UC Berkeley

This dissertation consists of a three-part study on criminality and organized crime---mainly gangs---on development and inequality. With a focus on El Salvador, each chapter analyzes the effects of the emergence and evolution of gang activity in the country starting in the late 1990s on human capital and material wellbeing, as well as the policies that have shaped the state's relationship with gangs. Chapter 1 provides context on the growth and expansion of gangs in El Salvador and situates the dissertation project in the broader literature. The importance of gangs' territorial control and its medium to long-term consequences for inequality and poverty are the focus of Chapter 2. Chapter 3 highlights the role of competition and collusion in driving gangs' main income source, extortion. Lastly, Chapter 4 turns to the externalities of a controversial, yet common, occurrence when dealing with robust criminal organizations: direct negotiations between the state and gangs. All chapters are unified by a focus on how criminality shapes developing, urbanizing societies.

The second paper of my dissertation studies how the growth, and in particular, territorial control of gangs affects socioeconomic development in El Salvador's urban areas. Leveraging a natural experiment stemming from the mass deportations of individuals with criminal backgrounds from the United States to El Salvador in the late 1990s, we find that gang members repatriated from the United States quickly exploited the power vacuums following the country's devastating civil war. Through a regression discontinuity analysis, we analyze socioeconomic inequality across gang and non-gang controlled areas. The results highlight strong, negative effects on educational attainment and wealth, and also point to a novel mechanism: mobility restrictions. In order to carry out their illicit activities, gangs severely limit the mobility of individuals living in territories under their control, limiting the degree to which individuals can seek gainful employment.

Relying on their extensive territorial control and widespread networks, gangs engage in repeated extortion of businesses and households. Using detailed data on individual extortion payments to gangs and sales from a leading wholesale distributor of consumer goods and pharmaceuticals in El Salvador, the third chapter documents evidence on the determinants of extortion payments, firm responses to extortion, and effects on consumers. Leveraging a non-aggression pact between MS-13 and Barrio 18, the country's two main gangs, in 2016, we examine how collusion affects extortion in areas where they previously competed. Although there is a precipitous drop in violence, extortion increases by upwards of 15%, affecting the prices for pharmaceutical goods and potentially contributing to a rise in hospital admissions for chronic illnesses.

Given the direct and indirect suffering brought about by gangs' territorial control and violence, governments often turn to unconventional measures to deal with organized crime. A common, and controversial, policy involves brokering or facilitating truces with and among criminal organizations. In the last chapter, we estimate the short-term impacts of the 2012 Salvadoran gang truce, a plausibly exogenous reduction in violence, on labor market decisions and human capital investments. The opaque negotiations between the Salvadoran government and the country's two main gangs lead to a significant drop in homicides. However, other economic agents did not react: neither businesses nor households changed their behavior after the gang truce. We discuss the role of uncertainty in explaining our null results.