Indirect Effect of Terrorism on Economic Growth

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Introduction
These days, terrorism is an integral component of our diet.There is never a day that passes without some assassination, political abduction, hijacking, or bombing taking place around the world.As the number of terrorist attacks has surged in the last ten years, governments' concerns and academics' interest in the phenomenon of terrorism have grown.
We remark that there is broad consensus across definitions regarding one crucial point: imprudent and unlawful activity constitutes a terrorist act.People would become terrified and panicked as a result of this crime, and a government with political aspirations could embrace this conduct as well (Abu Issa et al., 2019).
Governments are therefore unable to define terrorism only in line with popular political, social, and cultural beliefs-for instance, by labeling Islamist extremists as terrorists more frequently than not.Additionally, they purposefully employ the phrase to promote their political agendas and denounce particular types of political violence.However, the news media also plays a part in creating the terrorism threat, in addition to politicians (Nacos, 2016;Rothenberger, 2021).
Terrorism has had a devastating impact on the world.However, academic interest in global terrorism has been very limited.In order to identify the underlying causes of terrorism and the elements that led to the collapse of the world economy, a study based on empirical research with clearly defined variables, recent new data, and new advancements in dynamic modeling must be conducted.In addition to supporting the relevant authorities and countries in their efforts to formulate better and more appropriate policies and plans for the global elimination of terrorism, this study will assist investors and policymakers in understanding the dynamics of terrorism.
Following the 2001 World Trade Center attacks, terrorism became a more important issue.Since then, an abundance of research has examined how terrorism affects different economic metrics, with economic growth being the most extensively discussed.
Terrorism can potentially affect short-term economic growth in several ways.Attacks of this nature have the potential for increasing uncertainty, which would restrict and redirect foreign direct investment (FDI).FDI is an important source of savings for developing nations looking to finance investments.Growth is also slowed by terrorism since it raises the price of security, insurance, and wage premiums.Because of these increased expenses, there is a decrease in profits and a lesser return on investment.
The impact of terrorism on economic growth is both direct and indirect.Terrorism directly impedes economic growth through short-term reductions in trade, human capital loss, schooling, and infrastructure damage.Additionally, through influencing macroeconomic variables such as FDI, domestic investment, inflation, and non-development, terrorism impedes economic progress indirectly .This study, explained the channels through which terrorism hinders economic growth.Based on the theory, we take six important macroeconomic variables to determine the indirect effect of terrorism on output growth.These variables include FDI, domestic investment, trade openness, unemployment, inflation, and public spending because terrorism has strongly affected these sectors of the economy.
The relationship between terrorism and economic growth is a complex and sensitive topic that is attracting growing interest in academic, policy, and economic circles.Understanding this relationship is essential for developing adequate national security and economic development policies.This part will assess the indirect effect of terrorism on economic growth.The simultaneous equation model was applied to panel data for a sample of 31 countries (18 developing and 13 developed).Enders and Sandler (1996) used VAR analysis to examine how terrorism affected net foreign direct investment in Greece and Spain.They discovered that while investors looked for nations with lower levels of violence, terrorism decreased inflation in these nations by 13.5% and11.9%,respectively.However, large, diversified economies are anticipated to experience less of an impact.

