Systemic crime raises costs, deters investment in Brazil

“The economy is a connected system. Governments create public policies to help the population and businesses generally,” said Daniel Cerqueira, a board member of the Brazilian Public Security Forum. “If governments are chaotic, if they don’t work well, if laws are poorly made, and if the environment is unfriendly to investment, it naturally causes capital to leave and investment interest to decrease.

This situation can be understood from both an international perspective—Brazil’s relationship with the rest of the world—and a domestic one, Cerqueira said. “In a study analyzing 62 countries, researchers found that higher homicide rates are associated with lower foreign direct investment,” he said, citing research by Leanora Brown and Keva Hibbert that includes Brazil in the sample.

The economic impacts of crime work through various channels, according to Cerqueira. The first is that crime and violence raise business costs, which lowers companies’ competitiveness. “Costs increase through direct channels, such as the need for businesses operating in violent environments to pay higher freight and insurance premiums. But there is also productivity loss through indirect channels, such as the victimization of workers,” he said.

That victimization, in turn, may be direct—such as when a worker dies due to violence—or indirect, involving physical and/or psychological effects on employees. “There is an issue of human capital loss, whether because the employee was murdered or because they developed, for example, post-traumatic stress disorder and need to take time off for treatment. All of this ultimately also represents a cost for companies,” Cerqueira said.

A 2023 study by the Center for Studies on Security and Citizenship (CESeC) showed, for example, that rates of hypertension, prolonged insomnia, depression, and anxiety are higher in communities in Rio de Janeiro that are more exposed to shootouts involving security forces.

These costs influence companies’ strategic choices: they might decide not to start a business in violent areas or, if already there, to leave. “Rio has several examples. The Jacarezinho area, which experienced what was then the deadliest police operation until this year’s operation [in the Alemão/Penha complex], once hosted numerous factories. They gradually shut down as the area became extremely violent,” Cerqueira said. “There was a demobilization of physical capital to other locations, and that represents a cost for companies.” Cerqueira is referring to a police operation that left 28 people dead in the Jacarezinho favela in 2021. In this year’s mega-operation, 121 people were killed, including four police officers.

Violence can also reduce consumer willingness to frequent these businesses and ultimately undermine profitability, the expert added. “It can discourage certain types of consumption, such as restaurants and cultural activities, because people are afraid to go out, in addition to its effects on tourism by foreigners and Brazilians,” he said. “Tourism is a sector that, for a long time, several countries such as Portugal and Spain have strategically used as an engine of development, but a country that appears in the news every day because of high levels of violence discourages tourists.”

This has the potential to affect Brazil’s current account balance, which records transactions between residents and non-residents. “Tourism functions as a kind of export for us, and that would be declining,” Cerqueira compares.

Another factor related to organized crime that lowers productivity in legitimate companies is the infiltration of criminal organizations into legal sectors, Cerqueira noted. “With funds that often come from money laundering, they can sell at lower prices. To stay competitive, other legitimate businesses are forced to cut prices—not because that competitor is more efficient, but simply because it has surplus resources from illegal markets. There are many examples of this,” he said.

He cites a recent case: Operation Hidden Carbon, which dismantled a complex network of shell companies, investment funds, and fintechs used by the criminal organization Primeiro Comando da Capital (PCC) to launder money, defraud the fuel market, and hide assets. The Institute for Legal Fuel (ICL), which represents major fuel distribution and petrochemical companies, estimates that at least R$30 billion is siphoned off from the sector annually due to tax evasion, non-payment, and fraud against consumers, including pump tampering and fuel adulteration, known as “blended fuels.”

A more recent issue in Brazil that has also attracted attention—and carries economic consequences—is the infiltration of organized crime into politics and public administration. “When policy decisions are made to benefit specific groups, laws and contracts are drafted in a biased way, leading to a broad loss of economic efficiency. This is a cost that society as a whole will have to bear,” Cerqueira said. He cited, as an example, bus companies in São Paulo that are under investigation for alleged links to the PCC. “These are contracts that may be costing society more while generating less well-being.”

