Economic effects of crime

Economic effects of crime

Crime imposes huge economic effects on European societies. These economic effects are, in essence, the opposite of the positive economic effects of urban development (or spatial development). The successful burglary of a dwelling house or commercial building, for example, will not only lead to the loss of goods, but also affects (accumulated) the local, regional (and sometimes even national) economy through the decrease of property value and direct investments, uncertainty and fear of crime. This relationship is illustrated below:

File:Economics impact of crime 2.jpg
Figure: Illustration of relationship between crime, the urban object and society

Why the costs of crime should be considered by urban planners?

As mentioned above, considerable costs are incurred in relation to crime. Crime not only leads to material and immaterial costs for those who have become victimized, but crime also forces local and national authorities to spend billions on the prevention, detection, persecution and punishment of criminals. For the Netherlands, for example, the costs of crime are estimated to be 20.2 billion euro in 2005, approximately 4.1 percent of the GDP. Brand and Price (2000) estimate the costs of crime to be between £35 and £60 billion per year for England and Wales.

The identification and the estimation of the costs of crime have received broad attention in economic literature and research, but the economic effect(s) and impact of crime on society is still an underexposed field of interest.

Measuring the economic effects of crime

Economists use various definitions and terminology for categorizing the economic impacts/effects of crime. The two main categories are the primary and secondary economic impacts, also referred to as direct and indirect economic effects.

Primary economic effects of crime

Economists use in general two types of methods to further categorize the (primary) costs of crime. The first way is by defining the subject who bears the effects (victims, potential victims, society etc.).

Types of victims

From an economic point of view crime can be against:

• individuals/households
• the commercial sector/companies
• the public sector/society

Note: Businesses as victims of crime

Not just individual households, but also businesses have to deal with crime, ranging from shoplifting and vandalism to piracy and counterfeiting. These crimes are committed by employees (theft, fraud, money laundering) and by outsiders (shoplifting, vandalism, etc.). In the Netherlands, 60 percent of all property crimes were aimed at business companies in 2005 and in the US 35% of all retailers reported customer theft and 75% of surveyed businesses reported one of more crime incidents. As a result, an average Dutch company spends annually 891 EUR on preventive security measures with a total of EUR 1.3 billion in 2005. In particular small businesses (retail companies) may be vulnerable to crime, just like banks, but estimates of the costs of crime are difficult to determine as many crimes against businesses go unreported out of fear of bad publicity.

A second approach of categorizing is by breaking down the costs in relation to individual incidents (Davidson, 1999). This way, the costs of crime are categorized as:

1. in anticipation of crime: mainly costs of precaution measures to avoid crime such as locks, alarm prevention programs and surveillance.
2. as a consequence of crime: for instance, loss of property, medical and health care costs, victim support etc.
3. in response to crime: costs considering police, prosecution, court proceedings, sanctions etc. The identification and the estimation of the costs of crime is undertaken by several scientific researchers, see table below:

Costs in anticipation of crime	Costs as a consequence of crime	Costs in response to crime
Security expenditure	Property stolen and damaged	Police
Insurance resources	Lost output	Presecution
Precautionary behaviour	Emotional and physical impact	Legal aid
Fear of crime/Quality of life of potential victims	Health services	Magistrates and (Crown)courts
Collective/community defensive expenditure	Victim support services	Probation Service
Government crime prevention activity	Insurance claims	Prison Service
Insurance premiums	Quality of life of victims	Jury Service
Example	Example	Criminal Injuries Compensation resources/payouts
		Witness costs
		Miscarriages of justice
		Offender and his/her family

Table: Costs of crime by category (source: Brand and Price, 2000, edited by Decisio, 2012)

Costs in anticipation of crime

In order to prevent the consequences of becoming a victim of crime, households, companies and public offices take action to reduce the risk of becoming a victim. These measures exist of:

• Defensive expenditure/ security measures such as locks, alarm installations, camera surveillance, lighting, security guards etc., and;
• Precautionary behaviour aimed at reducing the risk of becoming a victim. For example taking a taxi at night instead of public transport, avoiding particular areas, staying at home etc.

Moreover, there are measures aimed at mitigating/reducing the consequences of victimization such as insurances. From a macro-economic perspective, only the administration costs of insurances can be considered costs of crime. The insurance fee and claim are considered to be transfer payments and are not a loss to society (strictly spoken).

