metadata: authors: 0: author: Enamorado Enamorado,Ted
1: author: Lopez-Calva, Luis F.
2: author: Rodriguez Castelan,Carlos
count: Mexico
docna: 0: docna: Crime and growth convergence : evidence from Mexico
docty: Policy Research Working Paper
subtopic: Urban Solid Waste Management,Public Sector Economics,Public Financial Management,Public Finance Decentralization and
            Poverty Reduction,Inequality,Crime and Society
teratopic: Law and Development,Public Sector Development,Poverty Reduction,Conflict and Development,Social Development
abstracts: cdata!: Scholars have often argued that crime
            deters growth, but the empirical literature assessing such
            effect is scarce. By exploiting cross-municipality income
            and crime data for Mexico -- a country that experienced a
            high increase in crime rates over the past decade -- this
            study circumvents two of the most common problems faced by
            researchers in this area. These are: (i) the lack of a
            homogenous, consistently comparable measure of crime and
            (ii) the small sample problem in the estimation. Combining
            income data from poverty maps, administrative records on
            crime and violence, and public expenditures data at the
            municipal level for Mexico (2005-2010), the analysis finds
            evidence indicating that drug-related crimes indeed deter
            growth. It also finds no evidence of a negative effect on
            growth from crimes unrelated to drug trafficking.
geo_reg_key: 119228,517191
repnme: repnme: Crime and growth convergence : evidence
            from Mexico
display_title: Crime and growth convergence :
            evidence from Mexico
listing_relative_url: /research/2013/12/18683099/crime-growth-convergence-evidence-mexico
topicv3: Public Finance Management m1326316 716,Poverty m1326687 695,Organized Crime m1327084 2453,Crime m1439217 3041,Homicide m1439222 HOM-3046
publishtoextweb_dt: 2013-12-01T00:00:00Z
historic_topic: Law and Development,Public Sector Development,Poverty Reduction,Conflict and Development,Social Development
no_of_pages: 14
author_keys: 0: author_key: 1261865
1: author_key: 1180219
model_extractions: WPS6730 Policy Research Working Paper 6730

# Crime and Growth Convergence

## Evidence from Mexico

_Ted Enamorado Luis F. López-Calva Carlos Rodríguez-Castelan_ The World Bank Latin America and the Caribbean Region Poverty Reduction and Economic Management Unit December 2013
Policy Research Working Paper 6730

# **Abstract**

Scholars have often argued that crime deters growth, but the empirical literature assessing such effect is scarce. By exploiting cross-municipality income and crime data for Mexico—a country that experienced a high increase in crime rates over the past decade—this study circumvents two of the most common problems faced by researchers in this area. These are: (i) the lack of a homogenous, consistently comparable measure of crime and (ii) the _small sample_ problem in the estimation. Combining income data from poverty maps, administrative records on crime and violence, and public expenditures data at the municipal level for Mexico (2005–2010), the analysis finds evidence indicating that drug-related crimes indeed deter growth. It also finds no evidence of a negative effect on growth from crimes unrelated to drug trafficking.

This paper is a product of the Poverty Reduction and Economic Management Unit, Latin America and the Caribbean Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http:// econ.worldbank.org. The authors may be contacted at lflopezcalva@worldbank.org or crodriguezc@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Crime and Growth Convergence: Evidence from Mexico**

Ted Enamorado<sup>∗</sup> Luis F. López-Calva<sup>†</sup> Carlos Rodríguez-Castelan<sup>‡</sup>

**Keywords:** Crime, convergence, growth, spatial inequality **JEL codes** : O12, O54, H70, D74 **Sector Board** : Poverty

> ∗ Princeton University. E-mail: tede@princeton.edu

> † World Bank. E-mail: lflopezcalva@worldbank.org

> ‡ World Bank. E-mail: crodriguezc@worldbank.org

The authors would like to thank Louise-Cord , Samuel Freije-Rodriguez and Mary Alexander Sharman for valuable comments and edtis. The findings, interpretations and conclusions in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank Group, its Executive Directors, or the countries they represent.
# **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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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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taskforce involving several state and federal law-enforcement agencies.<sup>5</sup> Monthly figures have been released publicly since December 2006. Among these, drug vs. non-drug related homicide rates are disclosed for each municipality in the country. In the analysis that follows, we collapse each of the crime variables available (total homicide rate, drug and non-drug related homicides) on a yearly basis for each municipality. We also employ data on aggregate figures of public expenditures at the municipal level, obtained from the State and Municipal System of Databases (SIMBAD) compiled by the National Institute of Statistics, Geography, and Informatics (INEGI).

# **4. Regional convergence analysis**

The traditional convergence framework follows the contributions of Barro and Sala-i-Martin (1991). This paper looks at β-convergence, which refers to a negative association between the rate of growth and the initial level of an attribute—in this case, per capita income.

In order to analyze conditional β-convergence, we make use of the following regression specification: where yi,t refers to the log of per capita income in municipality i at period t, Ci,t is the crime rate at the municipal level, Xi,t is a vector of conditioning variables (public expenditures and education in the municipality), vi,t is a stochastic error term, and τ is the length of the period under analysis. Moreover, in order to account for possible geographical correlation between crime rates in Mexico, we cluster the standard errors at the state level using the wild cluster bootstrap of Cameron, Gelbach, and Miller (2008).<sup>6</sup> The analysis starts by looking at the overall levels of crime and violence in 2007, as measured by the – homicide rates per 100,000 inhabitants, and their effect on growth over the 2005 2010 period. As illustrated in Table 1, the homicide rates of 2007 are not found to have any effect on the economic growth rate of municipalities between 2005 and 2010 (see Column 1). While the coefficient for _Total Homicides Rate 2007_ shows the (expected) negative sign, the effect is not statistically distinguishable from zero. If we use five-year lags of the total homicide rate as instruments for the levels of crime

> 5 The Center for Investigation and National Security (CISEN); the National Center for Information, Analysis and Planning to Fight Crime (CENAPI) within the Office of the Federal Attorney General (PGR); the Public Security Secretariat (SSP); the Secretary of National Defense (SEDENA); the Secretary of the Navy (SEMAR); and the Secretary of the Interior (Secretaría de Gobernación) are the institutions that participate in this collaborative effort, as described by Molzahn et al. (2012).

> 6 This method offers a solution in cases where the number of clusters (N=32 in our case) is small, which would impose limitations to methods such as cluster-robust standard errors that rely on an infinite number of clusters in order to be asymptotically consistent.

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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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possibility that the theorized negative effect of crime on growth discussed in the literature is more pronounced when the attention is centered on _organized_ crime vis-à-vis more ‘common’ types of crime.

7