Economic Globalization and Transnational Terrorism€¦ · whether economic globalization increases...

10.1177/0022002703262869ARTICLEJOURNAL OF CONFLICT RESOLUTIONLi, Schaub / ECONOMIC GLOBALIZATION AND TERRORISM

Economic Globalization andTransnational Terrorism

A POOLED TIME-SERIES ANALYSIS

QUAN LIDREW SCHAUBDepartment of Political Science

Pennsylvania State University

The effect of economic globalization on the number of transnational terrorist incidents within countriesis analyzed statistically, using a sample of 112 countries from 1975 to 1997. Results show that trade, foreigndirect investment (FDI), and portfolio investment have no direct positive effect on transnational terroristincidents within countries and that economic developments of a country and its top trading partners reducethe number of terrorist incidents inside the country. To the extent that trade and FDI promote economicdevelopment, they have an indirect negative effect on transnational terrorism.

Keywords: economic globalization; transnational terrorism; economic integration; foreign directinvestment

Do countries that are more integrated into the global economy also experience moretransnational terrorist incidents within their borders? In the months following Septem-ber 11, 2001, many people questioned the future viability of an open global economy,believing that economic globalization had contributed to the transnational terroristattacks on the World Trade Center and the Pentagon. Indeed, more than $1.4 billion ofgoods cross the borders of the North American Free Trade Agreement (NAFTA) coun-tries every day (McDonald 2002). In the last year alone, cargo vessels off-loadedroughly 18 million, 40-foot-long cargo containers at American ports, often in singlebatches as large as 8,000. Ports and border crossings around the world have similarlyexperienced an increasing volume of daily shipping and trucking activity. The increas-ing numbers of trucks and container vessels that facilitate international commerce

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AUTHORS’ NOTE: We thank Scott Bennett, Sarah Knight, Michael Koch, Manus Midlarsky, ToddSandler, George Shambaugh, and participants of the Pennsylvania State University International RelationsReading Group for comments and suggestions. We also thank Todd Sandler and Edward Mickolus for helpwith data and Adrienne Lauzon and Andreea S. Mihalache for research assistance. An earlier version of thisstudy was presented at the annual meeting of the International Studies Association, Portland, OR, February2003. The replication data set is available at http://www.yale.edu/unsy/jcr/jcrdata.html.

JOURNAL OF CONFLICT RESOLUTION, Vol. 48 No. 2, April 2004 230-258DOI: 10.1177/0022002703262869© 2004 Sage Publications

increase the likelihood of a terrorist successfully smuggling himself or a weaponundetected across a vulnerable border. Financial markets have also experienced adrastic increase in the volume of cross-national transactions. The daily turnover in theforeign exchange market is nearly $2 trillion, exceeding the value of all traded goodsand services. The growing number of international financial transactions threatens tooverwhelm the enforcement officers who attempt to intercept money meant to sponsoracts of terrorism. Therefore, the risks facing international criminals—including terror-ists—who use global networks to facilitate their operations decrease substantially. Theglobal war on terrorism after September 11 has led to tightened security almost aroundthe world, increasing the costs associated with conducting international business.

In contrast, a small number of scholars and policy makers argue that economicopenness will result in a reduction in transnational terrorism. Proponents of this viewbelieve that economic globalization promotes economic development, which in turnalters the decision calculus of terrorist groups toward a reduction in terrorist activities.Progress in economic development due to trade and capital flows removes one of themain incentives for people to engage in terrorist activities out of desperation and pov-erty. Although this argument is relatively new and less well developed, many policymakers have turned to it for a solution to global terrorism.

Little systematic empirical analysis has been conducted to estimate the effect ofeconomic globalization on transnational terrorism. In this study, we assess empiricallywhether economic globalization increases or decreases transnational terrorist inci-dents inside countries. We consider economic globalization as implying the growingintegration of a country’s economy into the world’s goods and financial and produc-tion capital markets, following the convention in the globalization literature (see, e.g.,Frankel 2000; Bhalla 2002; Garrett 1998; Li and Reuveny 2003). We use economicglobalization and economic integration interchangeably in this study. Although glob-alization is often interpreted to imply global diffusion of technology and culture, wefocus on the impact of economic globalization.

