Foreign Financial Flows and Terrorism In Developing Countries

Amar Iqbal Anwar , Mazhar Mughal (1)

1 CATT - Centre d'Analyse Théorique et de Traitement des données économiques

This study examines the differential response of various international financial flows to post 9/11 episode of terrorism in developing countries. Using monthly data for the period from January 2003 to June 2013, we employ ARMAX technique to analyze the impact of terrorism in Pakistan on the inflows of foreign direct investments (FDI), portfolio investments, migrant remittances and exports receipts. We find that FDI falls substantially as a result of terrorist activity, whereas portfolio investments and exports show little change. In contrast, migrant remittances show a significant increase. These differences are also visible among financial flows coming from major source regions and countries. The results are robust to use of alternative definitions and indicators of terrorism as well as the inclusion of various macroeconomic variables. These findings indicate that foreign private capital flees an economy suffering from terrorism whereas domestic producers stay put. Migrant remittances, however, are the only financial flows that rise in the time of difficulty.

Keywords: Remittances; Portfolio investment; Terrorism; 9/11; FDI; Exports; Developing countries; Pakistan

Domains: Economics and Finance

Amar Iqbal Anwar, Mazhar Mughal. Foreign Financial Flows and Terrorism In Developing Countries. 2013. ⟨hal-01885149⟩