Indirect Effect of Terrorism on Economic Growth

Throughout the world, terrorism has become a major challenge to socio-economic development. Although there are studies that have examined the direct impact of terrorism on economic growth, this study complements the existing literature by investigating the moderating effect of terrorism on economic growth by introducing variables as moderations to analyze the indirect effect of terrorism on economic growth. To do this, a simultaneous equation model was applied to panel data for a sample of 31 countries (18 developing and 13 developed). The results of this study show the following: The indirect effect of FDI and trade openness on economic growth is significantly positive in the case of the entire sample; The moderating effect of unemployment, investment and public spending significantly and negatively affects economic growth in the case of the entire sample; For the case of developed countries, we note that the indirect effects of unemployment and public spending are not significant; In other words, the indirect impacts of trade opening, investment and FDI are significantly positive on economic growth in the case of developed countries, For the case of developing countries, the indirect effects of trade opening, public spending as well as public investment on economic growth are significantly negative as is the indirect effect of unemployment. It can be concluded that the direct or indirect effect of terrorism on economic growth is not remarkable in developed countries.