Following Enders and Sandler (1993, 1999, 2000), we define terrorism as the pre-meditated or threatened use of extra-normal violence or force to obtain a political, reli-gious, or ideological objective through the intimidation of a large audience. A transna-tional terrorist incident in a country involves victims, perpetrators, targets, orinstitutions of another country. We choose to focus on transnational terrorist incidents,such as terrorist attacks that are initiated by foreign terrorists against some domestictarget within a country or committed by domestic terrorists against some foreign targetwithin a country.1 The suicide attacks on the World Trade Center and the Pentagon byforeign nationals on September 11 represent one type of transnational terrorist event.The targeting of U.S. banks and bank personnel by Greek terrorists in Greece offers anexample of the other types of transnational terrorism described above. Although trans-national terrorist incidents can affect a country’s integration into the global economy,we focus on how economic globalization affects transnational terrorist incidentsinside a country. To date, there has been no systematic empirical analysis of whethereconomic globalization induces or reduces transnational terrorist incidents within

Li, Schaub / ECONOMIC GLOBALIZATION AND TERRORISM 231

1. The bombing of the Alfred P. Murrah Federal Building in Oklahoma City by Timothy McVeigh in1995 is an example of a domestic terrorist event.

countries. Our analysis fills this gap. The findings obviously bear significant policyimplications for the war on terrorism and the future of the global economy.

Our empirical analysis covers 112 countries from 1975 to 1997. The dependentvariable is the number of transnational terrorist incidents initiated within a country in ayear. The independent variables include a country’s openness to trade, foreign directinvestment (FDI), portfolio investment, a country’s economic development, andthe development of its top economic partner countries. We control for country size,level of democracy, government capability, interstate conflict, temporal persistence,regional variations, and temporal unit effects.

The findings can be summarized as follows. Trade, FDI, and financial capital flowsof a country have no direct positive effect on the number of transnational terrorist inci-dents initiated within the country. However, the economic development of a countryand its top economic partners reduces the number of transnational terrorist incidentswithin the country. To the extent that trade and FDI promote economic development,economic globalization has an indirect negative effect on transnational terrorism.These results are robust to alternative model specifications and statistical estimators.

The rest of the study proceeds as follows. In the first section, we discuss competingarguments on how economic globalization increases or decreases the number of trans-national terrorist incidents within a country. In the second section, we present theresearch design for our empirical analysis. In the third section, we discuss our findingsand conduct a sensitivity analysis, and in the last section, we conclude the article.

HOW DOES ECONOMIC INTEGRATION AFFECTTRANSNATIONAL TERRORISM IN A COUNTRY?

TERRORISTS AS RATIONAL ACTORS

Causal analysis of how economic globalization affects transnational terrorist inci-dents presupposes that terrorists behave rationally. The notion that terrorists are ratio-nal actors merely implies that terrorists are goal oriented, can rank order their prefer-ences, and act to maximize their preferences within budgetary constraints (see, e.g.,Crenshaw 1981; Sandler, Enders, and Lapan 1991). Several implications emerge fromthis interpretation of terrorist behavior. First, terrorist groups often are involved innationalistic, separatist, racist, nihilistic, religious, Marxist, or other economic move-ments. These groups hold particular political, religious, or ideological goals and striveto attain them through long periods of struggle (Crenshaw 1981; Hoffman 1997, 1998;Midlarsky, Crenshaw, and Yoshida 1980; Stohl 1979; Wilkinson 1986). Many terroristgroups are also found to negotiate with authorities to maximize their benefits andrefrain from typically “irrational” behaviors (behaviors not designed to fulfill thestated goal or those that work against the fulfillment of that goal), such as the indis-criminate killing of hostages. Second, terrorist groups allocate resources betweenlegal and illegal activities to maximize utility subject to budgetary constraints(Sandler, Tschirhart, and Cauley 1983). The respective levels of legal and illegal activ-ity carried out by a terrorist group depend on three factors: the relative costs between

