gritos y susurros

Terrorism and the world economy: Relevant science for groenlinks (2)

February 8th, 2008

In the series of posts that I intend to write about interesting articles for groenlinks, comes one about terrorism. Needles to say, the issue of terrorism is relevant for a party that has a strong international component. Few years ago, few groenlinksers (me among others) tried to write a discussion paper for groenlinks on terrorism. We meet several times, and brainstormed about it, we even set up a blog that was alive for a while, but we were unable to come up with something new, or interesting. Our goal was to produce a list of alternative proposals to fight terrorism. But to start with, we could not come up with a decent definition of terrorism. Reviewing the european legislation then, we realize that european countries define terrorism in different ways, some incompatible. Doubtless, if we could not even agree on what were we talking about, was harder to come up with measures against. The only thing in which history seems to have agreed with us is that terrorism is no more a phenomenon of central organizations, but rather of distributed networks. If anything, harder to tackle by a traditional police-like approach. What else, we still don’t really know. 

After we stop meeting came the attacks in Madrid, and the assassination of Van Gogh. Far after came the ongoing (re)surge of the Taliban. The issue of terrorism remains from utmost relevance, as the photos of a young Al Qaida recruit (probably the age of my own son) carrying grenades and a pistol appeared in the newspapers yesterday. Looking backwards it is not surprising that we could not come up with an anti-terrorism master plan, since the matter remains elusive for more exalted thinkers than ourselves. As a matter of fact, following the literature, one can notice that smaller aspects of terrorism have been discussed. Probably, faced with such a complex issue, it is better and more realist to tackle narrow issues. And in this trend is what the article of today inscribes itself. No grand-standing about terrorism, but just one issue. Without more: 

Terrorism and the world economy

Abadie and Gardeazabal, 2008

European Economic Review, 52: 1-27

The claim of this paper is straightforward: if a country is threaten by terrorism, it will attract less investments. The statement seems obvious, and the political message should be also obvious: terrorism not only damage human lives, or terminates them, but also reduces your available money. So the conclusion seems clear: terrorism should not be supported in any way, since it also affect your money. What is harsh is that life is more complicated than that. 

Take, for example, one of the data points of the analysis, the basque country. The authors claim that the GDP has been reduced up to 10% due to terrorism. Obviously this should decrease the support that terrorism has? not so. The perception of the basque people in which the basque country carries the economy of spain remains alive. As a matter of fact, it is one of the strong  motivations for support of nationalistic movements, ETA among others. Consider cases like Colombia. The support that terrorism has would not be decreased in any way if it is said that foreign investment will decline. After all, what is the agenda of the colombian terrorist? Doubtless an isolationist one, in which any foreign investment is not welcomed at all. 

The point of this paper is to claim that in a world economy with free movement of capital, capital will not go to terrorized countries. What is painful to realize is that this conclusion might reinforce the terrorist agenda, instead of weaken it. 

Without more, the abstract of the paper: 

It has been argued that terrorism should not have a large effect on economic activity, because terrorist attacks destroy only a small fraction of the stock of capital of a country(see, e.g., Becker, G.,Murphy,K.,2001.Prosperity will rise out of the ashes.Wall Street Journal October 29,2001).In contrast, empirical estimates of the consequences of terrorism typically suggest large effects on economic outcomes (see, e.g., Abadie, A., Gardeazabal, J., 2003. The economic cost of conflict: A case study of the Basque country. American Economic Review 93, 113–132). The main theme of this article is that mobility of productive capital in an open economy may account for much of the difference 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 sufficiently open, so international investors are able to diversify other types of country risks. Using a unique data set on terrorism and other country risks, we find 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. On average,a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5%of GDP. The magnitude of the estimated effect is large, which suggests that the ‘‘open-economy channel’’ impact of terrorism may be substantial. 

Tip: 

You might try to read this article tracking down the journal and asking for a reprint: don’t. You will be asked several tens of dollars to get a copy. Instead, go to library of the university closer by and ask for the journal, since you will be able to make a copy. If this is to cumbersome: email the authors. Copyright laws allow them to spread their work for fair use, without charge.