Does Globalisation Affect Crime? Theory and Evidence

• Published date: 01 October 2016
• DOI: http://doi.org/10.1111/twec.12422
• Date: 01 October 2016
• Author: Arghya Ghosh,Peter E. Robertson,Marie‐Claire Robitaille

Does Globalisation Affect Crime? Theory

and Evidence

Arghya Ghosh

1

, Peter E. Robertson

2

and Marie-Claire Robitaille

3

1

University of New South Wales, Sydney, NSW, Australia,

2

The University of Western Australia, Perth,

WA, Australia and

3

The University of Nottingham, Ningbo, China

1. INTRODUCTION

THERE is a long history of economic thought that expresses scepticism over the benefit s

of trade liberalisation on non-economic grounds (Irwin, 1996; Findlay and O’Rourke,

2007). This scepticism extends to the contemporary globalisation debate where some authors

such as Rodrik (1997) have suggested that the economic gains from trade might be dominated

by other considerations such as crime and social conflict.

1

In particular, in an environment

where law enforcement is imperfect or costly, agents can engage in expropriation or predation

rather than production. Recent studies by Ghosh and Robertson (2012), Dal Bo and Dal Bo

(2011) and Dube and Vargas (2011) show that the impact of trade on expropriation may be

positive or negative depending on whether a country is labour or capital-abundant. These

papers thus raise interesting, but untested, propositions regarding the effects of trade liberali-

sation on crime. In particular, they suggest the possibility that the effects of trade liberalisa-

tion on expropriative activity will differ between developed and developing economies.

2

The aim of this paper is to explore this relationship theoretically and empirically using

international data on crime rates. Crime is perhaps the most pervasive form of expropriation,

and there is an extensive literature on the economics of crime following Becker (1968) and

Ehrlich (1973). In particular, Imrohoroglu et al. (2004) have emphasised the importance of

law-enforcement activities, as well as economic activity, and inequality in explaining crime

trends. Likewise, there is an extensive literature on how trade affects wages and inequality.

Nevertheless, the link between trade liberalisation and crime, and whether it differs across the

development spectrum, has not been explored in the literature.

3

Perhaps the body of work closest to our own is the recent literature on external shocks and

economic conflict, such as Miguel et al. (2004), Collier and Hoeffler (2004), Besle y and Pers-

son (2008), Bruckner and Ciccone (2010) and Dube and Vargas (2011). These studies seek to

identify the determinants of conflict and civil war. Across these studies, there is a relatively

robust finding that changes in external prices are associated with changes in conflict, partic u-

larly in African countries.

1

See also Deardorff (2000), Wolf (2004) and Bhagwati (2004) for overviews of the globalisation

debate.

2

Other models that look at similar issues, including predation, include Anderson and Marcouiller

(2005), Anderson and Bandiera (2006), Dodson (2002) and Demombynes and Ozler (2005). Similarly,

Dutt et al. (2009) consider the impact of openness on unemployment, allowing for the sign to differ

between capital and labour-abundant countries.

3

In particular, an extensive literature exists on the determinants of crime across countries, focusing on

factors such as the rate of growth (Pyle and Deadman, 1994; Cook, 2010), unemployment rates (Bushway

et al., 2010), urbanisation (Glaeser and Sacerdote, 1999; Fajnzylber et al., 2000) and the level of develop-

ment (Soares, 2004).

©2016 John Wiley & Sons Ltd

1482

The World Economy (2016)

doi: 10.1111/twec.12422

The World Economy

Insofar as conflict and crime are both types of expropriative activity, the present study can

be thought of as being complementary to this literature. Focusing on crime has an advantage

because of the extensive availability of comparable data relative to other forms of expropria-

tive activity such as civil conflict, coercion and piracy. Finally, as we illustrate in our theo ret-

ical section, the economics of the crime literature provides some interesting, yet untested,

propositions regarding the heterogeneous responsiveness of crime rates to trade liberalisation

across countries depending on their labour abundance.

The aim of this paper, therefore, is to examine whether trade liberalisation has affected the

rate of crime. The empirical section tests this proposition with respect to theft and burglar ies,

using a panel data of 72 countries over the period 1980 to 2008. We find that trade liberalisa-

tion increases crime rates in very labour-abundant countries, but has a statistically insignifi-

cant effect on crime for most countries with intermediate levels of labour abundance. We also

find some evidence to suggest that trade liberalisation may reduce crime in very capital-abun-

dant countries.

