Departmental Papers

Violent crime and insecurity remain major barriers to prosperity in Latin America and the Caribbean (LAC). With just 8 percent of the global population, LAC accounts for a third of the world’s homicides. Building on the existing literature, this paper aims to support economic policymakers and development partners by exploring the interplay between insecurity and macroeconomic outcomes, with emphasis on the relationship between violent crime and growth, the business climate, and public finances. The analysis shows that national-level crime indicators mask huge internal disparities, and that municipalities with 10 percent higher homicide rates have lower economic activity by around 4 percent. The paper develops an innovative measure of insecurity—the share of crime-related news—and shows its association with lower industrial production. Using firm-level data, it also estimates that the direct costs of crime, for firms, are around 7 percent of annual sales, and these are much higher when gangs and drug-trafficking organizations are present. Violent crime rises with macroeconomic instability, inequality, and governance problems. Using a large cross-country panel, the analysis finds that homicides increase when a country is affected by negative growth, high inflation, or a worsening of inequality. Victimization surveys indicate that where populations are concerned with the rule of law—impunity and police corruption—only one in five victims file their case with the police. Lack of trust and crime can be mutually reinforcing. Finally, the paper documents the fiscal burden of security provision and finds that spending tends to be inelastic to crime and that spending efficiency could be improved. The paper concludes with policy lessons and areas for additional collaboration between national authorities, international partners, and key stakeholders. These focus on data collection and analysis, economic policies that may address the root causes and manifestations of crime, strengthening rule of law institutions, and intensifying regional exchanges on security and public finance issues.