Organised crime: the economic underbelly

Organised crime does not just wreak havoc in society, it also has a profound economic impact that costs the global system countless billions each year

Organised crime: the economic underbelly
The underhand dealings of organised crime syndicates are playing an increasingly influential role on the world economy 

The subject of numerous wildly successful films, books and television shows, organised crime has always been a fascination of the general public. Despite the bloody violence that distinguishes such tales, we have long held a strange interest in their unlikely heroes, so enthralled are we by stories of their egocentricity, ruthlessness and lavish lifestyles.

Of course, as with all art, inspiration comes from reality. Though there have been several successful crackdowns on organised crime syndicates over the years – those in Colombia immediately coming to mind – mafioso groups are still very much in play and at large.

While movies may have given us quasiromantic notions about such factions, the truth is organised crime groups cause mayhem, death and destruction. They threaten communities with violence and partake in appalling activities such as human trafficking and extortion. To survive, criminal organisations snare youths – particularly those living in areas with few employment opportunities – thus feeding into a continuous tide of criminality that lasts through the generations. Such criminality seeps into various industries and sectors, bringing forth economic repercussions of global proportions.

Loosely defined
The definition of organised crime is somewhat fluid, but pertains to a group of any number of individuals that is involved in any type of criminal activity. Anonymous syndicates can be based in one region, span an entire country, or can even be dispersed around the globe.

Organised crime groups have a hierarchical structure. They often appear to be legal, but are run in illegal ways

It is quite common for one group – or family, as they are sometimes called – to collaborate with another, particularly in exploits such as drug trafficking between continents. Through such partnerships, organised crime groups have become increasingly complex, and can generate billions of dollars each and every year.

As gangs are often engaged in selling narcotics and firearms, with many also involved in human trafficking, the social impact they have is immeasurable. Further, these organisations often participate in racketeering, money laundering, the sale of counterfeit goods and extortion, meaning they also have a direct effect on their respective economies, which inevitably spills over into the international system as well. This, however, is impossible to accurately quantify.

“It is hard to measure the economic impact of organised crime because it is very hard to collect data on their economic activities. When members of a criminal organisation are arrested, they are generally unwilling to cooperate”, said Nadia Campaniello, an economics lecturer at the University of Essex.

That said, there are methods to tackle this challenge. “One has to come up with clever ways to estimate such impact”, Campaniello told World Finance. “There is one paper by Paolo Pinotti that addresses the issue of the costs imposed in a region by the presence of the mafia. He uses two southern Italian regions, Apulia and Basilicata, as a case study and estimates that the presence of the local mafia has decreased GDP per capita by 16 percent over a period of 30 years. Moreover, he finds that resources have not been reallocated from the formal to the informal economy, but that private capital has been substituted by less productive public investment.”

organised-crime-fig-1Though it is difficult to calculate the global impact, there are bodies that attempt to do so – figures, however, are few and far between. In 2009, the United Nations Office on Drugs and Crime (UNODC) estimated that transnational organised crime generates $870bn a year, which is close to around seven percent of the world’s merchandise exports.

Of all the illegal exploits conducted by criminal organisations, drug trafficking remains the most popular and lucrative. UNODC estimates this trade has an annual value of around $320bn, with the global cocaine market earning around $85bn of that sum alone and the estimated global production of opium having reached an all-time high in 2014 (see Fig 1).

Even harder to quantify are the vast sums made from human trafficking, the illegal movement of people for the purpose of sexual exploitation and/or forced labour. In 2014, the International Labour Organisation estimated around 21 million victims are trapped in modern-day slavery, earning the criminals involved roughly $150bn. Meanwhile, UNDOC estimates that, in Europe alone, the trafficking of women and children for sexual exploitation (see Fig 2) brings in around $3bn in revenue each year.

Local impact
Campaniello provided two scenarios when asked about the microeconomic impact organised crime can have. The first involved a local legal business for which a criminal organisation offers ‘services’. “What the mafia does is to offer the business a monopoly or oligopoly by restricting access to the market. Of course, the business has to pay for this kind of protection. This is [noted social scientist] Diego Gambetta’s view of what the mafia does – it offers ‘protection’… from competitors.”

The second involves a legal business that operates on a larger scale in a competitive market, and so cannot be restricted. “In this case, having to pay for protection will make the business’ life very difficult, because it has to pay a hidden tax that its competitors do not have to pay. From the point of view of the consumers, in both scenarios, prices are bound to go up. The consumer surplus drops. The economic welfare decreases”.

It has become increasingly difficult to identify businesses that are linked to mafia groups. This is largely due to the similarities criminal organisations share with legal businesses, including their configuration and the appearance they give to the world. “They have a hierarchical structure and, oftentimes, they appear to be legal, but they are run in illegal ways. They force legal companies to do business with them using the threat of violence”, Campaniello explained.

When violence subsides and feuds die down, it would seem to the outside world that such groups no longer exist – yet exist they do. “Probably the only way to track their activities is to follow the money. That was the famous investigative strategy of Borsellino and Falcone, the two judges who were killed after the maxi processo (maxi trial) against the mafia”, Campaniello continued. “Unfortunately [their] methodology cannot be easily replicated to study the economic impact of organised crime in other areas and for other criminal organisations, because to isolate the causal effect, [they exploited] some historical events and geographical characteristics that are unique and just characterised the areas [they had] investigated.”

