Lecture given at the Netherlands Economic
Institute (NEI) on 18/4/2001
Human vice is the most certain thing after death and taxes,
to paraphrase Benjamin Franklin. The only variety of
economic activity, which will surely survive even a
nuclear holocaust, is bound to be crime. Prostitution,
gambling, drugs and, in general, expressly illegal
activities generate c. 400 billion USD annually to their
perpetrators, thus making crime the third biggest industry
on Earth (after the medical and pharmaceutical
industries).
Many of the so called Economies in Transition and of
HPICs (Highly Indebted Poor Countries) do resemble
post-nuclear-holocaust ashes. GDPs in most of these
economies either tumbled nominally or in real terms by
more than 60% in the space of less than a decade. The
average monthly salary is the equivalent of the average
daily salary of the German industrial worker. The GDP
per capita - with very few notable exceptions - is around
20% of the EU's average and the average wages are 14%
the EU's average (2000). These are the telltale overt signs
of a comprehensive collapse of the infrastructure and of
the export and internal markets. Mountains of internal
debt, sky high interest rates, cronyism, other forms of
corruption, environmental, urban and rural dilapidation -
characterize these economies.
Into this vacuum - the interregnum between centrally
planned and free market economies - crept crime. In most
of these countries criminals run at least half the economy,
are part of the governing elites (influencing them behind
the scenes through money contributions, outright bribes,
or blackmail) and - through the mechanism of money
laundering - infiltrate slowly the legitimate economy.
What gives crime the edge, the competitive advantage
versus the older, ostensibly more well established elites?
The free market does. When communism collapsed, only
criminals, politicians, managers, and employees of the
security services were positioned to benefit from the
upheaval. Criminals, for instance, are much better
equipped to deal with the onslaught of this new
conceptual beast, the mechanism of the market, than most
other economic players in these tattered economies are.
Criminals, by the very nature of their vocation, were
always private entrepreneurs. They were never state
owned or subjected to any kind of central planning. Thus,
they became the only group in society that was not
corrupted by these un-natural inventions. They invested
their own capital in small to medium size enterprises and
ran them later as any American manager would have
done. To a large extent the criminals, single handedly,
created a private sector in these derelict economies.
Having established a private sector business, devoid of
any involvement of the state, the criminal-entrepreneurs
proceeded to study the market. Through primitive forms
of market research (neighbourhood activists) they were
able to identify the needs of their prospective customers,
to monitor them in real time and to respond with agility to
changes in the patterns of supply and demand. Criminals
are market-animals and they are geared to respond to its
gyrations and vicissitudes. Though they were not likely to
engage in conventional marketing and advertising, they
always stayed attuned to the market's vibrations and
signals. They changed their product mix and their pricing
to fit fluctuations in demand and supply.
Criminals have proven to be good organizers and
managers. They have very effective ways of enforcing
discipline in the workplace, of setting revenue targets, of
maintaining a flexible hierarchy combined with rigid
obeisance - with very high upward mobility and a clear
career path. A complex system of incentives and
disincentives drives the workforce to dedication and
industriousness. The criminal rings are well run
conglomerates and the more classic industries would have
done well to study their modes of organization and
management. Everything - from sales through territorially
exclusive licences (franchises) to effective "stock" options
- has been invented in the international crime
organizations long before it acquired the respectability of
the corporate boardroom.
The criminal world has replicated those parts of the state
which were rendered ineffective by unrealistic ideology or
by pure corruption. The court system makes a fine
example. The criminals instituted their own code of
justice ("law") and their own court system. A unique -
and often irreversible - enforcement arm sees to it that
respect towards these indispensable institutions is
maintained. Effective - often interactive - legislation, an
efficient court system, backed by ominous and ruthless
agents of enforcement - ensure the friction-free
functioning of the giant wheels of crime. Crime has
replicated numerous other state institutions. Small wonder
that when the state disintegrated - crime was able to
replace it with little difficulty. The same pattern is
discernible in certain parts of the world where terrorist
organizations duplicate the state and overtake it, in time.
Schools, clinics, legal assistance, family support, taxation,
the court system, transportation and telecommunication
services, banking and industry - all have a criminal
doppelganger.
To summarize:
At the outset of transition, the underworld constituted an
embryonic private sector, replete with international
networks of contacts, cross-border experience, capital
agglomeration and wealth formation, sources of venture
(risk) capital, an entrepreneurial spirit, and a diversified
portfolio of investments, revenue generating assets, and
sources of wealth. Criminals were used to private sector
practices: price signals, competition, joint venturing, and
third party dispute settlement.
To secure this remarkable achievement - the underworld
had to procure and then maintain - infrastructure and
technologies. Indeed, criminals are great at innovating and
even more formidable at making use of cutting edge
technologies. There is not a single technological advance,
invention or discovery that criminals were not the first to
utilize or the first to contemplate and to grasp its full
potential. There are enormous industries of services
rendered to the criminal in his pursuits. Accountants and
lawyers, forgers and cross border guides, weapons experts
and bankers, mechanics and hit-men - all stand at the
disposal of the average criminal. The choice is great and
prices are always negotiable. These auxiliary
professionals are no different to their legitimate
counterparts, despite the difference in subject matter. A
body of expertise, know-how and acumen has
accumulated over centuries of crime and is handed down
the generations in the criminal universities known as jail-
houses and penitentiaries. Roads less travelled, countries
more lenient, passports to be bought, sold, or forged, how
to manuals, classified ads, goods and services on offer and
demand - all feature in this mass media cum educational
(mostly verbal) bulletins. This is the real infrastructure of
crime. As with more mundane occupations, human capital
is what counts.
