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8/3/2019 Econ Impact Terrorism Slides
1/22
Economic Impacts of Global Terrorism:
From Munich to Bali
James R. Barth, Tong Li, Don McCarthy,
Triphon Phumiwasana and Glenn Yago
War, Terrorism and Investors
January 8, 2006
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Motivation for Study
Increase in terrorist incidents world-wide
Increased intensity of these incidents
Relatively new area of empirical study prompted need
for broader study:
Cross-country (149)
Longitudinal across time (35 years)
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Terrorism Defined
Violence, or the threat of violence, calculated to create an
atmosphere of fear and alarmDirected against civilian
targetsfor political motives carried out in a way to achieve
maximum publicity (National Memorial Institute for the
Prevention of Terrorism)
Terrorism measures:
Number of incidents
Number of fatalities and injury caused by these incidents
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Dataset
National Memorial Institute for the Prevention of
Terrorism - MIPT Terrorism Knowledge Database
More than 20,000 terrorist incidents since 1968
The panel data used in our study includes 149 countries
and covers 35 years (1970-2004)
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Terrorist Incidents
Summarized
Middle East/Persian Gulf Region leads the world in shares of
incidents and fatalities/injuries
Countries with high political risk (e.g. Israel, Lebanon)consistently appear in the top ten countries ranked by terrorism
measures
Top ten also include high income countries (e.g. France, U.S.)
Increased spike in incidents and fatalities/injuries since 1990
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Selected Major Terrorist
Incidents Over Time
Source: MIPT (2005) and Milken Institute.
0
500
1000
1500
2000
2500
1968 1973 1978 1983 1988 1993 1998 2003
NumberofIncidents
0
2000
4000
6000
8000
10000
12000
14000
Nu
mberofFatalitiesan
dInjuries
Incidents
Fatalities and Injuries
Oct. 23, 1983
Lebanon
Military target
June 23, 1985
Canada
Airports and airline
Dec. 21, 1988
U.K.
Airports and airline
Mar. 12, 1993
IndiaBusiness
Jan. 11, 1998
Algeria
Business
Aug. 7, 1998
Kenya
DiplomaticAug. 11, 2001
Angola
Transportation
Sept. 11, 2001
U.S.
Business
Feb. 21, 2004
Uganda
Private
Sept. 1, 2004
Russia
Educational institution
Apr. 10, 1988
Pakistan
Military
Feb. 26, 1993 U.S.
Business
May 20, 1995
Japan
Transportation
Jan. 31, 1996
Sri Lanka
Business
Oct. 22, 2002
RussiaPrivate
Mar. 11, 2004
Spain
Transportation
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Changing Pattern of Terrorist
Incidents
Terrorist targets have changed since the 1970:
Diplomatic targets
In 1970s, 41% of targets
Since 2000, only 2%
Private targets (private citizens and property)
In 1970s, only 1%
Since 2000, 30% of targets
Fatalities and injuries were focused on military targets in the 1970s; now
have shifted to private and business targets
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Country-Level Correlations between
Terrorism Measures and Selected Variables
Higher political risks aresignificantly correlated
with higher level of
terrorist activities.
Law and
Order
Religious
Tensions
Internal
Conflict
Ethnic
Tensions
Number of Incidents 0.04 -0.14 -0.33*** -0.11
Number of Incidents
/GDP (USD billions)-0.3*** -0.23** -0.45*** -0.14
Number of Incidents
/Population (millions)0.09 -0.18** -0.2** -0.06
Fatalities and Injuries
/Number of Incidents-0.09 -0.08 -0.03 -0.07
Fatalities and Injuries
/GDP (USD billions)-0.21** -0.32*** -0.37*** -0.21**
Fatalities and Injuries
/Population (millions)0.05 -0.25*** -0.27*** -0.13
Note: *, ** and *** denote significance at 10, 5, and 1 percent level,
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Impacts of Terrorism on
Economic Activity
Literature suggests that terrorist activities may: depress GDP growth,
destroy physical and human capital,
deter foreign direct investment,
hinder bilateral trade,
have a positive effect on the price of defensestocks and negative effect on non-defensestocks.
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Empirical Model
Iit dependent variables(i denotes country, t denotes time period)
Xit common control variablesTERit terrorism variables constant coefficienti country fixed effectst time-period fixed effects control coefficients terrorism coefficients
it
error terms
ititittiit TERXI +++++= ''
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Correlations for Terrorism
Variables Included in Regressions
Number of
Incidents
/Population
Number of
Incidents /GDP
Fatalities and
Injuries
/Population
Fatalities and
Injuries/GDP
TERPOP
(Number of Incidents
/Population)
1
TERGDP(Number of Incidents/GDP)
0.38*** 1
TERIPOP
(Fatalities and Injuries
/Population)
0.61*** 0.15*** 1
TERIGDP
(Fatalities and Injuries /GDP)0.14*** 0.25*** 0.6*** 1
Note: *, ** and *** denote significance at 10, 5, and 1 percent level, respectively.
