Crime versus Globalization

Transcription

1 Crime versus Globalization Catherine e Fontena * Januar 5, 007 Preliminar an Incomlete In a recent ress release, the Secretar of the Organization of merican States (OS, Jose Miguel Insulza, referre to securit as a e challenge for atin merica, because the region has the worl s highest crime statistics, an crime is growing (OS, December 8, 006. The illegal rug inustr contributes to high crime rates, but is unliel to be resonsible for the stea increase in crime. For eamle, rgentina, which oes not la a large role in rug trafficing, saw reorte roert crime in Buenos ires grow b 500% from 99 to 00 (Giaveoni, 003. The recent oinion oll of atin mericans b The Economist shows clearl that the two sets of issues uermost in voters mins were unemloment an overt on the one han, an crime an ublic securit on the other (The Economist, Dec 7 th, 006, italics mine. These two issues ma in fact be relate. The other major international tren of the last fifteen ears has been the oening to trae of China, Inia an the former Soviet Union. In the wors of Richar Freeman: Most eole have not come to gris with the most funamental realit change in the current era of globalization the fact that the global labor force has virtuall ouble in size in the last 5 ears (Freeman 005. Worers in the manufacturing an service sectors of atin merica fin themselves cometing hea-to-hea with these new worers. Given the low wage rates in China an Inia, the en result in atin merica is often unemloment an/or ownwar ressure on wages. In oor countries with little income suort, crime is often an economic resonse to istresse circumstances. Thus we might well eect worse conitions for worers to lea to higher crime. This aer evelos a moel of global trae in which the entr of labor-rich countries onto worl marets ma lea to a rise in crime in other countries. Moreover, the resulting crime rates ma be higher than in autar! The interest of such a moel is to consier the full imlications of crime in a globalize worl: the effect of trae on crime rates, but also the effect of crime rates on trae an outut. The restructuring that atin merican economies will unergo in the net ecae ma be far less benign than that suggeste b a stanar trae moel, because of the harmful economic consequences of increase crime. n in more general terms, the gains from trae ma actuall be negative, once the negative eternalities from rising crime are taen into account. * Deartment of Economics an Melbourne Business School, Universit of Melbourne, Melbourne, ustralia. Corresonence to C.e.Fontena@unimelb.eu.au. I am grateful to Chris Emon, Guio Friebel, Tue Gørgens an Jenn George for useful comments. Resonsibilit for all errors remains m own.

2 The Moel The moel is a stanar two-goo, two-inut, two-countr Hecscher-Ohlin moel, augmente to inclue crime. Goos X an Y are rouce uner Cobb-Douglas rouction functions from caital an labour, in countries an B: X = 0 <, < Y = Caital an labour are non-traeable inuts. (From this oint we will write eressions in terms of the caital-labor ratio,. Consumers in all countries have the same Cobb-Douglas utilit function: U(X,Y = - 0 < < Thus, in autar, the rices of goos X an Y in countr reflect onl the outut of countr : X = = ( Y while uner free trae between countries an B, rices reflect worl outut: X X B BB = = ( Y YB BB In the absence of crime, trae will iml that the caital-ratio is ientical in both inustries an both countries, but the countries will have a ifferent mi of inustries. In line with the literature on roert rights (Hirschleifer 995, Grossman 995, we moel robber as an occuation, which agents enter until the returns from crime equal the returns from rouctive labor in the X an Y inustries. The moel of crime is efine b two technologies: (a the matching technolog, which etermines the robabilit with which robbers an roucers meet an (b the attacing technolog, which etermines the share of outut a robber can cature (or, equivalentl, a robber s robabilit of success in an encounter. For the matching technolog, we assume an atomless istribution of agents, an ranom matching, so that each agent meets other agents with robabilities equal to their roortions in the oulation (as in Rolan an Verier 003. Thus, if there are worers in inustr X an worers in inustr Y, an a total number of agents in the econom, the robabilit of a robber encountering a firm (efine as a worer an the caital s/he uses of te X is / an of te Y is Y / ; the robabilit of a roucer not encountering a robber is ( Y /. One stor that woul give rise to such ranom matching is if the econom ha T ifferent locations for rouction: then the unique ash equilibrium to a game in which robbers tr to meet roucers, an roucers tr to avoi robbers, woul see equal roortions of robbers an of roucers of each te, in each location.

3 We assume ecreasing returns in the attacing technolog: as the outut of the firm grows, the total amount cature b the robber increases, but it is a ecreasing share of outut. The outut er worer of each firm is an in inustries X an Y, an the share cature b the robber is, where <,. Thus the eecte rofits of a firm in inustr X in the resence of crime is, an in inustr Y is. In the absence of crime, the first-orer conitions for factor rice equalization across inustries woul be: = (3 ( = ( (4 ote that the marginal rouct of caital must be equal across inustries in a countr, but not across countries, as we assume that caital is immobile. In the resence of crime, the first-orer conition for caital becomes = (5 The first orer conition equalizing the marginal rouct of labor across inustries is similar. n, since the marginal rouct of labor is also equal to the wage rate, it must also be equal to the eecte earnings of a robber: ( = ( (6 = The equation which closes the sstem states that all the caital in an econom is use: = (7 Ientical eressions hol for countr B. The Results Interestingl, the relative factor intensit of caital across the two inustries is not a function of the resence or absence of crime, or of trae: both (3 & (4 an (5 & (6 iml that: 3

