Breaking the Cycle

I published the following article with my colleague Dora Beszterczey in the Winter 2011 issue of the Americas Quarterly.

Latin America has the sad distinction of being one of the world’s most violent regions, with crime rates double the world average. Actively struggling to provide safety to their citizens, Latin American governments are pouring millions of dollars into law enforcement, and in some places even deploying the army. Many countries are also working to strengthen law enforcement institutions through reforming court systems and professionalizing police forces. While these are all important measures, governments risk losing sight of the relationship between security, economic opportunity and growth.

In the long term, only prosperous societies will be able to address the roots of today’s escalating insecurity. The deciding factor may well be the fate of micro, small and medium enterprises—the mainstays of the region’s economies and the drivers of job growth and economic output. Unfortunately, these entities are also on the frontlines of the bloodshed—hit hardest by rising violence. Latin America’s future, as a result, hangs in precarious balance.

Businesses on the Frontline

Just a few years ago, Ciudad Juárez was Mexico’s fastest growing city, burgeoning with new maquiladoras churning out auto and computer parts, medical supplies and consumer goods bound north. Universities, restaurants and real estate blossomed in the export economy’s wake. Yet in the last few years, Ciudad Juárez has become the most violent city in Mexico and, by many accounts, the world. The number of drug-related killings has climbed each year, and 2010 is set to break another bloody record. October alone recorded 352 drug-related killings, more than the annual toll in 2007.

Three years into Mexico’s war against the drug cartels, narco-violence has left big business still standing and foreign direct investment still flowing, even in places like Juárez. Large corporations quickly beefed up security and changed the daily rituals for many workers. For instance, in border towns, managers, engineers and other support staff often move to the United States, returning to Mexico for work each day. Instead, the devastating effects of the violence occur at the micro- and small-enterprise level.

Over 10,000 small businesses—four out of 10 firms—have closed their doors in Ciudad Juárez alone. The city’s official unemployment rate climbed from virtually zero to 20 percent in the last three years, swelling the ranks of sidewalk vendors and other informal jobs. With few economic options available, many of the unemployed also found work in the drug cartels and local gangs, accelerating the downward economic and violent spiral.

The Real Costs of Insecurity

Policymakers, academics and financial analysts wrangle over the supposed cost of violence—estimated to slice between 1.2 and 3 percentage points off Mexico’s gross domestic product. But these numbers do not get at the more intangible impact of opportunities and jobs lost to violence and insecurity—and the disproportionate cost to small businesses and entrepreneurs.

Rising violence and insecurity have placed a financial burden on Mexican firms of all sizes. For larger firms, this has meant increased spending on insurance, security equipment, armored cars, and the like, amounting, on average, to 3 percent of their operating expenses. However, for small businesses, such costly insurance measures are simply out of reach. Their owners are obvious targets for organized crime. They lack the political weight, access and lobbying power to solicit policymakers to address their concerns. They are also less able to afford the private security forces upon which so many large corporations now rely. Subsequent robbery and extortion payments take a larger share of their revenues.In this insecure climate, financing at local banks dries up as banks further ration access to credit for small businesses.

Even if available, the insecurity adds a “violence premium” on loans that small entrepreneurs can ill afford. These combined factors prevent small business owners from making productive investments that would allow their firms to grow and innovate. In many cases, the effects prove insurmountable, leading firms to stay small and informal, or to close shop altogether.

These individual decisions—and often tragedies—have an impact on broader communities and the national economy. In Mexico, micro and small enterprises employ 28 million people, or 50 percent of the workforce. By being forced to remain small and informal, these businesses fail to spur the creation of new jobs and other economic opportunities.

The recent economic downturn is only sweeping more workers into the informal ranks. In Mexico and elsewhere in Latin America, the lack of opportunities available to young people makes crime an attractive alternative. In Ciudad Juárez, the 80,000 ni-nis—youth neither in work nor at school—are offered 500 pesos ($40) for each stolen car and 1,000 pesos ($80) for an assassination.

As the cartels up the ante in Monterrey, Mexico’s industrial heart and one of its wealthiest cities, young people run murderous errands for a “salaried” 4,000 pesos ($320) a week. Throughout the region, the challenge of providing opportunities and legal employment for youth coming of age will only grow. Without solutions, violence will continue to escalate.