Is the risk of crime against business greater in unequal countries?

Rising inequality is one of the most pressing societal challenges of our time. According to data from the Global Inequality Database, the past two decades have seen an increase in the share of total income of the richest 10 percent of the population in all but two of the world’s ten largest economies (with the exception of France and the United Kingdom). In the world’s largest economies, the average income share of the richest 10 percent of the population increased from 37.5 percent in 2001 to 41.3 percent in 2021. This is often attributed to rapid technological change and competition from international trade, despite the magnitude of the change In inequality, as well as the explanations behind it, are likely to be different between advanced and emerging economies.

In addition to assessing broader ethical considerations, academic research has begun to deconstruct the many harmful ways in which rising inequality shapes societies: from lower economic growth to lower subjective well-being and political polarization. The researchers also explored how corporations are involved in increasing inequality within countries, which has sparked debate about the role of corporations in motivating or deterring them. An important issue that has not received much attention, however, is the opposite effect – the potential cost that income inequality imposes on businesses.

The results indicate that a single decimal increase in the Gini coefficient is associated with a 4 percent increased crime risk. This is a significant increase compared to the average crime risk of 20 percent in the sample.

In a recently published study, we highlight one of the channels through which inequality affects business – specifically, crime risks – and the role of social cohesion in mitigating its harmful effects. Our analysis is based on the World Bank’s Corporate Survey, which provides rich data on exposure to crime and corporate losses. Figure 1 presents an inequality scatter plot, measured using the Gini coefficient, against intercompany crime exposure (ie, the average probability of theft over the period 2006–2018). The plot, which is based on the 122 countries included in our data set, reveals a clear positive association between crime and inequality with a correlation coefficient of 0.40. In South Africa, the most unequal country in the world with a Gini of 0.63, the chance of a company being exposed to crime in a given year was 43.3 percent. In Kazakhstan, where the disparity is moderate with a Gini of 0.28, the crime risk in business was only 17%.

Figure 1. The relationship between crime and inequalitySource: Authors’ calculations based on World Bank data

We confirmed this positive association with a more systematic regression analysis that took into account the effects of different state and firms. The results indicate that a single decimal increase in the Gini coefficient is associated with a 4 percent increased crime risk. This is a significant increase compared to the average crime risk of 20 percent in the sample.

Three explanations

There are at least three sets of explanations for this strong positive association between inequality and crime: economic, social, and institutional.

  • Gary Becker, the 1992 Nobel Prize winner in economics, popularized the rationalist view of crime, holding that agents choose to engage in criminal activities by balancing the expected rewards of criminal activities against legal action. According to this view, inequality increases the economic attractiveness of criminal business by decreasing the chances of the poor to obtain legal employment and achieve advancement.
  • Second, social theories, such as Robert Merton’s stress theory, assert that the poor become more resentful of the rich when their hopes of improving their situation become unacceptable in the face of rising income and wealth inequalities. In parallel, the ability of societies to regulate the behavior of their members is diminishing, allowing economic and social grievances to escalate into violence and crime.
  • Finally, institutional theory suggests that inequality tends to erode the social fabric that binds societies together, thus weakening the institutions that support the legitimacy of business activities. In some cases, companies may gradually lose their “licence to operate” as their legitimacy slowly erodes. In other cases, inequality can lead to violent protests or radical social movements demanding redistribution of wealth and directly condemning the wealthy and their businesses. In our analysis, we emphasize this last interpretation.

Together, these economic, social, and institutional forces can end up making businesses in unequal countries legitimate targets for criminal activities.

One Antidote: Social Cohesion

Does stronger social cohesion mitigate the negative effects of inequality? To answer this question, we examined the potential role of social trust and segmentation in tempering the link between inequality and crime. Social trust reflects the extent to which members of the community believe in the honesty, integrity, and reliability of other (indiscriminate) individuals. Previous research has confirmed that generalized trust is a critical component of social cohesion that enables teamwork. We also expect high-trust societies to have higher moral standards, which would weaken the relationship between inequality and crime by reducing the potential for inequality that fuels widespread resentment against the wealthy. Trust also has an “environmental” effect that facilitates interaction and interdependence between members of a society with different levels of social status. Thus it can serve as an informal organizational mechanism that compensates for the weakening of formal institutions in unequal societies.

Besides trust, social cohesion has other elements that are reflected in cognitive and cultural commonalities that create a shared sense of identity. Ethnolinguistic fragmentation, which captures cognitive and cultural differences, can be seen as an inverse measure of social cohesion that shapes the relationship between inequality and crime. First, the economic mechanism linking inequality and crime could be stronger in countries with greater ethno-linguistic disintegration because inequality in these countries will likely enhance economic regulation and resource allocation along racial or ethnic lines. Excluded groups could be further disadvantaged, which could fuel hate crimes directed at businesses owned by ethnic groups considered distinct. An example is the attacks of the poor on minority-owned businesses in South Africa during the protests of 2021. There is also a large body of evidence that ethno-linguistic fragmentation tends to undermine the development of democratic and inclusive institutions. Therefore, highly divided countries will not be in a good position to put in place sound policies that can mitigate the negative effects of inequality, especially those of redistribution that transfer wealth across ethnic groups.

Our analysis confirmed that social cohesion, measured using social trust and ethnic linguistic segmentation, had a significant moderating role. The association between inequality and crime drops sharply as levels of trust increase, and becomes insignificant as trust reaches the levels seen in Armenia and Thailand (where more than a third of the population trusts other random people). Thus, the strong link between inequality and crime appears to be confined mainly to low-trust countries.

The relationship between inequality and crime is greater at higher levels of ethnolinguistic fragmentation. In China, where fragmentation is very low, the association between inequality and crime is greater than half the level in Burkina Faso, where fragmentation is much greater.

Inequality not only increases the risk of crime in business; It is also associated with greater losses from crime (measured as a share of revenue). These results, which are robust to a wide range of sensitivity tests, highlight how inequality can constitute an important hidden operational cost for companies, including multinationals. The findings suggest that crime risks attributable to inequality can shape firms’ entry decisions into foreign markets and capital allocation.

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