Definitions, Economic Growth, and Past Literature

Terrorism is the premeditated use or threat to use violence by individuals or sub-national groups in order to obtain a political or social objective through the intimidation of a large audience beyond that of the immediate victims. Terrorists try to circumvent the democratic process by extorting concessions through the pressures that a targeted citizenry may bring on its government to end the violence. The above definition excludes state terror, where the state applies violence to intimidate its citizens (e.g., Stalin in the Soviet Union), but includes state-sponsored terrorism where a state assists (e.g., through safe havens, intelligence, or funding) a terrorist group. Terrorists employ myriad modes of attack—e.g., bombings, assassinations, kidnappings and skyjackings—the mix of which is chosen in order to optimally trade off risks and returns (Sandler, Tschirhart, and Cauley 1983). Terrorists try to make their attacks appear random so as to maximize an audience's anxiety as risks seem ubiquitous and unpredictable. In truth, attacks are not random but are planned to best exploit perceived target weaknesses and value. A terrorist group consists of members of an organization, who employ terrorist attacks to further a political objective.

Terrorist events are usually subdivided into two varieties: domestic and transnational terrorism. Domestic terrorism is homegrown with consequences for only the host country, its institutions, citizens, property, and policies. As such, domestic terrorism involves perpetrators, victims, and targets solely from the host country. Any terrorist demands associated with a domestic terrorist incident are directed at the people or institutions from the venue country. Many suicide bombings by the Liberation Tigers of Tamil Eelan (a.k.a. the Tamil Tigers) are acts of domestic terrorism, such as the bombings that do not injure or murder foreigners carried out by Abu Sayyaf in the Philippines. Through its victims, targets, supporters, perpetrators, or implications, transnational terrorism concerns more than a single country. If terrorists cross a border to perpetrate their acts, then the attacks are transnational. Terrorist incidents that begin in one country and conclude in another country (e.g., an international skyjacking or the mailing of a letter bomb to another country) are transnational terrorist events. If a terrorist incident involves the citizens from two or more countries as victims or perpetrators, then it is a transnational terrorist act.

The kidnapping (and subsequent murder) in 2002 of Wall Street Journal reporter Daniel Pearl in Karachi, Pakistan was a transnational terrorist incident. In addition, the hijacking of Indian Airlines flight 814, en route from Katmandu to New Dehli, on 24 December 1999 is an example of transnational terrorism. After stops in Amritsar (India) and Dubai, the plane landed in Kandahar, Afghanistan, where the incident finally concluded on 31 December 1999, with the four Pakistani terrorists receiving some of their demands and safe passage (Mickolus and Simmons 2002). The toppling of the World Trade Center towers on 9/11 was a transnational terrorist event, because the victims hailed from many countries, the mission had been planned and financed abroad, the terrorists were foreigners, and the implications were global. The bombing of foreign-owned investments for political reasons is a transnational terrorist incident, in which foreign direct investment may be persuaded over time to seek a safer country. For the period of this study (1970–2004), both domestic and transnational terrorism plagued Asian countries. For example, the Tamil Tigers and Abu Sayyaf engaged in both types of attacks.

Internal conflicts include intrastate wars, where all violence is confined within a country's borders. Such conflicts typically concern opposition groups fighting for territory or political rights. At times, internal conflict may also be between ethnic groups with opposing interests. We used the Uppsala Conflict Data Program/International Peace Research Institute Oslo (UCDP/PRIO) Armed Conflict Dataset, Version 4–2007 (Gleditsch et al. 2002) and hence applied their definitions. This is the most complete and up-to-date dataset on conflicts currently available. Conflict is “internal” when it involves the home government and domestic opposition groups; conflict is “internationalized internal” when it involves the home government, domestic opposition groups, and other countries. The latter may provide support to one of the adversaries or else dispatch some troops to the conflict. As is common in the literature, we include internal and internationalized internal conflicts as internal conflicts. In contrast, external conflict may be between two or more countries (i.e., interstate) or “extrastate” between a country and a non-state group from abroad (Gleditsch et al. 2002). The Armed Conflict Dataset distinguishes between minor conflicts with 25 to 999 battlerelated deaths per year and wars with 1,000 or more battle-related deaths per year. Because we use internal conflicts as a proxy for domestic terrorism for some of the runs in Sections 4 and 5, we included all conflicts in our two conflict categories with 25 or more battle-related deaths. Terrorism is a tactic that is used in both internal and external wars—e.g., the Viet Nam War involving the United States had a lot of terrorist attacks. In small civil wars, some violence may be in the form of terrorist attacks owing to the modest means of an opposition group—e.g., Tamil Tigers suicide attacks in Sri Lanka.

