Organised Crime and the Economy: a Framework for Policy Prescriptions*

Andrea Mario Lavezzi+

Abstract In this paper we discuss policies to combat organised crime from the perspective of economic analysis. We introduce concepts such as supply and demand for Mafia and the implied notion of equilibrium to build a framework to classify the contexts in which organised crime interferes with the economy. We then use this framework to discuss policy interventions, distinguishing between policies implemented by the State and mobilisation of civil society. We show that using the economic approach helps understand the aspect of persistence of criminal organisations and identify vicious circles of different nature. The broad spectrum of State policies identified includes norms on competition, on the efficiency of the State, on decriminalisation and on market deregulation. Finally, in discussing the mobilisation of civil society, we highlight the problem of coordination, an aspect often overlooked in the literature. Keywords: Organised Crime, Deterrence Policy, Civil Society

* This paper is based on my seminar at Fonderia Oxford of March 2012. I wish to thank Paolo Falco and seminar participants. I am grateful to two anonymous referees for very useful comments. Thanks also to Luigi Balletta, Francesco Biondo, Paolo Campana, Francesco Calderoni, Giovanni Trovato and Alessandro Spena for useful comments and discussions. Usual disclaimer applies. + A. Mario Lavezzi is Associate Professor of Economics in the Faculty of Law at the University of Palermo, Italy, and member of CICSE. His research focuses on economic development, the economics of organised crime and social networks. Address: Dipartimento di Scienze Giuridiche, della Società e dello Sport, Sezione Diritto e Società, Università di Palermo, Piazza Bologni 8, 90134 Palermo, Italy. Email: [email protected]. Tel. + 39 091 23892208. Fax + 39 091 6111268. 1 1 Introduction The presence of organised crime is found in a conspicuous number of countries (Van Dijk, 2007), Italy being a prime case in the context of Europe. This paper uses the perspective of economic analysis to study a specific aspect of the presence of organised crime in an area, namely its interference with the economy, and possible policy interventions. Previous economic analyses of criminal organisations include, among others, Konrad and Skaperdas (1998), Bandiera (2003), and Bueno de Mesquita and Hafer (2007) but, to date, with the exception of Skaperdas (2001), the economic approach has not been used to discuss policies to combat organised crime. By focusing especially on the Italian experience, the aim of this paper is to propose a framework to classify the contexts in which interferences between organised crime and the economy occur, and then to use this framework to discuss policy. In the discussion of policies we distinguish between policies implemented by the State and the mobilization of the civil society, a distinction often found in the literature.1 For this purpose, we use standard concepts of economic analysis, such as demand, supply and equilibrium, and focus on incentives that the agents concerned, namely affiliates to criminal organisations and non-affiliates, have in carrying out their actions. In this way we can define simple concepts such as demand and supply of Mafia, and identify vicious circles, that is cases in which organised crime becomes a persistent phenomenon. We argue that the economic approach has important merits with respect to the existing literature. First of all, it allows the use of simple concepts (e. g. demand and supply of Mafia, equilibrium) to tackle an otherwise complex phenomenon2 such as criminal organisations. Secondly, it provides crucial elements to design policy interventions. Specifically: i) the emphasis of organised crime as an equilibrium phenomenon, and the related notion of vicious circle, allows us to understand its persistence. Policies, therefore should aim at breaking such equilibria, targeting supply, demand, or both. ii) Economic reasoning with its focus on incentives shows that State policies other than pure repression (e.g. those promoting market competition) should be included among the deterrence policies. In general, the diverse nature of the vicious circles identified suggests a selective use of policies according to the nature of the vicious circle. Finally, the economic approach provides elements to understand the difficulties related to the often invoked mobilization of civil society, namely those

1 Previous works on antimafia policy and/or mobilization of civil society, taking a sociological and politological approach, include schneiderSchneieder and Schneider (2003), La Spina (2005) laSpina2005, and mete2010Mete (2010). 2 See, e.g. Mete (2010, p. 5). 2 concerning the structure of incentives and coordination of the agents involved. The paper is organised as follows: Section 2 presents some evidence for the effect of organised crime on the Italian economy, and sets the stage for the analysis; Section 3 introduces the framework; Section 4 analyses the policy prescriptions suggested by the framework; Section 5 contains the concluding remarks. 2 Preliminaries Recent empirical studies document the negative consequences of organised crime on the Italian economy. In particular, Ppinotti (20112) shows that in some southern Italian regions organised crime has been responsible in recent years for a cumulative GDP loss of approximately 16 %.3 Asmundo and Lisciandra (2008) find that the resources lost to the Sicilian economy through organised crime via extortion amount to 1.4 % of regional GDP, while Daniele and Marani (2011) show that organised crime has a negative effect on foreign direct investments. Albanese and Marinelli (2012, p. 11) estimate that organised crime negatively affects productivity, finding that firms’ productivity (measured by TFP) increases by approximately 9 pecentage points moving from the 90th (Agrigento) to 10th (Perugia) percentile of the distribution of the level of organised crime at provincial level. Finally, Bonaccorsi di Patti (2009) shows that the presence of organised crime in a region increases interest rates paid by firms on loans by approximately 30 basis points. Overall, the above studies demonstrate that organised crime is associated to substantially negative economic effects. In this paper we concentrate on the interaction between organised crime and the economy. We focus on the relationship between criminal organisations and non-affiliates, i.e. agents external to them, essentially belonging to the legal sector of the economy. That is, we mostly abstract from the direct involvement of organised crime in illegal markets, in which production and distribution of illegal goods and services (drugs, prostitution, counterfeit goods, etc.) take place.4

3 This figure is likely to represent a lower bound, as the areas analysed by Pinotti (2012) are Puglia and Basilicata, regions in which there is less organised crime than in other regions such as Sicily, Calabria and Campania. In another study, Tullio and Quarella (1999) find a negative and significant effect of organised crime (measured by the number of homicides) on economic growth in Italian regions, especially in the late 1980s. 4 The direct involvement of organised crime in illegal markets can, however, alter the functioning of the legal sector: i) it may interfere with the allocation of factors, e. g. labour and capital, that might be employed in the legal sector; ii) it allows criminal organisations to accumulate wealth that can be re-invested in the legal sector, lent to 3 The criminal organisations we consider are those of the so-called “Mafia” type.5 That is, entities that not only operate for profits and possess an organised structure, i.e. some division of labour, a hierarchy, etc., but are also have features that make them more similar to institutions such as the State. We refer in particular to their goal of controlling territory.6 In addition, they use violence and intimidation to pursue their goals, but are also interested in obtaining social consensus (see, e. g., sSciarrone, 2011b, p. 3 and Scaglione, 2008a). The goal of controlling territory has important implications for the present discussion. First of all, it is related to the provision of services by criminal organisations to members of society and of the economy (individuals, firms, etc.) that are typical of the State such as protection, and settlement of disputes (Gambetta, 1993).7 This necessarily requires the organisation to interact with the political powers, as the latter comprise the institutional subjects charged with the same goal.8 Finally, the “necessary” interaction with governments implies another important effect on the functioning of an economy, namely interference legal firms, used to corrupt public officers and to strengthen its military apparatus. In particular, reinvestment in legal activities and concession of credit can alter the competitive process, while corruption or collusion with public officers may distract them from impartial provision of services to legal firms. Finally, a strong military apparatus increases the capacity for intimidation (sSciarrone, 2011b, p. 5). 5 The main Italian criminal organisations are Cosa Nostra, the ’Ndrangheta, the Camorra and Sacra Corona Unita, whose regions of origin are, respectively: Sicily, Calabria, Campania, and Puglia, all belonging to southern Italy. However, the recent paper by Calderoni (2011) shows that criminal organisations are significantly present not only in these four southern regions, but also in some provinces of central (e. g. Rome, Latina) and northern (e .g. Milan, Turin, Brescia) Italy. 6 A characteristic clearly traceable in the Sicilian Cosa Nostra and in Calabria’s ’Ndrangheta (Paoli, 2003, 2004), but also relevant to some provinces of Campania, where the Camorra is active (Sciarrone, 2011b, p. 24). 7 Varese (2011) defines these organisations as providers of: “extralegal governance”. See also Varese (2010, pp. 14-20). 8 This intuition was captured by judge Paolo Borsellino, murdered by Cosa Nostra on July 19th, 1992, who claimed that: “Mafia and politics are authorities living on control of the same territory: they either start a war or find an agreement.” (my translation), quoted in Abbate and Gomez (2007, p. 36). In this paper the aspect of the interaction between criminal organisations and political power will be cursorily touched upon. For a game-theoretic study of the interaction between a criminal organisation and government see, e. g., Bueno de Mesquita and Hafer (2007). 4 with public procurement: “thanks to intimidation and collusion with corrupt politicians, [criminal organisations] have struggled to control the market for public works” (Paoli, 2004, p. 23).9 The working hypothesis in this paper is as follows: a fundamental reason why organised crime exists and persists is that the State is inefficient in both the provision of services and in the capacity to repress criminal organisations. 3 Organised crime and the economy From the aim of controlling territory, therefore, it follows that criminal organisations necessarily interfere with the legal economy, and with the political/institutional framework in which it is embedded. In other words, these organisations do not simply juxtapose themselves to a pre-existing economic system, as would be the case for an organised group of smugglers. By their very nature, they become interlocked with the system and may alter its functioning. In this section we use economic analysis to propose a framework to classify the different contexts in which organised crime interferes with the economy, that is instances in which behaviours of agents operating in the economy are affected by the presence of the organised crime.10

