surveys estimate that in 2010 alone, crime cost victims losses of US$12.9 billion and additional health expenses of US$619 million (INEGI, 2011). For firms, surveys estimate that losses due to theft and vandalism account for as much as 3.6 percent of their product value.<sup>4</sup> Additionally, by 2010, 42.8 percent of Mexico’s firms paid for private security, spending about 2.2 percent of their annual sales on these services (IFC and WB, 2012).

Arias and Esquivel (2012) analyze how drug-related violence has influenced labor markets merging data from the National Labor Force Survey (ENOE) with administrative records of crime, and – developing a fixed effect model for the 2006 2010 period with a balanced panel for 32 states. Their results suggest that violence is indeed associated to increased unemployment: for every 10 drugrelated homicides per 100,000 inhabitants, they find evidence that unemployment increased by 0.5 percent and the fraction of self-employed by 0.4 percent.

The cost analyzed here relates to the potential reduction in the speed of income convergence across regions in Mexico. Previous work has shown evidence of poor municipalities in the country catching up with richer ones in terms of income growth—indicating ''convergence'' across municipalities (Davalos et al. 2012). Yet, there is no empirical analysis of whether the crime rates faced by the country represent a real threat to the aforementioned convergence pattern and what would have been the speed of convergence in the absence of the crime wave. In order to analyze this effect, this paper uses differentiated homicide rates and focuses on municipalities, thus distinguishing if the impact of crime rates over growth is the result of common crime, organized crime, or both.

# **3. Data and methodology**

Data on income per capita by municipality for 2005 and 2010 are obtained by using the poverty maps methodology (Elbers et al. 2003). Simply put, the method consists of imputing income to households in the Population Census (2010) and Population Count data (2005) using a model that predicts income from a household survey (the National Survey on Household Income and Expenditures, ENIGH, 2005 and 2010). The advantage of this methodology is that it benefits from the strengths of both the household survey and the censuses while avoiding their weaknesses. Empirical evidence based on this method has proven its precision when applied to a large sample of countries, and particularly for aggregated data at the municipality level in Mexico (see Elbers et al. 2001; Lopez-Calva, et al. 2005).

As mentioned previously, the data on the total number of homicides at the municipal level is available from the official figures made public by Mexico's Technical Secretary for the National Security Council ( _Sistema Nacional de Seguridad Publica_ , SNSP), a federal institution that is part of the Secretary of the Interior. The SNSP compiles information through an extensive collaborative

> other expenses: for example, it is less than half of the social security budget (i.e. pensions and healthcare), and 68 percent of what is spent in public education.

> 4 Average losses for middle-high income countries like Mexico (Argentina, Botswana, Chile, Colombia, Mexico, Panama, Peru, Uruguay, Venezuela) are 2.7 percent (IFC and WB, 2012).

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