NCPA - National Center for Policy Analysis

Case Study of Terrorism's Cost: Spain's Basque Region

February 1, 2002

Political instability and terrorism are believed to have strong adverse effects on economic prosperity. However, evidence of these effects is scare; probably because it is difficult to know how economies would have evolved in the absence of political conflicts. A study recently published by the National Bureau of Economic Research (NBER) investigated the economic impact of conflict, using terrorism in Spain's Basque region as a case study.

  • At the outset of terrorist activity in the early 1970s by ETA, a group seeking independence for Basque-speakers, the Basque region was one of the richest in Spain, occupying the third position in per capita gross domestic product (GDP).
  • In the late 1990s, after 30 years of terrorist and political conflict, it had dropped to the sixth position in per capita GDP.

To quantify the effect of terrorism on this decline, researchers constructed a "synthetic" region resembling the Basque Country before the outbreak of terrorism in the 1970s.

  • They found that after two decades there was a 10 percent average gap in per capita GDP between the Basque Country and the comparable synthetic region without terrorism.
  • Also, they used the unilateral truce by ETA from 1998 to 1999 -- during which terrorist activity subsided -- as a natural experiment to estimate the effects of the conflict.
  • The relative performance of stocks of firms with a significant part of their business in the Basque Country improved as the truce became credible, and fell when the cease-fire ended, indicating the terrorist conflict was perceived to have a negative impact on the economy.

Taken together, this evidence suggests that sustained terrorist activity has a negative economic impact on the region in which it occurs.

Source: Alberto Abadie and Javier Gardeazabal, "The Economic Costs of Conflict: A Case-Control Study for the Basque Country," NBER Working Paper No. 8478, September 2001, National Bureau of Economic Research.

For NBER text


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