Economic Consequences of Drug-Trafficking Violence in Mexico

This study contends that in Mexico there is a threshold above which drug-trafficking-related violence causes a general slowdown in the economy. Before that threshold is reached, firms and individuals pay for the increase in violence via protective security costs, a decision that is reflected in the job market. Once violent conflict has escalated to a substantial degree, economic agents’ medium- and long-term decision making is negatively affected, revealing a significant contraction in the economy. Using two different empirical strategies, this study proposes electricity consumption as an indicator of local economic activity. To estimate the marginal effects of violence on the economy, an instrumental variables regression is utilized; this regression uses as exogenous variation a tool developed by Mejía and Castillo (2012), which is based on record seizures of Colombian cocaine. To estimate the “threshold” effects of drug violence on the economy, a synthetic control method is used which consists of constructing counterfactual scenarios as an optimal weighted average of control units. It is found that an increase in the levels of violence has significant, negative effects on labor force participation and employment. It is also found that cities that experienced a dramatic spike in violence between 2006 and 2010 sharply curtailed their energy consumption in the years following the spike.