3.1 The demand for Mafia and mutual advantage (MA) Criminal organisations may offer a variety of services. Most of these services belong to the category of “protection” which, according to Gambetta (1993), is what specifically characterises organisations such as the Sicilian Mafia. Following Varese (2006b, p. 412), we can list the following “services”: “protection against extortion...; protection against theft and police harassment...; protection of thieves...; protection in relation to informally obtained credit and the retrieval of loans...; elimination of competitors...; intimidation of customers, workers, and trade unionists for the benefit of employers...; intimidation of lawful right-holders...; and the settlement of a variety of disputes...”.11

9 Criminal organisations in general have an interest in grabbing public resources. Tullio and Quarella (1999) show that, in Italy, there is a positive correlation between public investments and homicides. The intuition is that where public funds are abundant, the public sector may become a target for organised crime and conflict may surge among different gangs, leading to high levels of violent crimes such as homicides. 10 We will mostly, but not exclusively, consider cases in which there is direct interaction between organised crime and the legal sphere. 11 See Varese (2006a, p. 412) for references. 5 In some circumstances, therefore, demand may arise for such services because they provide various benefits. We use the term demand for Mafia to describe the demand for services that agents external to a criminal organisation may express, yielding benefits that would have not been obtained otherwise.1213 As a consequence, mutual advantage (MA) can characterise the interaction between the organisation and agents operating in the legal sphere. That is, firms or agents in the legal economy obtain a benefit, as does the criminal organisation, in the form of payments received for services, social consensus or both. Some of the mentioned services are those typically provided by the State (e. g. protection against theft or recovery of loans), and can be demanded as response to unlawful behaviour of third parties (e.g. stealing goods or not repaying debts). Other services, on the contrary, can be demanded to increase power over third parties bearing legitimate claims (e.g. intimidation of customers, workers, competitors). Clearly, criminal organisations receive a payment for the provision of such services.14 An important case for the present discussion is the increase in market power for some firms through protection from competitors. For example, Varese (2009, p. 263) describes the interaction between the Camorra and legal firms, emphasizing the aspect of mutual advantage.

12 La Spina (2005, p. 129) calls the mentioned benefits “unnatural”, with respect to those accruing to firms “colluding” with criminal organisations. Such an aspect, however, is not included in a specific framework as in this paper. 13 The corresponding concept of supply of Mafia in this article simply refers to the fact that some individuals choose to be members of criminal organisations. 14 We focus on instances characterised by mutual advantage, i.e. those in which the will of the agent in demanding the services is predominant. Therefore, although the boundary may be blurred, we abstract from the pure activity of extortion, which can be defined as: “the forced extraction of resources for services that are promised but not provided” (Varese, 2010, p. 18). Extortion is another aspect involved in the aim to control territory. That is, extortion appears not only as a means of securing resources, but also an activity that allows the organisation to signal its role of authority over a territory (Lo Forte, 2008, p. 62). See also Paoli (2004, p. 170): “[R]acketeering is not primarily an economic activity ... for mafia members it represents the due collection of a tribute by a political organisation acting as an alternative to the state.” Although not included in the discussion of mutual advantage, extortion is considered in this paper in other contexts, such as the discussion on the size of firms or the case of joining an anti-racket organisation as a form of mobilisation of civil society. 6 The example discussed is the following:15 the Camorra family Nuvoletta guarantees that in the food stores of some neighbourhoods of Naples only the products of some firms (e.g. Parmalat, a major Italian food company) are sold. As a counterpart, Parmalat delivers its products to the Nuvoletta family at discounted prices, which in turn allows them to offer these products cheaply to local consumers. All parties involved, therefore, receive benefits. Parmalat enjoys an advantage by distributing its products through the Camorra, as it obtains a position of quasi-monopoly. The Camorra obtains a net gain from its activity of intermediation, not only in terms of monetary rewards, but also of social consensus, because consumers enjoy high- quality products at low prices, themselves deriving benefits from this process. Another important case of protection from competition is the organisation of cartels for the adjudication of public works.16 That is, criminal organisations create and enforce cartels of firms, based on i) location, ii) customers or iii) queues.17 Specifically: i) in Sicily, Mafia families control different territories, and firms operating in one territory do not compete with firms from other territories (and are therefore protected from competition by the latter). ii) The cartel based on customers, instead, can be described as a situation in which: “cartel members ... agree not to accept or seek business from customers who are currently served by another member of the cartel” (Gambetta and Reuter, 1995, p. 123).18

Finally, iii) the cartel based on queues concerns the case in which different buyers purchase repeatedly from a single seller, and adjudication of public works represents a classic example. In this case, for instance, firm A1 is adjudicated the first contract, firm A2 the next, etc. Cartel members agree in advance on the firm which will be adjudicated the public work, and make fictitiously high offers. This occurs within a broader agreement on the rotation of cartel firms in the adjudication of public contracts. Enforcement of agreements is guaranteed by the organisation, which levies a “tribute” on the participating firms.19 As pointed out by Gambetta and Reuter (1995, p. 126), this is a case in which the initiative to have a criminal organisation as enforcer may directly come from the firms.20 15 This example is originally proposed in Roberto Saviano’s Gomorrah. 16 The following discussion draws on Gambetta and Reuter (1995). 17 The enforcement of cartel agreements by the organisation depends on its capacity to utilize violence in a credible way (Gambetta and Reuter, 1995, p. 117). 18 An example documented by Gambetta (1993, p. 213) is the fruit and vegetables market in Palermo. 19 See Gambetta and Reuter (1995, pp. 124-125). 20 The problem of interference with public works appears particularly important in Italy. The Italian Direzione Investigativa Antimafia (DIA), 7 The above cases feature direct interaction between organised crime and non-affiliates involving these two parties alone. There is, however, a case in which legal firms may turn to organised crime because the presence of the latter has an effect on a third party, which increases the probability of expressing the demand for Mafia. Specifically, we refer to the case of turning to criminal organisations to obtain credit.21 We noticed that the presence of organised crime in Italy generates higher interest rates (Bonaccorsi di Patti, 2009).22 High interest rates, in turn, make access to credit difficult and therefore may push firms to seek credit through unofficial channels, a prime case being usury, an activity often carried out by criminal organisations.23 Usury can guarantee loans in the short run to credit-rationed firms, but in the long run it is not only a source of even higher interest rates, but may lead to the loss of control of the firm in favour of the criminal organisation involved (Lo Forte, 2008, p. 62). Therefore, in this case, we can speak of demand for Mafia in order to obtain short-run benefits. In the previous cases, there is mutual advantage to be gained from the interaction in question: organised crime obtains benefits from direct interaction with agents from the legal sphere. The relation involves the two parties alone, or can be “mediated” by a third party. The last case we consider is that in which criminal organisations may be favoured indirectly without a specific advantage to other parties. We refer to the case highlighted in Lavezzi (2008). Drawing on insights from Schelling (1971), Lavezzi (2008) shows that the structure of the Sicilian economy has characteristics that make it particularly vulnerable to organised crime. In particular, the economic structure of Sicily is biased towards: i) many small firms; ii) firms operating in traditional/low-tech sectors; iii) a relatively large construction sector; an investigative body specialising in organised crime, devotes a specific section to public procurement in its reports. See: http://www.interno.it/dip_ps/dia/. 21 Varese (2009, p. 263) highlights the possibility that organised crime can lend money. 22 Banks in areas where organised crime is widespread charge firms higher interest rates because the latter operate in a more risky environment, and because there is a high probability of banks lending money to firms owned by, or under the influence of, criminal organisations, which also makes the loan more risky. In addition, banks operating in such areas are likely to have higher operating costs, such as those for security. (Bonaccorsi di Patti 2009, pp. 5-6). 23 Lo Forte (2008, pp. 59-62) highlights the fact that usury is becoming increasingly attractive for Cosa Nostra, while in Ministero dell’Interno (2010, pp. 503-504) it is claimed that, in Italy: “[usury] appears more widespread in areas with a greater presence of organised crime” (my translation). In Ministero dell’Interno (2010, p. 504) it is also argued that usury can be considered as another means to secure control of the territory. 8 iv) a relatively large public sector. Features i)-iii) make the economy vulnerable to extortion, as racketeers find it easier to extort money from small firms,24 or firms carrying out “simple” activities,25 or firms whose activity has a strong “territorial” component,26 such as construction. Finally, a large public sector means more opportunities to grab public money, for example through interference in public procurement. Lavezzi (2008) emphasizes the causal link between the structure of the economy and the presence of organised crime. In particular, a small firm can be more easily subject to extortion by a criminal organisation and hence its small size favours the persistence of organised crime. However, the opposite causal link may exist. That is, the presence of organised crime can induce firms to remain small, for fear of higher demands for money.27 Overall, a situation may arise in which firms remain small and organised crime persists. 3.2 Vicious circles (VC) What the cases discussed so far have in common is that they tend to generate equilibria, or persistent situations in which organised crime obtains resources and is therefore reinforced.28 For this reason, we use for all of them the term vicious circle (VC). Specifically, given the presence of organised crime, a vicious circle is created when action taken by agents favours organised crime. Organised crime is favoured when the agents directly turn to the organisation to obtain a service, the provision of which secures a payment to the organisation, social consensus or both, but it may also occur when the presence of organised crime creates a favourable precondition for Mafia activities, such as when a credit-rationed firm is pushed to seek credit from a

