Anthony Woodburn, Guest Columnist
Most people will have little difficulty in perceiving crime as a key variable in determining outcomes of businesses and industries, one way or the other. The challenge to decision-makers, though, is to move beyond estimates and provide empirical data that seek to validate this perception. Indeed, a major hurdle is the determination of concepts and measurements of the variables associated with crime in business. While some people can easily identify toxic relationships between crime and business, believe it or not, others will never be able to differentiate.
Notwithstanding, the relationships between crime and business will somehow impact spending by employed, as well as unemployed, households, as well as the level of investment in business and industries. This accumulated spending will ultimately impact the level of gross domestic product (GDP). Therefore, the incidence of corrupt practices in business remains business as usual.
Though constrained by the general criteria of the Corruption Perception Index (CPI), it is imperative that one should be interested in disaggregating universally defined corrupt practices in the public and private sectors. In so doing, one is likely to arrive at observations that are country-specific.
These observations will form useful indicators in determining the impact of country-specific corrupt practices that may or may not be implied in the CPI, such as: extortion on the level of spending, underinvoicing of durables and non-durables on businesses, unregulated investment schemes (UISs) on the financial sector, and the level of UISs on autonomous expenditure. This inquiry will serve useful purposes, as it will assist in identifying causal relationships between crime and business. Once this inquiry has taken place, public policy decision-makers will be in a better position in coming to terms with the correlation between crime and business.
Corruption Perception Index
Perceived corrupt practices in government and governance are captured by a global barometer called the CPI. The CPI is a measure of corruption varying between zero (extremely corrupt) and 10 (clean). This tool was developed by Transparency International, and is widely recognised by individuals, groups, and countries in determining the level of perceived corrupt practices being tolerated by a country's legal and administrative systems. While the model variables of the CPI are common to approximately 200 countries, there exist significant gaps in the ranking between developed and developing countries (Chart 1). The question therefore arises: what accounts for these gaps?
One of the interpretations is that the level of perceived corruption tolerated by a country is largely dependent on the capacity of its legal and administrative systems to simultaneously identify, deter, cauterise, and apply appropriate sanctions where necessary. According to the 2010 CPI, Canada and Jamaica recorded marginal increases over 2009, while the United Kingdom and the United States recorded marginal declines over the same period (Chart 1).
But, what is significant is the fact that when compared to the others, Jamaica ranks 87th, and its CPI rating is closer to zero. This comparison is relevant, because it should add a caveat to current debates surrounding business propositions with the Jamaican diaspora in the United Kingdom, the United States and Canada. And, it is no secret that these countries maintain robust principles of the Jamaican Christie-lian Orthodoxy, that is, they have many comparable Greg Christies seeking to minimise the incidence of corruption and governance issues in their respective countries.
The Multiplier Effect
A disaggregation of the general criteria of the CPI will probably explain and assist in improving Jamaica's ranking. Keynesian theory of the multiplier effect bears significance on these examples. While holding all other variables on the spending line constant, as spending on durables, non-durables, and services increases, firms make more profit and, as such, they are able to supply more goods and services, assuming that goods and services are locally produced. As profits increase, firms are inclined to both increase production and services delivery, and/or expand operations. Having taken these options, three related inferences can be made. If spending increases by US$300 million, economic activities will be multiplied in the economy by an even larger amount, and this will have an increasing effect on GDP.
Likewise, if investments in the construction industry increase by US$300 million, this will follow a similar pathway as did consumption spending. However, the increasing effect on GDP will be much smaller. Conversely, if there is a decline in investments in the bauxite and alumina industry, spending will decline and, as a result, there will be a declining multiplier effect on GDP.
The Crime Multiplier
Though seldom spoken about, deliberately or otherwise, or perhaps because it is least understood, the crime multiplier plays a significant role in spending, and importantly, we may not accept it de jure, but we do accept it de facto. The challenge, therefore, as previously indicated, is that there are no empirical data to validate the crime multiplier, so estimates are cautiously referred to. With some exceptions, though, the crime multiplier follows a similar trajectory as the Keynesian multiplier effect.
The proceeds of criminal activities increase spending, which results in an increasing multiplier effect. For instance, engaging in UIS anywhere is a crime, and as Jamaicans, like many others have experienced in recent times, the returns are exponential. Extortion is a crime, and needless to say, the proceeds allow for an increased multiplier effect as well. Underinvoicing of durables and non-durables are permanent fixtures in the revenue department's nightmare, and interestingly, the proceeds are huge, yet sustainable.
Political leaders, members of civil society, and the administrative system have described the role and functions of certain community leaders as fantastic. These community leaders have no formal designation; however, they are being seen as acting in the 'best interest' of the community and, by extension, the country. They provide social services and all forms of representation for community members.
However, their sources of funding remain undefined. It is widely speculated in Jamaica that UISs, including OLINT, Cash Plus, World Wise, and LewFam, among others, operated for the estimated period 2004-2008 with a promised rate of return of six to 20 per cent per month, taking in an amount of US$1 billion-US$2 billion invested or lost, and this amount represented 12.5-25 per cent of GDP (Carvajal, et al, 2009). Autonomous spending as a result of the proceeds of extortion, money laundering, and UISs may be comforting to community members, quasi-financial investors, political leaders, and civil society; however, this practice violates the principles of good work ethic, labour productivity, and law and order.
We can all agree, therefore, that crime multiplier is a phenomenon of interest to the informal economy. The crime multiplier is structurally attached to the formal economy in such a way that if an attempt at separation is made, it may have riotous consequences. The crime multiplier is largely as a result of autonomous consumption, wherein consumption is independent of disposable personal income. In other words, people spend based on money that was never earned. There is no evidence that this increased spending is as a result of wealth, endowments, or the proceeds of gambling.
An institutionalisation of the crime multiplier has negatively impacted good work ethic, good governance, labour productivity, and law enforcement. In the business of crime, one can reasonably assume, therefore, that the capacity of Jamaica's legal and administrative systems to enforce anti-corruption strategies will be stubbornly resisted.
One can infer, therefore, that in as much as the crime multiplier seems a formidable force facing policymakers, it can be arrested. We have seen in Jamaica where arbitrary gambling has been transformed into casinos, higglers have been reorganised and renamed 'informal commercial importers (ICIs)', and 'robot' taxis have been reorganised into the formal transportation system. The inability of Jamaica's administrative system to identify and properly deal with the crime multiplier, or the capacity of the economy to correct this market failure, can only add legitimacy to the Corruption Prevention Index in its current form. Unfortunately, we may have been schooled into paying attention to the criteria of the CPI, but if closer attention is paid to the crime multiplier, Jamaica may be in a position to improve its ranking.
Anthony Woodburn is a part-time lecturer in business research at the University College of the Caribbean and Mona School of Business, the University of the West Indies. Email feedback to firstname.lastname@example.org and email@example.com.