MASTER THESIS PRESENTATION - THE ECONOMIC CONSEQUENCES OF TERRORISM - Thibaut Grancher

THE ECONOMIC CONSEQUENCES OF TERRORISM

THIBAUT GRANCHER

MOTIVATIONS

Finding a subject tying defence and security issues to the economy

A topical topic after the last tragic events

Very few litterature on the subject

INTRODUCTION

The developing of terrorism activities no more located exclusively in developing countrieso Change in the perception of terrorism

Succession of measures taken to deal with the threat

Foster us to ask questions about the economic consequences of terrorism

Three relationships studied

PLAN

INTRODUCTION

LITTERATURE REVIEW

MEASURES OF THE IMPACT OF TERRORISM

EMPIRICAL METHOD

EMPRICICAL RESULTS

0 - Descriptive statistics

1 - Impact of terrorism on consumption

2 - Impact of terrorism on tourism industry

3 - Military expenditures in response to attacks

CONCLUSION

Who are the terrorists?

No universal definition but two generally used :

o The US Department of State in 1983 : “premeditated, politically motivated violence perpetrated against non-combatant targets by subnational groups or clandestine agents, usually intended to influence an audience”

o Current definition according to the US Code : “involve violent acts or acts dangerous to human life that violate federal or state law; appear to be intended to intimidate or coerce a civilian population; to influence the policy of a government by intimidation or coercion; or to affect the conduct of a government by mass destruction, assassination, or kidnapping”

Krueger (2008) oTerrorists are generally issued from richer families and better educated than those at the

same age in their origin country.

LITTERATURE REVIEW

Why do they attack us?

Popular explanations from political leaders or experts :

o Hate our way of life; lack of education; the illiteracy

To avenge against foreign interventions

Religious reasons

What are the economic consequences?

LITTLE EFFECT

Horwich (2000) Comparison with natural disasters (Kobe earthquake of 1995)

Becker and Murphy (2001), Krueger (2001)

Little impact on physical and human capitals, and strong capacity of adaptation of businesses and people

Karolyi and Martell (2005) Impact very localised on the company (uncertainty on stock values)

BIG EFFECT

Abadie and Gardeazabal (2001) Negative impact on the GDP per capita (Basque region / Spain)

Bloom (2009) Uncertainty on the financial market with a high volatility

Clark and Stancanelli (2016) Effect on the well-being (gender gap)

CRISIS MANAGEMENT EFFECT

Lenain et al. (2001)Depend of measures taken by the governments (confidence, financial system etc.)Bigger effects on specific industries

MEASURES OF THE IMPACT OF TERRORISM Data selection :

o 5 countries : France, Belgium, Spain, the United Kingdom, the United States

o Data from 2001 to 2015

o All our data come from the Global Terrorism Database (GTD), the Organisation for Economic Co-operation and Development (OECD), the World Development Indicator (WDI), World Travel & Tourism Council (WTTC).

oThree levels of measurement :LEVELS OF MEASUREMENT DEPENDENT VARIABLES

The consumption expendituresThe household spending (OECD)

The consumer confidence index (OECD)

The tourism industry

Total contribution of travel and tourism on GDP (World Travel & Tourism Council [WTTC])

The number of international tourist arrivals (WDI)

The number of resident tourists departures to international destinations (WDI)

The military expenditures

The military expenditures in percentage of GDP (WDI)

The consumer confidence index (OECD)

The number of international tourist arrivals (WDI)

The number of resident tourists departures to international destinations (WDI)

EMPIRICAL METHOD

Use of several explanatory variables :

VARIABLES ON TERRORISM CONTROL VARIABLES YEAR DUMMIES

The frequency of attacks per year (Global Terrorism database [GTD])

The GDP per capita in current US $ (WDI)

The year 2015 as the reference yearThe number of fatalities per year (GTD) The unemployment rate in percentage (WDI)

The number of injuries per year (GTD) The short term interest rate (OECD)

EMPIRICAL METHOD

Use of six models with the OLS method :

MODELS RELATIONSHIPS

Model 1 Yi = ß1 Frequency of attacks + ui

Model 2 Yi = ß1 Frequency of attacks + ß2 Number of fatalities+ ß3 Number of injuries + ui

