Terrorism limits economic openness
According to Daniel Meierrieks and Friedrich Schneider, terrorism can be understood as a violent contest between a terrorist organization and a government it challenges. Terrorist organizations use violence to extract political concessions from a besieged government, while the government implements specific polices to make such concessions less likely. In their study, the researchers focus on the effect of terrorism on a country’s level of de jure economic openness. Here, de jure openness refers to government policies and regulations that affect international trade (e.g., tariffs) and international capital movements (e.g., current account regulations). The results of a series of two-way fixed effects and instrumental-variable regressions show that governments implement more restrictive international economic policies (meaning lower levels of de jure economic openness) in response to terrorism.
The researchers argue that this shift in governmental policy with respect to economic openness is meant to strengthen the government’s position in its violent contest with terrorist organizations. In detail, less liberal economic policies (1) hamper the organization and financing of terrorism, making future attacks less likely, (2) reduce adverse economic effects from terrorism by inhibiting capital flight and stabilizing public finances and (3) signal political resolve, thus increasing the government’s chances of political survival. However, the authors also stress that less liberal economic policies, while potentially advantageous in the government’s fight against terrorism, may also have adverse economic consequences as economies tend to grow more strongly when the regulation of international trade and capital movements is comparatively low.