When Organized Crime Moves In: Economic and Human Capital Disruption

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.