Model 3 Yi = ß1 Frequency of attacks + Control variables + ui

Model 4 Yi = ß1 Frequency of attacks + ß2 Number of fatalities + ß3 Number of injuries + Control variables + ui

Model 5 Yi = ß1 Frequency of attacks + Control variables + Year dummies + ui

Model 6 Yi = ß1 Frequency of attacks + ß2 Number of fatalities+ ß3 Number of injuries + Control variables + Year dummies + ui

EMPIRICAL RESULTS0 - Descriptive statistics

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1Frequency of terrorist attacks per year

France

USA

UK

Spain

Belgium

Frequency of

attacks

Number of

fatilities

Number of

injuries

Household

spending

Consumer

confidence

Tourism contribution

to GDP

International

tourist arrivals

Resident tourist

departures

Military

expenditures

Frequency of attacks 1.0000

Number of fatilities 0.2175 1.0000

Number of injuries 0.1942 0.1037 1.0000

Household spending 0.1895 0.0847 0.2120 1.0000

Consumer confidence 0.0495 0.0654 0.1065 0.6584* 1.0000

Tourism contribution to GDP 0.2917* -0.0431 0.2364* 0.0542 0.0102 1.0000

International tourist arrivals 0.3481* 0.0493 0.0746 0.0232 -0.3127* 0.5092* 1.0000

Resident tourist departures 0.1193 0.1156 -0.1308 0.1203 -0.1315 -0.1692 0.3461* 1.0000

Military expenditures 0.1517 0.0865 -0.0512 0.1594 -0.2801* -0.2035 0.5159* 0.7816* 1.0000

legend : * p<.05

Correlation between terrorism variables and the dependant variables

Figure 4

1 - Impact of terrorism on consumptionHousehold expenditures

H1 H2 H3 H4 H5 H6

Frequency of attacks 0,083*** 0,075*** 0,035** 0,029* 0,031** 0,029**

Number of fatalities 0,000 -0,000 -0,000

Number of injuries 0,002 0,002* 0,001

GDP per capita in US$ 0,000*** 0,000*** 0,000** 0,000**

Unemployment in total % of labour

force-0,125*** -0,131*** -0,114*** -0,112***

ST interest rates per annum 0,369*** 0,352*** 0,293* 0,273*

year==2002 0,576 0,396

year==2003 0,614 0,410

year==2004 1,376* 0,894

year==2005 0,822 0,481

year==2006 0,222 0,007

year==2007 -0,043 -0,252

year==2008 -2,488*** -2,711***

year==2009 -2,689*** -2,984***

year==2010 0,359 0,059

year==2011 -0,854 -1,160

year==2012 -1,291 -1,579

year==2013 -0,692 -1,060

year==2014 0,278 -0,045

o._Iyear_2015 Ref Ref

Number of observations 74 74 70 70 70 70

Adjusted R2 0,261 0,268 0,553 0,564 0,755 0,754

note: *** p<0.01, ** p<0.05, * p<0.1

Table 4 Household expenditures in terms of annual growth rates

Consumer confidence

C1 C2 C3 C4 C5 C6

Frequency of attacks 4,411*** 4,363*** 0,311*** 0,300** 0,268*** 0,273***

Number of fatalities -0,009 -0,002 0,001

Number of injuries 0,021 0,005 -0,002

GDP per capita in US$ 0,002*** 0,002*** 0,001*** 0,001***

Unemployment in total % of

labour force2,071*** 2,041*** 1,525*** 1,517***

ST interest rates per annum 5,871*** 5,829*** 8,828*** 8,889***

year==2002 17,082*** 17,774***

year==2003 22,512*** 23,281***

year==2004 21,228*** 22,788***

year==2005 14,024** 15,196**

year==2006 4,866 5,675

year==2007 -4,573 -3,780

year==2008 -6,792 -5,947

year==2009 20,319*** 21,389***

year==2010 23,101*** 24,193***

year==2011 19,064** 20,170**

year==2012 16,880** 17,966**

year==2013 19,698** 21,015**

year==2014 21,142** 22,327**

o._Iyear_2015 (dropped) (dropped)


Adjusted R2 0,411 0,398 0,987 0,987 0,993 0,992

note: *** p<0.01, ** p<0.05, * p<0.1

Table 5 Consumer confidence, in long-term average with 100 as basis and the amplitude adjusted

