An empirical investigation of causal linkages between domestic terrorism and macroeconomic variables: a case for Pakistan

While the root causes of terrorism are multidimensional – ranging from religious extremism to a sense of alienation from society to anger at perceived geopolitical injustice – economic factors can help explain the rise of terrorism. With the help of the ARDL bounds testing approach followed by variance decomposition (VDC) and impulse response (IR) function, this study provides an empirical investigation to determine the causal relationship of the variables of economic growth, trade, military spending, education spending and unemployment on the onslaught of terrorism in Pakistan. The results of the overall study clearly conform to the deprivation and modernization hypotheses that underdevelopment and poverty do provide fertile grounds to terrorists for new recruits while unequal growth could equally facilitate the spread of terrorism. According to our analysis, in the short run, terrorism is most affected by the variables of trade and GDP. However, in the long-run, two startling outcomes are the positive and significant relationships between GDP growth and terrorism, and also between military spending and terrorism which imply that increased economic growth and military spending breed terrorism. The first relationship can be explained on the basis of rising income inequality and modernization hypothesis. The second linkage can be the aftermath of government’s asymmetric military spending at the expense of critical development sectors like education which significantly reduce the opportunity cost of terrorism in the society as elicited by a significant long-run relationship between military spending and education. The overall result of the study has many significant policy implications including shifting the precedence of military spending and war on terror towards the more desirable socio-economic sectors of education, trade and employment.