From Butter to Guns from Guns to Butter

From Butter to Guns, from Guns to Butter? Causality Between Terrorism and Economic Development CEA Conference 2010, Quebec City, May 2010 Daniel Meierrieks (with Thomas Gries) University of Paderborn, Germany WWW. C-I-E. org

Agenda 1. Introduction 2. Literature Review 3. Causality Analysis 4. Summary 1. 2. 3. 4. Introduction Literature Analysis Summary 2

1. Introduction 1. 2. 3. 4. Introduction Literature Analysis Summary § Popular discourse and perception: • Poor economic conditions breeds terrorism • Terrorism has negative economic effects § Main questions of this contribution: • What are the causal links between economic conditions (butter) and terrorism (guns)? • Does economic underdevelopment lead to terrorism? • Does terrorism produce economic damage? 3

2. Literature Review 1. 2. 3. 4. Introduction Literature Analysis Summary 2. 1 Effects of Terrorism on the Economy 1/2 Terrorism causes economic damage: § Economic destabilization as a central goal of terrorists § Potential Channels of Transaction (Sandler and Enders, 2008) • Direct costs of destruction • Indirect costs of attacks (e. g. , withdrawal of foreign capital; higher transaction costs) § Empirical Evidence, e. g. : • Negative impact of terror on trade, tourism and FDI (e. g. , Enders and Sandler, 1996; Drakos and Kutan, 2003; Nitsch and Schumacher, 2004) • Negative impact of terror on overall growth (e. g. , Crain and Crain, 2006; Gaibulloev and Sandler, 2008) 4

2. Literature Review 1. 2. 3. 4. Introduction Literature Analysis Summary 2. 1 Effects of Terrorism on the Economy 2/2 The skeptical view: § Effect of terrorism on the economy is not homogenous across all countries (and may not matter at all) • Large and diversified countries are better prepared to absorb shocks from terrorism • Localized terrorist attacks may not translate into reduced aggregate economic activity • Terrorist groups do not aim at economic destabilization but may have political/military goals § Empirical evidence, e. g. : • Short-lived and marginal effects of terror on FDI and macroeconomic performance (e. g. , Tavares, 2004; Enders et al. , 2006; Gaibulloev and Sandler, 2009; Gries et al. , 2010) • Terrorist groups often aim at political and not economic destabilization (Neumayer and Plümper, 2010) 5

2. Literature Review 1. 2. 3. 4. Introduction Literature Analysis Summary 2. 2 Effects of Development on Terror 1/2 Economic development causes terrorism: § Simple Cost-Benefit Approach (Blomberg et al. , 2004) • Terrorists as rational actors • Terrorists consider cost, benefits and opportunity costs of violence • Poor economic conditions low (opportunity) costs of violence + high payoffs from violence terrorism § Some Empirical Evidence • Good economic conditions discourage terror (e. g. , Lai, 2007) • Solid economic performance impedes terrorism (e. g. , Muller and Weede, 1990; Blomberg et al. , 2004) 6

2. Literature Review 1. 2. 3. 4. Introduction Literature Analysis Summary 2. 2 Effects of Development on Terror 2/2 The skeptical view: § Terrorism caused by non-economic factors, e. g. : • Political repression • Foreign policy • Ethno-religious tensions § Empirical evidence • Most studies fail to connect economic conditions to terror (Krieger and Meierrieks, 2010) • Repression, state failure etc. matter more strongly to the emergence of terrorism (e. g. , Abadie, 2006; Piazza, 2008) 7

2. Literature Review 1. 2. 3. 4. Introduction Literature Analysis Summary 2. 3 Nature of Causality (Summary) § Terrorism Economic development (skeptical view) § Economic development Terrorism (skeptical view) § Terrorism Economic development (bidirectional causality) 8

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 1 Sample and Data § Sample • 83 countries • Balanced panel data for 1972 -2007 (4 -year averages) § Variables • Economic development = logged real GDP per capita • Terrorism - Number of terrorist attacks per 100 000 inhabitants - Number of terrorism victims (killed+wounded) per 100 000 inhabitants - Terror index including information on terrorist attacks and victims § Data Sources • PENN World Table, Version 6. 3 • Global Terrorism Database (GTD) 9

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 2 Econometric Procedure 1. Unit Root Test 2. Test for Homogenous Causality Between Terrorism and Development 3. Test for Heterogeneous Causality Between Terrorism and Development 4. Variance Decompositions 10

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 3 Panel Unit Root Test § Series need to be stationary to correctly test for panel causality § Panel unit root tests to test for stationarity § Panel unit root test results • GDP p. c. non-stationary • All terrorism series stationary § GDP p. c. becomes stationary after first-differencing § Panel cointegration between development and terrorism does not play a role 11

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 3 Panel Unit Root Test 12

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 4. 1 Homogenous Panel Causality § Test for an unambiguous (not country-dependent) causal effect between two variables § Estimation approach (Holtz-Eakin et al. , 1988) • Use of past values of dependent and independent variable to estimate present values of dependent variable • Difference-GMM estimator • Differencing eliminates country-specific effects • Specification tests for validity of instruments • Wald test to assess causality § Causality test results • No significant causal effect of income on any terrorism variable • Significant and negative causal effect of all terrorism variables on income 13

