The Effect of Terrorism on the Size of the Shadow Economy

• In Event: Shaping Conflict Narratives: Global Perspectives

Abstract

Does terrorism contribute to the growth of the shadow economy? While extensive literature has delved into the causes as well as the economic and psychological impacts of terrorism, little has been studied on its impact on the shadow economy. In this paper, we aim to demonstrate that terrorism leads to an increase in the shadow economy through mechanisms including economic hardship and loss in social capital. We argue that this stems largely from growing discontent and diminishing trust in institutions, coupled with ineffective and ambiguous counterterrorism measures that fail to selectively target the perpetrators, especially in authoritarian regimes. Consequently, it hampers the economic pursuits of individuals, businesses, and foreign investors, encouraging their involvement in informal economic activities. We employed data on terrorism and the shadow economies of 116 countries from 1990 to 2017 using fixed effects and Driscoll-Kraay estimators. The results show that terrorism is positively associated with the size of the shadow economy, and the impact is stronger among autocracies than in democracies and hybrid regimes. We use the generalized method of moments to deal with the endogeneity, which supports the finding.

Authors

• Dain Yoo, Georgetown University

• Da Sul Kim