A new report from the World Bank has highlighted the huge toll SA’s high crime rate is taking on the economy, with the bank estimating crime costs the economy R700bn a year, undermining SA’s growth potential and the welfare of its citizens.
If businesses alone could invest some of the amount they spend on security on productive ventures instead, SA’s growth potential could increase by about one percentage point, says the bank in its latest annual economic update on SA.
It urges more effective public spending on public order and safety, calls for the decline in police capacity to be addressed as a priority, and argues that “well-designed and implemented policies, targeted to a few prioritised crimes, can yield results in the medium term”.
It also calls for root causes linked to poor socioeconomic outcomes to be addressed.
The study comes as economists add up the steep cost to the economy of SA’s failure to provide reliable electricity and the crisis in its port and rail services. Few expect economic growth to do much more than keep up with population growth of about 1.6% over the next three years, despite the government’s attempts at reform.
The bank now expects the economy to grow by just 0.7% in 2023 — with SA underperforming not just the world economy but also most emerging economies — and by an average 1.5% between 2024 and 2026, which means unemployment is likely to remain above 32% and the poverty rate will decline only slightly, the report said.
The study of the economic cost of crime is the first to quantify this systematically, drawing on surveys of businesses and households and using an accounting methodology that’s been widely used in similar studies globally. It finds that SA’s unusually high and violent crime rates “damage the economy and contribute to the misallocation and inefficient use of resources, inflicting an estimated cost of at least 10% of GDP each year”.
“Crime reduces firms’ competitiveness, crowds out productive private and public spending, damages basic infrastructure and affects people’s quality of life, all of which contribute to the misallocation of resources in the economy,” says the report, which emphasises its estimates are conservative and the overall social and economic costs are probably higher.
Crime raises operating costs and makes it harder to start and grow businesses, affecting small, medium and micro businesses particularly badly. The report estimates the annual impact of crime on firms at 6.5% of GDP, including direct losses in income and assets as well as the cost of prevention. The impact of economic crime on households is estimated at 2% of GDP.
The report points to the impact of crime in terms of reinforcing an inequality rate that is already among the highest in the world. “All households and firms are vulnerable to crime, but their capacity to protect themselves (through private security) depends primarily on their income.”
Crime also contributes to the deterioration of network infrastructure through theft, says the report. Though Transnet, Eskom and others have made much of the damage done by cable theft and vandalism, the bank finds that the direct and indirect costs of infrastructure theft to operators, though substantial, represent only a fraction of the overall damage to the economy.
The study found that formal sector businesses sustained more crime-related losses than emerging-market peers, with losses 30% higher than in Indonesia , Morocco and Nigeria and up to six times higher than in high-income countries.
The construction sector faces “specific extortion problems linked to well-organised mafias dubbed ‘local business forums’ that invade construction sites and demand a ransom, or a stake in development projects,” the report said.
In the informal sector, at least 10% of businesses were exposed to economic crime each year, including burglary, robbery and theft, with some surveys indicating higher numbers.
The government allocated almost 10% of non-interest expenditure — about 1% of GDP — to the police, judiciary and correctional services in 2021, which was above the global average. But despite the high levels of spending, the incidence of crime exceeds that of most countries, the report said.
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