Criminal activities are hugely profitable (though wealth
accumulation and capital distribution are grossly non-
egalitarian). Money is stashed away in banking havens
and in more regular banks and financial institutions all
over the globe. Electronic Document Interchange and
electronic commerce transformed what used to be an
inconveniently slow and painfully transparent process -
into a speed-of-light here-I-am, here-I-am-gone type of
operation. Money is easily movable and virtually
untraceable. Special experts take care of that: tax havens,
off shore banks, money transactions couriers with the
right education and a free spirit. This money, in due time
and having cooled off - is reinvested in legitimate
activities. Crime is a major engine of economic growth in
some countries (where drugs are grown or traded, or in
countries such as Italy, in Russia and elsewhere in CEE).
In many a place, criminals are the only ones who have any
liquidity at all. The other, more visible, sectors of the
economy are wallowing in the financial drought of a
demonetized economy. People and governments tend to
lose both their scruples and their sense of fine distinctions
under these unhappy circumstances. They welcome any
kind of money to ensure their very survival. This is where
crime comes in. In Central and Eastern Europe the process
was code-named: "privatization".
Moreover, most of the poor economies are also closed
economies. They are the economies of nations
xenophobic, closed to the outside world, with currency
regulations, limitations on foreign ownership, constrained
(instead of free) trade. The vast majority of the populace
of these economic wretches has never been further than
the neighbouring city - let alone outside the borders of
their countries. Freedom of movement is still restricted.
The only ones to have travelled freely - mostly without
the required travel documents - were the criminals. Crime
is international. It involves massive, intricate and
sophisticated operations of export and import, knowledge
of languages, extensive and frequent trips, an intimate
acquaintance with world prices, the international financial
system, demand and supply in various markets, frequent
business negotiations with foreigners and so on. This list
would fit any modern businessman as well. Criminals are
international businessmen. Their connections abroad
coupled with their connections with the various elites
inside their country and coupled with their financial
prowess - made them the first and only true businessmen
of the economies in transition. There simply was no one
else qualified to fulfil this role - and the criminals stepped
in willingly.
They planned and timed their moves as they always do:
with shrewdness, an uncanny knowledge of human
psychology and relentless cruelty. There was no one to
oppose them - and so they won the day. It will take one or
more generations to get rid of them and to replace them by
a more civilized breed of entrepreneurs. But it will not
happen overnight.
In the 19th century, the then expanding USA went through
the same process. Robber barons seized economic
opportunities in the Wild East and in the Wild West and
really everywhere else. Morgan, Rockefeller, Pullman,
Vanderbilt - the most ennobled families of latter day
America originated with these rascals. But there is one
important difference between the USA at that time and
Central and Eastern Europe today. A civic culture with
civic values and an aspiration to, ultimately, create a civic
society permeated the popular as well as the high-brow
culture of America. Criminality was regarded as a
shameful stepping stone on the way to an orderly society
of learned, civilized, law-abiding citizens. This cannot be
said about Russia, for instance. The criminal there is, if
anything, admired and emulated. The language of
business in countries in transition is suffused with the
criminal parlance of violence. The next generation is
encouraged to behave similarly because no clear (not to
mention well embedded) alternative is propounded. There
is no - and never was - a civic tradition in these countries,
a Bill of Rights, a veritable Constitution, a modicum of
self rule, a true abolition of classes and nomenclatures.
The future is grim because the past was grim. Used to
being governed by capricious, paranoiac, criminal tyrants
- these nations know no better. The current criminal class
seems to them to be a natural continuation and extension
of generations-long trends. That some criminals are
members of the new political, financial and industrial
elites (and vice versa) - surprises them not.
In most countries in transition, the elites (the political-
managerial complex) make use of the state and its
simulacrum institutions in close symbiosis with the
criminal underworld. The state is often an oppressive
mechanism deployed in order to control the populace and
manipulate it. Politicians allocate assets, resources, rights,
and licences to themselves, and to their families and
cronies. Patronage extends to collaborating criminals.
Additionally, the sovereign state is regarded as a means to
extract foreign aid and credits from donors, multilaterals,
and NGOs.
The criminal underworld exploits the politicians.
Politicians give criminals access to state owned assets and
resources. These are an integral part of the money
laundering cycle. "Dirty" money is legitimized through
the purchase of businesses and real estate from the state.
Politicians induce state institutions to turn a blind eye to
the criminal activities of their collaborators and ensure
lenient law enforcement. They also help criminals
eliminate internal and external competition in their
territories.
In return, criminals serve as the "long and anonymous
arm" of politicians. They obtain illicit goods for them and
provide them with illegal services. Corruption often flows
through criminal channels or via the mediation and
conduit of delinquents. Within the shared sphere of the
informal economy, assets are often shifted among these
economic players. Both have an interest to maintain a
certain lack of transparency, a bureaucracy (=dependence
on state institutions and state employees) and NAIRU
(Non Abating Internal Recruitment Unemployment).
Nationalism and racism, the fostering of paranoia and
grievances are excellent tactics of mobilization of foot
soldiers. And the needs to dispense with a continuous
stream of patronage and provide venues for the
legitimization of illegally earned funds delay essential
reforms and the disposal of state assets.
This urge to become legitimate - largely the result of
social pressure - leads to a deterministic, four stroke cycle
of co-habitation between politicians and criminals. In the
first phase, politicians grope for a new ideological cover
for their opportunism. This is followed by a growing
partnership between the elites and the crime world. A
divergence then occurs. Politicians team up with
legitimacy-seeking, established crime lords. Both groups
benefit from a larger economic pie. They fight against
other, less successful, criminals, who wish to persist in
their old ways. This is low intensity warfare and it
inevitably ends in the triumph of the former over the
latter.