24 “[I]n large organisations too many people have to sign the checks, initial the vouchers, audit the books, scrutinize budgets, take inventory ... The small independent entrepreneur ... would be more able to meet the demands than a complex organization would be” (Schelling, 1971, p. 182). 25 The simpler the operations, the higher the observability of output and profits, and therefore the higher for the firm the difficulty of hiding profits and refuse to meet the requests of racketeers. (Schelling, 1971, p. 181). 26 This is related to the importance for criminal organisations of controlling the territory. Varese (2011, pp. 8-9, 64) emphasizes the local nature of markets in which organised crime interferes. 27 Scaglione (2008b, p. 150), provides anedoctal evidence of this aspect. 28 See also Sciarrone (2011b, pp. 4-5). 9 criminal organisation or a firm chooses an action that indirectly favours organised crime, such as deciding to remain small.29 We can, therefore, classify the examples discussed above as different instances in which vicious circles are created. In some cases there are mutual advantages for both parties in the vicious circle. Table 1 contains the proposed classification of vicious circles.

VC1) Interaction between agents and criminal organisations alone, organised crime directly benefits from agents’ actions, and agents receive benefits directly from organised crime (there is demand for mafia): VC1.1) Provision of State-like services: criminal organisations substitute for, e.g., governments, the police or courts; (MA) VC1.2) Provision of “empowering” services: criminal organisations provide some agents with extra-power, especially market power. (MA) VC2) Interaction between agents and criminal organisations, organised crime directly benefits from agents’ actions, agents receive (short-run) benefits directly from organised crime (there is demand for mafia), third parties are involved and are affected by the presence of organised crime (example: banks in credit markets) (MA) VC3) Interaction between agents and criminal organisations, organised crime indirectly benefits from agents’ actions (example: firms choosing small size)

Table 1: Vicious circles: a classification

In Table 1, we have indicated MA in the cases in which we can speak of Mutual Advantage and, in particular, of existence of demand for mafia. In the case of demand for services listed at VC1, a vicious circle emerges because criminal organisations, through obtaining benefits, are reinforced. They will provide firms with further opportunities to demand their services, etc. In the case of VC2 a vicious circle is created because the presence of organised crime causes high interest rates. This consequently pushes legal firms to demand credit through usury via organised crime, which therefore obtains resources for its persistence, regenerating a situation of high interest rates, followed by usury, etc.30

29 Clearly, agents choose an action because it guarantees higher benefits than other possible actions. That is, in principle they may choose to demand a service from the State, seek loans from a bank, increase the firm’s size, etc. 10 In the case of VC3, small firms make extortion easier, and therefore this may represent a favourable precondition for criminal organisations to obtain resources and persist, but at the same time the presence of criminal organisation may push firms to remain small.31 Overall, the situation in which firms are small and organised crime exists tends to be reproduced. Notice that MA is not present in VC3: that is, firms in this case do not demand mafia.32 In general, in all of these cases an initial state in which organised crime is present tends to perpetuate. The concepts of vicious circle and mutual advantage have important implications for understanding of the persistence of criminal organisations, and for the related issue of policy interventions that we discuss, respectively, in Sections 3.5 and 4 Before proceeding, we stress that services under label VC1, in particular those indicated at VC1.1, can be demanded not only when the State inefficiently provides them.33 There are two other instances in which agents have no possibility to resort to the State for such services, which do not depend on State inefficiency. We refer to the cases in which “other rules” (OR), i.e. rules concerning contexts not directly related to organised crime, create space for criminal organisations to emerge as providers of services. Namely, we refer to the cases of the illegal economy and of the informal economy, that we discuss in the following section. 3.3 “Other rules” (OR): the illegal and the informal economy In this section we discuss the case in which the presence of rules not directly related to organised crime creates opportunities for criminal organisations to be providers of services we indicated in Section 3.1, especially of State-like services indicated at VC1.1. We refer in particular to laws on prohibition and to those regulations, including tax laws, whose burden may cause a firm to choose to operate in the informal (or shadow) economy. These two contexts, although

30 As stressed above, the borrower of money in usury draws an advantage only in the short run. 31 By “interaction” in this case we simply refer to the fact that there is a payment made by the firms to the criminal organisation. However, the emphasis in this case is in the action taken by firms that indirectly favours organised crime, i.e. remaining small. 32 That is, the “benefit” firms obtain is, by remaining small, the avoidance of possible higher costs that would obtain if they grew, and not some benefit that may be obtained directly by turning to organised crime. 33 For example, in Italy the State is extraordinarily inefficient in ensuring debt recovery (see below). 11 profoundly different, share the feature of being contexts in which the State is absent. 3.3.1 The illegal economy As stated above, in this paper we do not investigate the direct provision of illegal goods and services by organised crime. However, the existence of an illegal sector of the economy in which agents external to organised crime operate can have great bearing on the present discussion.34 Skaperdas (2001, pp. 180-182) discusses the role of prohibition in favouring organised crime, even when the latter is not directly involved in production or distribution of prohibited commodities.35 In particular: “with prohibition private parties cannot write and enforce contracts through the normal legal channels, and thus an effective power vacuum is created around the production, distribution and financing of the prohibited commodity and its inputs” (Skaperdas, 2001, p. 181). The consequence is that an authority, alternative to the State, may be needed to settle disputes, enforce contracts, etc. in the illegal sphere of the economy. Therefore, the presence of illegal sectors may be a cause of emergence of demand for Mafia. 3.3.2 The informal economy A similar reasoning can be made with respect to the informal sector of the economy, i.e. a sector where transactions take place without the necessary compliance with formal rules. Some authors show that compliance with formal rules (especially including those on taxation) can create a burden that make some agents choose to operate in the informal sector.36 The implication is that, without for example formal documentation of a transaction, it is not possible to apply to legal institutions for support, protection, etc. In addition, as noted by Varese (2009, p. 263): “[if an] economic activity goes totally

34 Obviously, agents carrying out illegal activities are also criminals by definition. 35 Demleitner (1994), who focuses on criminal organisations directly involved in illegal markets, suggests that prohibition may affect some aspects of the organisation of criminal activities. With respect to the case of prohibition of alcohol in the US, we read: “Loosely organized groups turned into well-organized and structured enterprises ... In the course of the 1920’s many ... ethnic groups were forced to collaborate to transport alcohol across state lines. They split supply territories geographically to avoid competition and unnecessary diminution of their profits. Because of these economic necessities, regional organizations developed” Demleitner (1994, pp. 622-623). 36 See, e.g., De Soto (1989) and Schneider and Enste (2000). 12 unrecorded, firms cannot turn to banks. Instead they fall back on the local Camorra families.” Another example is the case of “black” labour markets, which is significantly high in the Italian experience. Where firms resort to black labour, i. e. they hire workers illegally, there is space for criminal organisations to emerge as intermediaries or authorities in such markets.37 Specifically, they can participate in the labour hiring process by supplying firms with (illegal) labour. In addition, as noted in the discussion of VC1.2, they contribute to keeping workers’ claims low, playing a sort of anti-union role. In this process, therefore, firms benefit from obtaining cheap and “docile” workers, and criminal organisations enjoy social consensus for providing community members with “jobs”.38

3.4 Organised crime and the economy: a framework The consideration of OR allows us to present the complete framework, shown in Figure 1.