2 - Impact of terrorism on tourism industryTourism state

T1 T2 T3 T4 T5 T6

Frequency of attacks 0,498*** 0,488*** 0,121*** 0,120*** 0,105*** 0,104***

Number of fatalities -0,002 -0,001 -0,000

Number of injuries 0,005 0,002* 0,001

Domestic tourism spending in billion

US$-0,006 -0,004 -0,007* -0,007

Foreign tourism spending in billion

US$0,033 0,027 0,062*** 0,060***

GDP per capita in US$ 0,000 0,000 -0,000*** -0,000***

Unemployment in total % of labour

force0,552*** 0,560*** 0,367*** 0,375***


year==2002 4,136*** 3,939***

year==2003 5,887*** 5,650***

year==2004 6,327*** 5,906***

year==2005 4,844*** 4,520***

year==2006 3,300** 3,080*

year==2007 1,118 0,925

year==2008 1,276 1,065

year==2009 8,637*** 8,299***

year==2010 9,091*** 8,747***

year==2011 8,985*** 8,652***

year==2012 8,389*** 8,038***

year==2013 10,001*** 9,595***

year==2014 10,687*** 10,317***



Adjusted R2 0,461 0,460 0,952 0,953 0,964 0,963

note: *** p<0.01, ** p<0.05, * p<0.1

Table 6 Tourism contribution to GDP

Impact on international touristarrivals

A1 A2 A3 A4 A5 A6






labour force0,396*** 0,391*** 0,321*** 0,320***


year==2002 2,690*** 2,780***

year==2003 3,507*** 3,609***

year==2004 3,368*** 3,600***

year==2005 2,178** 2,344**

year==2006 1,040 1,147

year==2007 -0,244 -0,139

year==2008 -0,529 -0,417

year==2009 3,077** 3,223**

year==2010 3,296** 3,445**

year==2011 2,935** 3,086**

year==2012 1,971 2,115

year==2013 2,496* 2,677*

year==2014 2,626* 2,786*



Adjusted R2 0,418 0,404 0,989 0,989 0,993 0,993

note: *** p<0.01, ** p<0.05, * p<0.1

Table 4 Number of international tourist arrivals

Impact on residenttouristdepartures

D1 D2 D3 D4 D5 D6






labour force0,259*** 0,257*** 0,165*** 0,163***


year==2002 2,539*** 2,751***

year==2003 3,519*** 3,758***

year==2004 3,307*** 3,851***

year==2005 2,221*** 2,611***

year==2006 0,653 0,905

year==2007 -0,889 -0,643

year==2008 -0,927 -0,666

year==2009 3,699*** 4,041***

year==2010 4,020*** 4,368***

year==2011 3,451*** 3,806***

year==2012 3,043*** 3,380***

year==2013 3,449*** 3,875***

year==2014 3,523*** 3,891***



Adjusted R2 0,410 0,395 0,990 0,990 0,995 0,994

note: *** p<0.01, ** p<0.05, * p<0.1

Table 8 Number of resident tourist departures

3 - Military expenditures in response to attacksImpact on militaryexpenditures

M1 M2 M3 M4 M5 M6

Frequency of attacks 0,105*** 0,104*** 0,013 0,013 0,014* 0,016*

Number of fatalities -0,000 0,000 -0,000

Number of injuries 0,000 -0,000 -0,000



labour force-0,055*** -0,054*** -0,014 -0,011

ST interest rates per annum -0,005 -0,005 -0,261*** -0,265***

year==2002 -0,556 -0,735

year==2003 -0,728 -0,913*

year==2004 -0,793 -0,934*

year==2005 -0,975** -1,156**

year==2006 -0,972** -1,168**

year==2007 -0,866* -1,060*

year==2008 -0,966* -1,174**

year==2009 -1,536** -1,757***

year==2010 -1,746*** -1,975***

year==2011 -1,782*** -2,007***

year==2012 -2,285*** -2,549***

year==2013 -2,561*** -2,815***

year==2014 -2,762*** -3,022***



Adjusted R2 0,397 0,380 0,898 0,895 0,908 0,907

note: *** p<0.01, ** p<0.05, * p<0.1

Table 9 Military expenditures in percentage of GDP

Impact of military expenditureson tourismflowsand consumers confidence

Consumer

confidence

Number of

international tourist

arrivals

Number of

resident tourist

departures

Military expenditures in % of

GDP-5,307*** 0,205 0,098

Frequency of attacks 0,358*** 0,075*** 0,052***

Number of fatalities -0,000 0,000 0,000

Number of injuries -0,003 -0,000 -0,001

GDP per capita in US$ 0,002*** 0,000*** 0,000***