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Summary of Empirical Results
+-**-***-
TERIGDP (Fatalities andInjuries /GDP)
-***---
TERIPOP (Fatalities and
Injuries /Population)
+**-*-***-*
TERGDP (Number ofIncidents/GDP)
++-**-*
TERPOP (Number ofIncidents /Population)
STRA(Stock TradedValue to GDP)
SMC(Stock MarketCapitalization
to GDP)
CAPGP(CapitalFormation to
GDP)
GDPG(Real GDPper CapitaGrowth)
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Summary of Empirical Results
(Continued)
+*---TGTPUB (Diplomatic, Government,
Military Incidents/Population)
++*-**-*TGTPRI (Private, Business andTransportation Incidents/Population)
+---*TGT6 (Military Incidents/Population)
+*--**-**TGT5 (GovernmentIncidents/Population)
+---TGT4 (Diplomatic Incidents/Population)
+***+++TGT3 (TransportationIncidents/Population)
+*+*-***+TGT2 (Business Incidents/Population)
++-*-*TGT1 (Private Citizens and PropertyIncidents/Population)
STRA(Stock TradedValue to GDP)
SMC(Stock Market
Capitalizationto GDP)
CAPGP(Capital
Formation toGDP)
GDPG(Real GDP perCapita Growth)
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Conclusions
Generally find negative and significant impact on GDPgrowth and capital formation, consistent withBlomberg, Hess, and Orphanides (2004)
Mixed results on stock market capitalization to GDP
Defense and security industries Positive impact on value of stocks traded to GDP
General increased activity Defense and security stocks
Private sector targets (TGTPRI) have a negative andsignificant impact on GDP growth and capitalformation
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Future Implications
Economic costs of terrorism are real at theglobal level
Terrorist incidents:
Lead to a re-allocation of resources to lessproductive uses (e.g. defense and security)
Destroy capital
Increase levels of fear and uncertainty Possible extensions of this research; impact on
other areas
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Economic Impacts of Global Terrorism:
From Munich to Bali
James R. Barth, Tong Li, Don McCarthy,
Triphon Phumiwasana and Glenn Yago
War, Terrorism and Investors
January 8, 2006
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Supplement (1)
=
=
n
k
itk
t
itkit TER
TDays
RDaysTER
1
*
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Empirical ResultsDependent Variable: Real GDP per Capita Growth
Control variables: Capital formation/GDP,trade/GDP (previous period), GDP per capita(previous period), population growth, inflation
The greater the number of terrorist incidents permillion population, the lower the real GDP percapita growth
The higher the number of terrorist incidents per$US billion GDP, the lower the real GDP percapita growth
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Empirical ResultsDependent Variable: Capital Formation/GDP
Control variables: trade/GDP (previous period), GDPper capita (previous period), population growth,inflation
The higher the number of terrorist incidents per million
population, the lower the capital formation as apercentage of GDP
The higher the number of terrorist incidents per$billion GDP, the lower the capital formation as a
percentage of GDP The higher the fatalities and injuries per $billion GDP,
the lower the capital formation as a percentage ofGDP.
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Empirical ResultsDependent Variable: Stock Market Capitalization/GDP
Control Variables: inflation and real GDP percapita growth
The higher the number of terrorist incidents per
$billion GDP, the lower the stock marketcapitalization as a percentage of GDP
The higher the fatalities and injuries per $billionGDP, the lower the stock market capitalizationas a percentage of GDP
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Empirical ResultsDependent Variable: Value of Stocks Traded/GDP
Control variables: inflation and real GDP percapita growth.
The higher the number of terrorist incidents per
$US billion GDP, the higher the value of stocktraded as a percentage of GDP
The higher the fatalities and injuries per millionpopulation, the lower the value of stock tradedas a percentage of GDP
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Empirical Results
Independent variables: number of terrorist attacks permillion population grouped by target
More terrorist attacks at private citizens and propertyper million population is related to: lower capital formation/GDP,
higher stock market capitalization/GDP,
higher value of stocks traded/GDP.
More terrorist attacks at airlines, airports,transportation, utilities and telecommunication targets
is related to: lower real GDP per capita growth,
lower capital formation/GDP,
higher value of stocks traded/GDP.
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