The road into Mexico's Tierra Caliente winds down through pine forests into a fertile paradise where tropical fruit seem to burst from the ground, before climbing again into the mountains of the untamed sierra. Remote, mysterious and not a little wild, this corner of the Pacific coast state of Michoacán has for centuries existed at the periphery of government rule. Today it represents an open challenge: a de facto state within a state run by a gang as bizarre as it is bloodthirsty.

This is the stronghold of Los Caballeros Templarios (The Knights Templar), a crime syndicate which combines pseudo-mystical ideology with cut-throat business instincts – and a capacity for extreme violence.

"Nobody enters without them knowing about it, they have lookouts everywhere," says one local, quietly.

"You get good at making neutral comments because you never know who is listening," says another.

"They are the law, not the government," says a third.

It was in this remote region that the outgoing Mexican president, Felipe Calderón, launched the first stage of what would become a nationwide military offensive against organised crime. Days after taking office in December 2006, he deployed battalions of masked troops and heavily armed federal police – first a few thousand in his home state of Michoacán and eventually 50,000 across the country. He even wore a military uniform when he appeared at a Michoacán army base to cheer on the soldiers.

The message was simple: after decades of playing down the growing power of the drug cartels, it was time for the Mexican state to flex its muscles.

Tierra Caliente, stronghold of Los Caballeros Templarios in Michoacán, Mexico.

But as Calderón leaves office, the reality of life in Tierra Caliente (Hot Land) offers a stark rebuke to his strategy. The flow of drugs northward appears to have continued unabated despite a string of cartel bosses being captured or killed in the years since he launched the offensive.

In that time, at least 60,000 people – possibly 100,000 – have been killed in violence across Mexico. Thousands more have disappeared. Scores of judges, journalists, politicians and local mayors have been assassinated, and the armed forces have been accused of systematic torture and abuse. The number of deaths appears to have plateaued in the past year, but the experience of Tierra Caliente suggests a falling murder rate is not necessarily any indication that the government is winning.

'We are a necessary evil'

In this part of Michoacán, the immediate result of Calderón's offensive was a surge of violence as the military presence exacerbated a power struggle between rival groups of narcos.

"Instead of helping, it produced more violence," observes one young professional in a small Tierra Caliente town.

That phase ended when the Caballeros beat off their rivals, and set about consolidating control. As a general in the region recently admitted, the recent relative calm owes more to the group's victory over its rivals than it does to the efforts of the federal forces.

"What Los Caballeros Templarios is doing is maintaining tight control on organised crime in this area," General Miguel Angel Patino told the Associated Press. "The dominance allows the area to stay quiet, to a certain point."

Instead of targeting the federales (federal police) the caballeros has now focused its efforts on building up its image, presenting itself as a crusading brotherhood dedicated to protecting the population, but which also happens to run a brutal criminal enterprise.

Like its predecessor, La Familia Michoacána, the caballeros have a system of bizarre and arcane rituals. New members are initiated wearing the costume of medieval warriors, complete with plastic helmets and swords. Cartel pamphlets combine a "code of honour" with demands for social justice.

A video released from August shows the cartel's leader, Servando Gómez Martínez, a former teacher, sitting in front of a statue of a knight, a sword, a Mexican flag and large framed pictures of Che Guevara and Pancho Villa. "Our only function is to help the people," he says. "We are not interested in causing chaos or terror and we want you to understand that because of the adverse circumstances we are here today as a necessary evil."

Despite their eccentricities, the caballeros have built a genuine local support base – aided by resentment over abuses committed by federal forces. Locals say dozens of people have disappeared after being detained by the security forces.

One resident, who is no fan of the cartel, describes federal police brandishing assault rifles at locals as they drive through town, and claims soldiers regularly search houses without warrants, and steal from residents.

"People are frightened of organised crime, but they are frightened of the federal police and the army as well," he says. "The difference is that they think the criminals might help them out."

The cartel has infiltrated local institutions. In one small town, not only does the group take a cut from the municipal budget, but its lookouts are on the town payroll. "Since the caballeros took over here, things have got much better," a young female resident says. "I would rather this than what we had before."

Maria Santos Gorrostieta. Photograph: Agencia El Universal/AP

Even if there were popular support for a confrontation, there are few incentives for local mayors to stand up to organised crime. Earlier this month, Maria Santos Gorrostieta, the former mayor of Tiquicheo, was dragged from her vehicle in front of her young children. Her body was found later with signs of torture. It was the third attempt on her life.

When Michoacán's governor obliquely blamed the caballeros for the murder, they responded with banners and pamphlets that denied the charge. They went on to allege that they had helped to get him elected last year as part of a secret pact made with his close associates that included getting the vote out in the Tierra Caliente. Now, the banner claimed, they merely wanted him "to tell us directly whether we can expect some return on our investment".

Calderón has consistently argued that taking the war to the cartels was the only way to stop Mexico becoming a "narco-state," but in this part of the country, the caballeros have already taken control of areas of everyday life that have nothing to do with the production or shipment of drugs. Locals say the cartel decides when the mango or lemon harvest should start, according to its reading of market trends. Farmers who cannot wait for the best prices must sell their fruit in secret, at considerable personal risk.

The caballeros are also said to have become the preferred option for sorting out disputes among members of the community, ranging from the disagreements over boundary fences to unpaid debts or a violent husband.

One witness describes how a cartel representative courteously welcomes disputing parties into his office and delivers his judgment without so much as a hint of a threat. "There is no need for that," the witness says. "Everybody knows what could happen."

The failure of the government's strategy in the Tierra Caliente could conceivably be blamed on the region's remoteness, its tight-knit, family-based communities, and traditional distrust of central government. But things are not much better in the nearby city of Uruapan. In some ways they are even worse.

