Over the past two decades, decentralization has been widely embraced as a pathway to stronger governance, more responsive service delivery, and increased local accountability. In El Salvador, this model helped democratize the political landscape after a brutal 12-year civil war. Municipal governments became important spaces for civic participation, political alternation, and even innovation in public service delivery. However, an invisible but powerful force has undercut this progress: the territorial expansion of criminal gangs.
Progressively during the post-civil war period from the last years of the past century until 2020, the presence of gangs such as MS-13 and Barrio 18 affected nearly every aspect of local governance in El Salvador. These groups filled power vacuums in many municipalities, exerting control through extortion and intimidation. While their impact on violence is well known, what has been far less understood is how gang control weakens the fiscal and administrative foundations of municipal governments themselves. We find that where gangs operate, municipalities struggle to raise revenue, maintain spending, and deliver basic public services. The outcome is a weakened local state and a reversal of decentralization gains since the 1990s.
When decentralization meets extortion: A broken promise?
One of the main arguments for decentralization is that it enables subnational governments to compete with one another through factor mobility. Labor and capital may more easily flow between neighboring subnational jurisdictions than they can between countries, and voters can vote with their feet by opting to relocate in local jurisdictions whose policy offers better match their preferences. Competition between subnational governments for capital investment and human resources encourages local politicians to adopt ‘market preserving’ policies that enhance prospects for economic growth. Through several illicit behaviors, however, gangs can limit factor mobility by extracting payoffs from economic actors seeking to transport goods between municipalities, and by imposing checkpoints that limit the mobility of residents. Criminal organizations interact with businesses in ways that affect the local economic environment in which they operate, not just in illegal markets but in formal markets as well, where they can affect levels of production, employment, and prices.
While insufficient local tax effort deserves the attention it has received from scholars of decentralization, it is important to note that widespread gang activity may also be impeding efforts by local authorities to collect taxes. Impoverished residents may be unable to pay ‘rent’ to the criminal gangs who are directly and violently extorting them, while at the same time complying with the municipal taxes and fees, they are legally obligated to pay. If gangs and mayors are trying to tap the same resources, there are good reasons to expect the former will win out. The negative impact of gangs on the ability of municipal governments to collect taxes and fees operates as a further impediment to the general norm that ‘finance should follow function’.
The Sine Qua Non Characteristics of Salvadoran Gangs
To understand the unique characteristics of Salvadoran gangs, it is important to briefly review the literature of non-state actors and their impact on decentralization and local governments. Not all non-state armed actors seek to overthrow or secede from the state, however. Compared to insurgents or guerrillas, criminal organizations like gangs pose a very different set of challenges to the state. The concern is not that gangs will use decentralized resources to strengthen their drive to secede from the country or bolster their prospects of defeating the government militarily. But rather than a zero-sum and parasitic relationship will be developed where gangs control territory and population to exert a reliance on extortion. Thus, in countries where gangs also rely especially heavily on extortion, we would expect to see the same impacts that are documented in our analysis.
How we measured the impact of gangs on municipal performance
Using a panel dataset of 258 Salvadoran municipalities over the period 2010–2019, we measured the impact of gangs on municipal performance, we assembled a dataset combining fiscal records, service delivery metrics, and crime statistics across Salvadoran municipalities. We used homicides attributed to MS-13 as a proxy for gang presence, lagging by one year to minimize reverse causality. We examined how variations in gang violence affected:
- Own-source revenue per capita
- Current and capital expenditures
- Garbage collection coverage (as a proxy for service delivery)
- Electricity consumption (as a proxy for local economic activity)
We also disaggregated effects by municipality size to assess heterogeneity.
Key finding #1: Gang presence depresses local revenue
Municipalities with higher levels of gang violence collect significantly less revenue from their own sources. For each additional homicide per 1,000 inhabitants by MS-13, own-source revenue in mid-sized municipalities drops by $5.60 per capita. Gang presence strongly reduces revenue collection in municipalities with 10,000–50,000 inhabitants.
The effects are not statistically significant in small or large municipalities—small ones collect very little anyway and are highly dependent on transfers, while large municipalities have diversified revenue bases and more administrative capacity to cope.
