Rosendo, a 50-year-old artisan, said tourism has decreased sharply over the last few years, forcing artisans to leave town in order to sell their crafts.
Eduardo Gallo, a respected Mexican anti-crime activist, said Olinala is just the latest in a series of towns where people have taken up arms to combat organized crime in frustration over the government's inability to control drug violence.
"People took over in order to prevent authorities' collusion with criminals," Gallo said.
At least two towns in the western state of Michoacan have formed their own armed guard forces and thrown up roadblocks to keep out criminals. Towns in northern Mexico also have taken similar measures.