Uruapan describes itself as the avocado capital of the world, but it now better known as the setting for a pivotal incident in the history of the drug wars. It was here, in 2006, that five severed heads were rolled on to the tiled floor of a nightclub called Sol y Sombra.

Since then, Mexico has grown used to ever more creative displays of savagery, but at the time decapitations were still rare, and the incident was one of the triggers for Calderón's offensive.

Kidnapped and tortured

Today, Sol y Sombra is open for business as usual and – aside from the lines of federal police vans parked in the central plaza – all seems reasonably calm. But the surface conceals a world of rampant criminality and state complicity.

"I am not a coward, but if any information about my identity gets out then I am a dead man," says a local man who agrees to describe his kidnapping.

The blindfold, shackles, threats and beatings were just the white noise of his ordeal, he says. The day he was forced to stand naked with his head in a noose and ordered to choose between rape or death was harder to bear.

He shudders as he recalls the screams of another victim being cut into pieces in the same room with an electric saw, and the sensation of the saw being held within inches of his own neck. And throughout the month-long ordeal, he heard his captors in regular radio contact with police chiefs. On at least one occasion, a patrol car escorted the vehicle moving him between safehouses.

When a person is abducted in Uruapan, their family's best hope is to discretely approach somebody thought to have links with the underworld. Relatives almost never go to the police unless that "somebody" is in uniform.

"In Michoacán we used to say that almost everybody here had a friend or a relative who was a migrant working in the US," one resident says. "Now we say we all have a relative or friend who is involved with organised crime."

This is partly because the crime syndicates no longer concentrate exclusively on drugs. The Michoacán cartels were among the first to diversify their business model to activities with a much more direct impact on the local population, including kidnapping, extortion, people trafficking and even the production of pirate DVDs.

As in the backcountry valleys of Tierra Caliente, Uruapan's legal economy is also dominated by the cartel. Taxi drivers are said to pay a monthly cut to the narcos, and are often required to act as spies, as are employees at the convenience store on the outskirts of town. Avocado growers pay a yearly fee per hectare, truck drivers fork out protection money, slot machines carry a sticker verifying that their owners are doing the same, and petrol stations are forced to buy stolen oil.

President Felipe Calderón. Photograph: Pedro Pardo/AFP/Getty Images

"Six years ago, everybody was in their own trench, but now there is a kind of symbiosis," says one well-connected resident. "That is the real impact of the Calderón strategy."

Calderón, now heading safely out of the country for a teaching fellowship at Harvard, has argued to the end that his decision to militarise the drug war was right. "I am sure that the Mexicans of tomorrow with remember these days as the moment when the country took the decision to defend itself, with all its force, against a voracious criminal phenomenon of translational dimensions," he said at the inauguration of a monument to fallen soldiers on 20 November.

Around the same time, the caballeros took their leave of the president with printed banners reminding Caldéron that they were not going anywhere. "As we are not going to have you as president from December," it read, "we wish you and your family well."

Incoming President Enrique Peña Nieto has pledged to continue Calderón's offensive, but he has also promised to "adjust" the strategy to focus on bringing down the violence.

His team talks of improving co-ordination within the security forces, attacking corruption and money laundering, and has acknowledged the need to improve opportunities for poor young people vulnerable to being sucked into the cartels. There have even been discreet noises about reconsidering the strategy in the light of the recent votes to legalise marijuana in some US states. But the new government's plans are all still very vague on everything except Peña Nieto's categorical denial that he will ever negotiate with criminals.

The Knights Templar, however, think otherwise. Residents of the Tierra Caliente say known members of the cartel campaigned in favour of Peña Nieto on the assumption that a dialogue will eventually come.

"For the good of the country, Enrique Peña Nieto will have to negotiate," says an influential figure in the region who speaks well of the traffickers. "If he doesn't this could get worse. They will feel betrayed."

Even some of those who have suffered unspeakable torments at the hands of organised crime say they see no other realistic solution.

"There have always been narcos and I think there always will be," says the kidnap victim from Uruapan. "But there has to be a way to reach a deal that allows them to get on with business without messing with ordinary people."

The cartel: regrouped – and reborn

With its remote valleys and dense pine forests, the Pacific coast state of Michoacán has for generations been a stronghold for Mexico's drug trade. Marijuana and opium plantations have been hidden in the mountainous region of Tierra Caliente for decades, and more recently local traffickers expanded their business to include metamphetamine production and the management of cocaine shipments heading north from South America.

President Felipe Calderón's military-led offensive in the area was originally aimed at containing the vicious rivalry between a locally based cartel called La Familia Michoacána and the Zetas, then the enforcement arm of the Gulf cartel, which was revolutionising organised criminal warfare in Mexico with military-style strategising and unbridled sadistic violence.

The Familia, which rivaled the Zetas' brutality, was also unusual in its claim to be executing "divine justice" and the personality cult around its spiritual leader, Nazario Moreno González, nicknamed The Craziest One and author of a book of self-improvement platitudes entitled Thoughts.

After winning its battle with the Zetas in Michoacán, the Familia began directly attacking the federal forces but the federales pushed back and in December 2010 killed The Craziest One.

The death of its spiritual leader sent the Familia scrambling for the mountains, where the leadership descended into crisis and split in two, prompting triumphalist government assertions that Michoacán would soon be back under control.

But while one of the factions has started to fade away, the other relaunched itself as the Caballeros Templarios, which reigns supreme in the Tierra Caliente today and holds significant sway in the nearby city of Uruapan as well as other parts of Michoacán. They maintain a presence in several states beyond that.

This year the Caballeros publicly called on other criminal organisations to form a countrywide alliance against the Zetas.