Terrorism is a complex phenomenon without a single agreed upon definition because many authors have defined the term terrorism based on their own understanding of it. The global terrorism database (GTD) defines a terrorist attack as ‘the threatened or actual use of illegal force and violence by a non‐state actor to attain a political, economic, religious, or social goal through fear, coercion, or intimidation.ʼ The attacks on the Twin Towers on September 11, 2001 (9/11), established that terrorism had reached a new dimension. Its roots are as much Middle Eastern as they are European and as much religious as they are secular.
The link between peace and economic growth is indispensable because economic development cannot occur without peace, and peace and security without growth may not be sustainable. Terrorism has both a direct and indirect effect on economic growth. Accumulations of physical and human capital are the main determinants of economic growth. Terrorism, conflicts and violence destroy both physical and human capital and undermine the socio-political institutions that positively affect economic growth. A country with a high level of violence loses the confidence of investors domestically and globally, which decreases domestic and foreign investments. Further, both human and financial resources shift abroad due to terrorist activities, which adversely affect economic growth. Countries affected by terrorism are allocating a considerable amount of financial and human resources to overcome terrorism and are spending less on economic and social infrastructure, which are imperative sources of human and physical capital accumulation. Terrorism is adversely affecting economic growth in these countries.
The annual inflation rate in Pakistan increased to 9.0 percent in September 2021 from 8.4 percent in the previous month, pointing to the highest inflation since June, due mainly to a faster rise in prices of food & non-alcoholic beverages (10.2 percent vs 10.0 percent in August), housing & utilities (9.7 percent vs 8.0 percent) and transport (9.1 percent vs 8.1 percent). Also, prices advanced more for restaurants & hotels (7.8 percent vs 7.3 percent), and miscellaneous goods & services (7.4 percent vs 5.9 percent), while communication inflation was steady (at 2.8 percent). On a monthly basis, consumer prices were up 2.1 percent, the highest in 14 months, accelerating from a 0.6 percent rise in the month prior.
In Pakistan, most important categories in the consumer price index are food and non-alcoholic beverages (35 percent of total weight); housing, water, electricity, gas and fuels (29 percent); clothing and footwear (8 percent) and transport (7 percent). The index also includes furnishings and household equipment (4 percent), education (4 percent), communication (3 percent) and health (2 percent). The remaining 8 percent is composed by: recreation and culture, restaurants and hotels, alcoholic beverages and tobacco and other goods and services.
There are several reasons for terrorism in Pakistan, which include among others, ethnicity, illiteracy, income inequality, inflation, high population growth, high unemployment, political instability, poverty, and injustice (Ismail & Amjad, 2014; Khan, Estrada, & Yusof, 2016; Syed, Saeed, & Martin, 2015). In Pakistan, terrorism primarily increased after 9/11, when Pakistan began playing its role as a front line state against terrorism. Both internal and external forces are promoting terrorism in Pakistan. These terrorist activities have negatively affected economic growth in Pakistan. Some studies have been conducted in Pakistan and have shown that terrorism has deteriorated economic growth in the country (Hyder, Akram, & Padda, 2015; Khan et al., 2016; Khan & Yusof, 2017; Mehmood, 2014; Shahbaz et al., 2013). But these studies have explored the direct effect of terrorism on economic growth. No study to date has been conducted to investigate the indirect effect of terrorism on economic growth. This study tries to fill this gap using data for the period 1972–2014. Thus, the objective of this study is to examine both direct and indirect impacts of terrorism on economic growth in Pakistan.
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