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The recent surge in crime and drug-related violence in Mexico has had a profound effect on the Mexican economy. Thousands of businesses have closed in Ciudad Juarez, a city that borders the U.S., due to the violence that has erupted between drug cartels. It has been estimated by Rios (2007) that $4.3 billion of losses occur yearly to Mexico, due to illegal drug activity in the country. Using a spatial model, this paper analyzes the determinants of crime in Mexican states. It was found that high levels of total crime and drug-related violence in neighboring states of Mexico have spillover effects. They lead to higher levels of theft in a given state, which serves as a source of funds to the cartels to purchase drugs they sell and to purchase services of enforcement gangs that carry out the orders of the cartels. Individual state economic growth and development can be significantly increased if a solution can be found to Mexico’s crime problem and drug-related violence

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