labour force1,457*** 0,323*** 0,164***

ST interest rates per annum 7,483*** 1,317*** 1,470***

year==2002 13,871*** 2,931*** 2,823***

year==2003 18,437*** 3,796*** 3,847***

year==2004 17,829*** 3,792*** 3,944***

year==2005 9,061 2,581** 2,724***

year==2006 -0,522 1,386 1,020

year==2007 -9,406 0,078 -0,538

year==2008 -12,179** -0,176 -0,550

year==2009 12,065 3,583** 4,212***

year==2010 13,709* 3,850** 4,561***

year==2011 9,520 3,497** 4,002***

year==2012 4,438 2,637 3,626***

year==2013 6,074 3,254* 4,149***

year==2014 6,287 3,406* 4,158***

o._Iyear_2015 (dropped) (dropped) (dropped)

Number of observations 70 70 69

Adjusted R2 0,994 0,993 0,994

note: *** p<0.01, ** p<0.05, * p<0.1

Table 10 Evolution of consumer confidence and tourism flows with the rise of

CONCLUSION

Positive effect between the frequency of terrorist attacks and :o The household spending

o The consumer confidence

o The tourism flows

o The military expenditures

Non significance of the number of dead or injured people

=> Psychological impact and importance of measures taken by the governments

Negative relationship between military expenditures and the consumer confidence

=> Necessity to review the actual response to terrorism? Are Vigipirate and Sentinelle plans really efficient?

REFERENCES

Abadie, Alberto and Gardeazabal, Javier (2001), “The Economic Costs of Conflict: A Case Study of the Basque Country”, NBER Working Paper, N° 8478, NBER Publishing.

Abadie, Alberto and Gardeazabal, Javier (2008), “Terrorism and the World Economy”, European Economic Review, vol. 52, pages 1-27.

Barro, Robert and Lee, Jong-Wha (2000), “International Data on Educational Attainment Updates and Implications”, NBER Working paper, N° 7911, NBER Publishing.

Becker, Gary and Rubinstein, Yona (2011), “Fear and the Response to Terrorism: An Economic Analysis”, CEP Discussion Paper, N° 1079, Centre for Economic Performance andLondon School of Economics and Political Science Publishing.

Bloom, Nicholas (2009), “The Impact of Uncertainty Shocks”, NBER Working Paper, N° 13385, NBER Publishing.

Chernick, Howard, (2005), Resilient City: The Economic Impact of 9/11, Russel Sage Foundation.

Clark, Andrew and Stancanelli, Elena (2016), “Individual Well-Being and the Allocation of Time Before and After the Boston Marathon Terrorist Bombing”, PSE Working paper,N° 2016 – 07, Paris School of Economics Publishing.

Egger, Roman and Maurer, Christian (2016), ISCONTOUR 2016 Tourism Research Perspectives, Books on Demand.

Hines, James and Jaramillo, Christian (2004), “The Impact of Large Natural Disasters on National Economies”, Mimeo, The University of Michigan Publishing.

Horwich, George (2000), “Economic Lessons of the Kobe Earthquake”, Economic Development and Cultural Change, vol. 48, pages 521 – 42, The University of Chicago Press.

Karolyi, Georges Andrew and Martell, Rodolfo (2005), “Terrorism and the Stock Market”, Charles A. Dice Center for Research in Financial Economics Working Paper, N° 2005 –19, Charles A. Dice Center for Research in Financial Economics Publishing.

Krueger, Alan, (2008), What Makes a Terrorist: Economic and the Root of Terrorism, Princeton University Press.

Lenain, Patrick; Bonturi, Marcos and Koen, Vincent (2001), “The economic consequences of terrorism”, Economics Department Working Paper, N° 334, OECD Publishing.

MASTER THESIS PRESENTATION - THE ECONOMIC CONSEQUENCES OF TERRORISM - Thibaut Grancher

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