37 See, e.g., Sciarrone Et Al. (2011, p. 180). 38 Varese (2011) highlights such activity in the labour market by the ’Ndrangheta in Bardonecchia, a Northern Italian city where the criminal organisation successfully transplanted in the 60s. 13

Figure 1: Organised crime and the economy: a Framework

Notice the particular role of OR: OR can explain emergence of demand for Mafia, and then vicious circles may appear. The cases indicated alongside OR can therefore be counted among the causes for the emergence of vicious circles. In the next section we focus on the implications for the persistence of organised crime, and defer the discussion of policy interventions to Section 4 3.5 On the persistence of organised crime The concept of vicious circle is related to the notion of equilibrium that we mentioned in the Introduction. In economics, an equilibrium is a state that tends to perpetuate in time, until the causes that determined it are modified. Both concepts, therefore, indicate a state that tends to persist. There is no doubt that the organisations of interest are persistent phenomena: the Sicilian mafia, for example, is at least as old as the Italian State (see, e.g., Gambetta, 1993, Ch. 4). The proposed framework therefore suggests what appears to be an appropriate perspective, as it provides tools to understand a fundamental feature of organised crime, i.e. its persistence. In addition, it highlights the diversity of cases characterised by persistence, which we argue is an important precondition before considering policy interventions. In particular, we can introduce the discussion on policy issues by starting from one fundamental question: would the agents we considered be better off if organised crime was eliminated? Answering the question amounts to considering whether agents’ first best outcome can be obtained with or without organised crime, a crucial aspect for the discussion on policies. As noted above, a fundamental reason why organised crime exists is because the State is inefficient, or because OR create favourable pre-

14 conditons for its existence.39 Assume that the State is efficient in the dimensions relevant to the present discussion: in the provision of services such as protection, debt recovery, etc. and in its capacity to defeat organised crime. We can therefore compare two scenarios: I) organised crime exists (and the State is inefficient); II) organised crime does not exist (and the State is efficient). The cases described as VC differ in this respect. Cases listed as VC1.1, VC2 and VC3 share the feature that the agents involved would prefer Scenario II, i.e. they would obtain their first best outcome when organised crime does not exist. In such a situation, in fact, they could obtain services from an efficient State, obtain credit from legal channels at low interest rates, increase the dimension of their firms and, reasonably, their profits. In other words, they would not “oppose” policies aimed at eliminating organised crime. Agents indicated in VC1.2, on the contrary, would obtain their first best in Scenario I, when organised crime exists: in this situation for example they would have market power otherwise not attainable, or would obtain public contracts that they would not have won had organised crime been absent.4041 Our definition of demand for Mafia is based on the

39 With respect to organised crime as a provider of illegal goods and services, Demleitner (1994, p. 616) argues that: “this article employs a market based, economic definition of organized crime which views organized crime as a rational response to the demand for illicit goods and/or services.” 40 We are, therefore, referring to firms that consider criminal organisations “an opportunity” (Sciarrone, 2011b, p. 6) (my translation). This set certainly includes inefficient firms that obtain market power thanks to the criminal organisation. If we consider efficient firms, that is firms that, e.g., would have won the public contract and/or obtained the quasi-monopolistic rent anyway, given the restriction of competition caused by the criminal organisation, these benefits would be higher in Scenario I than in Scenario II. In both cases inefficient and efficient firms would prefer Scenario I. There remains, however, the possibility that firms nonetheless claim to have been forced to enter the relationship with the organisation (see Section 4.1.2). 41 That the State is efficient in both providing services and in repressing organised crime is a simplifying assumption which allows us to consider for each case in Table 1 the comparison between the two scenarios mentioned above. Alternatively, one may assume that the State is efficient in providing services but not in fighting organised crime. Even though this seems less realistic, the only difference would be a separate consideration for the case VC1.1, which would not alter the conclusions on the outcomes for the agents involved. In fact, if the State is efficient in providing services, and this may occur in the presence of organised crime, the conclusion would still follow as 15 circumstance in which, given the presence of organised crime, some agents find it advantageous to turn to it. But demand for Mafia may also arise in a stronger sense when some agents prefer Mafia to exist than not, because they obtain their first best when organised crime is present. The implication for the discussion on policy is that repressing the demand for Mafia should be invoked especially in cases at VC1.2 as we can expect it to be particularly strong. 4 Policy implications The policies we discuss refer to interventions to combat criminal organisations, whose presence, notwithstanding the “advantages” mentioned in Section 3.1, has global negative effects on the economy (see Section 2). We consider the framework proposed in Section 3.4 and organise the discussion considering two contexts involving, respectively, the State and the civil society. In particular we refer to: i) the bodies of the State, that is entities at least formally separate from civil society, with authority over the latter for the capacity to set rules and enforce them; ii) individual citizens and their organisations, such as business and professional organisations, anti-racket organisations, etc. The consideration of these contexts is common in the literature on anti- mafia policies (see, among others, La Spina, 2005) and is justified by the role that criminal organisations can assume with respect to the whole society, as noted above.42

In both cases we focus on the incentives of the agents, whether or not they belong to criminal organisations. That is, in the presence of incentives to supply and demand Mafia, the policy intervention should consist in modifying these incentives through changes in the “rules of the game” (North, 1990, p. 3), that may affect the supply, the demand, or both. In every example, we also suggest some problems and trade- offs that the implementation of the policy proposal may encounter. 4.1 The State Under this label we consider the policy options aiming to alter the incentives behind Mafia supply and demand that may be agents could either prefer a scenario in which organised crime does not exist and the service is provided by the State to a scenario in which the service is provided by the State and organised crime exists, or be indifferent. In neither case would they “oppose” policies aiming to eliminate organised crime. 42 Mete (2010) proposes a different classification of policies, in particular implemented by the State, based on their effect on the four “pillars” of organised crime: its control of territory, its involvement in illegal activities, its internal organisation, and the environmental and cultural context in which it operates. 16 implemented by the State through its bodies (government, tribunals, authorities, etc.).43 In particular, we distinguish two sets of policies. We call the first set: “non-crime policies”, referring to cases in which the State, through policies other than those directly aimed at fighting organised crime, can alter the incentives in particular to demand Mafia. The focus is on policies affecting economic incentives which, following Acemoglu et al. (2005), could be interpreted as affecting the prevailing economic institutions.44 The second set, “crime policies”, focuses more directly on the repression of organised crime and, hence, on the capacity of the State to use force against criminal organisations. The reference is to the existence and severity of sanctions, the amount of resources employed for repression, etc. Such a classification of policies is often lacking in policy discussions.45 An exception is Varese (2009, p. 266) who, with respect to the deterrence of Camorra, argues: “[s]mall workshops must be able to turn to banks in order to obtain loans, taxes must be low enough to reduce incentives to avoid them, and the legitimate labour market must be flexible enough to make local enterprises competitive without forcing them into the grey economy, where they become sweatshops.” 4.1.1 Non-crime policies The policies discussed in this section do not strictly target crime prevention but can nonetheless affect the incentives to supply and, especially, to demand Mafia by making interaction with organised crime less attractive. Competition (C) The issue can be summarised as to whether market forces can “defeat” organised crime or vice versa (Sciarrone, 2011b, p. 6). Obviously, the State has a fundamental role in promoting competition by, say, reducing the amount of red tape to start a business, monitoring

43 When discussing rules we also consider the issue of their enforcement, which means taking into account, for example, the amount of resources devoted to this aim. 44 The set of economic institutions considered by Acemoglu et al. (2005) includes, for example, rules on property rights, on competition, on tariffs and quotas, on regulation of markets, etc. 45 The category of “crime policies” basically corresponds to what La Spina (2005) calls direct anti-Mafia policies. The main difference is that here we also include the enforcement of existing laws under “crime policies” while La Spina (2005, p. 66) includes the increase in the potential of police forces under “indirect policies”. The latter category also includes policies involving the civil society, while here the policies involving the State and the society are kept separate. 17 the markets through antitrust authorities, and stimulating trade through investment in infrastructures. More competition can reduce the demand for Mafia for different reasons. If, because of more competition, the monopolistic rents described in Section 3.1 can be easily dissipated, interaction with criminal organisations could be less appealing to firms. Criminal organisations erect barriers to entry but, in general, other barriers may exist. For example, in Italy it is relatively arduous to start up and conduct a business.46 In addition, there is little openness to foreign trade in the Southern regions plagued by organised crime, indicating poor integration in international markets and low potential competition from foreign countries.47 In principle, therefore, for firms seeking monopolistic rents from organised crime in local markets, dealing with more competition for example through a higher possibility of local consumers buying products elsewhere (i.e. from other firms, other regions or other countries), can reduce incentives to demand the “services” of organised crime. On the contrary, these firms might instead have higher incentives to try to sell their products in other markets.48 An interesting practical case is discussed by Gambetta (1993, pp. 206-214). The example is the transformation of Palermo's fruit and vegetable market of Palermo. In this market trade is regulated by intermediaries, calleded commissionari or scaristi. In the 1950s, the number of commissionari was extremely low (twelve), some were recognized as mafiosi, and violent episodes occasionally occurred within the market. Each middleman acted as “guarantor: he cultivated widespread connections with people from both city and country; he