Literature Review
Collier (1999) identified the most obvious and direct dangers of civil wars, among which terrorism can be seen as a related phenomenon, namely the destruction of physical capital, including the destruction of public infrastructure and the loss of human capital.At the same time, transaction costs are amplified due to reduced security, and the effectiveness of government institutions is compromised.The share of GDP devoted to investment spending is a determining factor in economic growth.Moreover, because there seems to be a link between economic conditions and a nation's probability of experiencing a civil war, poverty may have an indirect impact on terrorism.Collier and Hoeffler (2000) show that the growth rate of GDP per capita and the success of men in secondary education are inversely connected with the frequency of civil wars, while Fearon and Laitin (2001) discover an inverse relationship between GDP per capita and the start of civil wars.Gries et al. (2009) analyzed the role of economic performance in determining terrorist violence.The results showed that the attacked economies successfully adapted to terrorist threats, so economic growth was not compromised.Gries et al. (2009) studied the causality between terrorism and economic growth in seven Western countries for the period from 1950 to 2004.The causality runs from economic growth to terrorism characterized by poor economic performance, which is reflected in the low opportunity costs of violence, which can lead to increased conflict and terrorism.
Using time series analysis, some studies regarding Turkey can be presented as follows: Uysal et al. (2009) concluded that terrorism had a negative impact on economic growth in 1992-2001.
Similarly, Pinar (2011) examined the causes of separatist terrorism in southeastern Turkey, where government policies aim to improve economic conditions in order to support the widely accepted hypothesis that poverty is the main driver of the force behind separatist terrorism.However, no causal link has been found between economic development and separatist terrorism in southeastern Turkey.
In the recent wave, Caruso and Schneider (2011) studied the effects of socio-economic determinants of terrorism and political violence in Western European countries.Their results indicate that economic growth, inflation, and unemployment are inversely correlated with terrorism, while youth unemployment is positively related to terrorist activities.Furthermore, trade openness and long-term interest rates have reduced political violence and thus terrorism, while increased investment activities increase terrorism.Gries et al. (2011) aim to identify the link between the intensity of domestic terrorism and the growth rate of real GDP per capita in Western European countries.They found that economic performance only robustly drives terrorist violence in three out of seven countries.Their findings indicate that economic performance in determining terrorist violence appears to have been important for some countries, while all economies attacked have managed to adapt to the terrorist threat.Brockhoffand al. (2012) colleagues gathered data on 133 countries to study the impact of education on domestic terrorism over the period 1984-2007.Their results showed that lower education promotes terrorism when socio-economic, political, and demographic conditions are critical, while higher education is linked to low terrorism in clusters where these conditions are favorable.Altay and al. (2013) study the impacts of terrorism on Middle Eastern countries.They use certain macroeconomic variables to identify the impacts of terror.In this study, they use panel data analysis and include data between 1996 and 2010.Their results show that terror negatively affects all economic variables, especially tourism.
Bandyopadhyayand al ( 2014) studied the relationship between domestic and transnational terrorism, aid and FDI for a sample of 78 developing countries during the period 1984-2008.The empirical results reveal that both types of terrorism depress FDI.Aid appears to mitigate the negative consequences of domestic and transnational terrorism and appears to be more effective in mitigating the harmful effects of domestic terrorism.
Motahari and Dehghani (2015) used panel co-integration and a GMM technique to determine how globalization and terrorism affected the growth of MENA countries.They proved that trade liberalization and FDI attraction are negatively impacted by terrorism shocks.
Musayev ( 2016) uses a large data set on military spending along with new developments in panel data estimate techniques to look into possible sources of positive externalities for the relationship between military spending and economic growth.The findings indicate that, in general, military spending has a negative influence on growth, as is the case with the literature; however, once corruption levels are taken into consideration, this effect is not negative for nations that face more internal challenges or for nations with significant riches in natural resources.
According to Shaheen et al. (2017), there is no significant correlation between terrorism and poverty, but there is a positive correlation between terrorism and economic growth.The study examined the relationship between the incidence of terrorism, poverty issues, and economic growth in Pakistan for the period 1980-2015.The unit root test, cointegration, robust least squares regression, Granger causality, and impulse response function were applied.The study used the ARDL model to verify causality among the selected models.This research reveals that the government has taken three types of actions to control violence, namely military actions and operations, civilian policies, and peace agreements.The findings of the study reveal that there is a long-term relationship between the fight against terrorism and the economic growth of Pakistan.
Zakariaand al. ( 2019) studied the effect of terrorism on economic growth in Pakistan.This study used FDI, public expenditure, and domestic investment as measures of the factors of terrorism and its effect on the economic growth of the country.The study used GMM for the sampling period from 1972 to 2014.The findings of the study revealed that terrorism has had a negative and significant effect on domestic investment and economic growth.The results show that there is a negative relationship between FDI, domestic investment, economic growth, and terrorism.Korotaevand al. (2020) also confabulated the terrorism-growth nexus and concluded that terrorism exerts an adverse influence on growth in a group of developing economies.Saleemand al. (2020) illustrated the same link and deduced the opposite connotation between these two variables.
According to the same standpoint, a relatively recent finding by Lassoued and colleagues (2018) and Korotayev and colleagues (2021) offers more proof that there is a negative correlation between growth and terrorism for a set of developing economies.One possible interpretation of this outcome could be a correlation between human capital and growth.One possible reason for the rise in terrorism in economies is growth that does not correspond with an increase in the human capital index.Higher educational attainment, on the other hand, is associated with a decrease in terrorist acts.This suggests that economic growth combined with investments in human capital can help prevent terrorism.

The Sample and Data
As part of this research, we are interested in the study of a scourge that strikes the world, namely terrorism.We chose a simultaneous equation model applied to panel data for a sample of 31 countries (18 developing and 13 developed) during the period 2002 -2018.

 Data description
In this part we will introduce the moderating effect of terrorism on economic growth by introducing variables as moderations to analyze the indirect effect of terrorism on growth through these variables.
To examine the indirect effect of terrorism on economic growth, we use a simultaneous equation model containing seven equations, including the economic growth rate and six channel variable equations, namely FDI, inflation, unemployment, trade opening, investment, and public spending.The mathematical representation of the structural model is as follows:

Descriptive Statistics
In Table 1 we described the model variables by ranking the countries and using the average criterion.Terrorism calculated by the Global Terrorism Index averages 2.51; it is much higher in developing countries (3.15) than in developed countries (1.62).
The inflation rate which is linked to the consumer price index is on average 4.7%, this variable is higher in developing countries (6.7%) and this is due to the increase in the general level of prices and the increase in the volume of consumption in parallel with the decrease in the level of production which perhaps comes from the absence of investments and the deterioration of the infrastructure which counts as a main factor in the attractiveness of foreign investments.In confirmation of what we were saying, the value of the FDI ratio in developed countries (4.31%) is higher than that in developing countries (3.86%).The FDI is on average 4.05% for the complete panel.
Economic growth is on average 1.8% shared between 1.98% for developing countries and 1.57% for developed countries; This result shows the speed of economic growth is higher in developing countries.

