The impact of terrorism on formal and informal economy in African countries

This study examines the impact of terrorist attacks on the formal and informal economy for 47 African countries during the period 1996–2015. Four terrorism indicators are used, namely, domestic, transnational, uncertain and total terrorism. The empirical results are based on the two‐step Generalized Method of Moments in system. Three key findings are established. First, all terrorist indicators affect negatively the formal economy and positively the informal economy. This effect may be due not only to the size and maturity of the African economy, but also to the adoption of less conservative public policies. Second, an aggregate analysis identifying the impact of terrorism on various macroeconomic variables sheds light on the impact of terrorism on the overall situation of the African economy. Third, compared to domestic terrorism, transnational terrorism more significantly and negatively affects the formal economy and positively affects the informal economy. Political implications are discussed.