Terrorism and the world economy

By Alberto Abadie, Javier Gardeazabal. Transnational Terrorism, 2005

393 citations recorded by the source corpus.

It has been argued that terrorism should not have a large e®ect on economic activity, because terrorist attacks destroy only a small fraction of the stock of capital of a country (see, e.g., Becker and Murphy, 2001). In contrast, empirical estimates of the consequences of terrorism typically suggest large e®ects on economic outcomes (see, e.g., Abadie and Gardeazabal, 2003). The main theme of this article is that mobility of productive capital in an open economy may account for much of the di®erence between the direct and the equilibrium impact of terrorism. We use a simple economic model to show that terrorism may have a large impact on the allocation of productive capital across countries, even if it represents a small fraction of the overall economic risk. The model emphasizes that, in addition to increasing uncertainty, terrorism reduces the expected return to investment. As a result, changes in the intensity of terrorism may cause large movements of capital across countries if the world economy is su±ciently open, so international investors are able to diversify other types of country risks. Using a unique dataset on terrorism and other country risks, we ¯nd that, in accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. A standard deviation increase in the terrorist risk induces a fall in the net foreign direct investment position of about 5 percent of GDP. The magnitude of the estimated e®ect is large, which suggests that the \open-economy channel" impact of terrorism may be substantial.

Subfields: Economics and Econometrics, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/462eb3e9c682e73bb59d328dfba509bbc94ae2aa

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Citations in the corpus

Does Geopolitical Risks Predict Stock Returns and Volatility of Leading Defense Companies? Evidence from a Nonparametric Approach (2017, background): “…and volatility (see for example, Chen and Siems 2004; Drakos 2004; Eldor and Melnick 2004; Hon, Strauss, and Yong 2004; Johnston and Nedelescu 2006; Abadie and Gardeazabal 2008; Arin, Ciferri, and Spagnolo 2008; Fernandez 2008; Nikkinen et al. 2008; Barros and Gil-Alana 2009; Chuliá et al.…”
Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary-level investment and expansion (2017, background): “For example, researchers found that a higher level of terrorism risk is related to lower levels of net FDI after controlling for other types of risk (Abadie and Gardeazabal, 2008).”
Fighting terrorism in Africa: Benchmarking policy harmonization (2018, neutral): “…studies in the strand on linkages between terrorism and macroeconomic variables include: the effect of terrorism on foreign direct investment (FDI) (Abadie & Gardeazabal, 2008); linkages between terrorism, economic development and resource-wealth in conflict management (Humphreys, 2005; Meierrieks…”
Control of corruption, international investment, and economic growth – Evidence from panel data (2018, background): “We adapt the approach in Abadie and Gardeazabal (2008) and Turnovsky (2000), who study risk and economic growth in a stochastic setting, in an extended model by Obtsfeld (1994) and introduce corruption as a stochastic Poisson process that moves random amounts of capital into an unproductive…”