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Terrorism and the World Economy
| Content Provider | Semantic Scholar |
|---|---|
| Author | Abadiea, Alberto Gardeazabalb, Javier |
| Copyright Year | 2005 |
| Abstract | 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 and Murphy, 2001). In contrast, empirical estimates of the consequences of terrorism typically suggest large effects 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 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 dataset 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. 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 effect is large, which suggests that the “open-economy channel” impact of terrorism may be substantial. Alberto Abadie, John F. Kennedy School of Government, 79 John F. Kennedy Street, Cambridge MA 02138, USA. E-mail: alberto_abadie@harvard.edu. Javier Gardeazabal, Dpto. Fundamentos del Análisis Económico, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain. E-mail: jepgamaj@bs.ehu.es. We thank Pol Antràs, Jeff Frankel, Dani Rodrik, Todd Sandler, Jaume Ventura, Andrés Velasco, Richard Zeckhauser and seminar participants at the 2005 NBER Summer Institute for very useful comments. Erik Garrison provided expert research assistance. Financial support for this research was generously provided through NSF grant SES-0350645 (Abadie), Spanish Ministry of Science and Technology grant SEC2003-04826 and University of the Basque Country grant 35.321-13511 (Gardeazabal). |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.hks.harvard.edu/fs/aabadie/twep.pdf |
| Alternate Webpage(s) | https://addi.ehu.es/bitstream/handle/10810/6734/wp2005-19.pdf;jsessionid=70ACEC36BD84DB98C7F94673FBC1FB26?sequence=1 |
| Alternate Webpage(s) | http://ksghome.harvard.edu/~aabadie/twe.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Chromosome Deletion Donald Becker Email Ephedra sinica Ephrin Type-B Receptor 1, human Estimated Foreign function interface Guanosine Diphosphate Hernandez Aguirre-Negrete syndrome IBM Notes Kind of quantity - Equilibrium Movement Nephrogenic Systemic Fibrosis Seventy Nine Silo (dataset) Stan Frankel |
| Content Type | Text |
| Resource Type | Article |
