The Impact of Terrorist Shocks on Employment with a Spatial Econometric Approach; Evidence from Selected Countries in the Middle East Region

Document Type : Research Paper

Authors

1 PhD student, Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran.

2 Associate Professor, Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran

3 Assistant Professor, Department of Economics, Shiraz Branch, Islamic Azad University, Shiraz, Iran.

Abstract

Purpose: Today, the issue of employment and unemployment is highly problematic and crisis-prone economically, socially, and politically. The lack of adequate employment in a society can challenge social trust in the government and, consequently, its political legitimacy. Terrorism has a negative impact on the economic performance of countries, but the impact varies from country to country. The negative impact of terrorism is very low in high-income countries, but very high in low-income countries. The reason is that rich countries can use their resources to fight terrorism, but low-income countries are poor and do not have institutions that can respond to the negative impact of terrorism.
The Middle East is a region of great ethnic and religious diversity. The high share of energy supply, the concentration of regional and extra-regional powers in recent years accounts for a high share of terrorist attacks in the Middle East, which, in addition to human losses, have large and negative impacts on investment, tourism, and economic growth in the Middle Eastern countries. On the other hand, factors such as political risk, socio-political unrest, high levels of corruption, political instability, political uncertainty, oil price, and lack of transparency have led to an increase in terrorist attacks and the effects of sustained terrorist attacks in these countries.
Methodology: Spatial econometrics adds spatial effects to the power of periodic or mixed (panel) regression models. Thus, in spatial econometrics, sample information has a spatial component. When the data have a spatial component, two issues can be discussed, including spatial dependence and spatial heterogeneity.
In spatial econometric models, it is necessary to choose the numerical value of spatial directions in order to model spatial responses. For this purpose, we have two sources of assumptions. The first is concerned with the position in the coordinate plane, which is expressed by latitude and longitude and such that the distance of each point in the place or the distance of each observation located at each point can be calculated relative to fixed or central points or observations. The second assumption is that the source of spatial information is neighborhood and proximity, which expresses the relative location in space of a seen peripheral unit compared to other such scales. The degree of proximity and contiguity will be available based on the data obtained from the model of the community under study. According to these data, it can be determined which areas are adjacent to each other. In this case, the scales (areas) that have a neighborhood relationship have a higher degree of connectedness than the units that do not have neighbors. The adjacency matrix contains the elements 0 and 1, where the components on the main diameter are equal to zero and the components outside the main diameter are equal to one if two countries are adjacent to each other, and zero otherwise. Therefore, the objective of the current study is to examine the impact of shocks caused by terrorist activities on employment in the selected countries of the Middle East region during the period 2000-2021 using the spatial econometric model.
Findings and discussion: The results of the research showed that terrorist activities have a negative and significant impact on the level of employment in the affected countries and lead to a decrease in the level of employment and economic activities there in both direct and indirect ways. The result shows that one of the goals of terrorism is to divert the business environment from normal to critical conditions. Based on other research results, the variable of GDP per capita, inflow of foreign direct investment and trade have positive and significant effect on the level of employment in the selected countries of the Middle East, while the variable of inflation rate has negative effect on the employment there.
Conclusions and policy implications: According to the results of the research, in order to control the effectiveness of terrorist activities in the selected countries of the Middle East, the institutional quality, political and economic stability, and the structure of democracy should be enhanced. Therefore, if these conditions are accompanied by the instability of internal politics and low institutional quality, it creates a double effect for increasing terrorist activities. Of course, political instability and the existence of corruption and lack of transparency can contribute to the financing of terrorism too. Therefore, it is recommended that the laws and policies of governments in these countries be more stable and transparent in order to counter the creation of terrorist groups. Moreover, since terrorist shocks impose many economic costs on these countries, the cost of securing the region can be considered as an investment in improving the productive environment. Therefore, increasing the budget to deal with terrorist attacks and their complications, as well as funding regional cooperation to deal with terrorism, can bring significant economic benefits to these countries. Another important policy that is recommended is to provide more guarantees in these countries to protect the interests of investors against terrorist attacks. To this end, government guarantees and legal and economic protections for foreign investments to ensure the stability of their operations can reduce investment uncertainty to some extent. In this regard, even the insurance system of the countries can be activated and support foreign investors against terrorist risks. These joint activities can create common interests in unity and cooperation to fight terrorism. Finally, planning to keep economic and investment areas away from terrorist targets and ensuring the security of foreign investment areas and targets can also reduce foreign investment uncertainty to some extent.

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References

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The Journal of Economic Policy
Volume 17, Issue 33
September 2025
Pages 359-397

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