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 widespread terror episodes in the country, the Pakistani state and military implemented a mission to combat terrorism, primarily in the Khyber Pakhtunkhwa region of North Waziristan, under Operation Zarb- and. -Azb. Terrorism is a huge and intense topic in Pakistan; Pakistan’s Global Terrorism Index (GTI) in 2019 was 7,889 out of 10, making it the fifth country most affected by terrorism last year (Institute for Economics and Peace 2019). Terrorism poses an immense threat and serves as one of the biggest impediments to Pakistan’s stability and growth. Terrorism has negative impressions on the economy as it destroys physical and human capital, creates uncertainty in the market causing reluctance among investors/entrepreneurs, and urgently demands government spending on expanding security and counter-terrorism facilities.
The situation of terrorism and extremism in Pakistan escalated mainly in the late 1970s and early 1980s. The causes are attributed to multiple factors, including sectarian conflicts that escalated to the political level after 1980s and funding foreign which was injected into Pakistan endlessly during the period of some major international events; namely, the Iranian revolution, the Iran-Afghanistan war, the Soviet Union-Afghanistan war, and the Cold War (Zahab 2002). These global events influenced Pakistan due to its geopolitical and ideological position. Currently, several internal factors are identified as reasons 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).
Terrorist incidents, whatever the reason for their occurrence, can cause “domino effects” that have a negative impact on the country’s economy, directly or indirectly (Ross 2019). Directly, terrorist attacks damage the country’s infrastructure and destroy the three main factors of production: land, labor and capital. All 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, while invisible and incalculable, is another kind 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 socioeconomic 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 causes uncertainty in the market. Uncertainty presents a negative image of the country to investors, reduces the average return on investment (Abadiea and Gardeazabal 2007), and diverts potential investment to less terror-ridden settings or countries. As a result, business activities and entrepreneurship decline due to intermittent terror episodes. Second, terrorism induces the government to spend more on defense and counterterrorism facilities. Military spending is normally 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 on the economics (Ross 2019). The main focus of the state shifts from socio-economic development which not only positively influences the economy in the long run, but also helps to eradicate the root causes of terrorism such as poverty, illiteracy, income inequality, unemployment and poverty. injustice. Therefore, the opportunity cost (benefits foregone by choosing one alternative over another) of spending on defense rather than development is reasonably high and, as with business, should be included in the costs. economics of the country.
A study titled “Effect of Terrorism on Pakistan’s Economic Growth: An Empirical Analysis” (Zakaria, Ahmed, and June 2019) examined three macro variables, based on data from the period 1972-2014, that are indirectly affected by terrorism. These variables were Foreign Direct Investment (FDI), internal investment and the behavior of public spending. The results concluded that the impact of terrorism on FDI and internal 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 demand a rapid response from the state, the influence on government 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 accurately quantified in economic terms, but a sufficient estimate can be made to infer that terrorism has extremely detrimental effects on various sectors of the economy. Pakistan faces the threat of terrorism from within and without. According to the Global Terrorism Database (GTB), of the 3,043 terrorism incidents Pakistan faced between 2001 and 2012, 2,737 were domestic while 191 were transnational (St. Louis Fed On the Economy 2018). Terrorism is a particular threat to Pakistan’s economy for two reasons. First of all, unlike developed countries, Pakistan cannot absorb terrorism without showing adverse economic consequences. Second, internal conflicts (domestic terrorism) – which are rampant in Pakistan – have a greater impact on the economy than transnational attacks (Hyder, Akram, and Padda 2015). What should Pakistan do to counter terrorism in order to avoid economic collapse?
The research “Effect of Terrorism on Pakistan’s Economic Growth: An Empirical Analysis” has pointed out, based on data from the period 2002-2015, that there is an inverse relationship between GDP and terrorist attacks (suicides) in Pakistan, i.e. , when terrorism is low, economic growth is high and vice versa (Zakaria, Ahmed, and June 2019). Considering 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 reduces terrorism by eradicating its root causes (Ritter 2016). Human capital is defined as “the knowledge, skills, competencies and attributes embodied in individuals 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 actualize socio-economic growth and combat terrorism at the same time.
References
Abadiea, Alberto, and Javier Gardeazabal. 2007. Terrorism and the world economy. Direct science.
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 for Economics and Peace.
Louis, Robert. 2019. “Peshawar School Massacre.” Encyclopaedia Britannica. Encyclopædia Britannica, Inc., December.
OECD. 2018. “Human Capital – The Value of People.” OECD Outlook. OECD.
Ritter, Benjamin. 2016. “Human Capital Development in Developing Countries.” Global Leadership Journal (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 on Developing Countries.” Federal Reserve Bank of St. Louis.
World Bank Group. 2018. The Human Capital Project. Washington: The World Bank.
Zahab, Mariam Abu. 2002. “The Regional Dimensions of Sectarian Conflict in Pakistan.” In Pakistan: nationalism without a nation, by Mariam Abu Zahab, 115-30. London: ZedBooks.
Zakaria, Muhammad, Haseeb Ahmed, and Wen Jun. 2019. “Effect of Terrorism on Pakistan’s Economic Growth: An Empirical Analysis.” Economic research-Ekonomska Istra?ivanja (Reports UK Limited) 1794-1812.