46 According to the most recent Doing Business report (World Bank, 2012), Italy ranks 87th in the overall index, and 77th in the “ease of starting a business” category, which considers the number of procedures and days needed to start a business, and indicators of costs and capital requirements. See World Bank (2012, p. 103)

47 See, e.g., Poggi (2006, p. 17). 48 We can conjecture that it is no coincidence that in Sicily the entrepreneurs’ organisation Confindustria was the quickest to react to the Mafia, by setting rules to expel firms paying protection money (see Section 4.2.1). Exposure to world markets instead of reliance on local markets can explain such a reaction. I owe this remark to an anonymous referee. 18 was respected by everybody and intervened to settle disputes” (Gambetta, 1993, p. 206). Subsequently, the number of licenses greatly increased, arriving at 77 in 1981. This increased competition among them, and the individual power of each scarista to regulate the trade decreased. Competition, however, increased not only due to the growth in the number of intermediaries, but also due to some structural and technological characteristics of the trade: “In the fruit and vegetable trade the sources of supply are both many and widely scattered, and transport routes and delivery points outside the wholesale market can multiply unobserved. The rapid increase in agricultural productivity and conservation techniques in the years since the war, as well as the improved efficiency of transport, accentuated these differences, making the produce trade virtually impossible to monopolize” (Gambetta, 1993, p. 212). In addition, increased competition in the credit market contributed to reducing the power of mafiosi: “before the rural savings banks started to function properly, credit was in the hands of the man of respect. Growers who wanted credit were obliged to sell their goods to him. As sources multiplied, credit no longer came with the same strings attached” (Gambetta, 1993, pp. 212-213). The conclusion, with some caveats, was that: “if the mafia ever was involved in the market, it is now no more than a lingering memory” (Gambetta, 1993, p. 213).49 Two further reasons why more competition can be desirable are the following: i) the higher the level of competition in the production of commodities, the lower is firms’ power to set prices and hence the lower their possibility to transfer the payment of extortion on prices, and the lower their capacity to meet the extortionary demands; ii) the higher the competition in the banking sector (as in the fruit and vegetable market case discussed above), the lower the interest rates, and the lower the probability that firms resort to criminal organisation to obtain credit. While greater competition can be indicated as a force reducing incentives to seek monopolistic rents through organised crime, it is also true that the search for such monopolistic rents can be a response to increased competition, for example due to globalization. If firms find it difficult to handle stiffer competition, for example in international markets, they can resort to “protected” local markets to stay in business (Asso and Trigilia, 2011, p. XVIII). Efficiency of the State (E) If the demand for Mafia is expressed for services that the State provides inefficiently, increasing State efficiency in providing such services can reduce incentives to resort to organised crime. For 49 As noted in footnote 18, some commissionari still act as cartel members, in particular with respect to “big buyers” such as hospitals, schools, etc. 19 example, improving security in urban centres would lower the need to demand protection from other criminals; reducing the duration of trials for debt collection50 can reduce the demand for Mafia to provide this service. Public procurement law (E’) Incentives to participate in cartels overseen by criminal organisations can be reduced by changes to public procurement laws, making it more difficult for firms to enter this type of agreement. This is another instance, therefore, in which the efficiency of the State could be enhanced. An important feature of Italian legislation in this matter regards the so-called “anti-Mafia” certification. That is, firms applying for the adjudication of public works should provide an “anti-Mafia” certificate, demonstrating absence of past relationships with criminal organisations and of pending proceedings. The effectiveness of the anti-Mafia certificates, introduced in 1982, is the subject of a long-standing controversy (see, e.g. Valentini, 1991, CNEL, 2008, Caneppele et al., 2009).51 The main criticisms can be summarised as follows: i) these certificates are required for some types of contracts between the Public Administration and private firms (i.e. appalti), and for some types of sub-contracting (i.e. subappalti). However, in the post-adjudication phase, the firm executing the public work may enter into a variety of relationships, e.g. with suppliers, which are not controlled because they are not legally subject to certification. Organised crime, therefore, can enter the relationship at these stages, in particular in activities that are strictly local, where the work takes place, such as transportation, supply of concrete and gravel, waste disposal, etc. (Ance, 2007, CNEL, 2008, pp. 42-43, Sciarrone Et Al. 2011, p. 186). ii) The degree of severity of the certification is lower for contracts involving sums below certain thresholds.52 iii) Being an erga omnes law, i.e. a law applying to any 50 In 2008 the average number of days to collect a debt within commercial litigation was, respectively, in Italy, France, Germany and Spain: 1210, 331, 394 and 515 (Carmignani and Giacomelli, 2009, p. 325). 51 According to the Italian National Organisation of Construction Firms, instances of successful identification of firms linked to organised crime are: “negligible” (ANCE 2007, p. 4), (my translation). See also the figures in Valentini (1991, p. 1540). 52 For example, contracts awarded for supply of services below 200,000 Euros only require “certification” that, until recently, could be released by local Chambers of Commerce. For contracts on supplies above this threshold, a further certificate (informativa), released by Prefectures is needed. Although the latter clearly implies a higher degree of control, its discretionality has been criticised as being responsible for unjust 20 firm wishing to enter certain contractual relations with the Public Administration, it produces an enormous amount of information. Given insufficient coordination between National authorities and local bodies, it is difficult to efficiently handle these data (cnel2008).53 iv) As a consequence of such lack of a broad, easily accessible database, in conjunction with some ambiguities of the law itself, it can be relatively easy for firms connected to organised crime to bypass controls for example by simply relocating their headquarters in a different province (transcrime2008). Overall, v) as remarked by caneppeleEtAl2009: “the legal framework is still extremely complex. As a result, a great deal of room remains for interpretation and discretionality. Overlaps among different and successive legislative measures create loopholes that can be exploited to avoid controls and bypass the rules.” The recent evolution of the Italian laws54 on public procurement, however, seems to go in the direction of reducing the incentives to create cartels. Suffice it to mention, for example: i) the creation of specialized bodies (Stazione unica appaltante) at regional levels, with the task of collaborating with other public bodies (e.g. regional and provincial governments) in the management of the public work adjudication process.55 This aims at increasing the efficiency and transparency of the procedure. ii) The increase in the sanctions for interference with the adjudication procedure (turbata libertà degli incanti), and the introduction of a new crime, relative to interference with the choice of the contractor (turbata libertà del procedimento di scelta del contraente) Decarolis et al. (2010, p. 32).56 iii) The obligation for the contractor of transparency in all its financial transactions, given the above risks of interference by a criminal organisation in the post-adjudication phase Decarolis et al. (2010, p. 33). Finally, an interesting proposal to redefine the procedure to assess lack of involvement with organised crime could lie in carrying out more selective controls. Caneppele et al. (2009), in particular, suggest narrowing down controls on public contracts with higher risks of infiltration by organised crime. The criteria to assess such riskiness can be based on an analysis of the geographical area where the work should be carried out, and on the type of work itself. For example, work involving a large number of sub-contracting relationships with firms exclusion of firms from the adjudication process (Ance, 2007, p. 6). 53 In addition, business organisations complain that this legislation places a high burden of red tape on firms (see Ance, 2007, p. 7). 54 See in particular Law 136 of 2010. 55 See Decarolis et al. (2010, p. 27) for more details. 56 These two measures may therefore reduce the incentives to supply Mafia, in particular through repression. Since they are not, however, explicitly aimed at repressing organised crime, we do not include them in the discussion of Section 4.1.2. 21 operating in “vulnerable” activities (such as those which are area- related) could be the target of closer scrutiny. This would allow a more efficient use of resources for such intervention, possibly increasing its deterrence capacity and freeing many other firms from administrative obligations. Decriminalisation (D) Decriminalisation of illegal goods and services, in particular narcotics, is heavily debated from different perspectives (see, e.g., Husak and De Marneffe, 2005, or, for an economic approach, Miron and Zweibel, 1995). In particular, advocates of decriminalisation point out that prohibition generates costs which outweigh the benefits, given essentially by the likely reduction in the consumption of the prohibited good.57 For example, with reference to drugs prohibition, Miron and Zweibel (1995, pp. 178-179) point out that such costs include: the diffusion of violence,58 the diffusion of “income-generating” crimes, such as property crimes committed by drug users,59 the congestion of tribunals and the consequent slowdown of the justice system.60 Skaperdas (2001), as noted above, highlights another cost of prohibition mostly neglected in the literature, that it is the creation of a “power vacuum” (Skaperdas, 2001, p. 193) where organised crime may substitute for legal institutions. First of all, therefore, decriminalisation would reduce the costs mentioned above: violence, spread of other crimes, etc. With respect to the consequences for organised crime, from the perspective of Skaperdas (2001) shared in this paper, decriminalisation would reduce demand for mafia as an alternative to the State. In addition, as long as

