Proyecto preliminar

We employ three indicators of terrorist activity and adjust all of them for population size.

We correct for country size because we expect the average e¤ect of terrorism on the economy to decline with it, while larger countries are also anticipated to experience more terrorist activity in absolute numbers (cf. Sandler and Enders, 2008; Krieger and Meierrieks, 2011).

Using three terrorism indicators also adds to the robustness of our …ndings, in particular as no existing indicator is able to measure terrorism as a whole (e.g., with respect to its level or its repercussions). First, we use the number of terrorist attacks per 100,000 inhabitants (TA). Second, we employ the number of terrorism victims per 100,000 inhabitants (TV ), i.e., the number of individuals wounded or killed in terrorist strikes. Previous studies on the causes and consequences of terrorism also use similar indicators (e.g., Tavares, 2004; Crain and Crain, 2006; Gaibulloev and Sandler, 2011). While the former indicates the frequency of terrorism, the latter indicates its intensity. Third, we construct a terrorism index (TI ) similar to that employed by Eckstein and Tsiddon (2004), which includes information on

the number of terrorist attacks and terrorism victims in a given year and country.⁷ The data for population size is drawn from the PENN World Table. The raw data for the terrorism variables is drawn from the Global Terrorism Database (GTD ) (LaFree and Dugan 2007).

The GTD, unlike other databases, includes data on domestic and transnational terror-ism. Even though domestic terrorism is far more common than transnational terrorism, previous empirical studies have resorted to an analysis of the causes and consequences of the latter due to data constraints (e.g., Krieger and Meierrieks, 2011). However, transna-tional terrorism is expected to be associated with internatransna-tional political factors (i.e., foreign policy). For instance, Addison and Murshed (2005) argue that transnational terrorism may be used by a terrorist group against the external sponsor of a domestic government the group opposes, so as to reduce the political support of this sponsor for the domestic gov-ernment. Similarly, the evidence provided by, e.g., Savun and Phillips (2009) and Azam and Thelen (2010) indicates that international political variables (e.g., military interven-tions, involvement in international crises) matter to the patterns of transnational terrorism.

However, such variables are less likely to matter to domestic terrorism, which is usually more strongly related to domestic goals and circumstances. Therefore, one may argue that domestic terrorism can be expected to share a closer association with a country’s economic situation than transnational terrorism.

For our analysis we consider all terrorist activity (i.e., domestic and transnational ter-rorism) in a given country and year in order to examine the terrorism-economy nexus in Latin America. That is, we take into account terrorism by domestic groups against domes-tic and foreign targets, terrorism by foreign groups (i.e., imported transnational terrorism) and unclaimed terrorist activity.⁸ Therefore, we are able to consider the aggregate e¤ect of

7Formally, the terrorism index TI is equal to: T I = ln(e + T A + T V ), where e is the mathematical constant and TA and TV are the number of terrorist attacks per 100,000 inhabitants and the number of terrorism victims per 100,000 inhabitants, respectively. The index thus captures the frequency as well as the intensity of terrorism.

8While most of the recorded activity in Latin America was carried out by domestic groups against domes-tic and international targets (ca. 65% of all activity) and little of the activity can be considered imported transnational terrorism (ca. 4%), a considerable measure of activity (ca. 30%) cannot be attributed to a speci…c terrorist group.

terrorism on the economy (and vice versa). Terrorist activity is expected to produce eco-nomic damage, regardless of the origin of the attacking terrorists, so that we see no point in di¤erentiating between domestic and transnational terrorism.⁹ Also, national economic conditions ought to matter to domestic and foreign groups alike. As an example, while slow growth may make it easier for domestic terrorist groups to recruit new members (so that domestic terrorism increases), foreign groups may also …nd it attractive to attack so as to further destabilize the domestic economy (so that imported transnational terrorism also increases).

4.4 Panel Causality Analysis: Methodology and Findings

In this section we introduce the methodology to test for causality in a panel framework and discuss our …ndings. We …rst examine the stationarity properties of the terrorism and growth data series by means of a series of panel unit root tests. We then test for Granger causality (Granger, 1969) with panel data, treating the data correctly as it follows from the results of the panel unit root tests. Finally, we follow Hurlin and Venet (2001) and Hurlin (2005) and use a sequential approach to test for causality that allows us to treat all variables as endogenous. Here, we …rst assess whether the independent variable (say, x ) Granger-causes the dependent variable (say, y) in any cross-section. Rejection of the null hypothesis of non-causality takes us to the second step, where we test for homogeneous causality. That is, we examine whether x uniformly Granger-causes y in all cross-sections.

If we reject the null hypothesis of homogeneous causality, we in a third step may assess for which group of cross-sections x Granger-causes y (group-speci…c causality).

This sequential approach with panel data has several advantages. First, through the use of time-series cross-sectional data we are able to use more observations and reduce

iden-9The relationship between terrorism and economic growth may depend on the type of terrorism, as sug-gested by Gaibulloev and Sandler (2011). While we argue in favor of using data on total terrorist activity to examine this relationship, future research may evaluate the isolated e¤ects of domestic and transna-tional terrorism on growth (and vice versa). The potentially di¤erent e¤ects of domestic and transnatransna-tional terrorism on economic activity are also discussed in the introduction to this doctoral thesis.

ti…cation problems, thus arriving at more e¢ cient results than conventional time-series causality analyses. Second, we are able to take into account country-speci…c (…xed ) ef-fects which are likely to matter in our analysis. For instance, (virtually) time-invariant factors such as geography and national mentality that are captured in the …xed e¤ects may in‡uence economic performance and terrorist activity, so that accounting for them ought to help to identify the terrorism-economy nexus more closely. Third, we allow for causal variation among the countries. By pursuing this approach— described below in more detail— we relax the strong assumption that the causal e¤ect of the respective independent on the respective dependent variable is identical across all cross-sections.¹⁰