Adaptive organisation

As the authorities become more experienced and skilled at tracking down members of organised crime groups, these members become better at eluding the law. “New technologies are an important driver of this increasing sophistication ”, said Campaniello. “In the last few years, we have seen the rising of new types of crime that are difficult to identify, prosecute and measure: cybercrimes, money laundering [and] sophisticated
white-collar crimes.”


The estimated value of transnational organised crime


The estimated value of the international drug trafficking trade


The value of the global cocaine market


people are currently victims of human trafficking

Technological developments have also aided the transnational nature of organised crime, which has become ever more active in recent years. Campaniello used the example of the Italian Mafia, which is known for pouring foreign investment into various countries.

“We also know that with the recent recession and with [the] stock market drop, the mafia has a great advantage because they use cash and they invest in legal businesses the money that they get from illegal activities for money laundering.”

Dealing in illegal waste is another lucrative business for criminal organisations, and it is one that is aided by today’s integrated global economy. Italian mafia group Camorra, for example, frequently wins contracts from governments around the world for toxic waste disposal by underbidding the competition. With the contract in hand, it then disposes of untreated waste illegally in the Italian region of Campania, causing dire environmental damage.

Finally, it would be remiss not to mention perhaps the newest criminal activity, which is being aided by new technology: cybercrime. Though our increasingly digitalised financial, social and political systems may offer us greater efficiency and convenience, they also offer criminals opportunities to engage in fraudulent activities with greater ease and bigger consequences than ever before.

Networks can be maintained and expanded to the furthest corners of the Earth with a click of a button, while financial institutions, individual bank accounts and client databases – no matter how big or small – can be hacked and compromised, earning criminals millions in a very short space of time.

Illegal firearms
The transportation of illegal firearms is rife among organised crime factions

Structural nuance
The principal differentiator between the biggest criminal organisations is their structures – which is also a major factor in their success. On one end of the spectrum there are highly centralised and structured organisations, the best example being Japan’s Yamaguchi-gumi, known commonly as the Yakuza. On the other, there are decentralised systems in which power is divided among various factions, such as Russia’s Solntsevskaya Bratva. Because of the vast differences between the two, both structures work in different ways to contribute to the success of their criminal enterprises.

The Yakuza owes much of its prosperity to a strict hierarchy that has come to define the group. Jake Adelstein, a writer and an expert on the Yakuza, explained: “This is why the Yamaguchi-gumi has been called Japan’s second largest private equity group by Robert Feldman, an economist at Morgan Stanley. The thugs at the bottom generate revenue, which goes up the franchise pyramid, and the elite invest it in legitimate and illegitimate companies… They are also a meritocracy, where non-Japanese can reach the very top: Korean-Japanese, Taiwanese-Japanese. This has allowed them to attract some very smart people.”

Being so structured, the Yakuza is actually out in the open, and the identities of its members are no secret. “Their headquarters are listed on the national police agency website. They have offices, business cards, fan magazines and comic books about them”, Adelstein told World Finance. The reason for this lack of secrecy is the fact that being a member of the Yamaguchi-gumi is not actually illegal: Japanese authorities believe that in regulating the group instead of banning it they ensure its activities are not driven further underground, which would only increase the level of violence, make the problem bigger, and thus harder to control.

Regulating criminal organisations instead of outright banning them has helped to alleviate the problems they cause socially

Power in the Solntsevskaya Bratva, on the other hand, is highly dispersed, aiding in the anonymity of its members. As such, this group operates in a far more clandestine manner, leaving a far greater trail of destruction wherever it goes.

Campaniello explained: “Whenever the syndicate is decentralised, there is more violence because different groups want to conquer as much ground as possible. This is what happened in the 1930s in the US, in Campania in the 1970s, and in Sicilia in the 1980s.” While bloodbaths are common for the Solntsevskaya Bratva and Camorra, in Japan murders committed by the Yakuza are very rare.

Although the leaders of centralised organisations have much greater control, decentralised systems are more prone to internal feuds and destruction from within. Order is thus better maintained within the Yakuza – in fact, the group operates similarly to a legal company, which also makes it easier to quantify its economic value. In contrast, groups such as Camorra and Solntsevskaya Bratva remain hidden in the shadows, making it incredibly difficult to identify the full extent of their activities and the effect they have both locally and internationally.

Understanding the economic impact of organised crime is imperative in order to tackle an increasingly complex issue that continues to plague the global economy. If international organisations and local governments hope to work together and stamp out transnational illegal activities, there must be greater understanding of how they operate. By understanding the stakes involved for these individuals and the true reasons for their membership, root issues can be identified and, eventually, resolved.

Though in recent years the US has been putting pressure on the Japanese authorities to take a harder stance on the Yakuza, there is something to be said for regulation. Regulating criminal organisations instead of outright banning them has helped to alleviate the problems they cause socially, while also turning the gang into an entity that can be dealt with in a way that is tangible. The Yakuza’s conspicuousness also helps to curb its violence. In stark contrast, the Russian and Italian mafias continue to cause death and destruction, making their influence on society both intimidating and inestimable.

As with any practice, knowledge is power. Keeping organised crime groups above ground may be the best way to tackle their impact, both socially and economically, until a long-term solution is found that will rid the global system of the illegal activities these groups conduct.