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legal and illegal activities, the relative gains between the two types of activities, and thetotal resources available. A rise in the total resources of a group should correspondwith a rise in its overall activities. A decline in the cost per unit of illegal activity shouldresult in a substitution from the legal activity if the relative gains remain the same.Third, rational terrorist groups not only maximize their preferences but also react toconstraints. It is useful to distinguish between specific and structural constraints. Spe-cific constraints, such as the implementation of metal detectors at airports, affect onlythe costs associated with an individual legal or illegal mode of operation, merely caus-ing substitution among the various modes of operation (Enders and Sandler 1993). Incontrast, structural constraints such as the end of the cold war (Enders and Sandler1999) affect the relative costs of all modes of legal and illegal activities, causingoverall increases or decreases in terrorist activity within a state.

These conceptual expectations of rational terrorist behaviors appear to be substan-tiated empirically. Gurr (1979) and Mickolus (1979) show that terrorists employ moreexpensive and riskier modes of attack less often than less expensive and less riskymodes of attack. Jenkins, Johnson, and Rondfeldt (1977) suggest that the high successrates of hostage missions indicate that terrorists can be rationally expected to favormodes of attack that are likely to lead to the attainment of a particular goal. The highsuccess rates associated with this type of logistically complex activity also signify thatterrorist groups effectively plan and execute operations with success as a goal, a fur-ther indication of rationality. The experience of the Greek government offers yetanother example. As the Greek government took action to limit terrorism withinGreece, the frequency of terrorist events in Greece declined over time while terroristorganizations conducted an increasing number of operations elsewhere in Europe. Theincreased deterrence by the Greek government changed the costs associated with ter-rorism in one state and affected the relative cost of terrorism in other states (Sandlerand Lapan 1988; Sandler 1997).

Enders and Sandler (1993) show that an increase in the cost of one mode of terroristoperation across the entire international system leads to long- and short-run changes inthe global frequency of other modes. For example, the worldwide implementation ofmetal detectors in airports led to a decrease in the number of worldwide skyjackingsbut resulted in an increase in the use of other similar modes of attack. The higher rela-tive price of skyjackings forced terrorists to substitute other logistically similar modesof attack, most notably kidnappings and barricade and hostage-taking missions. Inaddition to specific antiterrorist efforts, terrorist activities are also affected by struc-tural constraints. Eyerman (1998) tests competing arguments on how regime type rep-resents a structural constraint that affects the overall level of illegal terrorist activityexperienced by a state. The breakup of the former Soviet Union provides anotherexample of a structural constraint. Following the breakup of the Soviet Union, the totallevel of terrorist resources fell worldwide, as the funding previously provided by theSoviet Union to terrorist organizations slowly dried up. This overall decline in the levelof resources controlled by terrorist organizations resulted in a change in the relativecosts associated with both illegal and legal operations. The cost of illegal activity roseas the resources to fund such activity disappeared, causing the relative cost of legal


activity to fall. This resulted in a decrease in both the absolute and relative levels ofterrorism during the last three-quarters of 1994 (Enders and Sandler 1999).

In addressing these issues related to the rationality of terrorist behaviors, the previ-ous literature on transnational terrorism has set the stage for analyzing how economicglobalization affects transnational terrorist incidents. For economic globalization toaffect such incidents within a country, it has to affect the incentives of terrorists, thestructural constraints on terrorist behaviors, or both. Below, we discuss how economicglobalization can increase or reduce transnational terrorist incidents within a country.

