On December 16, 2014, a terrorist attack killed 150 people, of whom at least 134 were students, when Taliban gunmen abruptly attacked the Army Public School in Peshawar, Pakistan (Lewis 2019). In response to this incident, as well as other episodes of terror that had become widespread in the country, the Pakistani state and military implemented a mission to combat terrorism, mainly in the Khyber Pakhtunkhwa region of North Waziristan, in the framework of Operation Zarb-e. -Azb. Terrorism is a large and intensive issue in Pakistan; Pakistan’s Global Terrorism Index (GTI) in 2019 was 7,889 out of 10, making it the fifth most affected country by terrorism last year (Institute for Economy and Peace 2019). Terrorism represents an immense threat and constitutes one of the greatest impediments to the stability and growth of Pakistan. Terrorism has negative impressions on the economy, as it destroys physical and human capital, creates uncertainty in the market that generates reluctance among investors / entrepreneurs, and urgently demands government spending on expanding security and counterterrorism facilities.
The terrorism and extremism situation in Pakistan intensified mainly in the late 1970s and early 1980s. The causes are attributed to multiple factors, including sectarian conflicts that rose to the political level after 1980 and financing external that was incessantly injected into Pakistan during the period of some major international events; namely, the Iranian Revolution, the Iran-Afghanistan War, the Soviet-Afghan War, and the Cold War (Zahab 2002). These global events influenced Pakistan due to its geopolitical and ideological position. At present, several internal factors are identified as motives for terrorism in Pakistan, including ethnicity, illiteracy, income inequality, inflation, high population growth, high unemployment, political instability, poverty and injustice (Zakaria, Ahmed and June 2019).
Terrorism incidents, whatever the reason for their occurrence, can cause “domino effects” that have negative impressions on the country’s economy, directly and indirectly (Ross 2019). Directly, terrorist attacks damage the country’s infrastructure and destroy the three main factors of production: land, labor and capital. All of these factors play an important role in determining economic growth, but they are direct victims of terrorism. The emotional cost to the community as a whole, although invisible and incalculable, is another type of direct cost to the country. Indirectly, terrorist activities can decrease domestic and foreign investment, increase inflation, damage the stock market, increase unemployment, and bolster government spending on security rather than socio-economic development projects (Zakaria, Ahmed, and June 2019).
Terrorism has long-term and far-reaching effects on investor decisions, industry performance, and government behavior. First, it creates uncertainty in the market. Uncertainty portrays a negative image of the country for investors, reduces the average return on investments (Abadiea and Gardeazabal 2007) and diverts potential investments to environments or countries less affected by terror. As a result, business activities and entrepreneurship decline due to intermittent terror episodes. Second, terrorism influences the government to spend more on defense and counterterrorism facilities. Normally, military spending is seen as a stimulant, but the “broken window fallacy,” a parable used by economists to illustrate the negative economic effects of war and destruction, brings to light the adverse costs of terrorism in the world. economics (Ross 2019). The main focus of the state shifts from socio-economic development which not only positively influences the economy in the long term, but also helps to eradicate the root causes of terrorism such as poverty, illiteracy, income inequality, unemployment and injustice. Therefore, the opportunity cost – the benefits that are lost by choosing one alternative over another – of spending on defense rather than development is reasonably high and, as in the case of companies, should be included in the economic costs of the country. .
A study entitled “Effect of Terrorism on Economic Growth in Pakistan: An Empirical Analysis” (Zakaria, Ahmed and June 2019) examined three macrovariables, based on data from the period 1972-2014, that are indirectly affected by terrorism. These variables were Foreign Direct Investment (FDI), national investment and the behavior of public spending. The results concluded that the impact of terrorism on FDI and national investment is significantly negative, while the impact on public spending is significantly positive. The net effect, however, is negative. We can anticipate that, since terrorist attacks require a rapid response from the State, the influence on public spending is positive. But this change in government behavior can be questioned in terms of the opportunity cost of spending on defense rather than development, as mentioned above.
The impact of terrorism on a country and its people cannot be precisely quantified in economic terms, but a sufficient estimate can be made to deduce that terrorism has extremely deteriorating effects on various sectors of the economy. Pakistan faces the threat of terrorism from within and from without. According to the Global Terrorism Database (GTB), of the 3,043 terrorist incidents that Pakistan faced between 2001 and 2012, 2,737 were domestic, while 191 were transnational (St. Louis Fed On the Economy 2018). Terrorism is particularly threatening to the Pakistani economy for two reasons. First, unlike developed countries, Pakistan cannot absorb terrorism without showing adverse economic consequences. Second, internal conflicts (domestic terrorism), which are exploding in Pakistan, have a greater impact on the economy than transnational attacks (Hyder, Akram and Padda 2015). What should Pakistan do to combat terrorism in order to avoid economic collapse?
The research “Effect of terrorism on economic growth in Pakistan: an empirical analysis” has pointed out, based on data for the period 2002-2015, that there is an inverse relationship between GDP and terrorist (suicide) attacks in Pakistan, that is, when terrorism is low, economic growth is high and vice versa (Zakaria, Ahmed and June 2019). Taking into account the economic consequences of terrorism, a practical solution would be one that mitigates terrorism / extremism in the long term and contributes to economic growth simultaneously. The development of human capital in the areas of education and health at the national level has been shown to contribute to economic growth in developing countries and also to reduce terrorism by eradicating its root causes (Ritter 2016). Human capital is defined as “the knowledge, skills, competencies and attributes embodied in people that facilitate the creation of personal, social and economic well-being” (OECD 2018). Pakistan’s Human Capital Index (HCI) is currently 0.39 out of 1 (World Bank Group 2018), showing an indication of massive improvement. The Pakistani government and business sector should progressively invest in human capital development, especially in the fields of education, health and entrepreneurship, to upgrade socio-economic growth and combat terrorism at the same time.
References
Abadiea, Alberto and Javier Gardeazabal. 2007. Terrorism and the world economy. ScienceDirect.
Hyder, Shabir, Naeem Akram, and Ihtsham Ul Haq Padda. 2015. “Impact of terrorism on the economic development of Pakistan”. Pakistan Business Review (ResearchGate) 704-722.
Institute of Economy and Peace. 2019. Global Terrorism Index 2019: Measuring the Impact of Terrorism. Sydney: Institute of Economics and Peace.
Lewis, Robert. 2019. “Massacre of the Peshawar School”. Encyclopædia Britannica. Encyclopædia Britannica, inc., December.
OECD. 2018. “Human capital – The value of people”. OECD Outlook. OECD.
Ritter, Benjamin. 2016. “Development of human capital in developing countries”. Global Leadership Magazine (ICGL) IV: 129-134.
Ross, Sean. 2019. “Top 5 Ways Terrorism Affects the Economy.” Investopedia.
St. Louis Fed on the economy. 2018. “The economic impact of terrorism in developing countries”. Federal Reserve Bank of St. Louis.
World Bank Group. 2018. The Human Capital Project. Washington: World Bank.
Zahab, Mariam Abou. 2002. “The regional dimensions of the sectarian conflict in Pakistan”. On Pakistan: nationalism without a nation, by Mariam Abou Zahab, 115-30. London: Zed Books.
Zakaria, Muhammad, Haseeb Ahmed and Wen Jun. 2019. “Effect of terrorism on economic growth in Pakistan: an empirical analysis”. Economic research-Ekonomska Istra? Ivanja (Informa UK Limited) 1794-1812.