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978-0-521-88758-8 - Terrorism, Economic Development, and Political Openness

Edited by Philip Keefer and Norman Loayza
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TERRORISM, ECONOMIC DEVELOPMENT, AND POLITICAL OPENNESS

To what extent are terrorism and development related? What are the relative
weights of the economic, political, and social aspects of development? What is the
development effect of different responses to terrorism? This volume addresses
these crucial questions, synthesizing what we do know about the development
links with terrorism and pointing out what we do not know. Contributors to this
volume examine the economic and fiscal costs of terrorism and the response to
terrorism. They conclude that the economic costs of terrorism in rich countries
are low relative to the economic costs of combating terrorism; both are likely
high in poor countries. They also report evidence on how development affects
terrorism. This work supports the hypothesis that political development polit-
ical openness and the quality of government is inversely associated with the
emergence of terrorist organizations. Though less clearly, it also supports the
proposition that national economic development mainly international open-
ness can moderate terrorism.

Philip Keefer is a Lead Research Economist in the Development Research Group

of the World Bank. Since receiving his Ph.D. in economics from Washington
University in St. Louis in 1991, he has worked continuously on the inter-
action of institutions, political economy, and economic development. The issues
addressed in this work range from the effect of insecure property rights on eco-
nomic growth to the effect of political credibility on the fiscal and monetary
policy choices of governments. His work has appeared in numerous economics
and political science journals, including the Quarterly Journal of Economics, the
Review of Economics and Statistics, the American Political Science Review, and
the American Journal of Political Science. Dr. Keefer has worked intensively in or
on numerous countries, including Bangladesh, Brazil, the Dominican Republic,
Ghana, Indonesia, Mexico, Nepal, Pakistan, Peru, and the Philippines.

Norman Loayza is a Lead Research Economist in the Development Research

Group of the World Bank. He was born in Arequipa, Peru, and received a Ph.D.
in economics from Harvard University in 1994. Since then, he has worked
at the research group of the World Bank, with an interruption of two years
(19992000) when he worked as senior economist at the Central Bank of Chile.
Dr. Loayza has studied several areas related to economic and social development,
including economic growth, social conflict, and crime and poverty alleviation.
He has edited five books; is coeditor of the book series Central Banking, Analysis,
and Economic Policy; and has published more than 30 articles in professional
journals, such as the Journal of Monetary Economics, the Review of Economics
and Statistics, the Journal of International Economics, Economic Development and
Cultural Change, and the Journal of Law and Economics.

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Terrorism, Economic Development, and

Political Openness

Edited by
PHILIP KEEFER
The World Bank

NORMAN LOAYZA
The World Bank

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no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2008

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication Data

Keefer, Philip.
Terrorism, economic development, and political openness / Philip Keefer, Norman Loayza.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-521-88758-8 (hardback)
1. Terrorism. 2. Terrorism – Economic aspects. 3. Terrorism – Political aspects.
I. Loayza, Norman. II. Title.
HV6431.K38 2008
363.325–dc22 2007029941

ISBN 978-0-521-88758-8 hardback

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and does not guarantee that any content on such
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Contents

List of Tables page vii

List of Figures xi
Contributors xiii

Overview: Terrorism, Economic Development, and

Political Openness 1
Philip Keefer and Norman Loayza

PART ONE. THE COSTS OF TERRORISM

1 Economic Consequences of Terrorism in Developed and

Developing Countries: An Overview 17
Todd Sandler and Walter Enders
2 The Costs of Responding to the Terrorist Threats: The U.S. Case 48
Gregory F. Treverton, Justin L. Adams, James Dertouzos, Arindam
Dutta, Susan S. Everingham, and Eric V. Larson

