Terrorism and the World Economy

I’m spending the week in Boston, at the National Bureau of Economic Research’s Summer Institute meetings. Over the next couple of days, I thought I might occasionally blog on papers that have piqued my interest.

In Terrorism and the World Economy (PDF), Alberto Abadie and Javier Gardeazabal look at why the impact of major terrorist events is larger than the physical damage would predict. For example, they point out that while 9/11 destroyed only 0.06% of the productive assets of the US, it has been blamed for at least part of the subsequent downturn in the world economy. Their insight is to note that a small rise in terrorist risk can lead to a big downturn if international investors pull their money out. Using data on 110 countries’ terrorist risk ratings, and controlling for a bunch of other factors, they find that more terrorist risk leads to a big reduction in foreign direct investment. By contrast, most of the models that have done the accounting exercise on the effect of terrorism on the economy have assumed a closed economy.

Both authors are from the Basque region of Spain, and have also done work together on how their home province has been affected by terrorism.

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4 Responses to Terrorism and the World Economy

  1. Good post Andrew. I’ve also given this paper a plug, and cited you.

  2. ChrisPer says:

    How about the force multiplier effect of the media? The impact of the coverage on consumer and investor confidence, and the relentless “if it bleeds it leads” sensationalism, create a very negative feedback system.

  3. Andrew Leigh says:

    Chris, one of the things I quite like about their paper is it doesn’t involve assumptions of irrationality, which is perhaps a bit of a stretch when it comes to financial markets.

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