Even before the major operation in Rio de Janeiro at the end of October, William Jackson, chief economist for emerging markets at Capital Economics, had already pointed to “worrying signs regarding the prevalence of criminal organizations in Brazil recently.” In his view, recent events “have highlighted that crime is a politically relevant issue and that there is a shift—at least in some parts of the political spectrum—toward a much tougher approach to fighting criminality.”

Jackson estimated that high crime rates reduce Latin America’s potential gross domestic product (GDP) growth by around 0.25 percentage points, placing Brazil in an intermediate position. “It is not as severe as in some high-crime regions, such as parts of Central America, but it carries a higher cost than in other countries—for example, Uruguay and Chile.”

Although conditions have improved compared with last year, Brazil ranks as the third least peaceful country among 11 in South America assessed by the 2025 Global Peace Index (GPI).

Produced by the think tank Institute for Economics & Peace (IEP), the GPI evaluated 163 countries and independent territories in this year’s edition. Brazil ranks 130th, an improvement over its 2024 ranking. Within South America, however, only Venezuela (139th) and Colombia (140th) perform worse.

The index includes 23 qualitative and quantitative indicators that evaluate the “state of peace” across three areas: the level of ongoing domestic and international conflict, the degree of militarization, and safety and security—the category where Brazil scores the lowest. This grouping considers factors like national harmony or discord, including crime rates, terrorist activities, violent protests, and relations with neighboring countries.

Felipe Tavares, chief economist at BCG Liquidez, references a study by the Inter-American Development Bank (IDB) showing that Southern Cone countries lose about 3.39% of GDP annually due to high crime rates. In Brazil’s case, the yearly social loss is estimated at R$372.9 billion.

Based on this, Tavares estimated that R$32 billion of that amount is attributed to the state of Rio de Janeiro. Focusing only on the direct effects of violent crime, the yearly impact would be approximately R$13 billion. Tavares also estimates that arrivals of foreign tourists experience an average negative impact of 0.17%, which affects sectors like hospitality, retail, and services.

Using a municipal-level econometric approach, distinct from that employed by the IDB, Tavares reached similar conclusions: the economic impact of crime in Rio de Janeiro ranges from R$10.7 billion to R$11.5 billion per year. “Crime erodes wealth, reduces productivity, and imposes a persistent social cost on the state’s economy,” he said.

From an economic perspective, crime can be understood as an “incentives problem,” Tavares argues. He cites Gary Becker (1930-2014), the American economist and 1992 Nobel laureate who developed, among other ideas, the “economics of crime.” The idea, Tavares explains, is that criminal behavior is also a rational decision: individuals weigh the expected benefit of the crime against the cost of punishment. If the perceived gain outweighs the risk of punishment, crime becomes an economically viable option.

“In contexts of high poverty and inequality—as is chronically the case in the state of Rio de Janeiro—the imbalance between the costs and benefits of crime tends to intensify. Adverse economic cycles increase the appeal of illicit activities, especially in regions where the presence of the state is weak and the expected returns from formal employment are low,” Tavares said. The result, he added, is a parallel economy that competes with the productive economy, distorts incentives, and destroys human capital.

It is also based on diagnoses like this that Renato Galeno, coordinator of the international relations program at the business school IBMEC-RJ, argues that equating criminal factions with terrorist groups would not be an effective method for combating organized crime. “When we talk about terrorist groups, we think in terms of means and ends. Violence is not an end in itself; the end is rooted in strong convictions and political and ideological motivations—broadly speaking, in revolutionary, religious, nationalist, or ethnic or racial movements. This is very different from groups whose objective is to make money.”

Because the motivations of these two types of organizations differ, the way to address them must also differ, Galeno argued. “People who are part of terrorist groups are highly driven by passion. The measures to prevent them from being drawn into such groups are different. For groups that want to make money, people can still walk away—what I call a ‘social remedy.’ Confusing the two does not help and may harm Brazil, its population, and its businesses,” he argued.