PART TWO. DEVELOPMENT, DEMOCRACY, AND THE ORIGINS

OF TERRORISM

3 From (No) Butter to Guns? Understanding the Economic Role

in Transnational Terrorism 83
S. Brock Blomberg and Gregory D. Hess
4 The Lexus and the Olive Branch: Globalization,
Democratization, and Terrorism 116
S. Brock Blomberg and Gregory D. Hess
5 Kto Kogo?: A Cross-Country Study of the Origins and Targets
of Terrorism 148
Alan B. Krueger and David D. Laitin
v

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vi Contents

6 Terrorism and Civil War 174

Nicholas Sambanis

PART THREE. THE ORIGINS OF TERRORISTS

7 The Political, Economic, and Organizational Sources

of Terrorism 209
David D. Laitin and Jacob N. Shapiro
8 Economics and Terrorism: What We Know, What We Should
Know, and the Data We Need 233
Fernanda Llussá and José Tavares

Appendix 255
Index 297

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List of Tables

0.1 Elections and good government page 9

1.1 Macroeconomics studies of the effect of terrorism 34
1.2 Microeconomic studies of the effect of terrorism 41
1.3 Measurement of economic consequences of terrorism: Panel
versus time series 43
1.4 Economic effect of terrorism: Summarizing principles 44
2.1 Changing U.S. perceptions of “security” 49
2.2 Defining terms 49
2.3 Some previous estimates of higher security costs 52
2.4 U.S. federal government estimated security costs, FY 2004 60
2.5 Summary of nondefense costs 65
2.6 Funding for Iraq, Afghanistan, and enhanced security, FY
2001–2005 in $billions 67
2.7 DoD obligations of funds for Iraq, Afghanistan, and enhanced
security, FY 2001–2004 in ($billions) 68
2.8 Ten largest foreign assistance activities (excluding international
financing), by FY 2004 outlays 70
2.9 British budget allocations for counterterrorism and domestic
security 73
2.10 Federal grants to states and localities 74
2.11 Summary of private costs of antiterrorism 75
2.12 Total post-9/11 equilibrium for incremental spending on
Homeland Security by the U.S., annual in $billion 77
3.1 Measures of international terrorism 1968–2003 91
3.2 Terrorism by development and governance 94
3.3 Terrorism by globalization and region 95
3.4 Terrorism by region 95

vii

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viii List of Tables

3.5 International terrorist incidents cross-country regressions:

1968–2003 100
3.6 International terrorist incidents panel regressions: 1968–2003 104
3.7 International violent terrorist incidents panel regressions:
1968–2003 105
3.8 Domestic terrorist incidents panel regressions: 1998–2003 full
country sample 106
3.9 Terrorism in country, annual average 1968–2003 109
4.1 Terrorism by growth and governance: 189 country sample 124
4.2 Terrorism by globalization: 189 countries 124
4.3 Terrorism by globalization and democratization: 210 countries 124
4.4 Gravity model for terrorist incidents by location: 1968–2003 full
country sample 130
4.5 Robustness checks: Gravity model for terrorist incidents:
1968–2003 full country sample 136
4.6 Gravity model for terrorist incidents by nationality: 1968–2003
full country sample 139
4.7 Gravity model for victims of terrorism: 1968–2003 full country
sample 141
4.8 Gravity model for terrorist victims of U.S.: 1968–2003 full
country sample 143
5.1 Number of terrorist events originating from each country and
events per million people 154
5.2 Description of events 156
5.3 All events: Sample means, depending on origin, target, or place
of occurrence 159
5.4 Suicide attacks: Sample means, depending on origin, target, or
place of occurrence 162
5.5 Terrorist attacks per million population (origin or target
country) by country characteristics 164
5.6 Negative binomial regressions with country-level data (unit of
observation is country of origin of terrorist, prime target of
terrorists, or country where the event occurred) 168
5.7 Target country’s GDP per capita quartile 170
5.8 Target country civil liberties 171
6.1a Logit model of the incidence of civil war, 1997–2003 189
6.1b Logit model of the incidence of terrorism, 1997–2003 (excluding
civil wars) 189
6.1c Logit model of terrorism or civil war with democracy-income
interactions 190

