Economic Effects of Terrorism
The Economic Effects of Terrorism: Counterfactual Analysis of the Case of Israel
Dotan Persitz Tel Aviv University †
Abstract
The paper evaluates the effect of Palestinian terror on the Israeli economy by using counterfactual methodology and quarterly data for the macroeconomic aggregates of OECD countries and Israel from 1980 to 2003. Had there been no terror in Israel since 1994, the country’s per-capita GDP in 2003:3 would have been 8.6% higher than it was. Predictions based on low future levels of terror and the absence of a peace process produced good out-of-sample fit for 2003:4-2005:3. Palestinian terror increased the shares of consumption and government expenditures and decreased the shares of investment and trade balance in GDP. Weak evidence of a structural change at the aggregate level was observed. Journal of Economic Literature Classification Numbers: C53, E01, H56 Keywords: counterfactual, terror, Israel.
†
The Eitan Berglas School of Economics, Tel Aviv University, Tel Aviv, Israel, 69978. Phone: +972-36405816. E-mail: persitzd@post.tau.ac.il.
Introduction
There is no doubt among economists that wars, terrorism, and political instability have a significant negative effect on the economies in which they take place. Recent economic literature investigates both the consequences of political violence and the mechanisms that transform this violence into economic damage. Unfortunately, Israel has long been experiencing a high and volatile level of terrorism, making it a viable “natural experiment” for this literature. The objective of this study is to quantitatively estimate several aspects of the macroeconomic consequences of Palestinian terror against Israel since the mid-1990s. Three questions stand at the heart of this paper. First, how badly has terror affected Israel’s per-capita GDP since the country suffered its first suicide attack? 1 Second, how did this lengthy period of terror change the open-economy National Accounts
Dotan Persitz Tel Aviv University †
Abstract
The paper evaluates the effect of Palestinian terror on the Israeli economy by using counterfactual methodology and quarterly data for the macroeconomic aggregates of OECD countries and Israel from 1980 to 2003. Had there been no terror in Israel since 1994, the country’s per-capita GDP in 2003:3 would have been 8.6% higher than it was. Predictions based on low future levels of terror and the absence of a peace process produced good out-of-sample fit for 2003:4-2005:3. Palestinian terror increased the shares of consumption and government expenditures and decreased the shares of investment and trade balance in GDP. Weak evidence of a structural change at the aggregate level was observed. Journal of Economic Literature Classification Numbers: C53, E01, H56 Keywords: counterfactual, terror, Israel.
†
The Eitan Berglas School of Economics, Tel Aviv University, Tel Aviv, Israel, 69978. Phone: +972-36405816. E-mail: persitzd@post.tau.ac.il.
Introduction
There is no doubt among economists that wars, terrorism, and political instability have a significant negative effect on the economies in which they take place. Recent economic literature investigates both the consequences of political violence and the mechanisms that transform this violence into economic damage. Unfortunately, Israel has long been experiencing a high and volatile level of terrorism, making it a viable “natural experiment” for this literature. The objective of this study is to quantitatively estimate several aspects of the macroeconomic consequences of Palestinian terror against Israel since the mid-1990s. Three questions stand at the heart of this paper. First, how badly has terror affected Israel’s per-capita GDP since the country suffered its first suicide attack? 1 Second, how did this lengthy period of terror change the open-economy National Accounts