Terrorism, Defense Expenditure, and their Impact: Evidence from Selected Countries of Asia

Abstract

Following the financial crisis, across the Western world, defense budgets have undergone substantial and far-reaching cuts. But in the emerging markets there has been a significant rise in defense expenditure (DE). Countries such as China, Brazil, and India have doubled or even tripled their defense spending during the past two decades. It has been generally argued that terrorism can potentially affect economic growth adversely in the short run through a number of channels. Terrorist attacks can increase uncertainty which limits the scope for domestic investments and also diverts foreign direct investment. In order to mitigate terrorism, increased government spending on security can crowd out more growth-enhancing public and private investments in social sectors such as health and education, which in turn may affect the long run growth of a nation. Terrorism also hinders growth by raising the cost of doing business in terms of higher wages, larger insurance premiums, and greater security expenditures. These higher costs result in reduced profits and, thus, smaller return on investment. Terrorist attacks can also destroy infrastructure, thereby leading to business disruptions. This study attempts to examine both the short- (SR) and long-run (LR) associations among terrorism, DE, and its impact on GDP taking time series evidence, using autoregressive distributed lag model (ARDL) model from some selected countries of Asia – India, China, Bangladesh, and Pakistan – during 1990 to 2014. The results show that there are LR associations among the three variables for Pakistan only.

Citation

Bhattacharyya, R. (2019), "Terrorism, Defense Expenditure, and their Impact: Evidence from Selected Countries of Asia", Das, R.C. (Ed.) The Impact of Global Terrorism on Economic and Political Development, Emerald Publishing Limited, Leeds, pp. 205-222. https://doi.org/10.1108/978-1-78769-919-920191018