Abstract

We study how two of the world’s largest gangs—MS-13 and 18th Street—affect economic development in El Salvador. We exploit the fact that the emergence of these gangs was 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 a spatial regression discontinuity design, we find that individuals living under gang control have significantly less education, material wellbeing, and income than individuals living only 50 meters away but outside of gang territory. None of these discontinuities existed before the emergence of the gangs. The results are confirmed by a difference-in-differences analysis: after the gangs’ arrival, locations with gang activity started experiencing lower growth in nighttime light density compared to areas without gang presence. A key mechanism behind the results is that to maintain territorial control, gangs restrict individuals’ freedom of movement, affecting their labor market options. Residents of gang territory are also more likely to drop out of school. The results are not determined by selective migration from gang locations, differential exposure to extortion and violence, or differences in public goods provision.