World Bank calculates costs of crime to SA’S economy
The bank’s findings reveal the price extracted from the public and private sectors - and ordinary citizens – owing to the country’s high crime rates. Essentially, it’s yet another tax. By
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Crime costs South Africa’s economy the equivalent of about 10% of its GDP each year, according to a new World Bank report titled Safety First: The Economic Cost of Crime in South Africa. And that, the report admits, is a “conservative estimate”.
“High crime rates damage the economy and contribute to the misallocation and inefficient use of resources, inflicting an estimated cost of at least 10% of GDP every year. This amount – which represents R700-billion in 2023 – combines transfer costs associated with stolen property, protection costs and opportunity costs,” the report says.
This assessment dovetails with other estimates, but it is backed by the expertise and research capabilities of the World Bank, which frames the issue as a burdensome additional tax on SA’S slow-growth economy.
“Although not all these costs represent absolute welfare losses, they do penalise those households and businesses who are victims of crime, and the state, which spends large amounts on public order and safety. Hence, it represents a high ‘tax’ on the economy that distorts the allocation of resources, constrains the country’s growth potential and has negative distributional effects,” the report says.
By global standards, crime in SA – similar to unemployment and inequality – is off the charts. The report notes that the country’s homicide rate is over six times the average for upper-middle-income countries and nearly 16 times that for high-income countries.
“If businesses alone could invest some of the amount they spend on security in productive ventures instead, South Africa’s growth potential could increase by about 1 percentage point,” the report says.
This is material, given the World Bank’s forecast of economic growth of only 0.7% for SA for 2023. If just some of the capital allocated to security by business could be put to more productive use, the GDP growth rate would more than double.
Small businesses hammered
Crime takes its greatest toll on small and medium-sized businesses, the report notes, because they cannot absorb the costs. For households, it reduces disposable income while reinforcing inequality because the most vulnerable, who have few assets, are unable to protect themselves or their meagre belongings.
Crime also undermines the public sector – a case of state failure corroding the state’s capacity to deal with the problem in a vicious cycle. “High crime requires higher public spending on policing and security, along with significant transfers to state-owned enterprises whose operations and financial soundness are damaged by infrastructure theft. This crowds out much-needed developmental spending.
“But weaknesses in public institutions to prevent, investigate, solve and prosecute crime make it harder to fight crime, particularly organised crime,” the report says.
Protection is the biggest cost. The World Bank estimates that the protection costs for households on security and insurance amounts to 1.3% of GDP, and security spending by businesses equals about 2.9%.
Of course, a lot of this spending will be counted as a plus for GDP, which measures the monetary value of all goods and services produced in a country over a certain timeframe. GDP does not distinguish between “good” or “bad” value, nor does it capture the opportunities lost or the value that would have been added if the money was spent more productively.
Cumulative costs
SA’S economy would not miraculously grow at 10% or more annually if crime was suddenly eliminated. It is the cumulative costs that add up to close to 10% of GDP. Without this “tax” the economy would grow at a much brisker rate but not a double-digit pace.
“Transfer costs” are estimated to amount to 2.6% of GDP and include losses from property or personal robberies, losses to merchandise and services, extortion (0.7%) and copper cable theft.
Lost opportunity costs come in at 2.8% of GDP, including 1.1% in tourism shortfalls (tourists who stay away because of security concerns), excessive state security spending (blue-light brigades spring to mind), and higher transport costs (cash deliveries to ATMS).
Pointedly, the report says that these calculations probably underestimate the scale of the problem.
“This overall estimated cost is a conservative estimate as it only covers economic crime, and many costs are not accounted for because of the lack of data to estimate them. For example, medical costs; foregone wages because of incarceration, incapacitation, death, or stolen working devices (car, computer, etc); and intangible costs related to trauma, changes in routines and behaviours, distrust in the police, etc are not costed. All of these are likely to be significant in SA.”
What South Africa could do
The World Bank does make some sensible proposals to address the issue, some of which build on initiatives that business has launched with the government. “Develop a strategy anchored around a few priorities for more effective action. Reducing organised crime and murders could be prioritised given their broadbased human and economic impacts and their alarming rising trend in recent years,” it recommends.
“Recruit and retain specialist skills required for complex investigations at the Directorate for Priority Crime Investigation (also known as the ‘Hawks’) and the Special Investigating Unit,” is another proposal.
“Scale up evidence-based violence prevention programmes through a rebalancing of resources within the public order and safety budget,” is also on the list.
There are at least two massive potholes in this road to redemption. One is political: with elections looming, the ANC is not going to take responsibility for collapsing state capacity. Then there is the small matter of alleged criminals and corruption in its own ranks.
The other is the worsening fiscal situation in a barely growing economy. Even well-targeted, cost-effective initiatives are bound to fall by the wayside as the Treasury wields the knife, with cuts on the cards for the National Prosecuting Authority.
The report, which markets and investors will notice, lays bare the mounting costs of crime to SA’S economy. A cynic might say that some of the looters have concealed their spoor by undermining the state’s ability to address the issue. This is indeed like a “tax”, but one that robs the Treasury of much-needed revenue.