and violence in 2007, we still find that crime does have a negative impact on growth (see Table 1, column 5), but again, the effect is not statistically distinguishable from zero<sup>7</sup> .

The results change significantly when the effect on income convergence is separated by the two types of crime—drug related homicides and non-drug related homicides (see columns 2, 3, and 4). The analysis shows that municipalities with higher levels of drug-related crimes in 2007 have grown at a slower pace between 2005 and 2010 than municipalities less affected by this shock. For instance, according to our estimates, a one standard deviation increase in the number of drug-related homicides (approximately 18 homicides, see Table 2) will imply a decrease in the growth rate of 0.20 percentage points. The latter means that e.g., municipalities with a rate of 90 drug-related homicides per 100,000 persons decreases income growth by approximately one percentage point. The negative effect of drug-related crime rates over growth continues to be present if the sample of municipalities is divided into urban and semi-urban, although the effect is imprecisely estimated for urban areas (see Table 3).<sup>8</sup> Here, a one standard deviation increase in the number of drug-related homicides translates to a decrease in the growth rate of approximately 0.19 percentage points in semi-urban municipalities and 0.13 percentage points in urban municipalities<sup>9</sup> . Finally, we found no effect of non-drug related crimes over growth during the time period under study.

# **5. Discussion**

Combining municipal level data from poverty maps, administrative records on crime and violence, and public expenditures data at the municipal level, we investigate the effect of crime on growth in Mexico. The data make it possible to distinguish between drug and non-drug related crimes, allowing us to separate the effect between common crime and organized crime on growth—a distinction not previously addressed in the literature. Additionally, we focus on the regional development pattern, namely, the income growth convergence observed across municipalities in Mexico over the past years. By using the differentiated homicide rates and focusing on (the 2,457) municipalities, we circumvent the main two challenges faced in researching the effects of crime on growth, namely, the lack of a harmonized measure and the small-sample problem.

Our analysis indeed finds evidence of a negative impact of drug-related crime on income growth in Mexican municipalities over the period from 2005 to 2010. Non-drug related crimes, on the other hand, are not found to have any effect on the economic growth rate of municipalities during the same time period. As noted by authors like Stone (2006), more empirical evidence on the effects of crime over growth is needed. We believe that the evidence presented in this paper speaks of the

> 7 We have to point out that no data disaggregating types of homicides by drug and non-drug related crimes exists in Mexico before to 2006. Nonetheless, we have used the 5 year lagged values for the rate of total homicides as an instrument for drug and non-drug related crimes. The results are identical to the ones presented by the OLS estimates in Table 1, columns 2 and 3. Those results are not presented here but are available from the authors upon request.

> 8 Urban status is defined in this paper according to the National Population Council (CONAPO) definition. In this sense, a municipality with more than 15,000 inhabitants is considered urban, while one with less than 15,000 individuals is considered a semi-urban area.

> 9 As noted before, this effect is indistinguishable from zero for urban municipalities.

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