57 In a supply/demand framework, prohibition acts on supply as a tax shifting the supply schedule upwards. Other things being equal, this produces a decrease in equilibrium consumption (Miron and Zweibel, 1995, p. 177). 58 In this paper we show that the lack of enforcing authorities in illegal markets may generate demand for Mafia. However, resolution of disputes may alternatively be achieved by straightforward recourse to violence. 59 The need to find money to spend on prohibited goods and services also stems from the fact that another consequence of prohibition is that their price increases (see, e.g., Miron and Zweibel, 1995, p. 177 and Demleitner, 1994. p. 640). 60 In the 1920s in the US, “prohibition cases clogged the courts, impeded true justice, and brought the performance of law into disrepute”(Demleitner, 1994. p. 625). 22 the criminal organisation is directly involved in illegal markets,61 decriminalisation would reduce its profits and therefore reduce its capacity to corrupt public officials and accumulate military power.62 However, according to Demleitner (1994), besides the positive aspects mentioned, it is possible to identify negative consequences of decriminalisation. In particular, after decriminalisation criminal organisations may: 1) reinvest resources in the remaining illegal markets, under the assumption that not all illegal activities will be legalized at the same time; 2) reinvest resources in the legal sector;63 3) move to countries where the good or service is still illegal. Finally, 4) small-scale criminals involved in the illegal market may turn to other low-skill (criminal) occupations, at least in the short run and, therefore, in the long run state-supported activities like training would be needed.6465

Deregulation (D’)

The issue of deregulation is strictly connected to the issue of increasing competition. The focus here is, however, on the fact that excessive regulation (and taxation) can not only hinder competition, but may provide firms with incentives to operate in the “informal economy”, where regulations are not applied and taxes are not paid. As noted above, in Italy the regulatory burden of starting up and running a business is considerable (World Bank, 2012). With respect to “informal” labour markets, it should be pointed out that they are 61 The extent to which criminal organisations are involved in illegal markets can, indeed, vary (see Ministero dell’Interno, 2010, pp. 269- 273). The role of drugs trafficking for Italian criminal organisations is discussed for example in Paoli (2004). 62 See footnote 4. 63 An important historical example is Las Vegas, where criminal organisations heavily reinvested the resources accumulated during prohibition after its abolition. See also Dubinsky (2006, p. 411). 64 See also Becchi (2000, pp.137-143) for the Italian case. 65 Mete (2010) briefly mentions decriminalisation of drugs, that we will include among the “non-crime policies” without, however, considering possible drawbacks.

23 particularly widespread in the Southern regions plagued by organised crime.66 Policy interventions, therefore, can be inspired by the comment made by Varese (2009, p. 266): “the legitimate labour market must be flexible enough to make local enterprises competitive without forcing them into the grey economy”. The problems of such policy proposals refer to the fact that “excess regulation”, in particular in the case of the labour market, may be based on the need to introduce workers’ rights and safeguards (i.e. work safety standards, insurance, etc.). That is, we are in presence of a trade- off: less stringent regulations may lower the probability of creating black markets vulnerable to criminal organisations, but at the same time they can erode workers’ rights and safeguards. 4.1.2 Crime policies In this section we consider the use of force by the State, that is policies aimed at repressing supply or at repressing demand for Mafia. The focus is in particular on anti-Mafia laws and on their implementation. Higher sanctions increase the cost of supplying and demanding Mafia, and should therefore decrease the incentives for such supply and demand. We discuss separately the aspect of repressing the supply and repressing the demand for Mafia, and some related problems.

Repressing the supply of Mafia (Fs) The Italian criminal code punishes not only crimes related to organised crime (e.g. extortion), but also sanctions affiliation to organised crime as a specific crime (Article 416-bis of the Italian Penal Code). In addition, Law 646/1982 (known as the Rognoni-La Torre Act) allows property of organised crime members to be seized, thereby relieving an individual not of his personal freedom but of his wealth, while the Article 41-bis of Law 354/1975 allows the Minister of Justice to apply special restrictions upon prisoners charged with serious offences, including those related to organised crime.67 Efforts at repression have recently been considered positive (Paoli, 2008), in particular for being

66 In 2009, the percentage of “irregular” jobs recorded in these regions were: 19.2% in Sicily, 29.2% in Calabria, 15.3 % in Campania, and 18.7% in Apulia. The corresponding figures for, respectively, Italy, North-East and North-West are: 12.2%, 9.2%, 10.1% (ISTAT, 2011). 67 Article 41-bis was introduced and then modified, respectively, in 1986 and 1992. Other legislative tools are for example laws on informants or “pentiti”, i.e. members of criminal organisations that are offered special treatment (e.g. state protection) conditional upon revealing information on crimes and/or on other affiliates. See La Spina (2008, pp. 200-202) who, however, classifies these laws among “indirect” methods to repress organised crime. 24 able to affect the “organizational and military power” of criminal organisations (Sciarrone, 2011b, p. 45).68 What seems to be the main problem is not the absence of a proper antimafia legislation, but the enforcement of the law. For example, Ministero dell’Interno (2007, p. 121) reports that unsolved homicide cases ascribable to organised crime increased from 70.8% in the period 1992-94 to 89.2% in 2004-06, while those ascribable to other forms of crime, in the same interval, decreased from 47.3% al 23.7%.69 In addition, the Italian justice system suffers from chronic delays, not only in the application of civil justice, as mentioned in Section 4.1.1 for the case of debt collection, but also in the application of penal law. According to a survey of the Italian Minister of Justice, in 2008, the average duration of a penal trial (summing first degree, appeal and judgement by the Supreme Court of Cassation) amounted approximately to three and a half years, reaching five years if the initial period of investigation is included.70 In addition, there is some evidence of higher efficiency of courts in the North of Italy than in the South: from an average of six months for the district of Trento, to approximately two and a half years in Salerno (Campania), Messina (Sicily) and Potenza (Basilicata).71 In general, the problem of enforcing the law in Italy would not seem to depend on the amount of resources used, for example in terms of police and personnel employed for the

68 Paoli (2008) emphasizes the relatively large number of individuals apprehended in the period after 1992, a turning point in State repression after the murders in that year of judges Falcone and Borsellino. 69 Note the remarkable difference, however, in the absolute values of these two sets of figures. 70 These figures refer to “average residence time” (giacenza media) of a proceeding in the various courts. See http://www.giustizia.it/giustizia/it/mg_1_14_1. wp? previsiousPage=mg_1_12_1&contentId =SST454116. 71 These figures refer to the effective duration of trials, observed from the computerized register of some courts. See http://www.giustizia.it/giustizia/it/mg_1_14_1. wp? previsiousPage=mg_1_12_1& contentId=SST454253. 25 administration of justice.72 The Italian justice system, in particular, seems to suffer mostly from organisational problems.73 Similarly, police forces are not exiguous but are probably in need of organisational changes.74 In a specific study on Italian police forces, Carrer and Dionisi (2011, pp. 53-75) emphasize the issue of territorial control, which could benefit from more police on foot, than in patrol cars.75 This remark seems particularly appropriate with respect to organised crime, where there are two major issues: i) the aim of criminal organisations to control territory, also by obtaining social consensus; ii) the difficulty for investigators of obtaining information, because of the “imposed” secrecy (omertà) that surrounds each organisation’s activity. For example, Akerlof and Yellen (1994) highlight the importance of obtaining information on gangs from the communities in which they operate but this, however, also depends on whether the community is more sympathetic to the gangs than to the police. As the police can be perceived as representing an inefficient

72 The number of police officers per 1000 inhabitants was in 2008, respectively in Italy, France and Germany: 4.11, 3.66, 3 (my computation from data in EUROSTAT, 2012, p. 13). On the staff employed in the administration of justice see, e. g., Marchesi (2003, pp. 34 and ss.). 73 For example, Coviello et al. (2011) identify “task juggling”, i.e. the frequent switch to different trials as opposed to sequential work, as a source of inefficiency in the activity of Italian judges, while Corrado and Leonardi (2007) describe the increases in efficiency obtained by the Tribunal of Turin, following simple reorganisation of work and the introduction of an incentive scheme for judges and administrative personnel, based on consideration of their contributions to efficiency for promotions and salary increases. 74 La Spina (2008, p. 202-203) highlights the benefits that repression of organised crime obtained from the use of technology by police forces , e.g. by the utilization of: “up-to-date sensors [and] operative interconnected control rooms”. 75 In Italy, the service of “neighbourhood policeman” (poliziotto di quartiere) started on 2002 in 28 provincial capitals, and then was extended to 748 areas of provincial capitals and in other 79 urban centres (Ministero dell’Interno, 2007, p. 451)

26 State, communities where organised crime is pervasive are likely to perceive the latter as an efficient provider of services.76 As for the investigation phase, let us note that repression of criminal organisations may benefit from recent studies of the network structure of criminal organisations (see, e.g., Varese, 2006b, and Morselli, 2008). In particular, knowing the network structure can be important in order to dismantle the organisation, for example through removal (i.e. arrest) of relevant nodes.77