4 ( = (8 ( Results : o Crime In the absence of crime, all of labor in the econom is use in rouction, an therefore = closes the sstem. Uner autar, the results are as follows = (9 ( ( = or = (0 n if countries an B are traing: B = ( B ( ( = as in equation (8. Equation (0 unerlines that caital-labor ratios are now otimize in the entire econom, as the are etermine b the total worl sul of caital an labor. Results : Crime The non-linear structure of the crime technolog reners close-form results imossible, but in the case of autar we can arrive at an imlicit function for, an in the case of trae we arrive at a air of imlicit functions that can be solve for an B. The eni outlines these imlicit functions. We use the moel to rovie an eamle of an instance in which trae causes crime to increase relative to autar. Consier the case of three countries,, B, an C, each with 00 units of caital. Countr has 00 units of labor, Countr B has 0, an Countr C has 00. The entr of Countr C into trae with an B cause crime in countr B to increase relative to the 4

5 rior situation of trae between an B, but also relative to an autar state in Countr B. ssigne arameter values: - =0.3, =0.7 (so X is the inustr in which labor is relativel more rouctive than caital - =0.5 (so there is no tilting of references towars one of the goos - = 0. (the ecreasing returns in crime. Uner autar: Countr oulation in sector X oulation in sector Y.9% 9.4% 77.7% B.4% 8.5% 79.% C.4% 6.% 8.4% oulation in crime The crime rates are obviousl not at realistic levels, but it is interesting to note the relationshi between crime an surlus labor: the larger the labor force, the higher the crime rate. We note, too that the allocation of labor across sectors is inefficient: uner these arameters, the otimal allocation of labor is to have 70% of labor in sector an 30% in sector B, but the comosition here uts more labor in sector B. Decreasing returns in the crime technolog maes caital intensit relativel more attractive. Uner trae between an B: Countr oulation in sector X oulation in sector Y 0.4% 0.6% 79.0% B 3.% 7.8% 78.9% oulation in crime Trae between an B causes crime to fall in countr B, because the returns to rouctive labor rise, an crime to rise in countr, because the returns to rouctive labor fall. ote that countries are not secializing to the egree that woul be otimal, in the resence of trae: If there were no crime, countr B shoul evote 74% of its labor to sector X, an countr shoul evote onl 64%. But in the resence of crime, countr B evotes 6% of its labor to sector X, an countr evotes 49%. Uner trae between, B an C: 5

6 Countr oulation in sector X oulation in sector Y 3.5% 4.7% 8.8% B 7.4% 0.6% 8% C 3.9% 4.% 8.% oulation in crime Remarabl, crime goes u in both countr an B, relative to autar, an falls ver slightl in countr C. The welfare consequences of the regimes are even more striing: Countr Utilit er caita uner autar Utilit er caita uner trae between an B B C.6.56 Utilit er caita uner trae between, B, an C C s welfare goes own in the case of trae between the three countries, as we might eect from rising crime. But what can elain the fall in welfare in, in a straightforwar two-countr trae interaction? There are two contributing factors: ( the rise in crime in countr, as rouctive labor is more oorl remunerate an caital becomes more highl remunerate; an ( istortions in the rouctivit of inustries inuce b the crime technolog. If cannot full tae avantage of its comarative avantage at revailing worl rices, then ajustments in worl rices ma be to its etriment. This brief eamle shows that crime an the benefits of globalization ma be eel interrelate, an that crime ma overturn our usual reictions about the benefits of trae. Trae can raise crime rates, even relative to autar, an ma reuce welfare in the countries engage in trae. In light of these results, our reictions about the imact of labor maret re-structuring over the net ecae ma be substantiall more gloom. 6

7 Giaveoni Pita, M. (003 a Seguria Pública en la Ciua e Buenos ires: Su evaluación en un conteto e eterioro global. (Public safet in the cit of Buenos ires: n araisal in an environment of worlwie eterioration. Unite ations Develoment Project reort. Grossman, H. an M. im (995 Swors or Plowshares? Theor of the Securit of Claims to Proert, Journal of Political Econom, 03(6,.75. Freeman, R. (005 What Reall ils Euroe (an merica: The Doubling of the Global Worforce, Globalist ewsaer, June 03, 005. Hirshleifer, J. (995 narch an Its Breaown, Journal of Political Econom, 03(0,.6 Rolan, G. an T. Verier (003. aw enforcement an transition, Euroean Economic Review 47(4,

8 eni: Caital/labor ratios in the resence of crime Uner autar: We solve for b relacing in equation (6 with its value in equation (, an relacing with its value in terms of. Equation (6 being a air of equations, this gives us a sstem of eressions for an, which can then be substitute into equation 7, to give the following imlicit function: ( ( ( ( ( ( ( ( 0 = Then, returning to the eression for : = ( ( ( ( ( ( an substituting into equation 7 gives. Uner trae between an B: We use the two equations of (6 to obtain an eression for in terms of onl: = ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( 8

9 We use this eression an (7 to obtain ; an analogous eression efines an. Then we equalize B B from equation, to its value erive from equation (6 for countr an for countr B: B B B B B = ( ( = ( ( ( ( ( ( ( ( 9