Causality between terrorism and economic growth

Abstract

This article analyzes the causal relationship between terrorism and economic growth, running a series of tests for Granger non–causality with panel data for a maximum of 160 countries from 1970 to 2007. The authors find that the causal relationship between terrorism and growth is heterogeneous over time and across space. They argue that the temporal causal heterogeneity can be explained by shifting geographical and ideological patterns in terrorism associated with the end of the Cold War. Different causal mechanics across countries are ascribed to a variety of country–specific factors (the level of politico–economic development, a country’s cultural affiliation, the intensity and persistence of terrorist activity, and the level of political instability). These factors govern a country’s robustness to shocks from terrorism and the extent to which terrorism is motivated by economic factors. For the Cold War era, economic growth is found to have swayed terrorism for Latin American countries in intermediate development positions that were politically unstable and experienced strong terrorist activity. For the post–Cold War era, terrorism is found to be detrimental to growth for African and Islamic countries with low levels of political openness, high levels of political instability, and strong terrorist activity. The study’s findings help to better understand the conflicting evidence on the terrorism–economy nexus and to give more solid counter-terrorism advice.