Repressing the demand for Mafia (Fd)

We have defined the demand for Mafia as the demand expressed by agents not belonging to criminal organisations, and mostly belonging to the legal sector of the economy. The demand is expressed for benefits that would accrue to non-affiliates, and that would not have been obtained otherwise, in particular had the criminal organisation not existed. The issue, therefore, is to impose a sanction upon non-affiliates that interact with the Mafia. The sanction currently featured by Italian law is “external support” (concorso esterno) which is, however, not defined by a specific article of law, but by the joint application of the article concerning Mafia affiliation (416-bis) and the article on joint commission of a crime (Art. 110, Italian Penal Code). In addition, what is sanctioned is behaviour yielding advantages to the Mafia, while the possible advantage for the non-affiliate is not sanctionable. This is related to the difficulty, in the context of a trial, of demonstrating the will of a non-affiliate to obtain a benefit. If, at least in economic terms, such a benefit is fairly easy to define and in practical terms it can be identified, the agent receiving it may claim to be a victim. In the case of cartels, for example, a firm may claim that, in order to participate in the auction, it was forced to join the cartel, it being otherwise impossible to compete and, perhaps, stay in business. Therefore, even if an advantage can be defined and its existence demonstrated, repression of the behaviour that it generated is difficult to implement. A sanction could be imposed when the behaviour

76Clearly, this also depends on the capacity of criminal organisations to credibly threaten, while the enforcement of sanctions by the State, as the present discussion highlights, is far from certain in Italy. In addition, if in communities where organised crime is pervasive: “inhabitants feel apart from the larger society” (Skaperdas, 2001, p. 194), the presence of police forces can be ineffective as it can be perceived as reinforcing the feeling of exclusion. 77Let us note, however, that studies on the regeneration process of criminal networks once some nodes are removed are lacking. 27 depends on “reproachable will” (volontà rimproverabile), the presence of which should be ascertained in any specific situation.78 Following the discussion in Section 3.5 we argue that repressing the demand for Mafia is particularly relevant in the case indicated as VC1.2. In the other cases, it would be more advisable to reduce the incentives to express demand for Mafia by acting, respectively, on the degree of competition (including competition in credit markets) and on the efficiency of the State. In the case of usury, in particular, the repression of the supply of Mafia is advisable, as it would affect the behaviour of banks and make interaction with organised crime to obtain credit less likely. In this case repressing the demand is not even considered by the Italian law, which is designed to repress only the lender of money, on the assumption that the object to protect is the borrower’s wealth. 4.2 The Civil Society We presented instances of policies that involving the State, and discussed some problems of their implementation.79 In this section we discuss the forms of deterrence that may be activated by civil society. We refer, in particular, to individual citizens, business and professional associations, antimafia and anti-racket organisations, etc. Consideration of aspects involving society are often present in discussions on organised crime.80 For example, Asso and Trigilia (2011, p. XXVI) argue that a low moral cost of entering relationships with organised crime is one fundamental cause for the establishment of such relationships. The concept of moral cost is based on the relationship of an individual with the rest of society (or the social

78 Current scholarly discussion is considering the introduction of a specific crime that overcomes these problems. See, e.g. Fiandaca (2010), advocating the definition of a crime in the context of a contract between the organisation and non-affiliates. See also the discussion in Sciarrone (2011b, pp. 45-48).

79 A fairly obvious problem of implementation of any State policy is that, as long as it depends on political processes, it may take a long time and, in addition, politicians may be corrupted or intimidated by criminal organisations, or they may choose to collude with mafias. See, e. g., Bueno de Mesquita and Hafer (2007) on the latter point. 80 See, e.g. Akerlof and Yellen (1994) on “community” values, Schneider and Schneider (2003), La Spina (2008, p. 198) and Ramella and Trigilia (1997). 28 networks to which s/he belongs) and, in particular, on the: “degree of approval-disapproval that individuals face in their relevant circles” (Asso and Trigilia, 2011, p. XXVII, my translation). More specifically, exhortations of “mobilization of civil society” against the mafia, on the premise that pure repression is not sufficient, often come from politicians and judges,81 and can also be found in the scholarly literature (see, e. g., Fiandaca and Visconti, 2006, p. 398). We present in Section 4.2.1possible modes of activation of civil society, and postpone to Section 4.2.2 an evaluation of these “policies” and of the problems that their implementation may encounter. 4.2.1 Activation modes We consider three possible “tools” that can be activated within civil society: 1) to express disapproval at organised crime; 2) to expel a firm or a professional from a business or professional association; iii) to join an anti-racket organisation. Expressing Reprobation (R) Following the idea of a “moral cost” attached to interactions with organised crime, we consider the effect of a value in a population, according to which organised crime is “bad”, and consequently interacting with it implies a cost.82 The importance of the acquisition of such a value is often mentioned when invoking social mobilization against organised crime. For example, Ramella and Trigilia (1997, p. 25) claim that: “it is crucial that citizens internalise, among their values, criteria that increase the moral cost of criminal behaviour” (my translation). Expulsion from a Business Association (ES) In 2007, Confindustria Sicilia, i.e. the Sicilian division of Confindustria, the Italian confederation of industrial firms, introduced in its ethical code a rule prescribing expulsion for member firms

81 Such exhortations recently came from high-level Italian politicians and judges, such as President Giorgio Napolitano (May 2009); President and former vice-President of the Antimafia Parlamentary Commission, Giuseppe Pisanu (May 2012) and Giuseppe Lumia (October 2010); former National Antimafia Prosecutors, Piero Grasso (April 2012) and Giancarlo Caselli (October 1994). For the list of sources see Appendix B. 82 By this simplification, we refer to ideas such as those of Schneider and Schneider (2003, p. 217), who use the term “antimafia ideology”, or Akerlof and Yellen (1994, p. 188), who speak of: “community norms concerning cooperation with law enforcement efforts” (emphasis added). A related concept, often used with respect to its dissemination in schools, is “culture of legality” (La Spina, 2008, p. 204). 29 colluding with the Mafia. In 2010 this rule was introduced in the ethical code of the national organisation, and therefore became enforceable nationwide.83 By August 2011, 15 firms in Sicily had been expelled and 20 suspended in Palermo, and 20 expelled in Trapani for refusing to present antimafia credentials. In all, 60 firms reported members of criminal organisations, twenty of which were in Palermo. Some firms, however, voluntarily left Confindustria (Sciarrone, 2011b, p. 12).84

Joining an anti-racket organisation (AP) An important initiative coming from civil society is forming, or joining, an “antimafia” organisation.85 Notable recent examples are Palermo-based organisations such as “Addiopizzo” (founded in 2004) and “Libero Futuro” (founded in 2007). While both aim to provide support (e.g. legal, psychological, etc.) to entrepreneurs resisting the extortion racket, the former also provides a “service” that follows an economic intuition. The idea behind the creation of Addiopizzo is to direct consumers towards firms that refuse to pay extortion money, by making the list of such firms public, organizing campaigns, and so forth.86 To date, about 700 firms have joined Addiopizzo.87

83 In 2011 the rule was accepted by Confcommercio, the Italian business association of service, tourism and retail firms. 84 The creation of “black lists” and “white lists” of firms is currently under discussion. The former should include firms that, for example, did not denounce extortion, while the latter should include those that have, or have had, no relationships with criminal organisations. A specific target for these tools is the construction sector, and the ultimate goal should be to provide benefits for firms on the white list and penalties for firms on black lists, for example in the adjudication of public works. See, e.g., Sciarrone (2011b, p. 46). 85 See, e.g. schneider2003 on antimafia movements, and Forno and Gunnarson (2010, pp. 107-109) for a succinct historical account of these movements. 86 Forno and Gunnarson (2010) provide a detailed account of the activity of Addiopizzo. 87 See http://www.addiopizzo.org/. 30 4.2.2 Problems In this section we discuss some problems of the forms of civil society mobilization we described in Section 4.2.1. Coordination When invoking the spread of “values”, “antimafia” rules of conduct, etc., there are at least two problems. The first is how to disseminate such values. The second, assuming that the value is disseminated, concerns the size of the cost that it would impose on agents interacting with organised crime, compared to the advantages that such interaction brings. To simplify, we group these problems under the label “coordination”.88 As for the spread of this value, the adoption by an individual may depend on the number of agents that have already adopted it. In other words, this dynamic may be subject to “thresholds” (Granovetter, 1978) and hence display non-linearities, such that dissemination of the value in a population may be difficult to obtain. Schneider and Schneider (2003, pp. 223-225), for example, make practical examples in which adopting an “antimafia ideology” in contexts like offices or bureaucracies from the point of view of an individual: “is a prescription for alienating friends and colleagues and becoming embroiled in unpleasant conflicts at work”. However, even if the value is shared within a population, this may not be sufficient to avoid interactions with organised crime. The issue is how high the cost implied by this value is vis-à-vis the advantages from interacting with organised crime. For example, if interaction with organised crime provides some (high) exclusive advantage to an individual agent (e.g. to a firm adjudicating public works at the expenses of competitors, to a shopkeeper starting a business in a “protected” area, etc.), the situation may be a “prisoner-dilemma” case and the dominant strategy may be to interact.89 Alternatively, “coordination” problems may arise. This happens when non-interacting with organised crime is valuable when others are making the same choice. In this case multiple equilibria may appear, one in which no agents interact, and one in which all agents interact. For this to happen, however, it is necessary that the cost incurred by individuals choosing to interact is sufficiently high.90 Therefore, if the