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List of Tables ix

6.2 Multinomial logit model of political terrorism and civil war 194
8.1 Measurement of terrorist activity: Paper overview 255
8.2 Nature of terrorists: Paper overview 262
8.3 Utility cost of terrorism: Paper overview 272
8.4 Effect of terrorism on aggregate output: Paper overview 273
8.5 Terrorism and specific sectors of activity: Paper overview 278
8.6 Terrorism and economic policy: Paper overview 289
8.7 Countering terrorism: Paper overview 291

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List of Figures

1.1 Iterate and MIPT annual incident counts page 24

1.2 Macroeconomics variables and 9/11 27
2.1 Trend in Department of Homeland Security funding 62
2.2 Trend in international assistance programs 63
2.3 Trend in DHS components – Customs and INS 64
2.4 Trend in DHS components – transportation security 64
2.5 Real foreign assistance outlays (excluding international
financing), FY 1998 to FY 2004 (in billions) 72
3.1a Map of the world by terrorist incidents 96
3.1b Map of world by terrorist incidents per capita 97
3.2a Terrorists incidents by development, democracy, and
globalization 101
3.2b Terrorists incidents per capita by development, democracy, and
globalization 102
4.1a 1968–2003 T imports and T exports 128
4.1b 1968–2003 T imports and T exports: Conditional 129
5.1 Radar plot for origin countries of terrorist, relative to all
countries 160
5.2 Radar plot of targeted countries of terrorist, relative to all
countries 160
5.3 Radar plot: Origin countries of suicide terrorists, all countries 163
5.4 Radar plot: Targeted countries of suicide terrorists, all countries 163

xi

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Contributors

Justin L. Adams is a director of economic studies at Forward Observer, a

political economics consulting firm in Sacramento, California, whose pre-
vious research at RAND included defense economics and international eco-
nomic development.
S. Brock Blomberg is a professor at Claremont McKenna College with
appointments in the economics department and the politics, philosophy,
and economics program. He has written extensively on the economics of
terrorism in journals, books, and newspapers. He has held appointments
on the president’s Council of Economic Advisors, the Federal Reserve Bank
of New York, the Federal Reserve Board of Governors, the International
Monetary Fund, Harvard University, Wellesley College, and the University
of Southern California.
James Dertouzos is a Senior Economist who has worked on a variety of policy
issues at RAND since 1979, including public sector resource allocation, civil
justice, and market regulation.
Arindam Dutta is a doctoral fellow at RAND and a consultant for the World
Bank, focusing on the economics of international health, development in
South Asia, and program evaluation.
Walter Enders, a Professor of Economics and Lee Bidgood Chair of Eco-
nomics and Finance at the University of Albama, was selected as the
2004 recipient of the Blackmon-Moody Award, one of the highest hon-
ors bestowed on faculty at the university. In 2003, the National Academy of
Sciences selected him as a corecipient of its Award for Behavioral Research
Relevant to the Prevention of Nuclear War. Professor Enders and Profes-
sor Todd Sandler (see p. xvi) were chosen “for their joint work on trans-
national terrorism using game theory and time-series analysis to document
xiii

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xiv Contributors

the cyclic and shifting nature of terrorist attacks in response to defensive

counteractions,” according to the announcement by the NAS.

Susan S. Everingham is the Director of International Programs within

RAND’s National Security Research Division, whose earlier work focused
on mathematical modeling of defense systems, cost-benefit analysis of drug
and criminal justice policies, and military personnel management.

