This week pictures of the beautiful Miss Honduras were splashed across the world’s newspapers – but for the wrong reason. Sadly Maria Jose Alvarado and her sister Sofia were in the news because they had become the latest victims of Honduras terrible murder rate. Honduras 79 homicides per 100,000 people, making it the most dangerous country on earth – outside of conflict zones. But the problem is not confined to the tiny Central American nation as Latin America has four of the world’s five most dangerous countries. Other recent cases that shocked the world included the murder of 43 student teachers in Mexico. Of course the situation varies greatly within the region, for example, countries like Uruguay and Chile are safer than parts of Europe, but nonetheless crime is a consideration for investors in Latin America.
A growing concern
According to the UN Latin America’s murder rate grew by 12% between 2001 and 2011. Theft is also up, with the rate of robberies tripling in the last 25 years. What’s particularly striking is that this has happened while crime across the developed world has fallen.
Poverty on its own, doesn’t explain the problem. After all, the region has enjoyed an unprecedented economic boom during the last 15 years. Moreover income inequality – often labelled a cause of crime – has also been reduced to 0.5 today compared to 0.54 in 2000. A more likely cause is the weak performance of the state in preventing crime, catching criminals and processing legal cases. The UN found that inefficient police forces, cumbersome and often corrupt judicial processes and a crumbling prison system, all contribute to the rising crime.
Drugs are another issue. The high price that consumers in Europe and the US are willing to pay for marijuana, heroin and cocaine, creates both enormous incentives and funding for criminal groups in Latin America to produce and distribute their wares. Given that neither of these problems – the weak state and the drugs trade – seem likely to disappear anytime soon, investors need to work with the reality in the region.
How does it affect investors?
The impact differs depending on the type of business and level of crime in the area where it operates. But firms in affected areas will likely face extra costs for insurance, private security and crime prevention. In particularly bad areas extortion may encourage firms to hide their earnings, which means they will often make do with older, cheaper equipment – and that affects productivity.
The atmosphere of fear can put off consumers too. UN surveys have found that, depending on the country, between 45% to 65% of people have stopped going out in the evening for fear of crime. That’s bad news if for restaurants and bars. The overall cost of this crime on the economy is hard to calculate but a joint report from the International Development Bank and the UN, estimates that on the extreme end, in countries like Honduras, it can cost up to 10% of GDP, while in more peaceful places like Uruguay it is nearer to 3%.
But the crime problems have also created investment opportunities. UK firms have been doing good business selling equipment to police forces across Latin America. There has also been a boom for private security firms who now employ more than 3 million people across the region. Indeed Latin America now has more private security guards than police. Moves to improve the prison system may see more opportunities open up for outsourcing companies. Finally, many Latin American countries are looking to strengthen their state institutions, which should create opportunities for British legal and policy consultants.