88 Arguments in this section are based on research currently in progress. 89 For a similar remark see Varese (2011, p. 6). 90 For discussion of the relationship between prisoners’ dilemmas and coordination games in the presence of social norms see, e. g., Platteau (2003, p. 240)

31 situation is like a Prisoner’s Dilemma, interaction occurs; if it is a coordination problem, interaction may still occur. In both cases, the desirable choice to refuse interaction may be difficult to obtain. A similar point can be raised with respect to the payment of money following the demands of extortionists. If all firms could jointly coordinate on not paying the mafia, then extortion would become extremely costly or impracticable, and firms would be willing to adopt such behaviour. In particular, the criminal organisation would need to intimidate a large number of “non-paying” firms to reclaim payment, and this may imply high costs in terms of resources and consequently a high risk of being detected and punished by the State, while the individual “non-payer” would face a reduced probability of retaliation, being one among many. From the point of view of the individual firm, however, being a “non-payer” among many “payers” can be the worst possible outcome and, therefore, its dominant strategy may be to “pay”.91 These remarks may contribute to explain why “mobilization” against organised crime has so far been rather limited, and there have been periods of high intensity especially after tragic events such as the assassination of Carlo Alberto Dalla Chiesa, prefect of Palermo, in 1982 or, in particular, assassinations of judges Falcone and Borsellino in 1992 (see, e. g., Forno and Gunnarson, 2010, p. 108). In the literature analysing social mobilization against organised crime, however, consideration of such aspect is lacking.92

Relevance of sanctions

In the case of the rule adopted by the Italian Confindustria, the issue is whether the sanction, i.e. expulsion, is perceived as significant for member firms. A possibility, besides giving up representation by the organisation and the services it provides, could be a reputational cost

91 The Italian legislation also features norms providing incentives to victims of extortion, such as the possibility of accessing a solidarity fund in exchange for information on extortionists. However, this does not seem so far to have produced the desired results. See Forno and Gunnarson (2010, p. 120) for details. 92 See, among others, La Spina (2005, pp. 111-153), Schneider and Schneider (2003, Ch. 7 and 9), Shelley (2001). chneider and Schneider (2003, p. 193), with respect to the case of antimafia movements in Palermo, however, mentions other problems, such as “factionalism”, i.e. the crises that movements can suffer because of political segmentation, while La Spina (2005, p. 121) mentions the possibility that activism may be subjected to cycles. 32 for being expelled. At present, however, no compelling evidence exists on this point and the fact that some firms voluntarily abandoned Confindustria after the introduction of the “antimafia” rule of conduct is not encouraging. There is a significant difference, obviously, in the case of expulsion from a professional association (e g. of lawyers, doctors, architects, etc.) since its consequence would be the impossibility of (legally) exercising the profession. The involvement of professionals in relationships with criminal organisations has recently attracted scholarly attention.93 Although such relationships seem widespread in the Italian experience, cases of expulsion for demonstrated instances of interaction are extremely rare. According to Calì (2010, p. 19), about 500 documented cases in Italy are not followed by expulsion.94 Finally, with respect to the attempt to direct consumer demand to “non-paying” firms, the issue is whether this represents a sufficient economic incentive for firms to reject extortion.95 An interesting piece of evidence, however, is represented by recent declarations from pentiti that revealed their unwillingness to retaliate against firms that joined Addiopizzo.96 It may be conjectured that membership of such an association can deter retaliation by mafiosi following a refusal to pay, because this deed would be quickly known, the firm member being of a very visible network, and consequent attention on the organisation

93 See Sciarrone (2011) for the Italian case and Middleton and Levi (2004) for a discussion of crimes committed by lawyers in the British case. See also Morselli (2008, pp. 75-84) for analysis of professionals in organised crime networks. Early evidence of involvement of lawyers and doctors with Cosa nostra activities is quoted in Schneider and Schneider (2003, pp. 223-225). 94 A sensational recent case regards the Palermitan architect Giuseppe Liga, who became a Mafia boss linked to the powerful Lo Piccolo family. He was arrested on March 21st 2010, and subsequently subjected to the special incarceration regime prescribed by Article 41- bis (see Section 4.1.2). Notwithstanding these circumstances, he was only suspended by the local association of architects. Interestingly, in the discussion of the case of British Lawyers, Middleton and Levi (2004, p. 137) argue for regulatory responses instead of court decisions as deterrents, as they are swifter and more effective, in particular when a lawyer charged with wrongdoing by an independent body such as the Solicitors Disciplinary Tribunal is struck off the profession. 95 Research is in progress on this issue. 96 We refer in particular to declarations of pentiti Giuseppe Di Maio and Manuel Pasta. See http://www.addiopizzo.org/news.asp? id_news=120 and http://www.addiopizzo.org/news.asp? id _news=173. 33 would follow.97 Indeed, Di Maio claimed that fear of being denounced prevented extortionists from attacking members of Addiopizzo. 5 Conclusions In Figure 2 we present the framework adding the indication of the relative policy prescriptions.

Figure 2: Organised crime and the economy: a Framework and Policy Prescriptions

“Policies” involving civil society can be invoked in any case, addressed at eradicating the phenomenon of organised crime through refusal by members of society to interact with it. By contrast, the policies involving the State, i.e. non-crime and crime policies, respectively aimed at repressing the supply or demand for mafia, can be selectively allocated to different cases of interaction of organised crime with the economy. Note in particular that in the case of VC2, regarding credit markets, repression of the demand for mafia is not considered

97 An often quoted reason of why Libero Grassi, a Palermitan businessman killed in 1991 after refusing to pay and publicly denouncing his extortionists, is that he was left isolated after his public complaint (see, e. g., Forno and Gunnarson, 2010, p. 103). 34 because, as noted, the penal code (at least in Italy) does not sanction the demand for loans to a usurer. The main conclusions can be summarized as follows: i) the economic approach to the analysis of the interaction of organised crime with the legal economy allows the utilization of simple economic concepts such as supply and demand for Mafia and equilibrium; ii) this permits to identify vicious circles of different nature, which first of all allows understanding the aspect of persistence of criminal organisation; iii) policies aiming at deterrence, therefore, should be devised taking into account these differences.98 In particular, the focus on incentives to supply and demand Mafia allows to clarify that the policies to contrast criminal organisations can include non crime policie, such as those addressed to increase competition in markets, or to enhance the efficiency of the State in providing various services. In addition, the broad spectrum of policies may also include decriminalisation of illegal goods and services and deregulation of markets; iv) in the discussion of mobilization of the civil society, often invoked in policy discussions, we highlighted the problem of coordination, often overlooked in the literature, that may explain why this channel so far did not produce the expulsion of the criminal organisation from the social context.

98 A further difference to be considered is emphasized by Campana (2011), namely that the same criminal organisation can be involved in different activities in different territories. The Camorra group studied by Campana (2011), in particular, practices extra-legal governance in the territory of origin, while it is involved in standard business activities when it operates abroad. Varese (2012, p. 249) shows that this is also the case in a comparison of the activities carried out by a Russian criminal organisation when operating in the home country and in Italy. 35 References Abbate, L. and P. Gomez, (2007) I complici. Tutti gli uomini di Bernardo Provenzano, da Corleone al Parlamento, Fazi.

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43 Appendix

List of webpages consulted • Declaration of Giorgio Napolitano (may 2009), http://www.repubblica.it/ultimora/24ore/MAF IA-NAPOLITANO-CONIUGARE-AI- SUCCESSI-MOBILITAZIONE-DELLA-SOCIETA- CIVILE/news-dettaglio/3668501 • Declaration of Giuseppe Pisanu (may 2012) http://it.notizie.yahoo.com/mafia-pisanu- repressione-non-basta-servono -cultura-ed-165500004.html • Declaration of Giuseppe Lumia (october 2010) http://www.giuseppelumia.it/? p=6321 • Declaration of Piero Grasso (April 2012) http://www.tempostretto.it/news/intervista- pietro-grasso-messina -repressione-non-basta-serve-antimafia- speranza.html • Declaration of Giancarlo Caselli (October 1994) http://archiviostorico.corriere.it/1994/ott obre/18/Cavaliere_spiego_mafia _co_0_941018231.shtml

44