Costs as a consequence of crime

The biggest cost factor by far are caused by harm to the victims (both individuals as public and private organizations). This includes the value of damaged or stolen property, the time victims have to spend dealing with the consequences of crime (e.g., organizing a replacement, report the offence, recovering time), and the emotional and physical damage, including the reduced quality of life of the victims (and their families).

Costs in responds to crime

Finally, there are the costs of crime related to the response to crime. This category includes:

• Costs of policing (detection, prevention)
• The costs of the Criminal Justice System, including things such as the legal aid, prison costs and probation services, and witness costs et cetera.

Secondary economic impact of crime

Crime not only leads to financial, physical damage and prevention costs, but also indirectly influences the local/regional and national economy of a country. According to Detotto and Otranto (2010),“crime acts like a tax on the entire economy: it discourages domestic and foreign direct investments, reduces the competitiveness of firms, and reallocates resources, creating uncertainty and inefficiency”.

On a macro-economic level crime influences:

• economic growth;
• income;
• labor force participation;
• income spent on security measures; and
• crime reallocates resources creating uncertainty and inefficiency.

On a more local and regional level, economists define the following types of impact:

• business impact (crime reduces competitiveness of companies and investments)
• impact on property value
• tourism impact
• impact on quality of life/social capital

According to Tita, Petras and Greenbaum (2006) “crime serves as an important catalyst for change in the socio-economic composition of communities. The effect crime has on the local property value is one of those catalyst effects. A study by Ihlanfeldt and Mayock (2009), for example, concludes that a 10% increase in violent crimes within a neigbourhood is reducing property values by as much as 6%. Other research points out that criminal offences such as vandalism and graffiti (also) have a significant negative impact on prices, in contrast to burglaries. Furthemore, in 2011, a UK police website, where users can view the number of criminal offences at street level, led to worries among house owners and real estate agents that the house prices drop if crime rates are relatively high.

Another effect of crime is that residents become more less committed to their communities, causing the ‘social fibre’ of the community to be weakened. An example of the loss of social capital is that residents of neighbourhoods with a criminal reputation are judged to be associated with criminal activities, leading (amongst others) to stigmas that prevent those people from finding jobs.

Related subjects

Economic impact of crime is a type of economic impact. Furthermore, this subject is closely related to:

• the economic effects of terrorism,
• the economics of criminal and terrorist behaviour, and
• economic tools to measure the economic impact of crime.

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Primary economic impact at an individual household level

Facing security threats, individual households deal with the:

• Costs of preventive measures
• Costs of being a victim
• Costs due to behavioural changes due to fear of victimization
• Production loss due to emotional damage
• Use of mental healthcare
• Harm to offender’s and victim’s family, friends and acquaintances.

Examples of preventive measures are insurances (against property crimes), measures against breaking and entry, et cetera. The biggest cost factor by far are caused by harm to the victims. Costs as a result of loss of production due to theft or vandalism are as well substantial cost factors. The table below illustrates an overview of the cost of criminal offences in the Netherlands.

The table above illustrates furthermore that property damage results in the most damage, which is primarily due to the relatively high number of property crimes committed.The emotional consequences of crime could also lead to a loss of productivity.

Primary economic impact of crime on businesses and firms

Security industry

The global security industry consists of businesses and individuals whose aim is to sell safety from malevolent acts threatening life, property and other assets, and information. The security industry provides products and services ranging from fire and burglar alarms, locks and safes, through electronic access control, security consulting, to armoured car services, guard equipment and security fencing. The industry is also more and more providing services to public authorities.

The security industry is an rapidly expanding industry (7 to 8% annually since 2011). Available estimates put the private security industry's turnover at between USD 100 billion and USD 120 billion worldwide. The largest share is accounted for by the United States, but nevertheless the German security industry is estimated to be around USD 4 billion, and France's and the United Kingdom's around USD 3 billion.

Primary economic impact of crime on the public authorities

• Public authorities as victim (vandalism, and so on)
• Public authorities as protectors of security

The costs of policing are significant. In 2010, the Dutch government spent EUR 5 billion on policing (detection and prevention), which is ±2% of the annual public spending and 0.1% of the Dutch GDP. On top of that, the public authorities spend money on persecution and trial. The budget of the Dutch department of Justice in 2010 was almost EUR 6 billion (2.5% of the total budget.