Hayk Mardanyan

The relationship between GDP per capita growth and crime rates is often the subject of statistical analyses by agencies such as the World Bank and/or the IMF. These agencies estimate a negative correlation between crime rates and GDP per capita growth: in environments of economic prosperity, crime tends to decrease. However, there are not many theoretical academic papers exploring why this has to be the case, or modeling the relationship between these macroeconomic variables. One interesting paper modelling these variables is Goulas, A. and Zervoyianni, 2015: they incorporate crime rates into a standard Solow model and split public spending into productive spending and unproductive spending, where the latter stems from criminal behavior in the society. They then get a steady-state equation for aggregate output which is a function of crime rates, among others. This project tries to construct an endogenous statistical model of the macroeconomy where there is a "spiraling effect" between the crime rates and economic growth: that is, crime rates and economic growth are negatively correlated. As crime rates increase, there is a smaller fraction of the population involved in productive activities, which reduces economic growth. This in turn results in even more people resorting to criminal activities because there are less economic opportunities available as a result of economic shrinking. On the other hand, as crime rates decrease, economic growth will be enhanced, which will create even more economic opportunities and reduce crime rates even further. Which path the society takes will depend on the quality of initial institutions which were set up in a country during its period of colonization. The model will be estimated by an empirical analysis of a panel data involving post-colonial economies from both the advanced, developing and underdeveloped categories. It is well known that there are uniformly higher crime rates in more developed economies than there are in less developed ones: I will incorporate "starting conditions" of these economies and see how these initial states determine how the economy evolves as time progresses. The importance of this kind of research is evident: if the initial institutions of the economy end up determining whether growth increases as crime decreases or the other way around, this might suggest that foreign assistance and institutional exchange programs aimed at improving institutions in poorer countries can go a long way to help them get out of the vicious cycle described above.