Gregory D. Hess, the Russell S. Bock Chair of Public Economics and Taxa-
tion, is currently the dean of faculty and vice president for academic affairs at
Claremont McKenna College. He is a graduate of the University of Califor-
nia, Davis, and earned master’s and doctorate degrees at The Johns Hopkins
University. Before coming to CMC, he was the Danforth-Lewis Professor of
Economics at Oberlin College and a lecturer at Cambridge University and
Fellow of St. John’s College. He has served as an economist at the Federal
Reserve Board in Washington, DC, and has been a visiting scholar at the
Bank of Japan, the International Monetary Fund, and the Federal Reserve
Banks of Cleveland, Kansas City, and St. Louis. His teaching and research
interests include macroeconomics, public finance, monetary policy, macro-
economics, and political economy.

Philip Keefer is a Lead Economist in the World Bank’s Development

Research Group. His work focuses on the effect of political and social insti-
tutions on development. Before joining the Bank in 1994, he was Associate
Director of the IRIS Center at the University of Maryland. In 1989–1990, he
worked with the Instituto Libertad y Democracia in Lima, Peru. He received
his Ph.D. in economics from Washington University in St. Louis, in 1991.

Alan B. Krueger is the Bendheim Professor of Economics and Public Affairs

at Princeton University. He is currently editor of the Journal of Economic
Perspectives, the most widely read journal in the economics profession. A
prolific author, he has published widely on the economics of education,
income dispersion, technological change, labor demand, social insurance,
health economics, and environmental economics. Named a Sloan Fellow
in Economics in 1992 and a National Bureau of Economic Research Olin
Fellow in 1989–1990, he was a Fellow of the Center for Advanced Study in
the Behavioral Sciences in 1999–2000. After a brief stint as Chief Economist
at the U.S. Department of Labor, he was elected a Fellow of the Econo-
metric Society in 1996. The following year he received the Kershaw Prize,
which is awarded to a scholar under the age of 40 who has made distin-
guished contributions to public policy analysis. He received a B.S. with

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Contributors xv

honors from Cornell University and a Ph.D. in economics from Harvard

University.
David D. Laitin is the Watkins Professor of Political Science at Stanford
University. He received his B.A. from Swarthmore College and his Ph.D.
from the University of California, Berkeley. He is a member of the American
Academy of Arts and Sciences. He has conducted field research on issues
of language, religion, and nationalism in Somalia, Yorubaland (Nigeria),
Catalonia (Spain), and Estonia. His books include Politics, Language and
Thought: The Somali Experience (1977); Hegemony and Culture: Politics and
Religious Change Among the Yoruba (1986); Somalia: Nation in Search of a
State (1987, with Said Samatar); Language Repertoires and State Construction
in Africa (1992); and Identity in Formation: The Russian-Speaking Popula-
tions in the Near Abroad (1998). He has also conducted research on civil wars
and international terrorism, most of it in collaboration with James Fearon
(“Ethnicity, Insurgency and Civil War” in the American Political Science
Review [2003]) but also with Eli Berman and Alan Krueger.
Eric V. Larson is a senior policy researcher whose past research has focused
on national security and defense planning issues, including the war on ter-
rorism.
Fernanda Llussá is an Assistant Professor of Economics and Business at
the Universidade Nova de Lisboa, in Portugal. She completed her Ph.D.
in economics at the University of California, Los Angeles in 2003. Her
master’s degree at Fundação Getúlio Vargas, in Brazil, resulted in the the-
sis “Credibility and Public Debt Management: A Case Study of Brazil,”
awarded a National Prize in Economics by Banco Nacional de Desenvolvi-
mento Econômico e Social (BNDES) and later published as a book. Professor
Llussá has conducted research at the Harvard Institute for International
Development; on geography, institutions, and state growth in Brazil; and her
current research interests, including the effect of aggregate shocks on institu-
tions and economic growth, have resulted in several publications in refereed
journals.
Norman Loayza is currently lead economist in the research department of
the World Bank. He was born in Arequipa, Peru, and pursued high school
and general university studies in Lima. He obtained a B.A. from Brigham
Young University, specializing in economics and sociology, and continued
his studies at Harvard University, where he received a Ph.D. in economics,
in 1994. Since then, he has worked at the research group of the World Bank,
with an interruption of two years (1999–2000) when he worked as senior

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xvi Contributors

economist at the Central Bank of Chile. Dr. Loayza has taught postgraduate
courses and seminars at the University of the Pacific in Lima, the Catholic
University of Chile, and the University of Sao Paulo.