Key finding #2: Gangs cut municipal spending and public investment
The fiscal harm goes beyond revenue. Gang violence also reduces per capita municipal expenditures, especially capital spending on infrastructure and services. On average, each additional homicide by MS-13 reduces municipal spending by $17.90 per capita. In small municipalities, the effect is even stronger: a $20 drop per homicide. Capital expenditures decrease by approximately $19.70 per capita for each additional homicide.
This pattern suggests that gangs not only extract fiscal rents but also deter municipal staff from operating in gang-controlled areas. Field workers, contractors, and inspectors may be threatened, and public works projects delayed or abandoned due to fear of retaliation.
Key finding #3: Public services decline—and spillovers follow
Even seemingly basic services suffer under gang control. Our proxy for service provision—garbage collection—shows a measurable drop in coverage: 0.2% decrease in service coverage per homicide in mid-sized municipalities.
While this may seem small, over time and across municipalities, the cumulative effect is a steady erosion of basic governance.
Moreover, the economic impacts go beyond individual municipalities. Using a spatial econometric model, we find that gang violence in one locality reduces electricity consumption (a proxy for economic activity) by 3.1 million kWh within the municipality—and by 5.2 million kWh in neighboring areas. This confirms a key point: gang presence not only disrupts municipal capacity, it fragments regional economies by raising the costs of factor mobility, discouraging investment, and deterring cross-border flows of goods and labor.
Why are gangs able to disrupt local government so effectively?
The answer lies in a mix of institutional gaps and perverse incentives:
- Municipalities lack a robust tax base (El Salvador lacks a property tax) and rely heavily on fee-based taxes that are easier to evade or suppress via intimidation.
- Gangs can collect “rents” more effectively than the state, because their enforcement mechanisms are more credible—and more violent.
- Gangs exerted control over the territory thus thwarting municipal government efforts to collect taxes and provide municipal services such as street lighting, garbage collection, and public works.
- Local businesses and residents often cannot pay both the gang and the municipality. Extortion effectively crowds out taxation.
- Central government transfers are large but do not protect mid-sized municipalities that are especially vulnerable.
- There are no formal mechanisms for adjusting fiscal policy in response to criminal governance.
Rethinking decentralization in high-crime contexts
The evidence from El Salvador shows that while decentralization can improve responsiveness and participation, it is not immune to non-state capture. When criminal groups become established, they not only engage in violence but also undermine the state’s authority. That said, the solution is not to abandon decentralization. Instead, we must adapt its design to account for threats posed by organized crime.
Policy Implications for El Salvador
We showed that gang violence—measured using homicides attributable to MS-13—has a statistically significant and negative effect on local tax collection, capital and current expenditures, and even public service delivery. The fiscal damage is especially acute in mid-sized municipalities (populations between 10,000 and 50,000), which have enough tax potential to be targeted, but lack the scale and administrative capacity to resist. Why should this matter to policymakers? Because it reveals how gang extortion does not merely harm individuals or businesses. It systematically undermines the core mechanisms of decentralization—fiscal autonomy, political accountability, and inter-municipal competition. And this erosion of local governance has broader economic spillovers, affecting neighboring jurisdictions and limiting factor mobility across regions.
We conclude that instead of giving up on decentralization, which played such an important role in transforming post-conflict El Salvador, a viable alternative is to refine the decentralization framework and to more fully exploit complementarities with the national government. Resolving the security challenges created by gangs in El Salvador presents the country with an opportunity for a new beginning in decentralization.
We propose three core recommendations:
- Strengthen Municipal capacity to increase own source revenue collections.
- Introduction of property taxes or land levies, despite being politically sensitive, could reduce reliance on fee-based taxes.
- Recalibrate intergovernmental transfers to protect vulnerable municipalities
- Mid-sized municipalities are the hardest hit, yet they fall through the cracks of the current system. A revised formula should include factors such as vulnerability to security threats and fiscal fragility, in addition to population and poverty.
- Secure municipal operations in the territory
- Municipal service delivery can be ensured through security partnerships that ensure that local and central level governments control territory, and pilot the introduction of digital tax/fees collection.
This blog post was prepared by Jose Larios. Access the full article (open access):
Kent Eaton, Silvana Huanqui & Jose Larios. Decentralization and Criminal Gangs in El Salvador: Impacts on Municipal Finances and Local Economic Development. The Journal of Development Studies Volume 60, 2024 – Issue 9.