POSITIVE EFFECT OF ECONOMIC GLOBALIZATIONON TRANSNATIONAL TERRORISM

Many policy makers, journalists, and scholars believe, especially after the terroristattacks of September 11, that globalization causes an increase in the frequency oftransnational terrorism. For example, “the World Trade Center (attack) exposed thedark side of global interconnections: the ease with which the West’s enemies and theirresources can move around the world” (Is it at risk? 2002). Economic globalizationcan act as a structural constraint that alters the relative costs between legal and illegalactivities and affects the decision calculus of transnational terrorists. More specifi-cally, as globalization increases, the cost of illegal activity declines relative to the costof legal activity, and the overall level of terrorism increases. This decreased risk resultsfrom the expansion of the trade, financial, and production investment networks in theglobal economy.

Computers, chips, and satellites change significantly the structure of internationalfinance, reducing the risks associated with illegal transnational financial transactions(Strange 1998, 25). The “digitization” of money allows the wide use of credit cardsand smart cards, facilitates the instantaneous transfer of funds across borders, anddecreases the probability of being caught in transporting and using illegally obtainedfunds. The integration of the global financial market also leads to an increase in thesheer volume of financial transactions. As the cost of financial transactions decreases,their volume increases significantly. Monetary authorities are less and less able to reg-ulate transactions effectively because those transactions have multiplied so rapidly innumber (Strange 1998, 25). The huge volume of financial transactions that occur on adaily basis—more than $1 trillion worth—makes tracing terrorist funds an “extremelydifficult task” (Weintraub 2002). Financial globalization therefore limits the area ofcontrol that governments have over financial matters, as foreign exchange transactionsbecome practically untraceable (Kobrin 1997). The decreasing effectiveness of gov-ernments to monitor financial transactions decreases the risks in the illegal transac-tions used to sponsor terrorist operations.

Similarly, as the volume of international trade increases, the risk associated withillegal trading also decreases. Trade between the United States, Canada, and Mexico,for example, has more than doubled over the past decade to at least $1.4 billion worth aday. Over the same period, the number of customs agents responsible for discoveringcontraband or illegally traded goods has remained the same. Statistics concerningmaritime shipments demonstrate the phenomenon even more clearly. Of the 18 mil-


lion cargo containers that arrive by sea each year in the United States, only 2% to 10%of them are searched (McDonald 2002). Other sources claim that the lower estimate ismuch more accurate (The Trojan box 2002). These figures allow a numerical value tobe placed on the level of risk associated with illegal international trade. Obviously, a2% chance of discovery is much too low to seriously prevent determined terrorist orga-nizations from smuggling weapons of mass destruction across international borders orfrom conducting profitable illegal trade to finance terrorist operations.

Transnational terrorists also often take advantage of the international trade networkto market goods or services in an effort to marshal resources with which to carry outtheir criminal activities. Terrorist organizations often rely on the international tradenetwork to trade contraband to fund their various operations. The increasingly fluidnature of the global investment and distribution networks makes such trade increas-ingly less risky and therefore much more likely (Matthew and Shambaugh 1998). Forinstance, Osama bin Laden’s Al Qaeda terrorist network relied on illegal as well aslegal international trade to fund its operations (Shahar 2001).

Governments, however, are not well equipped to deal with these changes that facili-tate illegal international transactions. For one thing, the number of enforcement offi-cers required to perform proper regulatory and monitory functions is inadequate. “Theglobal financial system provides many more opportunities than it can ever hope toforestall or block . . . law enforcement is playing a game of catch up which it is almostcertainly destined to lose” (Strange 1998, 128). Bank examiners and governmentinvestigators simply cannot supply the necessary man-hours to effectively monitor theenormous volume of transactions that take place daily (Strange 1998). The failure ofgovernments to provide appropriate levels of enforcement stems not only from theenormous volume of transactions but also from the enormous salary gap for the highlyskilled information technology specialists required to fill such positions. As technol-ogy continues to drive economic expansion, the government is less competitive finan-cially than the private sector in recruiting the high-tech talent (Naím 2000). The gov-ernment is limited in its ability to monitor and sanction tech-savvy money-launderers,transnational terrorists, drug traffickers, and other international criminals who rely onthe international financial market.