Nicholas Sambanis is Associate Professor of Political Science at Yale Uni-

versity. He received his Ph.D. from Princeton University’s Woodrow Wilson
School of Public and International Affairs in June 1999. His publications have
appeared in several journals, including the American Political Science Review,
World Politics, the Journal of Conflict Resolution, Perspectives on Politics, and
the Journal of African Economies. He is the coauthor of Making War and Build-
ing Peace, a book about United Nations peacebuilding published by Prince-
ton University Press in 2006. He is coeditor of Understanding Civil War:
Evidence and Analysis, two volumes of case studies on civil war, published
by the World Bank in 2005, and is working on a book on the causes of self-
determination movements and secessionist civil war. Professor Sambanis is
researching questions on violent civil conflict; the interaction of economic
development, political institutions, and civil war; and the uses of interna-
tional organizations to prevent or resolve large-scale political violence.

Todd Sandler is the Robert R. and Katheryn A. Dockson Professor of Inter-

national Relations and Economics at the University of Southern California
and the Vibhooti Shukla Professor of Economics and Political Economy at
the University of Texas at Dallas. Professor Sandler applies theoretical and
empirical models of economics to the study of international political econ-
omy, defense, environmental issues, and public finance. He is particularly
interested in the application of game theory (noncooperative and cooper-
ative) and microeconomics to issues in international relations. His current
work focuses on the formation of international environmental agreements
and regimes. Another facet of his work analyzes alliances, intergovernmental
agreements, and the design of supranational structures. He is also working
on new papers on transnational terrorism, global public goods, and a new
book, The Political Economy of Terrorism.

Jacob N. Shapiro is a graduate student in political science at Stanford Uni-

versity and CISAC predoctoral Fellow. His research focuses on the role of
economic motivations in terrorist organizations and on the organizational
challenges these groups face. As a Naval Reserve officer, he was assigned to
the Office of Naval Intelligence and the Naval Warfare Development Com-
mand. Prior to attending Stanford, he served on active duty at Special Boat
Team 20 and onboard the USS Arthur W. Radford (DD-968). He received
his B.A. in political science from the University of Michigan.

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Contributors xvii

José Tavares is an Assistant Professor of Economics at Universidade Nova

de Lisboa and research affiliate at the Center for Economic Policy Research
in London. He holds a Ph.D. in economics from Harvard University and
has specialized in macroeconomics with a focus on the political economy
of fiscal policy and economic growth. His research has been published in
academic journals in Europe and the United States, including the Journal
of Monetary Economics, the Review of Economics and Statistics, the Journal
of Public Economics, and the European Economic Review and also appeared
in edited volumes of Harvard University Press, MIT Press, and Cambridge
University Press. He has undertaken research projects for the World Bank,
the Asian Development Bank, the Harvard Institute for International
Development, and the Banco de Portugal. His work has received comments
in the general press in the United States (New York Times) and in Portugal.
Gregory F. Treverton is director of RAND’s Center for Global Risk and
Security. Earlier, he served as president and director of studies of the Pacific
Council on International Policy, an initiative rooted in the American West to
bring together leaders interested in international matters and their effects on
domestic affairs. At RAND, he has directed the Intelligence Policy Center and
the International Security and Defense Policy Center, and he serves on the
faculty of the RAND Graduate School. Before joining RAND, Dr. Treverton
served as vice chair of the National Intelligence Council, overseeing the
writing of America’s National Intelligence Estimates (NIEs). He has been
Senior Fellow and Director of the Europe-America project and of the project
on America’s Task in a Changed World at the Council on Foreign Relations
in New York.

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