Mexico's Economy Takes a Hit from Impact of Violence

Mexico’s high economic impact of violence contrasts with the federal government’s underinvestment in public order and safety.

The Impact of Violence on Mexico’s Economy

Given the magnitude of violence in Mexico, measuring its economic impact becomes necessary for gauging the financial burden that it imposes on Mexican society.

Estimates from the 2018 Mexico Peace Index (MPI) show that the economic impact of violence in Mexico was 4.72 trillion pesos (US$249 billion) in 2017. This is equivalent to 21% of the country’s GDP.

To put this figure in perspective, it is eight times higher than the public investments made in health and seven times higher than those made in education in the same year.

Given the hefty cost of violence, Mexico’s expenditure on containing it is significantly low. In 2017, the federal government allocated a mere one percent of GDP for expenditure on public order and safety.

This level of expenditure is just 60 percent of the OECD average and is equivalent to what countries with very low levels of violence like Denmark and Luxembourg spend.

This points to the reality that, given Mexico’s high level of violence, the Mexican government effectively underinvests in developing the necessary institutional capacity required to contain and prevent it.

Estimates from the 2018 MPI report show that reducing the economic impact of violence by just one percent would free up enough resources to double the government’s expenditure on science, technology and innovation.

This highlights not only the high opportunity cost of violence but, most importantly, the cost-effectiveness of investing in violence-containment expenditure.

Breaking down costs

The economic impact of violence model developed by the Institute for Economics and Peace (IEP) uses an accounting method that aggregates ten indicators related to containing, preventing and dealing with the consequences of violence.

The model integrates both direct and indirect costs of violence as well as a ‘multiplier effect’. The multiplier effect calculates the additional economic activity that would have accrued if the direct costs of violence had been avoided.

Homicide contributed the most to economic impact of violence in 2017 at 46%

When broken down by categories, the largest contributor to the economic impact of violence in 2017 was homicide, at 46 percent of the total impact in 2017, up from 42 percent in 2016.

The total economic impact of homicide to Mexico’s economy amounted to 2.18 trillion in 2017, equivalent to ten percent of Mexico’s GDP.

Violent crime, which is comprised of robbery, assault and rape, was the second most expensive form of violence, representing 40 percent of the economic impact of violence, at 1.9 trillion pesos.

In turn, federal government spending on activities aimed at reducing violence – military, internal security and justice system expenditure was 493 billion pesos, accounting for 10 percent of the total economic impact.

The remaining three percent of economic losses are related to fear of violence, organized crime activity, household firearm purchases, and the costs of private security.

Overall, homicide and violent crime represented 87 percent of the economic impact of violence in 2017, as shown in Figure 1. This highlights that the impact from the consequences of violence is far larger than containment spending in Mexico.

Per capita and per state

The nationwide economic impact of violence amounted to 33,118 pesos per person in 2017. These per capita losses surpass four months of income for an average Mexican worker or two months income for the average Mexican family.

Results from the 2018 MPI report show that states with lower levels of peacefulness tend to register a higher per capita economic impact of violence. The correlation is strong and statistically significant, as shown in Figure 2.

Opportunity cost and cost-effectiveness

Violence imposes a sizeable financial burden on Mexican society. The costliness of violence entails that resources that would otherwise be put to more productive ends are being drained by the non-productive consequences of violence.

Indeed, the financial trade-off that violence creates in Mexico sheds light on how investments in (non-militarised) violence containment programmes can be cost-effective.

Particularly when considering that reducing the economic impact of violence by just one percent would free up resources equivalent to the government’s expenditure on science, technology and innovation.

2017 marked Mexico’s most violent year on record, with the country’s peacefulness deteriorating by 10.7 percent relative to 2016. At the same time, the violent crime rate rose by 15.2 percent in 2017.

The rise in the levels of violence contrast with the fact that the rate of increase in government expenditure on violence containment has been slowing since 2014, with a seven percent decline between 2016 and 2017, as shown in Figure 3.

Adjusting violence-containment expenditure

Going forward, if Mexico is to make headway in reducing its high levels and concomitant costliness of violence, expenditure on violence containment needs significant adjustment.

Spending beyond an optimal level has the potential to constrain a nation’s economic development, but underinvestment has so far created the conditions for excessive levels of crime, which have had a markedly negative impact on Mexico’s economy.

These trade-offs are not easy to understand and present an important policy challenge. The scarcity of public resources means that an increase in spending on containing violence has to be funded by increased taxes or reallocating from other sectors.

Meanwhile, the lack of capabilities in the judicial and security sectors continue to exacerbate Mexico’s ‘security gap’, with the consequential costs of violence far exceeding containment costs at a time of rising levels of violence.