The results hold for different specifications of the model including different measures of

crime and trade liberalisation. We also explore other related explanations such as the role

of institutions and the relationship between crime and inequality. Finally, we also control

for endogeneity that may arise in two distinct forms. First, we consider the potential endo-

geneity of the trade variables policy variables using instruments lagged values and also the

predicted value of openness, based on the geographic and historical characteristics. In addi-

tion, we consider the possibility, suggested in the crime literature, that past crime rates may

affect the current crime rate. We use an Arellano and Bond (1991) estimator to control for

differences in past crime rates. We find consistent support for our hypothesis that trade lib-

eralisation increases crime rates in very labour-abundant countries, and reduces crime in

very capital-abundant countries, but has little no effect for countries with average capital

abundance.

The rest of the paper is organised as follows. First, to motivate the empirical analysis, we

develop a simple model that shows how trade liberalisation can affect expropriation. This

model is presented in Section 2, and is followed by a discussion of the data and empirical

strategy, including data reporting issues, in Section 3. The results are discussed in Sections 4

and 5. Section 6 then investigates endogeneity issues, and Section 7 concludes.

2. A MODEL OF CRIME AND TRADE

Consider a small open economy with a unit measure of identical individuals.

4

Each

individual has 

Lunits of labour and 

Kunits of capital, the returns (per unit) to which are

denoted by wand r, respectively. There are two tradable goods, an exportable and an

importable denoted by xand m, respectively. Let p

x

and p

m

, respectively, denote the

world price of the exportable and importable. Choosing units appropriately for the two

goods, we set p

m

=p

x

=1. We assume that the import-competing sector is tariff protected

and let p(>1) denote the tariff-inclusive price of the importable good faced by domestic

consumers.

4

This builds on recent papers by Ghosh and Robertson (2012) and Dal Bo and Dal Bo (2011) with a

view to providing a simpler, but also more accessible, statement of the relationship between the impact

of trade on crime at different levels of economic development.

©2016 John Wiley & Sons Ltd

GLOBALISATION AND CRIME 1483

Both xand mare produced under constant returns to scale and perfect competition using

labour and capital. Perfect competition in both these sectors implies that unit cost equals

price:

cxðw;rÞ¼1;(1)

cmðw;rÞ¼p;(2)

where c

x

(w,r) and c

m

(w,r) denote the unit cost functions for xand m, respectively.

Unlike the standard Heckscher–Ohlin framework, we assume law enforcement is not per-

fect. As a consequence, in equilibrium, some resources will not be engaged in productive

activities. Each individual endowed with 

Lunits of labour and 

Kunits of capital faces an

effective choice between employing labour and capital in producing goods or services and

expropriating income from other agents.

a. Expropriation

We assume that in their attempt to expropriate income, each individual can target only one

individual and can only be targeted by one individual. The probability of successfully expro-

priating another individual’s market income depends on the resources committed to expropria-

tion. Suppose individual iuses Li

eunits of labour and Ki

eunits of capital in expropriation. The

production function for expropriation is eðLi

e;Ki

eÞei, where the following assumptions hold:

(i) e(0, 0) =0; (ii) e

i

is homogenous of degree one; and (iii) @eð:;:Þ

@Fi

e

[0;@2eð:;:Þ

@Fi

e

2\0;F2fL;Kg.

The unit cost function associated with this expropriation technology, which captures the

minimum income that an agent ihas to forego to produce e

i

=1, is then given by:

ci

ew;rðÞ¼min wLi

eþrKi

ejei¼1



:(3)

The value of e

i

determines the probability of i’s success in expropriation. More specifically,

an agent isucceeds in expropriation with probability /(e

i

) where /(.) satisfies the following

properties: (i) /(0) =0; (ii) /0(e

i

)>0, /00(e

i

)<0; and (iii) /(e

i

)<1. The first two properties

are standard. The third one says that there is a strictly positive probability of failure of expro-

priation even if all resources are devoted to expropriation.

b. Law-enforcement Services

Individuals buy law-enforcement services to reduce the probability of being expropriated.

Income from productive activities for an individual iis:

xiwLiþrKi;

where Li

LLi

eunits of labour and Ki

KKi

eunits of capital are engaged in productive

activities. A fraction c2(0, 1) of this income is subject to potential expropriation, and hence,

the actual income from productive activities may be less than x

i

. Nevertheless, x

i

may also

be realised if the act of expropriation is verified by a court.

We assume that each individual ibuys z

i

(≥0) units of law-enforcement services, which

we think of as a bundle of security and legal services. Naturally, the higher the level of z

i

, the

higher the probability that the claim of expropriation by individual iis successfully verified in

the court. Let a(z

i

) denote that probability which satisfies the following plausible conditions:

(i) a(0) =0; (ii) a(z

i

)<1 for all finite z

i

; and (iii) a0(z

i

)>0, a00(z

i

)<0. Let zR1

0zidi denote

©2016 John Wiley & Sons Ltd

1484 A. GHOSH, P. E. ROBERTSON AND M.-C. ROBITAILLE