From Drug Lords to Police State: The Effects of Order Transition on Local Economies

• Author: Leonardo Gentil-Fernandes,João V. Guedes-Neto,José Incio
• Published date: 01 September 2022
• Date: 01 September 2022
• DOI: http://doi.org/10.1177/00104140211060273
• Subject Matter: Articles

Article

Comparative Political Studies

2022, Vol. 55(10) 1765–1801

© The Author(s) 2022

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DOI: 10.1177/00104140211060273

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From Drug Lords to

Police State: The Effects

of Order Transition on

Local Economies

Leonardo Gentil-Fernandes

1

, João V. Guedes-Neto

1



and Jos´

e Incio

1



Abstract

What is the effect on local economies when the state intervenes to capture its

own territories back from non-state actors? In 2008, the government of Rio

de Janeiro, Brazil, implemented a policy to take control of favelas that were

previously dominated by organized crime groups (OCGs). We use day and

night luminosity to assess the effects of this program on economic growth.

The difference-in-differences design shows that state intervention has a

signif‌icant and negative average treatment effect on the favelas that received

the intervention. We further test a mechanism to explain this economic

downturn: institutional replacement. Based on crime data, we demonstrate

that this effect is caused by the destruction of local markets, especially illicit

activities. The data highlight the perils of order transition, even when OCGs

are removed by state actors. Furthermore, this paper reinforces the need for

policies that are mindful of the externalities of institutional shifts.

Keywords

politics of growth/development, democratization and regime change, Latin

American politics, political economy, organized crime

1

University of Pittsburgh, PA, USA

Author names are in alphabetical order.

Corresponding Author:

Leonardo Gentil-Fernandes, Department of Political Science, University of Pittsburgh, 230 South

Bouquet Street, Pittsburgh, PA 15213, USA.

Email: lef54@pitt.edu

By 2010, 22% of the population of Rio de Janeiro (Brazil) lived in favelas

(IBGE, 2010).

1

Many of them are controlled by organized crime and have no

access to state-operated public services. Their residents live under extreme

conditions, including open sewage and the constant risk of falling walls and

roofs. Previous governments have either overlooked this issue or adopted

unsuccessful programs that made the scene look like an unsolvable problem.

Poverty pockets concentrated in metropolitan areas are neither new nor

exclusive to Rio de Janeiro (Stokes, 1962; Davis, 2006). From Mumbai to

Chicago, criminal organizations have used poverty pockets in urban centers as

a source of recruitment, self-protection, and f‌inancial development

(Weinstein, 2008). In countries recovering from or passing through civil

conf‌licts (Asal et al., 2019; Kupatadze, 2012), criminal order replaces state

authority, offering a parallel source of stability to local communities (McGuire

& Olson, 1998). Far from anarchy, these organized crime groups (OCGs)

function as what Olson (1993) calls stationary banditry: They police, judge,

and tax as if they were the legitimate rulers of their communities. It is no

surprise that Tilly (1985) compared organized crime to state making.

What is the effect on local economies when the state intervenes to capture

their own territories back from these OCGs? This paper investigates the

economic impact of order transition in impoverished territories. We argue that

state intervention in areas previously controlled by groups that operate as

stationary bandits causes a temporary crisis, especially since order transition

leads to the partial destruction of local markets, thus decreasing income and

pushing economic activity down. At least until a new order has successfully

been established and managed to substitute the destroyed markets, such

transitions should lead to negative economic performance.

A recent policy implemented by the state government of Rio de Janeiro

provides an opportunity to test this theory. In 2008, it created the Unidades de

Pol´

ıcia Pacif‌icadora (Pacifying Police Units, hereafter UPPs) to handle the

expansion of organized crime in the city’sfavelas as it prepared to host the

2016 Olympic Games and the 2014 World Cup (Ribeiro, 2014; Silva & Beato,

2013). UPPs represented a sudden and drastic increase of state presence in

locations where criminal order was the norm. We show that this order

transition caused a negative impact in the economy of favelas because of the

destruction of illicit markets.

This study offers at least three contributions to academics and practitioners.

The f‌irst of them is methodological. We study the effects of the im-

plementation of UPPs in the favelas of Rio de Janeiro based on a difference-in-

differences design. Utilizing measures from the Day/Night Band of Visible

Infrared Imaging Radiometer Suite (VIIRS-DNB), this paper relies on day and

night luminosity as a proxy for economic activity and growth (for a similar

approach, see Henderson et al., 2012). This is especially relevant given the

diff‌iculties of obtaining data from highly violent localities (Osorio, 2014) or

1766 Comparative Political Studies 55(10)

those where the informal sector tends to be predominant (Bickenbach et al.,

2016; Dell’Anno, 2007; Henderson et al., 2012). Implementing this mea-

surement to assess the impact of a policing initiative, we bring attentio n to the

availability and relevance of this tool for policy analysis. Our study shows a

negative impact in luminosity, evidencing a downturn in the economy of areas

that were already impoverished.

This f‌inding corroborates to the literature on criminal governance and the

economy of crime. Based on these streams of research, we already know that,

“in pockets of state weakness”(Lessing, 2020, p. 2), stationary banditry

2

facilitates local cooperation through the enforcement of selected contracts

(Olson, 1993; Koivu, 2016; McGuire & Olson, 1998). These OCGs have their

own bureaucratic procedures, disciplinary system, and even job benef‌its

beyond salary (Lessing & Willis, 2019). In competition against state order

(Barnes, 2017), they provide private security and build trust networks to

develop illicit markets (Albarrac´

ın, 2018; Koivu, 2016).

Indeed, these areas are not completely stateless, in that their residents still

vote and pay taxes, among other types of citizenship obligations (Lessing,

2020). In some cases, the state actors may even tolerate or associate with

criminal rule (Pansters, 2018; Snyder & Duran-Martinez, 2009). Yet, as we

show, the transition from this dual-domination to the state’s monopoly of force

disrupts illicit markets and institutions generating a partial reduction of in-

come in these localities. This f‌inding lends additional empirical evidence to

the thesis that criminal organizations develop their own markets, which are

unlikely to survive under state order.

Based on crime reports, we f‌ind support to the hypothesis that this eco-

nomic downturn is, indeed, led by the destruction of local shadow markets

during order transition. In brief, since part of the residents lost the income

previously generated by arms and drugs dealing, a spiral of demand shortage

affected other local markets, pushing economic activity down. These f‌indings

lead to our third contribution, which is directed at policymakers and other

practitioners. We raise awareness to the need for governments to be mindful of

the negative economic effects of order transition. As such, economic and

social policies that mitigate these negative impacts and facilitate the intro-

duction of new institutions should be implemented alongside state rule to

reduce the negative effects of order transition.

State and Non-State Order

The relevance of state order is well-established in the literature. Huntington

(1973, p. 1) introduces his seminal work by arguing that “The United States,

Great Britain, and the Soviet Union have different forms of government, but in

all three systems the government governs.”In his narrative, the same was not

true for “the modernizing countries of Asia, Africa, and Latin America,”

Gentil-Fernandes et al. 1767