Organized crime and the economics

Organized Crime is particularly scary as these organizations have the sophistication to handle large scale business operations, the innovation drive to evade laws in various ways and the bloodlust to gain monopoly and complete power.  Thus they can flex their financial muscles and worry the world.

To begin with Organized Crime is defined by the FBI Website as “any group having some manner of a formalized structure and whose primary objective is to obtain money through illegal activities.” These organizations have a strict hierarchal base and have their own code of conduct.  Examples of organized crime are found all over the globe. Yakuza in japan, the Russian mafia, the Sicilian mafia are a few well known examples. Since the scope of this is pretty huge, the article shall stick to the most common ways the organized crime earns money and just how much goes into their net.

According to this forbes article, famous crime organizations net in revenue in billions of US Dollars. From Mexico’s Sianola that brings in  $3 billion in revenues to Japan’s Yamaguchi Gumi  that sees a whopping $80 billion in their cash registers; its big money all the way.

There a various avenues for them to earn money, seeing as they can provide a variety of goods and services. It’s a long list actually – assassination, assault,  prostitution, drugs, arms, protection racket ,bookkeeping/gambling, money laundering, counterfeiting, terrorism, cybercrime are some of the broad categories. This article will discuss two criminal activities only – mainly extortion and drugs. These two activities are usually under the reign of organized crime and affect our economy greatly.

Extortion and protection rackets are almost a trademark of organized crime. Musclemen force people to pay money, through intimidation, threats and bullying. This money is a “protection fee” of a sort – Protection from the very criminals that threaten to harm them. The criminals do not harm their victims so as long as the money keeps coming in. They have perfect information about the individual or organization they want to target and have complete knowledge about their financial standing through inside leads. Thus their demands are in perfect sync with a business’ financial reality. Economically this is a major blow. The victims are those individuals who own a business of some sort and thus generate money, and jobs in a community. Targeting them harms the entrepreneurial environment bringing about a halt to businesses and investment in the area. These Extortions can get creative – they call up a victim and make him believe that their family member is in danger. They use recordings, GPS locations and phishing scams to obtain information and make the threat more believable. Extortion serves as a way for a criminal organization to cover its costs, and this method brings in fixed and regular income. Also the high liquidity of this scheme is another plus. This paper on Extortion in Mexico gives a perspective the massive scope of extortion.

Drug trafficking is one of the most lucrative albeit dangerous strategy. Supply and transportation of illegal narcotics are a high risk, high returns investment of a criminally inclined organization. Usually even small quantities bring in a huge sum of money and are immensely valuable per gram, so creative methods are used to shift the goods around. According to this blog post drugs are an inelastic commodity. Meaning that even if price rise goes up an addicted user will still keep consuming drugs. With this theory in mind, a higher price of drugs can bring in more revenue for the cartels that can then use this increasing income to broaden operations and market scope; further embroiling the society in more crime. According to this paper, In the drug business there is not a lot of marketing costs, tax costs, typical storage costs and inventory costs (drugs are not very bulky). However due to its illegal nature, “the dominant costs appear to be associated with importing, labor, product and asset seizures, and compensation for the risks of incarceration and physical harm.”

The value of Cocaine for example increases from production to consumers. For example cocaine according to US Office of National Drug Control Policy cocaine’s street value per gram was 169 USD in 2010 (Purity- and inflation-adjusted).  The product is that valuable. The street value of coke and heroin is much more than its production costs, because of the complex distribution chain plus the cost of risk compensation for everyone involved.

So this quote from NY Times article make so much sense- “After a bust, arrested traffickers have been known to demand a receipt from authorities, so that they can prove the loss was not because of their own negligence (which would mean they might have to pay for it) or their own thievery (which would mean they might have to die).”

Since the drug trade is heavily penalized by the law, smugglers choose to allocate their risks as much as possible. Smaller quantities are smuggled and roles are rigidly compartmentalized, to protect the top authorities.  According to the same article, cocaine and heroin are high return investments that have allowed the Mexican cartels to become as powerful as they are today; they also indulge in marijuana which is a “cash crop”- An easy income source for the cartels as it requires no processing and it is easy to grow.

The scope of money, labor and innovation involved is massive. The drug business contains within its realm a multitude of activities like money laundering, theft, bribery, fraud, embezzlement etc – which channels resources into areas that are not productive to development or growth.

Organized Crime like Italian mafia has long captured the attention of popular culture! It’s been adapted for movies, books, television series and so much more. But looking at it economically gives us a whole new perspective. More often than not crime has catastrophic consequences, as seen above economic fallout of crime is intense and worrisome for all of us.


Vaibhavi Parmar
An article by:
Vaibhavi Parmar

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