In Figure 1 [ PDF 13.9KB | 1 page ], the number of Asian countries embroiled in internal (the dashed line) and external conflicts (the solid line) is displayed for each year during the sample period. Since 1974, Asian countries have been involved in more internal than external conflicts. Since 1988, there has been a single external war involving Pakistan and India over a territorial dispute in Kashmir. This war has also resulted in terrorist attacks in both countries. There have been eight or more Asian countries suffering internal conflicts since 1977.

To provide a perspective on Asian conflicts as compared with other regions, Figure 2 [ PDF 24.1KB | 1 page ] indicates the number of conflicts in each of five different regions for each sample year. If a conflict in Asia lasted for, say, eight years, then we recorded Asia as having eight “conflict years” for this single conflict. During 1970–2004, there were 1,339 conflict years worldwide, with Asia having the largest share (39%) of the total, followed by Africa with 32%. Throughout the sample period, 94% of conflict years globally were due to internal conflicts. The number of Asian conflicts peaked during the late 1980s and early 1990s and has fallen thereafter. Since 2000, the number of conflicts in Asia has fluctuated between 12 and 17 per year.

We now turn to three important determinants of income per capita growth (growth). The initial level of income per capita (y) is a positive influence on economic growth owing to the notion of convergence, whereby the income per capita of a poorer country outpaces that of a richer country (Barro 1991; Barro and Sala-i-Martin 1992). Convergence hinges on diminishing returns, in which countries are better able to add to output when there is less initial output and input. Very large growth rates are characteristic of post-war economies, after output and capital have been destroyed and the country is starting from a more modest base (Olson 1982). Convergence assumes that comparison countries possess identical production functions and transition equations, but differ in their income per capita. The latter assumption may hold for many Asian countries at similar stages of development that confront analogous production conditions. The investment share (I /GDP) is a second essential determinant of income per capita growth. Higher shares give rise to greater capital accumulation, which fosters growth through capital and embodied technological change. A third influence on growth is trade openness (open), measured by the ratio of the sum of exports and imports to GDP. Openness may bolster growth as augmented exports increase aggregate demand while larger imports provide raw materials and, for developing countries, technology transfers. Rodrik (1999), however, felt that the benefits of openness on growth in developing countries are overstated unless a complementary set of policies is put in place that promotes the accumulation of physical and human capital.

Income per capita growth may also be adversely affected by political violence in terms of alternative forms of terrorism and/or conflicts (Barro 1991; Blomberg, Hess, and Orphanides 2004). Terrorism and conflicts augment uncertainty and result in a loss of investor confidence. Political violence also limits economic growth by raising government spending on security. In recent years, an extensive body of literature has developed on the economic consequences of terrorism (Sandler and Enders 2008). Blomberg, Hess, and Orphanides (2004) and Tavares (2004) showed that each year of transnational terrorism reduces income per capita growth by 0.048% and 0.029%, respectively. Tavares (2004) went on to show that countries with more political rights are better able to withstand transnational terrorist attacks. In a recent study of Western Europe, Gaibulloev and Sandler (2008) distinguished between domestic and transnational terrorist attacks and found that each additional transnational terrorist incident per million persons reduced economic growth by about 0.4 percentage points in a given year. Domestic terrorism has a much smaller effect on growth. Two careful country studies applied novel methods to investigate the negative impact of terrorism on income per capita. For the Basque region of Spain, Abadie and Gardeazabal (2003) estimated a 10% fall in per capita income over a twenty-year period when ETA engaged in an active terrorist campaign. Eckstein and Tsiddon (2004) applied a vector autoregressive (VAR) analysis to show that Israel lost 10% of its per capita income during the three-year intifada beginning in the fourth quarter of 2000. In effect, terrorism reduced Israeli economic growth to zero during this violent era.

In a recent survey, Sandler and Enders (2008) identified some unifying principles of the economic impact of terrorism. First, large developed economies are able to withstand terrorism and display little macroeconomic consequences. This is traced, in part, to these economies' ability to regain people's confidence through enhanced security. Advanced economies can also apply monetary and fiscal policy to curb the economic effects of large terrorist events, such as the United States' (US) actions following 9/11 (Enders and Sandler 2006a). Second, small, terrorism-plagued developing economies suffer significant macroeconomic impacts from terrorism. Third, terrorism-prone sectors suffer substantial losses when attacked. Fourth, the immediate costs of most terrorist attacks are localized, thereby causing a substitution of economic activities from relatively vulnerable sectors to relatively safe sectors. This substitutability allows large diversified economies to cushion losses in economic activities.

A large and growing body of literature has identified the influence of intrastate conflicts on growth.¹ This literature has not only quantified the growth consequences of intrastate wars, but has also shown that civil wars' onset depends on slow growth, poverty, and past wars. Collier and Hoeffler (2004) demonstrated that natural resource dependency can also result in intrastate wars, fueled by greed and funded by diamonds, oil, and other precious resources.

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