3. Empirical Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 4. 1 Homogenous Panel Causality 14

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 4. 2 Heterogeneous Panel Causality § Relaxes the strong assumption of homogenous causation may be present only for some countries § Estimation approach (Hurlin and Venet, 2001) • • LSDV estimator Inclusion of country-specific effects Causation is allowed to vary across countries F-test to assess whether model gains in explanatory power when including lagged independent variables § Causality test results • No significant causal effect of income on any terrorism variable • No causal effect of all terrorism variables on income, potentially due to the inclusion of country-effects (e. g. , country size) 15

3. Empirical Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 4. 2 Heterogenous Panel Causality 16

3. Causality Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 5 Variance Decompositions § Investigation of a panel vector autoregressive model § Variance decompositions show the variation in one variable is explained by the shock to another variable over time § Findings from variance decomposition show that • Variations in development do not affect terrorist activity • Variations in terrorism have rather marginal effects on development § Findings from variance decomposition in line with those from heterogeneous panel causality 17

3. Empirical Analysis 1. 2. 3. 4. Introduction Literature Analysis Summary 3. 5 Variance Decompositions 18

4. Summary 1. 2. 3. 4. Introduction Literature Analysis Summary § No support for the hypothesis that poor economic conditions leads to terrorism (support for skeptical view) § Policy focus on non-economic causes of terrorism (e. g. political instability, state failure, foreign policy) § Rather moderate evidence that terrorism creates (nationwide) economic damage § Terrorism may create localized economic damage • Negative effects on regional development (e. g. , Basque country) • Negative effects on certain sectors of an economy (e. g. , tourism) § Targeted spending on security to dampen negative effects of terrorism on the economy § Future research may focus on certain ideologies of violence and specific economic variables and their links with terrorism 19

From Butter to Guns, from Guns to Butter? Causality Between Terrorism and Economic Development 1. 2. 3. 4. Introduction Literature Analysis Summary Daniel Meierrieks Thank You For Your Attention! University of Paderborn, Germany 21

Literature 1/2 § § § § § 1. 2. 3. 4. Introduction Literature Analysis Summary Abadie, A. (2006). Poverty, political freedom, and the roots of terrorism. American Economic Review 96(2), 50 -56. Blomberg, S. B. , Hess, G. D. , Weerapana, A. (2004). Economic conditions and terrorism. European Journal of Political Economy 20, 463 -478. Crain, N. V. , Crain, W. M. (2006). Terrorized economies. Public Choice 128, 317 -349. Drakos, K. , Kutan, A. M. (2003). Regional effects of terrorism on tourism in three Mediterranean countries. Journal of Conflict Resolution 47(5), 621 -641. Enders, W. , Sandler, T. (1996). Terrorism and foreign direct investment in Spain and Greece. Kyklos 49(3), 331 -352. Enders, W. , Sachsida, A. , Sandler, T. (2006). The impact of transnational terrorism on U. S. foreign direct investment. Political Research Quarterly 59(4), 517 -531. Gaibulloev, K. , Sandler, T. (2008). Growth Consequences of Terrorism in Western Europe. Kyklos 61(3), 411 -424. Gaibulloev, K. , Sandler, T. (2009). The impact of terrorism and conflicts on growth in Asia. Economics & Politics 21(3), 359 -383. Gries, T. , Krieger, T. , Meierrieks, D. , 2010. Causal linkages between domestic terrorism and economic growth. Defence and Peace Economics (forthcoming). Holtz-Eakin, D. , Newey, W. , Rosen, H. S. , 1988. Estimating vector autoregressions with panel data. Econometrica 56(6), 1371. 1395. 22

Literature 2/2 § § § § § 1. 2. 3. 4. Introduction Literature Analysis Summary Hurlin, C. , Venet, B. (2001). Granger causality tests in panel data models with fixed coefficients. Mimeo, University Paris IX Dauphine. Hsiao, C. (1982). Autoregressive modelling and causal ordering of economic variables. Journal of Economic Dynamics and Control 4, 243 -259. Krieger, T. , Meierrieks, D. (2010). What causes terrorism? Public Choice (forthcoming). Lai, B. (2007). "Draining the swamp": an empirical investigation of the production of transnational terrorism, 1968 -1998. Conflict Management and Peace Science 24(4), 297 -310. Muller, E. N. , Weede, E. (1990). Cross-national variation in political violence: a rational action approach. Journal of Conflict Resolution 34(4), 624 -651. Neumayer, E. , Plümper, T. (2010). Foreign terror on Americans. Journal of Peace Research (forthcoming). Nitsch, V. , Schumacher, D. (2004). Terrorism and international trade: an empirical investigation. European Journal of Political Economy 20, 423 -433. Piazza, J. A. (2008). Incubators of terror: do failed and failing states promote transnational terrorism? International Studies Quarterly 52, 469 -488. Sandler, T. , Enders, W. (2008). Economic consequences of terrorism in developed and developing countries: an overview. In: Keefer, P. , Loyaza, N. (Eds. ), Terrorism, Economic Development, and Political Openness. Cambridge University Press, New York, pp. 17 -47. Tavares, J. (2004). The open society assesses its enemies: shocks, disasters and terrorist attacks. Journal of Monetary Economics 51, 1039 -1070. 23