This paper provides an empirical analysis of how the frequency and severity of terrorism affect government revenue and expenditure during the period 1970–2013 using a panel dataset on 153 countries. We find that terrorism has only a marginal negative effect on tax revenue performance, after controlling for economic and institutional factors. This effect is also not robust to alternative specifications and empirical strategies. On the other hand, we find strong evidence that terrorism is associated with an increase in military spending as a percent of GDP (and a share of total government expenditure). Our estimations reveal that this impact is greater when terrorist attacks are frequent and result in a large number of fatalities. Empirical findings also support the view that public finances in developing and low-income countries are more vulnerable to terrorism than those in countries that are richer and diversified.
-median number of terrorist incidents than those with below-median number of terrorist incidents. This finding, however, is not statistically significant. Second, with regards to the impact on military spending, the point coefficient estimates both for the number of attacks and fatalities are significantly larger in the high terrorismsample than those for the low terrorismsample. 9
Heterogeneity in Terrorism Incidence
(percent of GDP)
(percent of GDP