Association for Public Policy Analysis & Management

In this paper, we study the effect that two of the largest gangs in Latin America (MS-13 and 18th Street) have had on economic development in El Salvador. We exploit the fact that the emergence of gangs in El Salvador was in part the consequence of an exogenous shift in American immigration policy that led to the deportation of gang leaders from the United States to El Salvador. Using the exogenous variation in the timing of the deportations and the exact boundaries of the territories controlled by the gangs, we perform a spatial regression discontinuity design and difference-in-differences analysis to estimate the causal effect of organized crime on development outcomes. Our results suggest that exposure to gang activity resulted in significantly lower economic growth (measured by nighttime light density), less human capital attainment, worse household conditions, and lower probability of owning durable goods. The results are not determined by selective migration away from gang locations. We argue that our findings are driven by high extortion rates in gang territory, lower investment in public infrastructure, and restrictions to residents’ mobility and labor choices. We also find that individuals are willing to pay additional USD $200 per month for housing to avoid living in neighborhoods that are controlled by gangs, implying that a marginal improvement in law and order would be equivalent to a permanent 60% increase in the level of GDP per capita.