| Abstract: |
This paper studies how organized crime presence transforms local communities
and human capital formation. Identifying these effects is challenging, as
crime is endogenous to local conditions. We address this by leveraging the
recent case of Ecuador, where criminal organizations from neighboring
countries have rapidly established a new cocaine export route. This externally
driven shock generated sharp increases in violent crime, allowing us to
estimate causal effects using a difference-in-differences design based on
proximity to areas prone to cocaine smuggling. Crime-affected areas
experienced higher dropout rates among children at grades characterized by
weak school attachment, the end of primary education and the first years of
secondary school. While we do not find evidence of increased dropout among
older students aged 15-18, individuals in this age group already out of
education at the time of the crime surge exhibited a marked rise in risky
behaviors, reflected in higher homicide victimization and earlier pregnancies.
We also document severe economic disruption: household income fell by nearly
30%, driven mainly by a decline in informal employment. Declining earnings are
a key mechanism linking crime exposure to school dropout. These findings show
that the externalities of organized crime impose persistent social costs,
deepening inequality and undermining human capital development. |