How Firms Cope with Crime and Violence: Experiences from around the World

CHAPTER 1

The Nature, Scale, and Scope of Private Sector Responses to Crime and Violence

Introduction

The costs of crime and violence to the private sector amount to significant losses in terms of gross domestic product (GDP), according to World Bank Enterprise Surveys, discussions with private sector chambers and business associations, and dialogues with governments throughout Latin America.¹ Losses caused by high rates of crime and violence have been estimated at 9.0 percent of GDP in Honduras, 7.7 percent in El Salvador, 5.0 percent in Jamaica, and 3.6 percent in Costa Rica (World Bank 2010, 2011a, 2011b, 2011c).

The private sector’s response to crime and violence varies by country, size of firm, and sector, among other factors. For example, in an environment with a high concentration of small and medium enterprises such as Jamaica, international buyers have lower switching costs: they can shift work orders, know-how, and capital in a short time to less-violent countries. On the other hand, large firms in extractive industries in Guatemala have millions of dollars in capital investments and are therefore forced to absorb the increased costs incurred in environments with high rates of crime and violence. From a financial perspective, these high rates can lead to increased business costs, such as a shift of scarce working capital from productive uses to security solutions; losses resulting from theft, contraband, fraud, and corruption; and higher insurance costs. At the same time, some firms simply exit the market, while others (such as private security firms) thrive amid high levels of violence, and some become party to the violence. The violence may be part of a strategy by powerful firms to eliminate competition or a way to run a protection scheme. Finally, in some cases, firms can contribute to alleviating the root causes of crime and violence by responding in a way that brings adversaries together and provides a platform for peaceful interaction and alignment of economic interests.

Some governments are increasingly concerned with the social and economic effects of high rates of crime and violence, as the recent cases of Honduras, Guatemala, and Brazil illustrate. In the first two months of 2012 alone, the government of Honduras received a Development Policy Loan (DPL) focused on crime and violence issues (the first such DPL by the World Bank). Guatemalan President Otto Fernando Pérez Molina proclaimed a response to rampant crime and violence as the top priority for his administration’s national development strategy (La Hora 2012). In Brazil, Rio de Janeiro is increasing its pacification programs in the slum areas to prepare for the World Cup (2014) and the Olympic Games (2016).

Although the issue of crime and violence has been examined thoroughly from a number of perspectives—such as youth gangs, money laundering, drug trade, human trafficking, and justice system reform—little systematic work has been done to understand how private businesses cope and try to preserve their competitiveness. (See box 1.1 for a literature review on the role of firms in environments that are prone to violence and conflict.) This volume documents a wide spectrum of coping strategies, from exit to survival, from acting alone to collective security mechanisms, and from operational strategies to predatory strategies (in which firms contribute to crime and violence).

Box 1.1 Literature Review on the Role of Firms in Environments Affected by Violence and Conflict

The literature review describes the impact of violence on firms (McDougal 2010) and a variety of coping mechanisms, including exit (Hirschman 1994); violence and conflict mitigation through associations and trade (Jha 2007; Santa-Barbara 2007; Varshney 2002); and perpetuation of the violence (McDougal 2010; Pugh, Cooper, and Goodhand 2004).

Hirschman (1994) gives a historical perspective on the power of exit as a way for firms to cope with unfavorable environments, suggesting that the United States was born as a result of businessmen exiting the European market in favor of a new liberal frontier. Business exit is outlined as a positive condition of economic development and an underpinning of free capitalist growth and innovation.

The coffee industry in postconflict Rwanda serves as a platform for former enemies to reconcile and form relationships. Varshney (2002) uncovers similar themes in India: a study of six large cities in India found that the presence of civic associations was the decisive factor in preventing the outbreak of ethnic violence in some cities, while others succumbed to such violence. The key insight from Varshney’s work is that the social capital developed through civic associations (business associations, professional associations, unions, and indeed commercial transactions per se) brings Hindus and Muslims together around a common set of interests, providing a platform to form peace committees that address emerging rumors, tensions, and clashes. Moreover, some businesspeople have a vested interest in violence (and seek to perpetuate it) while others have an interest in preventing it.

Jha (2007) develops a quantitative analysis of the legacy of medieval trading ports in India, finding that a medieval trade legacy had a significant effect on ethnic violence. The 1,000 years leading up to the 17th century saw a relationship develop between Muslim traders and the Hindus in the port cities on the Indian subcontinent. This duration of symbiotic trade relations depended on the complementarity of traded goods that could not be locally replicated or stolen and was facilitated by few barriers to trade, allowing for competition, low prices, and redistribution of surpluses. In other words, Hindus and Muslims were bound together through rational interest and the social connections that were passed down through generations. Today, those cities that were once medieval ports are 20–30 percent less likely to experience a religious riot, even as feuding Muslims and Hindus have killed more than 40,000 across India since 1947. From 1850 to 1950, such towns had 80 percent less chance of experiencing religious violence in any year. Because of the heavy silting of river inlets brought by yearly monsoons, many of these medieval harbors are now landlocked, yet the legacy of medieval trade’s institutional mechanisms continues to prevent ethnic violence from reaching the levels of the rest of the country. Santa-Barbara (2007) provides further evidence of the immense peacekeeping power of industry, suggesting that the decades of European peace following World War II that brought unprecedented levels of economic growth were partly the result of the European Coal and Steel Company (ECSC), which served as an important step in the formation of the European Union.a The examples of traders in India and the ECSC show how firms can play a critical role in reducing conflict and promoting lasting