The effect of crime on macroeconomic adjustment

Describes Colombia’s experience over the last decade, during which the country benefited from discovery of a large oil deposit and from a general increase in capital flows to Latin America: the effect was to increase spending by government and private sector alike, with a resulting doubling of national debt, so that a sudden cessation of foreign capital inflow led to disastrous effects on growth and employment. Relates this to the continuing threat of irregular armies financed by illegal drugs, and assesses the intimidating effect of this on macroeconomic policy making. Argues that increased violence and armed opposition to a legitimate government destroys fiscal and human capital, creates serious disincentives to growth‐enhancing local and foreign investment, and impedes macroeconomic reforms which are needed to handle events like a sudden stop in capital flows or deterioration in the terms of trade.