NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Terrorism Reduces Basque GDP

"After terrorism became endemic to the region, fears of violence, extortion and kidnapping by ETA separatists were responsible, on average, for a 10 percent drop in the area's per capita GDP."

It would come as a surprise to no one, particularly in the aftermath of the September 11 attacks in the United States, that among the grim effects of terrorism is its potential to cause widespread economic pain. At the same time, it's hard to say precisely how much economic damage can be attributed to terrorism, in terms of such things as stock values and gross domestic product (GDP), because economists have produced little evidence to illuminate a cause-and-effect relationship between the specter of terrorism and declining economic fortunes.

In The Economic Costs of Conflict: A Case-Control Study for the Basque Country (NBER Working Paper No. 8478), authors Alberto Abadie and Javier Gardeazabal seek a deeper understanding of this phenomenon by measuring the economic pain inflicted on the Basque Country of Spain that can be tied to the terrorist struggle that began in the late 1960s and continues today. They find that after terrorism became endemic to the region, fears of violence, extortion and kidnapping by ETA separatists were responsible, on average, for a 10 percent drop in the area's per capita GDP. Furthermore, they note that during a 1998-9 cease-fire, stocks in the region responded by outperforming stocks from outside the region. Then, when the cease-fire was over, those same Basque-centered stocks, seemingly taking a cue from the return to trouble, dropped below those of other regions.

The authors' economic analysis was somewhat complicated by the fact that, in order to isolate the effect of terrorism, they needed to compare the Basque Country to a region that matched its economic conditions, sans terrorism. Indeed, before the onset of the terrorist activity--which began in 1968 and became progressively worse throughout the 1970s--the Basque Country had higher per capita income, investment, and industrial production, along with a better-educated workforce, than the rest of Spain. So to make an accurate comparison, Abadie and Gardeazabal create an economic parallel universe of sorts for the Basque one, in which attributes from several Spanish regions are combined to form what the authors refer to as a "synthetic Basque Country without terrorism."

Abadie and Gardeazabal find that the Basque Country and the synthetic region behave similarly until 1975. Then, from 1975, when ETA's terrorist activity became a large-scale phenomenon, they diverge. The Basque Country per capita GDP drops to around 10 percent below that of the synthetic region.

Moreover, the comparison between the Basque Country and the synthetic region is sensitive enough to detect an economic decline that grew more pronounced during "spikes" in terrorist attacks. These findings suggest just how sensitive economic conditions can be not just to terrorism, per se, but to its varying levels of intensity. "Terrorism explains the GDP gap [between the actual Basque Country with terrorism and the synthetic Basque Country without terrorism] almost perfectly," the authors note.

Abadie and Gardeazabal observe that while their focus is the Basque conflict, "the methods applied in this paper can be used to measure the economic effects of conflict elsewhere."

-- Matthew Davis


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