The international banking system also tends toward secrecy, further facilitating thesustained symbiotic relationship between the international banking industry and inter-national criminals (Strange 1998). As banks compete internationally for clients, theymust stress their historic pledge to protect the privacy of their customers. Governmentdemands on banks to disclose the illegal banking activities of their customers repre-sent “sticks, without corresponding carrots” (Strange 1998, 131). Banks, threatenedwith punitive action for failing to disclose any illegal actions by their customers, face acatch-22. If they decide to play above board and deny privacy to the suspicious clien-tele, they risk losing profit and alienating their entire customer base. Therefore, banksare likely to continue to protect the privacy of their customers and hence implicitlyfacilitate the continued use of the international financial system by transnational ter-rorists. An article in The Wall Street Journal (Phillips 2002), which discusses the cur-rent difficulties of the Bush administration to gain compliance from European banks inaiding the U.S. war on terrorism, suggests that this is indeed the case; international


banks are unlikely to disclose the private information of their clientele. Therefore, therelationship between states and banking interests demonstrates yet another way thatglobalization reduces the costs of operations for transnational terrorist organizations.Matthew and Shambaugh (1998) emphasize the link between the international bank-ing community and transnational terrorist organizations, arguing that only throughcooperation with the international banking community can governments hope to“disrupt the transnational web of incentives, opportunities, and capabilities enough todiscourage terrorism.”

Economic globalization may also positively affect the level of transnational terror-ism in a state by increasing the density of desirable targets present within that state.According to Midlarsky, Crenshaw, and Yoshida (1980), most victims of transnationalterrorism are Western. The increased presence of Western targets that necessarilyaccompanies expanding globalization, therefore, is likely to increase the probabilitythat a terrorist group will choose a particular state as the location of an attack. In otherwords, holding other effects of globalization constant, economic globalization raisesthe probability of transnational terrorism simply by increasing the density of suitabletargets in more integrated states.

Examples of suitable targets, placed in states around the globe, abound. Multina-tional banks and corporations operated by individuals of many nationalities conductbusiness, send representatives, and maintain offices in multiple countries. Most terror-ist activities in South America during the late 1960s and early 1970s were directedagainst American or European business personnel employed by American corpora-tions (Midlarsky, Crenshaw, and Yoshida 1980). The extent to which many business-people travel internationally also increases the density of specific national targets invarious locations. Targets representing national governments also abound and havefrequently been the target of terrorist attack (Enders and Sandler 1999).

NEGATIVE EFFECT OF ECONOMIC GLOBALIZATIONON TRANSNATIONAL TERRORISM

Advocates of the negative relationship between economic globalization and terror-ism claim that economic globalization removes an important cause of transnationalterrorism. The emergence of this argument is quite recent, mostly as an immediatereaction to the terrorist events of September 11. It is not surprising that the argument isnot as well developed as those on the positive effect of globalization, nor has itreceived as much attention from students of transnational terrorism. Economic global-ization is argued to reduce transnational terrorist incidents because it facilitates eco-nomic development, which in turn removes an incentive to engage in terrorism.

A primary cause of transnational terrorism is underdevelopment and poverty, anargument that recently became popular among but was rarely formalized by policymakers and scholars (see, e.g., Biden 2001; Bush 2002; Johnston 2001; Merritt 2001;Rice 2001; Tyson 2001). Poor economic conditions create “terrorist breedinggrounds,” where disaffected populations turn to transnational terrorist activities as asolution to their problems. In Marwan Bishara’s words, “When people feel so inferiormilitarily and economically, they adopt asymmetric means—not the usual means—to


get what they want” (Johnston 2001). In addition, poverty, underdevelopment, andinstability are often associated with those states either willing to provide safe haven forterrorists or unable to successfully expel terrorists from their borders. Poverty and itsaccompanying instability in Afghanistan created the conditions that allowed theTaliban to gain power, a situation that in turn led to the provision of sanctuary for AlQaeda and Osama bin Laden. Consistent with this argument, Bush (2002) claims in awidely cited speech, “We fight against poverty because hope is an answer to terror.”

