Is the risk of crime against business increasing in highly unequal countries?

Rising inequality is one of the most pressing social problems of our time. According to data from World Inequality Database, the last two decades have seen an increase in the total income share of the top 10% in all but two of the world’s top 10 economies (excluding France and the United Kingdom). In the world’s largest economies, the average income share of the top 10 percent of the population increased from 37.5 percent in 2001 to 41.3 percent in 2021. This is often explained by rapid technological change and competition from international trade, although the magnitude of changes in inequality, as well as its underlying explanations, potentially differ between advanced and emerging market economies.

In addition to assessing broader ethical considerations, academic research has begun to uncover the many perverse ways in which growing inequality is shaping societies: from lower economic growth to decreased subjective well-being as well as political polarization. Researchers also explored how corporations are implicated in growing inequality within countries, which has led to debate about the role of corporations in stimulating or curbing it. However, an important issue that has been overlooked is the backlash, ie the potential costs that income inequality imposes on firms.

The results show that a one-decile increase in the Gini coefficient is associated with a 4 percent increase in the risk of crime. This is a significant increase from the 20 percent average risk of crime in the sample.

In with recently published study, we shed light on one of the channels through which inequality affects business, namely the risk of crime, and the role of social cohesion in mitigating its deleterious effects. Our analysis is based on the World Bank Business Survey, which provides extensive data on crime exposure and loss among businesses. On fig. Figure 1 is a scatterplot of inequality as measured by the Gini coefficient versus crime rates among businesses (i.e. average probability of theft over 2006-2018). A plot based on the 122 countries included in our dataset shows a clear positive relationship between crime and inequality, with a correlation coefficient of 0.40. In South Africa, the most unequal country in the world with a Gini coefficient of 0.63, the likelihood that a firm would experience crime in a given year was 43.3 percent. In Kazakhstan, where inequality is moderate with a Gini coefficient of 0.28, the risk of enterprise crime is only 17%.

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

We confirmed this positive relationship with a more systematic regression analysis that took into account the influence of different countries and firms. The results show that a one-decile increase in the Gini coefficient is associated with a 4 percent increase in the risk of crime. This is a significant increase from the 20 percent average risk of crime in the sample.

Three explanations

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

  • Gary Becker, winner of the 1992 Nobel Prize in Economics, popularized rationalistic view crime, alleging that agents choose to engage in criminal activity by weighing the expected benefits of criminal activity versus legal work. According to this view, inequality increases the economic attractiveness of criminal acts, dimming the poor’s prospects for legal employment and career advancement.
  • Second, sociological theories such as Robert Merton’s deformation theory, argue that the poor become more resentful of the rich when their hopes of getting better are frustrated in the face of growing income and wealth inequalities. In tandem, society’s ability to regulate the behavior of its members is reduced, allowing economic and social grievances to escalate into violence and crime.
  • Finally, institutional theory suggests that inequality tends to destroy the social fabric that binds communities together, thereby weakening the institutions that maintain the legitimacy of business activity. In some cases, businesses may gradually lose their “license to operate” as their legitimacy gradually wanes. In other cases, inequality can lead to violent protests or radical social movements that demand a redistribution of wealth and directly blame the rich and their businesses. In our analysis, we emphasize this latter explanation.

Together, these economic, social and institutional forces can lead businesses in unequal countries to become legitimate targets of criminal activity.

One Antidote: Social Cohesion

Does stronger social cohesion mitigate the adverse effects of inequality? To answer this question, we looked at the potential role of social trust and fractionation in mitigating the link between inequality and crime. Social trust reflects the degree to which members of society believe in the honesty, integrity, and reliability of other (random) people. Previous research emphasized that universal trust is an essential element of social cohesion, allowing collective action. We also expect high-trust societies to have higher moral standards, which weaken the relationship between inequality and crime, making it less likely that inequality fuels widespread resentment of the rich. Trust also has an “environmental” effect, which facilitates interaction and interdependence between community members with different levels of social status. Thus, it can serve as an informal regulatory mechanism to compensate for the weakening of formal institutions in unequal societies.

In addition to trust, social cohesion has other elements reflected in cognitive and cultural commonalities that create a shared sense of identity. Ethnolinguistic fractionalization, 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 may be stronger in countries with greater ethnolinguistic fragmentation, since inequality in these countries is likely to increase economic organization and distribution of resources along ethnic or racial lines. Excluded groups may be further disenfranchised, which can trigger hate crimes against businesses owned by ethnic groups considered privileged. An example would be the attacks of the poor minority-owned businesses in South Africa during the 2021 protests. There is also a large amount of evidence that ethnolinguistic factionalism tends to undermine the development of democratic and inclusive institutions. Thus, highly divided countries will not be in a position to develop sound policies that could mitigate the adverse effects of inequality, especially redistribution when wealth is transferred between racial groups.

Our analysis confirmed that social cohesion, as measured by social trust and ethnolinguistic factionalism, played a significant deterrent role. The link between inequality and crime weakens sharply as trust levels rise, and becomes negligible when trust reaches the levels seen in Armenia and Thailand (where just over a third of the population trusts random people). Thus, the strong link between inequality and crime seems to be mostly limited to low confidence countries.

The link between inequality and crime becomes stronger at higher levels of ethnolinguistic fractionalization. In China, where factionalization is very low, the relationship between inequality and crime is only half that of Burkina Faso, where fractionation is much higher.

Inequality not only increases the risk of crime in business; it is also associated with high crime losses (measured as a share of income). These results, which are robust to a wide range of sensitivity tests, show how inequality can represent an important hidden transaction cost for businesses, including multinational enterprises. The results show that the risks of crime associated with inequality can influence corporate decisions to enter foreign markets and allocate capital.