Terrorism and economic growth: the case of Pakistan
On December 16, 2014, a terrorist attack killed 150 people, including at least 134 students, when Taliban gunmen abruptly attacked the Army Public School in Peshawar, Pakistan (Lewis 2019). In response to this incident, as well as other widespread terror episodes in the country, the Pakistani state and military implemented a mission to combat terrorism, primarily in the North Waziristan region of Khyber Pakhtunkhwa, under Operation Zarb- and. -Azb. Terrorism is a large and intense issue in Pakistan; Pakistan’s Global Terrorism Index (GTI) in 2019 was 7,889 out of 10, making it the fifth country most affected by terrorism last year (Peace and Economics Institute 2019). Terrorism poses an immense threat and serves as one of the biggest impediments to Pakistan’s stability and growth. Terrorism has negative impressions on the economy, as it destroys physical and human capital, creates uncertainty in the market causing reluctance among investors/entrepreneurs, and urgently demands government spending on expanding security and anti-terror facilities.
The situation of terrorism and extremism in Pakistan escalated mainly in the late 1970s and early 1980s. The causes are attributed to multiple factors, including sectarian conflicts that escalated to the political level after the 1980s and funding foreign which was injected into Pakistan incessantly during the period of some major international events; namely, the Iranian Revolution, the Iran-Afghanistan War, the Soviet-Afghan War, and the Cold War (Zahab 2002). These global events influenced Pakistan due to its geopolitical and ideological position. Currently, several internal factors are identified as reasons for terrorism in Pakistan, including ethnicity, illiteracy, income inequality, inflation, high population growth, high unemployment, political instability, poverty and injustice (Zakaria, Ahmed and June 2019).
Incidents of terrorism, whatever the reason for their occurrence, can cause “ripple effects” that have a negative impact on the country’s economy, directly or indirectly (Ross 2019). Directly, terrorist attacks damage the country’s infrastructure and destroy the three main factors of production: land, labor and capital. All of these factors play an important role in determining economic growth, but they are direct victims of terrorism. The emotional cost to the community as a whole, though invisible and incalculable, is another type of direct cost to the country. Indirectly, terrorist activities can decrease domestic and foreign investment, increase inflation, hurt the stock market, increase unemployment, and reinforce government spending on security rather than socioeconomic development projects (Zakaria, Ahmed, and June 2019).
Terrorism has long-term and far-reaching effects on investor decisions, industry performance, and government behavior. First, it causes uncertainty in the market. Uncertainty paints a negative image of the country for investors, reduces the average return on investment (Abadiea and Gardeazabal 2007), and diverts potential investment to environments or countries less affected by terror. As a result, business activities and entrepreneurship decline due to intermittent bouts of terror. Second, terrorism induces the government to spend more on defense and counterterrorism facilities. Military spending is normally seen as a stimulant, but the “broken window fallacy,” a parable used by economists to illustrate the negative economic effects of war and destruction, brings to light the adverse costs of terrorism on the economy (Ross 2019). The main focus of the state is shifted from socio-economic development which not only positively influences the economy in the long run, but also helps to eradicate the root causes of terrorism such as poverty, illiteracy, income inequality, unemployment and injustice. Thus, the opportunity cost (the benefits foregone by choosing one alternative over another) of spending on defense rather than development is reasonably high and, as in the case of business, should be included in costs. economy of the country.
A study titled “Effect of Terrorism on Pakistan’s Economic Growth: An Empirical Analysis” (Zakaria, Ahmed and June 2019) examined three macro variables, based on data from the period 1972-2014, that are indirectly affected by terrorism. . These variables were Foreign Direct Investment (FDI), domestic investment and the behavior of public spending. The results concluded that the impact of terrorism on FDI and domestic investment is significantly negative, while the impact on public spending is significantly positive. The net effect, however, is negative. We can anticipate that since terrorist attacks require a quick response from the state, the influence on government spending is positive. But this change in government behavior can be questioned in terms of the opportunity cost of spending on defense rather than development, as mentioned above.
The impact of terrorism on a country and its people cannot be precisely quantified in economic terms, but a sufficient estimate can be made to infer that terrorism has extremely detrimental effects on various sectors of the economy. Pakistan faces the threat of terrorism from within and without. According to the Global Terrorism Database (GTB), of the 3,043 terrorist incidents Pakistan faced between 2001 and 2012, 2,737 were domestic while 191 were transnational (St. Louis Fed On the Economy 2018). Terrorism is a particular threat to Pakistan’s economy for two reasons. First, unlike developed countries, Pakistan cannot absorb terrorism without showing adverse economic consequences. Second, internal conflicts (domestic terrorism) -which flare up in Pakistan- have a greater impact on the economy than transnational attacks (Hyder, Akram and Padda 2015). What should Pakistan do to counter terrorism in order to avoid economic collapse?
The research “Effect of Terrorism on Economic Growth in Pakistan: An Empirical Analysis” has pointed out, based on data from the period 2002-2015, that there is an inverse relationship between GDP and terrorist attacks (suicides) in Pakistan, i.e. , when terrorism is low, economic growth is high and vice versa (Zakaria, Ahmed and June 2019). Considering the economic consequences of terrorism, a practical solution would be one that mitigates terrorism/extremism in the long term and contributes to economic growth simultaneously. Human capital development in the areas of education and health at the national level has been shown to contribute to economic growth in developing countries and also reduce terrorism by eradicating its root causes (Ritter 2016). Human capital is defined as “the knowledge, skills, competencies and attributes embedded in individuals that facilitate the creation of personal, social and economic well-being” (OECD 2018). Pakistan’s Human Capital Index (HCI) is currently 0.39 out of 1 (World Bank Group 2018), which shows an indication of massive improvement. The Pakistani government and business sector must progressively invest in human capital development, especially in the fields of education, health and entrepreneurship, to upgrade socio-economic growth and combat terrorism at the same time.
References
Abadiea, Alberto, and Javier Gardeazábal. 2007. Terrorism and the world economy. straight science.
Hyder, Shabir, Naeem Akram, and Ihtsham Ul Haq Padda. 2015. “Impact of Terrorism on Pakistan’s Economic Development.” Pakistan Business Review (ResearchGate) 704-722.
Institute of Economy and Peace. 2019. Global Terrorism Index 2019: Measuring the impact of terrorism. Sydney: Institute for Economics and Peace.
Louis, Robert. 2019. “Peshawar School Massacre.” Britannica Encyclopedia. Encyclopædia Britannica, Inc., December.
OECD. 2018. “Human Capital – The Value of People”. OECD Outlook. OECD.
Ritter, Benjamin. 2016. “Human Capital Development in Developing Countries.” Global Leadership Journal (CIGL) IV: 129-134.
Ross, Sean. 2019. “Top 5 Ways Terrorism Affects the Economy.” Investopedia.
St. Louis fed off the economy. 2018. “The Economic Impact of Terrorism in Developing Countries.” Federal Reserve Bank of St. Louis.
World Bank Group. 2018. The Human Capital Project. Washington: The World Bank.
Zahab, Mariam Abu. 2002. “The Regional Dimensions of Sectarian Conflict in Pakistan.” In Pakistan: nationalism without a nation, by Mariam Abu Zahab, 115-30. London: Zed Books.
Zakaria, Muhammad, Haseeb Ahmed, and Wen Jun. 2019. “Effect of Terrorism on Pakistan’s Economic Growth: An Empirical Analysis.” Economic Research-Ekonomska Istra?ivanja (Reports UK Limited) 1794-1812.