Recently, Krueger and Maleckova (2002) assessed empirically the link betweenpoverty or low education and participation in politically motivated violence and terror-ist activities. They show that the occurrences of hate crimes, which resemble terrorismin spirit, are largely unrelated to economic conditions. Then, based on a public opinionpoll conducted in the West Bank and Gaza Strip, they show that Palestinians who havehigher education or living standards are just as likely to support violence againstIsraeli targets. Next, they conducted a statistical analysis of participation in Hezbollahin Lebanon and found that education and poverty do not explain whether individualschoose to become martyrs for Hezbollah on suicide missions. Those who have a livingstandard above the poverty line or a secondary school or higher education are actuallymore likely to participate in Hezbollah. They also found that Israeli Jews involved interrorist activities in the early 1980s were well educated and with well-paying jobs.Finally, they show that there is mixed evidence on the effect of real gross domesticproduct (GDP) growth on the number of terrorist acts each year from 1969 to 1996 inIsrael. Krueger and Maleckova conclude that economic conditions and education arelargely unrelated to individual participation in and support for terrorism.

Although interesting and innovative, the study by Krueger and Maleckova (2002)needs to be put into perspective. First, most of their cases come from a region that ischaracterized by historical tension, hatred, and military violence. Their conclusionmay not generalize across all countries. Second, the positive relationship between aHezbollah suicide bomber’s education and suicide missions may merely reflect thatterrorist leaders use education as a screening device to pick the most competent candi-date possible. Without controlling for the job opportunities of the suicide bombers,Krueger and Maleckova are not directly testing their hypothesis.2 Third, the lack ofcorrelation between poor economic conditions and terrorist activities at the individuallevel may not be inferred to hold at the country level. Better educated people, livingunder good conditions in the poor countries, are also better informed about conditionsin other rich countries than their poor countrymen and hence are more conscious of thecomparison between the rich and their own countries. The sense of relative deprivationcan provide a strong incentive for them to engage in terrorist activities as the last resortto change the conditions of their own countries. Their individual behaviors can leadone to observe at the aggregate level more terrorist incidents in the poor countries.Hence, we concur with Krueger and Maleckova that whether economic developmentis related to transnational terrorism at the country level should be assessed in cross-country analyses.


2. We thank a referee for suggesting this point.

For economic globalization to reduce transnational terrorism, globalization has tobe able to promote economic development and reduce poverty. Many policy makershave endorsed the positive effect of globalization on development. Canadian FinanceMinister Paul Martin (2001) argues that participation in the global economic systemgreatly enhances a state’s economic development. President Bush (2002) also says,“The vast majority of financing for development comes not from aid, but from tradeand domestic capital and foreign investment. . . . So, to be serious about fighting pov-erty, we must be serious about expanding trade.” U.S. Federal Reserve Board Chair-man Alan Greenspan (1997) also claims that “the extraordinary changes in globalfinance on balance have been beneficial in facilitating significant improvements ineconomic structures and living standards throughout the world.” Leaders of the sevenmajor industrial democracies assert in the joint communiqué for the 1996 G7 Summitthat “economic growth and progress in today’s interdependent world is bound up withthe process of globalization” (Lyon G7 Summit 1996).

Scholars, however, have relatively more diverse opinions about the effect of eco-nomic globalization on development. On one hand, trade was considered to hindergrowth in the developing countries in the 1950s. More recently, Rodrik (e.g., 1992,2001) has raised doubt about the positive effect of trade openness on economic growthfor the developing countries. Trade is not sufficient to generate higher growth in thesecountries, and domestic factors are more important than economic openness. On theother hand, many studies (e.g., Edwards 1993; Frankel and Romer 1999; Stiglitz andSquire 1998) have shown that trade openness does promote economic development.The effects of portfolio and foreign direct investments are also debated in the litera-ture. Although the earlier dependency arguments and the later contagious financialcrises in the 1990s led to varying degrees of opposition or reservation concerning capi-tal market integration, there have been equally strong, if not stronger, theoretical argu-ments and empirical evidence showing that financial and production capital marketintegration benefits the economic development of countries in general (see, e.g.,Graham 2000; Obstfeld 1994; Quinn 1997).

