To the extent that there's a conventional wisdom on the relationship between crime and economic liberalization, it comes from the experience of Russia and Eastern Europe in the 1990s, when organized criminal groups flourished in the wild new free-market system.
But Kislaya Prasad of the University of Maryland's Robert H. Smith School of Business argues that there's another side to the story. In a paper for the Journal of Law and Economics, he argues that economic liberalization in India was responsible for a steep reduction in the country's crime rate. In particular, the murder dropped precipitously around the same time the government broke up the country's famous "License Raj," which had for decades placed stiff restrictions on manufacturing and imports:
Prasad chose to look at murders, since the statistics are generally more reliable than other crimes. So why would making it easier to set up businesses cause murder rates to fall?
Restrictions on economic activity and voluntary trade frequently give rise to attempts to contravene controls. The experience with prohibition of liquor, drugs, and prostitution, or the imposition of rationing and rent controls, is unambig- uous. Inevitably, production and consumption go underground, and individuals start to trade in black markets. Trade restrictions-especially when they are extreme-lead to widespread smuggling. An unfortunate by-product of such illegal trade and production is violent crime. A variety of social institutions, courts of law for instance, have been devised to manage con?ict between agents, engaged in trade. When a transaction becomes illegal, agents lose access to such institutions. An alternative way in which disputes might be resolved, and agreements might be enforced, is through violence (Miron 1999, 2001).
Individuals engaged in legal activities also have access to protections offered by the state which are unlikely to be available to those involved in illegal activities. For instance, a drug dealer who is muscled out of his or her territory could hardly approach the police for help. This means that turf battles are more likely to turn violent. Such arguments suggest that restrictions on voluntary trade are likely to lead to an increase in violent crime. Conversely, the removal of economic controls should be associated with a decline in violence.
Prasad also finds that trade oppenness has a negative relationship with with murder rates internationally.
There are a number of caveats here. The data applies of marginal effects on murder rates rather than absolute differences: The United States has a much more open economy than most European countries, but vastly more murders. Prasad also notes that the Russian example shows a case in which economic reforms were accompanied with a "weakened security infrastructure" that "made for favorable conditions for illicit trafficking in drugs, arms, and people."
India was a case in which dramatic economic liberlization took place without major political turmoil. That's not exactly an easy feat to pull off.
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