The Economics of Terrorism and Institutions: Insight from Developing Countries
Author: Farhat Rasul

This dissertation aims to examine the impact of terrorism on economic growth and macro-stability in developing counties including Pakistan. It also assesses the role of institutions on mitigating the damaging effect of terrorism for economic growth and stability. At the end, the thesis finds the key determinants of terrorism. To achieve said objectives, an extended version of neo-classical growth model is used. Twelve different indicators derived from International Country Risk Guide (ICRG) are used to construct institutional quality index whereas the macro-instability index is based on inflation, exchange rate variability and budget deficit. The empirical analysis has been performed for Pakistan as well as for the rest of the world (according to the stages of development) for the three said objectives. First, to evaluate the impact of terrorism and institutions on economic growth and macro-instability of Pakistan, the study utilized a time-series data over the period 1984 to 2016. The FMOLS estimated results showed that terrorism has a negative significant influence on growth per capita and macro-stability of Pakistan. The institutions revealed a positive impact on macro-stability but no effect on the economic growth per capita for Pakistan. The results of this section imply that the quality of institutions can constrain terrorist activities which indirectly can reduce macroinstability of Pakistan. The existence of the quality of institutions is necessary to channelize the resources into the right direction. Second, to compare the damaging effects of terrorism and institutions, a panel of developing and developed countries has been employed for the period of 2001 to 2016. The GMM estimated outcomes exposed a negative relationship of terrorism and growth per capita for the full sample, developing and developed countries as well. But the magnitude of the terrorism coefficient for the growth of the developed economies is small and insignificant. The institutions have showed a positive relationship with economic growth but this positive impact is vague for the developing countries. The findings of this section imply that terrorism has brought worse economic effects for the poor and developing countries as compared to rich and developed economies. To achieve the sustainable development through peace, developing economies have to bring the institutional reforms in order to abolish the conflicts and terrorist activities.viii The last objective of this study is to find the determinants of the modern terrorism. The empirical findings revealed that state failure, money laundering and natural resource depletion adjusted savings (real savings) are the significant determinant of terrorism in all cases (full sample, developing and developed countries). While, population growth, inflation and internet users are the factors of terrorism in developing countries but not for developed countries. The females’ participation reduces the terrorism in case of full sample and developing economies. It shows that economically active females can provide financial support to their families and can construct low crime society. The governments of the developing countries should strengthen the females by giving them financial support and decent employment opportunities. The empirical results of this section imply that governments of the developed and developing countries should reduce the economic inequalities, internal grievances, homicide rate, brain drain, and external interventions in order to avoid the state failures. The implementation of audit controls over the illegal use of internet (with the help of international cooperation) can limit the terrorist contents (radicalization, propaganda, planning, recruiting and training). The developing economies have to strengthen the financial markets by imposing the anti-money laundering rules and stable inflation rate to limit the menace of terrorism. The study has empirically proved the growth exhausting effects of terrorism that can be controlled only when the institutions are complimented for growth and stability in the world (the developed and developing countries) as well as for Pakistan. Overall the results endeavour to conclude that the countries can cut the terrorism activities and gain more from factors of production by improving quality of its institutions. Supervisor:- Dr. Nasir Iqbal Co-Supervisor:- Dr. Attiya Yasmin Javid

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Keywords : Developing Countries, Economics of Terrorism and Institutions, INSTITUTIONS, Terrorism
Supervisor: Nasir Iqbal
Cosupervisor: Attiya Yasmin Javid

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