Correlation Matrix
The descriptive study can also include correlation analysis which consists of finding to what extent two variables are linked.It is important to remember that correlation does not equal causation.The most common types of correlation analysis fall into three main families.
Pearson's correlation coefficient is used for linearly related variables and subsequently this method (Pearson) is considered the most used correlation method.It requires certain assumptions about the variables: for example, it assumes that the variables are linearly connected and are normally distributed.The interpretation of the correlation matrix is done by block; there are positive correlation blocks, negative correlation blocks, strong correlation blocks and weak correlation blocks.The most remarkable distinction in the correlation matrix is the value that exceeds 0.8 because this value leads us to detect a collinearity problem between the variables in consideration.The correlation values presented in our matrix do not exceed the order of 0.6 and subsequently we can distinguish the absence of collinearity.
The highest correlation values are presented by the urbanization rate with human capital (0.66) and with public expenditure (0.46) as well as human capital and public expenditure (0.47) which shows that countries and especially developed countries devote a higher share of spending to education, training and scientific research to improve the quality of human capital.Source: Author's calculation.
Table 3 summarizes the same results for the case of developed countries, it is also said that terrorism, social inequality, the poverty rate as well as the rurality rate of the population have blocks of negative correlation with the rate of urbanization, human capital, trade openness, investment and public spending.
The urban population, commercial openness and FDI have blocks of positive correlation in particular with investment, human capital and public expenditure.These results are due to the programs and state expenditure devoted to economic adjustments and social.In this case, we can say that the economic variables are positively correlated with each other.

Model Estimation
 Indirect impact of terrorism on economic growth (moderating effect) The indirect effect of unemployment on economic growth is also significantly negative and this amounts to observing that unemployment, poverty or social inequality increase their negative effect on economic growth in the presence of terrorism; we then talk about social suffering.
The indirect effect of public spending is also significant and negative on economic growth, explained by the fact that governments increase their spending, either military or domestic, to defend against terrorism.The indirect impact of investment on economic growth through terrorism is significantly negative, this is explained by the fact that public investment is disrupted by terrorist acts as well as infrastructure sabotage.
In other words, the indirect effect of FDI and trade openness on economic growth is significantly positive.This result is explained by the inflow of capital dedicated to aid paid to countries affected by terrorist acts.While the result of the FDI effect is econometrically inexplicable.For the case of developed countries, we note that the indirect effects of unemployment and public spending are not significant.This is explained by the low rate of unemployment in this type of country.Public spending is prioritized to defend terrorist acts.
In other words, the indirect impacts of trade opening, investment and FDI are significantly positive on economic growth.It can be concluded that the direct or indirect effect of terrorism on economic growth is not remarkable in developed countries.This result is consistent with Seung-Whan (2015).
Unlike the case of developed countries, we note that in developing countries, the indirect effects of trade opening, public spending as well as public investment on economic growth are significantly negative as well as the indirect effect of unemployment.
These results are explained by the difference in economic characteristics between developed and developing countries, especially since developing economies are more sensitive to terrorist acts, natural disasters and wars.

Summary and Conclusions
As part of this research, we are interested in the study of a scourge that strikes the world, namely terrorism.This study complements the existing literature by investigating the moderating effect of terrorism on economic growth by introducing variables as moderations to analyze the indirect effect of terrorism on economic growth.The question of this research is as follows: To what extent and by what mechanisms can terrorist attacks affect the economic growth of countries?We chose a simultaneous equation model applied to panel data for a sample of 31 countries (18 developing and 13 developed).The results can be summarized as follows:  The indirect effect of FDI and trade openness on economic growth is significantly positive in the case of the entire sample.
 The moderating effect of unemployment, investment and public spending significantly and negatively affects economic growth in the case of the entire sample.
 For the case of developed countries, we note that the indirect effects of unemployment and public spending are not significant.
 In other words, the indirect impacts of trade opening, investment and FDI are significantly positive on economic growth in the case of developed countries.
 For the case of developing countries, the indirect effects of trade opening, public spending as well as public investment on economic growth are significantly negative as is the indirect effect of unemployment.
Ullah et al. (2017)  investigated the possibility that terrorism in Pakistan is influenced by terrorism in India.They employed secondary time series data covering the years 1981-2016 in order to accomplish this purpose.The cointegration test result validates the long-term correlation between unemployment in Pakistan and terrorism in India and Pakistan.The findings suggest that unemployment in Pakistan and terrorism in India are the root causes of terrorism in Pakistan.Mubasharaand al. (2018)  examined the fight against terrorism and its effects on economic growth in Pakistan.

Table 1 .
descriptive statistics by development criterion

Table 2 .
Correlation matrix for developed countries

Table 3 .
Correlation matrix for developing countries

Table 4 .
Estimate of the full panel

Table 5 .
Estimated panel of cases from developed countries

Table 6 .
Estimation of the panel of cases from developing countries