WHEN GODFATHERS BECOME ENTREPRENEURS

06 Apr 2017

Mafia Inc. became Robin Hood for Italian business when bank credit dried up in the financial crisis

Broke Italian entrepreneurs were increasingly bailed out by organised crime during the financial crisis, according to research by Marco Le Moglie and Giuseppe Sorrenti, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017.

Their study compares the numbers of established enterprises in Italian provinces in 2007, and finds that the drop in the number of established enterprises during the financial crisis was 6 percentage points less severe in areas with higher criminal infiltrations.

The researchers conclude that organised crime in Italy, whose businesses were not affected by the crisis, helped fill a lending gap – which helped them to generate a ''Robin Hood'' image even while using the loans to launder the proceeds of other crimes.
''Organised crime took advantage of the banking system-induced credit contraction to increase its penetration in the legal economy by offering alternative sources of capital to finance businesses'', the authors explain.

This study is a fundamental starting point in the process of understanding criminal organisations'' modus operandi and reducing the ineffectiveness of policies tailored to fight their activity. The country-specific nature of the analysis does not undermine the findings'' generality.

More…

How much does organised crime invest in the legal economy? Despite mounting interest among the media and scholars on investment by criminal organisations into the legal economy, little is known about the amount and modality.

A study led by Marco Le Moglie and Giuseppe Sorrenti explores the outbreak of the 2007 economic crisis by comparing the entrepreneurial activity in areas with different levels of criminal infiltrations in Italy, a country historically plagued by a conspicuous presence of mafia-type organisations.

The drop in the number of established enterprises during the financial crisis was 6 percentage points less severe in areas with higher criminal infiltrations. Organised crime took advantage of the banking system-induced credit contraction to increase its penetration in the legal economy by offering alternative sources of capital to finance businesses.

The study finds that criminal organisations are capable of obtaining power, territorial control and social consensus despite their largely detrimental effect on local development and growth. The results suggest that neither violence nor intimidating behaviour is the driving force behind current criminal organisations'' power and control.

Once established, organised crime enhances its presence by offering services that weak institutions struggle to provide. With the demand for capital, criminal organisations see an invaluable opportunity to infiltrate and make their activities flourish; potential entrepreneurs need financial resources to develop their businesses, while organised crime seeks opportunities to launder money raised through illegal activities.

Although investment in the legal economy by organised crime is not a recent phenomenon, the outbreak of the financial crisis favoured its detectability. After 2007, legitimate sources of credit suddenly dropped, leaving entrepreneurs with fewer alternatives to finance their businesses. Meanwhile, criminal organisations'' economic activities – such as drug trafficking – remained stable and offered an opportunity for hungry potential entrepreneurs in search of funding.

As a result, provinces with a lower territorial presence of organised crime experienced more severe economic consequences in terms of entrepreneurial activity – measured as the number of established enterprises – with respect to similar areas with higher mafia territorial infiltration. In sum, organised crime''s investment in the legal economy was a way out for broke entrepreneurs.

This study is a fundamental starting point in the process of understanding criminal organisations'' modus operandi and reducing the ineffectiveness of policies tailored to fight their activity. The country-specific nature of the analysis does not undermine the findings'' generality. The exploitation of a weak institutional framework to gain power and raise forms of social consensus characterises, in fact, the ascent of the vast majority of criminal organisations (for example, the ''Robin Hood'' image of Pablo Escobar).

''Mafia Inc.'': When Godfathers Become Entrepreneurs

Giuseppe Sorrenti

University of Zurich (UZH) Department of Economics Schönbergasse | giuseppe.sorrenti@econ.uzh.ch