Concluding Remarks and Policy Recommendations

We added terrorism and conflict variables to a standard growth model to ascertain the influence that these political violence factors have on Asian growth for 1970–2004. Our oneyear- panel analysis indicates that transnational terrorism has a significant short-run, growthretarding effect for developing countries in Asia. Asian developed countries, however, manage to sustain terrorist attacks without displaying growth consequences. For Asian developing countries, transnational terrorism curbs income per capita growth primarily by stimulating government security spending, which diverts resources from more productive private and public investments. General terrorism, as measured by GTD, does not influence economic growth directly but indirectly by reducing investment shares.

Both internal and external conflicts are associated with smaller investment shares and larger government spending shares, with crowding-in of government expenditures dominating the crowding-out of investment. Internal conflicts have a much greater negative growth influence than transnational terrorist events or external conflicts. Populous countries must sustain a large increase in transnational terrorist attacks before displaying much lost in growth, given that our terrorism measure is in terms of incidents per million persons. Both internal and external conflicts crowd in government spending of a similar magnitude that is about twice as large as that from transnational terrorism.

A number of policy insights can be drawn from this analysis. Since transnational terrorism negatively impacts growth through increased government spending, targeted countries must ensure that they do not overspend on defensive and under-spend on offensive counterterrorism measures. Recent research indicates that there is a proclivity for at-risk countries to spend too much on protective countermeasures in the hopes of displacing potential attacks abroad (Enders and Sandler 2006a; Siqueira and Sandler 2006). Such actions have a negative impact on growth, which makes it even more imperative that neighboring nations cooperate in their efforts to curb terrorism. Coordination failures could result in countries transferring attacks to their own people and property elsewhere in Asia, so that little security would be truly gained. This also means that Asian countries must make a coordinated effort to eliminate terrorists and their weapons so that the need for defensive actions diminishes. Association of Southeast Asian Nations' (ASEAN) on-going joint actions to address transnational crime and terrorism need to continue and be improved. Coordinated actions can limit government crowding-out of investment by curbing overspending on defensive counterterrorism measures.

There is yet another reason for joint Asian efforts in fighting regional terrorism and conflict. In recent years, production in Asia has been increasingly fragmented as Asia exploits the economic benefits of comparative advantage. This fragmentation, however, heightens the region-wide economic impacts of localized conflict and terrorism. A conflict in an Asian country, whose outputs are vital throughout the region, can have devastating regional economic consequences, thus bolstering the need for coordinated actions.¹¹ This need also applies as Asia comes to depend on inter-linked infrastructure—roads, energy grids, and waterways. A conflict in one country can create bottlenecks that limit commerce throughout Asia.

Asian cooperation in terms of conflict is consistent with the Asian Development Bank's longterm strategic framework 2020 that emphasizes inclusive growth that ignores no segment of the population (Asian Development Bank 2008). On-going conflicts cause economic hardship to the host country and its neighbors and create pockets of poverty, inconsistent with inclusive growth.

Because developing countries are less able than their more developed neighbors to withstand terrorist attacks without economic consequences, rich Asian countries must assist their poorer neighbors to protect themselves and to recover from transnational terrorist attacks. Moreover, the rich Asian nations must take a leadership role in proactive countermeasures against a common terrorist threat. Terrorist groups, such as Jemaah Islamiyah which seeks a pan-Islamic state, underscore the need for coordinated government actions, because any Asian foothold that these terrorists achieve will allow them to pose greater risks throughout the region. Insofar as Jemaah Islamiyah also attacks Western interests (e.g., the Bali nightclub suicide car bombings on 12 October 2002 and the Jakarta Marriott Hotel suicide car bombing on 5 August 2003), Western countries also have a real interest in eliminating this terrorist group. Rich Western countries are in the position to greatly assist Asian countries' efforts to address such common terrorist threats. This assistance may take many forms—e.g., intelligence, counterterrorist agents, and resources. Many Asian groups are linked—e.g., al-Qaida, Jemaah Islamiyah, Abu Sayyaf, Harakat ul- Mujahidin, Islamic Movement of Uzbekistan, Jaish-e-Mohammed, Lashkar-e-Tayyiba, Lashkar I Jhangvi, and Harakat ul-Jihad-I-Islami/Bangladesh (US Department of State, 2003)—which bolsters the case for joint Asian efforts, supported by Western help. The ASEAN-EU declaration to fight terrorism jointly is a step in the right direction—see, e.g., the joint Co-Chairman's statements following the 14th and 15th ASEAN-EU Ministerial meetings in 2004 and 2005, respectively. Our study demonstrates the need for explicit joint proactive and defensive counterterrorism measures that operationalized these past declarations.

There is another justification for Western nations to assist Asia to address its transnational terrorism. As Western countries augmented their homeland security following 9/11, there was a documented transference of attacks to the Middle East and Asia (Enders and Sandler, 2006b). This transference means that Western countries have a responsibility for assisting. They also have a motive insofar as this transference involves an increase in attacks against Western persons and assets.

Policy concerns also involve internal conflicts because they curtail growth. As shown in Figure 1, internal conflicts present a much more prevalent security risk for Asia than external conflicts, which have primarily concerned two countries over the last two decades. Given the significant losses to growth posed by internal conflicts, Asia must devise a permanent plan for curbing the incidence of these conflicts. Because the economic impact of internal conflicts can disperse beyond the conflict-ridden country, this economic concern must be collectively addressed by Asia. This may, at times, require Asian-directed peacekeeping when United Nations resources are stretched too thin or United Nations action is too slow. Also, the Asian Development Bank and the World Bank have roles to play in terms of aid, especially once a conflict ends, to assist in reconstruction (Collier et al. 2003).

Security resources are scarce and must be allocated among different kinds of terrorist risks—i.e., domestic and transnational terrorism—and conflicts. Our analysis shows that transnational terrorism results in larger economic consequences than domestic terrorism. However, internal conflict gives rise to even greater economic harm than transnational terrorism. These findings begin to inform policymakers where security resources are best concentrated to reduce economic losses from violence. Actions against internal conflicts are paramount, followed by efforts to curb transnational terrorist attacks and to lessen their economic consequences. Even though the venue of the violence is country specific, this violence has region-wide security and economic spillovers that require a coordinate plan.

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