Economics of the Middle East

¶ … Abadie, Alberto & Javier Gardeazabal. "The Economic Costs of Conflict: A Case Study of the Basque Country. September 2002.

Explain the question that the paper addresses.

It seems like common sense that political instability reduces economic prosperity. However, this is difficult to demonstrate empirically, given that all nations experience political instability to some degree during their development, and all nations begin from different starting places, in economic terms, even when they suffer similar terrorist attacks. To answer this question and assess its validity, the authors use the Basque country in Spain as a kind of case study of the effects of terrorism upon a nation.

Unlike many previous studies, their examination is specific to the region, rather than a cross-national comparison. The purpose of this methodology was to reduce the number of variables that might affect economic growth besides terrorism, like previous economic development and access to natural resources. After the outbreak of terrorism, per capita GDP in the Basque Country declined 10% and seemed to widen in response to spikes in terrorist activity (Abadie Gardeazabal, 2002, p.2).

2. Why is it an important question, in your view and the author's view?

The study is important for two reasons. The first, as articulated by the authors, is that the Basque conflict has not been studied very much before. The authors provide a cursory overview of the issues and characterization of the group. Given the relatively short length the article and the fact that they are primarily interested in assessing quantifiable economic data rather than providing a historical overview of the terrorist activity in the region, this section is not very detailed.

The second significant contribution of the article is of its theoretical importance, namely how to examine and quantify the connection of political instability in a region with economic prosperity. The impact of terrorism upon economic stability (which is directly linked to social stability), of course, is of particular concern today upon such nations as Iraq and Afghanistan, as well as in the West.

3. Why and how does this paper contribute to existing literature?

Examining the impact of terrorism within the region, and using Catalonia as a kind of control group is a unique methodology for studying the impact of terrorism, even though the authors do acknowledge it is also possible that Catalonia could have exhibited an abnormally high level of per capita GDP during the 1990's and thus may artificially widen the GDP gap for the Basque Country (Abadie & Gardeazabal, 2002, p. 9). Furthermore, as the Basque Country is a region, not an enclosed nation, the authors experienced some difficulty dividing up stocks into Basque and non-Basque stocks in relation to influences of 'Good News' or 'Bad News' in another of their measurements of economic prosperity, that of stock performance of companies based in the region.

These variables of 'Good News' and 'Bad News' are of course inevitably subjective characterizations; no matter how empirically these factors are quantified, again highlighting the difficulty of the process of quantifying something as subjective as 'effect.'

4. What did you learn from the paper?

Linking terrorism to economic instability would seem like the classic chicken and egg question. It might seem difficult to establish causality because economically instable or impoverished countries lack the ability to afford their citizens opportunities, and thus become hot bets of terrorism. Thus, the economic difficulties might precede the outbreaks of terrorism. This article provides some suggestions how to establish causality as well as a correlation between terrorism and economic conditions.

5. What should be further studied?