# **1. Introduction**

Does crime deter growth? Plausible causal mechanisms on why this may be the case have been discussed in the existing literature: crime diverts resources that could have been used in more productive ways, crime increases security costs for businesses, it decreases health, it represents a threat to private property, and it discourages domestic and international investment because the investment climate deteriorates (see Fajnzylber et al. 1998; Londoño and Guerrero, 2000; Demombynes and Ozler, 2002; Stone, 2006; Powell et al. 2010; Cardenas and Rozo, 2008; Detotto and Otranto, 2010). The type of crime incidence, its intensity, and its persistence also matter. The existing literature, however, contains only a few attempts at assessing the magnitude of the effect of violent crime on income convergence, mainly due to the lack of harmonized and reliable data sources on crime across countries. Another challenge faced by researchers when comparing countries refers to the limited number of observations—or the “small sample” problem. This paper looks at the recent experience of rapidly increasing crime rates in Mexico to examine the effect of crime over _regional development patterns_ , or more specifically, growth convergence within the country.

Previously, Robles, et al. (2013) have used an instrumental variable approach to look at the effect of violence related to drug trafficking on labor force participation, local businesses and local rates of unemployment. This paper exploits harmonized data on crime, i.e., homicide rates differentiated by drug vs. non-drug related crimes, as compiled by Mexico's Technical Secretary for the National Security Council ( _Sistema Nacional de Seguridad Publica,_ SNPS). Moreover, to tackle the small-sample problem, the focus of attention is on municipalities across the country, which is feasible due to the construction of poverty maps for a panel of Mexican municipalities (consisting of 2,457 observations in each cross-section).

Mexico offers an interesting case for several reasons. First, the total number of homicides in Mexico has increased dramatically in recent years, more than doubling since 2007 following a 10-year period of reduction, with a decline of 45.4 percent, in the number of homicides (Figure 1). The rapid growth in the number of total homicides between 2007 and 2011 is explained mainly by an increase in drug traffic-related homicides, i.e., homicides resulting from confrontations among different criminal organizations or between the armed forces and policy against criminal organizations.<sup>1</sup> Interestingly, while drug related homicides increased by 55 percent annually over the period, nondrug related homicides actually _declined_ by an average of 4 percent each year between 2007 and 2011. Indeed, drug related murders accounted for 73 percent of all homicides in 2011, while in 2007 the figure was no more than 27.6 percent. The fact that it is possible to distinguish between drug and

> 1 According to the SNPS, a homicide must meet two out of six criteria in order to be considered a drug-related crime: (i) victim was killed by high-caliber firearms, (ii) victims with signs of torture or severe lesions, (iii) victims found at the crime scene or in a vehicle, (iv) victims whose bodies were taped, wrapped or gagged, (v) if the murder happened in a prison and involved criminal organizations, and (vi) If one of several “special circumstances” occurred, including if the victim was abducted prior to assassination ( _levantón_ ), ambushed or chased, if the victim was an alleged member of a criminal organization, or if a _narco-message_ was left on or near the body (see Molzahn et al. 2012).

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