The Impacts Of New Terrorism On Capital Movement

This paper examines the impact of new terrorism on capital flows for highly victimized nations from terrorism and also investigates that how terrorism and macroeconomic instability causes capital flight.The study has mainly two objectives;to examine the effects of new terrorism on capital flows and propose fruitful polices for capital controls.As per the objectives of study,we also investigated the crucial role of military expenditures for capital flows and capital flight for major terror-victim countries.An important contribution of paper is to check the missed impact of terrorism on capital flight and on different types of capital flows(FDI,portfolio investments,external debt stocks).To attain the objectives of paper,we used general to specific approach as full specification and regional analysis.In order to build empirical models,we take help from previous literature and theories on capital movement.Accordingly,for capital flows and capital flight we follow the investment growth model based on q theory of investments and investment diversion theory.Notably,the econometric models are drawn as per the logical and analytical framework of economic theories.Further,the study used alternative controlling factors for different types of capital flows and capital flight estimations.For empirical analysis,we used the dataset of 40 major terrorist victim countries as per regional context of terrorism for the period of 1990 to 2017.The data for our primary variables of interest;terrorism,capital flows,military expenditures and macro-economic factors is obtained from multiple sources.Firstly,we used the global terrorism database,(2018)to code the data for total terrorist attacks for highly victimized nations.Secondly,the military expenditures and macroeconomic factors data is obtained from World development indicators,(2018)and the data for institutional factors is gathered from economic freedom index,(2018).However,the dataset is further categorized into four regions;South Asia,Sub-Sahara African,Middle East and North African,Asia pacific and three income levels;high income,middle income,and low-income countries.The overall findings report significant impact of terrorism on different forms of capital flows and in creating regional capital flight.However,military expenditures have significant and positive impact on capital flows and negative on capital flight in most of the cases.In estimation strategy for capital flows and capital flight,we employed panel data techniques;quantile regressions,system GMM,while FGLS and random effect models and used as robustness check of empirical outcomes.Furthermore,we also checked the time lagged effect of our primary variables of interest;capital flows and capital flight for full panel and regional analysis.In robust analysis for capital flows the paper further checked the role of institutional and governance related variables towards different types of capital flows,which revealed very interesting and innovative outcomes.The summary statistics for our primary variables of interest,control variables,and institutional factors found no outliers in the data.The empirical estimations in context of capital movement and terrorism for full specification,regions and income levels report very interesting and innovative outcomes.In empirical analysis,we used alternative and different control variables for the types of capital flows.The results provide the evidence that terrorist related incidents in developing and victim economies severely effect the economic activities via different channels which discourage the inflow of investments and capital into host country.Firstly,we note that terrorist attacks adversely affect the FDI flows,portfolio investments and debt stocks for all countries,while the high magnitude is noted in the case of South Asia,Sub-Sahara African and low-income countries.These findings are justified from the fact that terrorism increase projected risk on investments and lower the returns in long term.The empirical results further highlight that military expenditures helps to attract capital flows in host countries in most of the cases.The reason behind positive relationship can be discussed through different channels;military expenditures are directed towards counter terrorism and helps in reducing terrorism in short term which lowers the risk.Accordingly,the results report that exchange rate,trade globalization and terms of trade decrease the inflows of capital in full sample,South Asia,MENA,middle income,and low-income groups.The results are in line with previous literature and explains that currency depreciation,trade openness and competitiveness of export prices at international level might be important macro-economic factors in making economic decisions.The empirical findings for institutional factors report that government effectiveness,size of government,sound money and polity(political accountability)are act as important factors in context of making investment related decisions.For example,the results note negative relationship for size of government,sound money and polity variables towards capital flows of sample countries.The empirical finding is very interesting and in line with theory,demonstrating that government expenditures,huge tax burden,low purchasing power and financial market stagnation are discouraging capital flows,which further point out that there might be some problems in host country markets concerning economic progress,regulations and financial market development.Similarly,government effectiveness,financial openness(capital restrictions)and stable political environment might help to retain and attract future capital flowsAfter discussing the role of terrorism on capital flows,we make our analysis more specific and directed on regional capital flight,which is also a major contribution of paper.The illegal movement of capital or cross border out flow of capital is considered as threat to economy and can cause capital scarcity issues as in the case of African and Asian countries e.g.Iran,Pakistan,Somalia,Egypt Sudan etc.In empirical models for capital flight,we used military expenditures as policy variable and checked whether military expenditures modulate the negative impact of terrorism on capital flight.The empirical estimations of quantile regression and system GMM provide the compelling evidence that terrorism and macroeconomic instability in developing and victimized nations cause the capital flight problems.In addition,we also find evidence that military expenditures might be used as key policy variable in reducing capital flight,but the paper propose that it should be used in such a way that it does not cut off the development and education related expenditures which are considered as more fruitful counter terrorism policies.Concerning the control variables,the results note that trade globalization,currency depreciation and political instability cause the capital flight from developing.The empirical outcomes identify that macroeconomic stability(inflation,exchange rate,economic growth)and political stability regarding political policies and governance are considered as important factors in mitigating capital flight.Overall empirical findings allow us to draw innovative conclusions and to formulate strategic policies regarding controls,capital flows and regional capital flight.These findings can be used by policy makers of sample countries,economists,and individual investors to take certain actions for attracting capital and making investments.