An assessment of the economic costs of organised crime

In 2012, Paolo Pinotti, Professor of Economics in the University of Bocconi, published a paper titled  “The economic costs of organized crime: evidence from southern Italy”. He reports on the economic consequences of organised crime, focusing on two regions of southern Italy where the presence of criminal organisations is a relatively recent phenomenon.

Are the econometrics tools used by Paolo Pinotti relevant to assess the impact of Mafia on the economy? Can law enforcement weaken Mafia’s influence?

Through this article, I wish to comment on and discuss the findings presented by Paolo Pinotti.

An assessment of the causal effect of organised crime on the  local economy

To analyse the effects of organised crime on the economy, Paolo Pinotti uses synthetic control methods to estimate the potential economic performance of no organised crime. In that respect, he succeeds in showing that the advent of organised crime leads to a strong, negative and significant causal effect on GDP per capita in those regions. Although the findings were to be expected, the use of GDP per capita to assess the economy of the concerned regions can still be questioned. One cannot argue that GDP per capita is a strong representative of the overall economic performance of a country since, by definition, the Gross Domestic Product refers to the monetary value of all final goods and services produced within the borders of a country, in a given period of time. If GDP per capita is a little bit more precise than GDP, by offering an average measure of one citizen’s living standards, this indicator remains at a mean value, an average, that can therefore not be trusted. In Italy, organised crime is the Mafia, a peculiar and complex industry which, more than being involved in economic activities, is also a governance institution. As any other organised crime, the Mafia engages both in legal and illegal operations, from construction and restaurant services to drugs, gambling and prostitution —  activities which cannot be included in GDP per capita.

Economic costs of Mafia3In the paper, to take into account this “shadow” economy, Pinotti uses electricity consumption as an alternative measure of aggregate economic activity. The idea is for him to make sure that the sudden sluggish growth in GDP per capita taking place in the wake of the introduction of the mafia in the market is not just representative of a reallocation of resources outside the scope of official statistics. Doing so, Pinotti finds that the electricity consumption in the treated regions — the regions where the mafia advent occurred — is greater than in the synthetic ones, slowing down only a decade after the arrival of the Mafia. This suggests that if at some point the mafia affected sectors using energy more intensively, there is no proof  that it has been the source of the expansion of a so called “shadow” economy.

This study of one channel through which the Mafia might effectively influence the economy is an insightful thought. However, it is not enough to represent a country by its “economic” or “monetary” value — especially when assessing the costs of the presence of organised crime. In the second paragraph of his introduction, Pinotti stresses the fact that organised crime has “obvious social and psychological costs” which add to the economic consequences through violence and predatory activities. If those are obvious, then should they not be taken into account as well?

A perhaps more global way to assess the economic and social costs of organised crime could have been to use the Human Development Index computed by the United Nations that, besides GDP per capita, also factors in indicators such as life expectancy or school enrolment. Other indicators try to look out for the weaknesses of GDP per capita such as the Genuine Progress Indicator and the Gross National Happiness Index. Even if those too have their shortcomings, performing the same analysis with some of them could be revealing of more than just the official economy of the two regions.

The impact of law enforcement on Mafia’s power

When defining the legal framework of organised crime in Italy, Pinotti interestingly mentions Article 416-bis of the Italian Penal Code, “assoiciazione a delinquere di stampo mafioso”, introduced in 1982 with Law 646/82. The introduction of this article has been a real breakthrough in the Italian judicial system, acknowledging effectively mafia organisations’ specificities in a text of law and recognising notably the use of any power of intimidation to commit criminal offences, limit freedom or control directly or indirectly economic activities, services or even public contracts. This article makes us wonder about the role law has to play in order to address the issue of organised crime.Economic costs of Mafia4

In a paper titled The Decline of the Italian Mafia,  published in 2008, Letizia Paoli, a famous criminologist and professor of the Law Faculty at Leuven University, indicates that a decline in Mafia organised crimes is mainly due to the intensification of law enforcement repression since early 1990’s. If we look back on the origin of the creation of organised crime, it is important to recall that the Mafia originated from a market failure of the state’s governance with the most important issues at stake being security of property rights and enforcement of contracts. Moreover, if we can imagine good ways to overcome those typical government’s failures, the remaining concern then would be to answer the question on how to tackle fear. As stated in article 416-bis, the inherent and key tool of organised crime is intimidation, and they are pretty good and inventive in that area, with very few boundaries.

To not give in to fear is not an easy road and can even be life-endangering. Famous Judge Giovanni Falcone, who was a fervent believer of his country’s institutions, devoted a major part of his work to the anti-mafia fight. His determination and thoroughness allowed for a profound reshaping of the investigation methods used at that time. He believed that only a deep understanding of the actions and peculiarities of the mafia could lead to a win. However, by flying too close to the sun, Judge Falcone was assassinated by the Corleonesi Mafia in 1992.

In his paper Governance Institutions and Economic Activity, 2009, Avinash Dixit outlines, once again, that in order to perform a good transition of any economy, the most important principle is to gain a complete understanding of the institutional equilibrium and structure, saying that a “successful reformer will combine respect for the past and thoughtful innovation”. All in all, the transition from a mafia organised governance to a regular one is a long and difficult process that can have important costs and requires great awareness and carefulness.

To stand against organised crime is not a straightforward fight where knowledge is key. Only recently, on 19th November 2017, Italy adopted a new legislation[1] amending, among others, the Code of Anti-Mafia Legislation and Protection Measures Under Legislative Decree and Penal Code, which proves that they have not yet had their last word. But, as Letizia Paoli reminds us in her book, the ability for mafia groups to “survive” should not be forgotten.

by Camille Quideau

[1] Law No. 161 of October 17, 2017, http://www.loc.gov/law/foreign-news/article/italy-new-law-to-combat-organized-crime-takes-effect/

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