Although it is certainly not feasible to expect to settle definitely the controversyover the effect of economic openness on development, it suffices to note that the possi-ble negative effect of economic globalization on transnational terrorism may beachieved by promoting economic development for the purpose of this analysis. Thenegative effect may be realized through two channels. As a country expands its trade,FDI, and financial capital, its growing integration into the global economy arguablyimproves not only its own economic conditions but also those of its economic partnercountries. Economic development in its own national economy removes an incentivefor its citizens to engage in transnational terrorist incidents against foreign targetswithin the country. In addition, economic progress in its major partner countriesreduces the likelihood that their citizens will cross borders to this country to engage interrorist activities. If economic globalization promotes development, a country’s eco-nomic integration affects simultaneously the development of itself and its major eco-nomic partners. Although a country’s own development and that of its major partnersaffect transnational terrorist incidents inside the country, following the same


theoretical logic, their effects are distinct empirically and should be separated inanalysis.

HYPOTHESES

The purpose of this study is to separate empirically the possible positive effect ofeconomic globalization on transnational terrorism from its possible negative effect.Based on the above discussions, the following testable hypotheses are formulated forthe empirical analysis below.

Hypothesis 1: A country’s economic integration in terms of trade, FDI, and financial capitalhas a positive effect on the number of transnational terrorist incidents within its borders.

Hypothesis 2: Economic development of a country decreases the number of transnationalterrorist incidents within the country.

Hypothesis 3: Economic development of a country’s economic partner countries reduces thenumber of transnational terrorist incidents within the country.

RESEARCH DESIGN: DATA, VARIABLES, AND METHOD

In this section, we design an empirical analysis that separates and tests the potentialpositive and negative effects of economic globalization on transnational terrorist inci-dents. The unit of analysis is the country-year. The estimation sample covers 112countries from 1975 to 1997. A list of all the countries is in Appendix A. Because thearguments on the effects of economic globalization are expected to apply to compari-sons both cross-nationally and over time for individual countries, we employ a pooledtime-series, cross-sectional (TSCS) design.

DEPENDENT VARIABLE

The dependent variable is the number of transnational terrorist events that occur ina country in a year. Data are collected from the International Terrorism: Attributes ofTerrorist Events (ITERATE) data sets from 1968 to 2000 (Mickolus 1982; Mickoluset al. 1989, 1993, 2002). The estimation sample for the statistical model is smaller thanthe size of the data on the dependent variable because of data limitations on severalindependent variables.

The ITERATE data involve several research design issues. First, the data are com-piled from publicly available media sources. Therefore, states with better developed orless government-controlled media may be overreported, whereas those with lessdeveloped or more government-controlled media may be underreported. TheITERATE data set, however, partially resolves this bias by drawing from both nationaland international sources and capturing events that government-controlled nationalmedia sources may have failed to report (Sandler 1995). However, it is worth notingthat the bias may still lead one to find more incidents associated with more developedor more democratic countries. This implies that one may have reasonably strong confi-


dence in results that find that more developed or less government-controlled statesexperience fewer transnational terrorist incidents.

A second design issue involves the method used to differentiate between the start-ing and ending locations of a terrorist event. Whereas in most cases, the starting andending locations of a particular event are identical, in roughly 5% of all incidents, thestarting and ending locations differ. Differences in starting and ending locations typi-cally result from hijackings, in which a terrorist group hijacks a plane or other vehiclein state A and uses said vehicle to travel to state B. In this analysis, we focus only onthose countries in which transnational terrorist incidents start. Because such a smallportion of the cases have different starting and ending locations, their effect on the esti-mation results is likely to be small. Furthermore, the theoretical arguments are moreapplicable to countries where these incidents first occur because, although a terroristmay rationally choose a starting location based on the above discussed theory, randomfactors outside of the terrorist’s control may influence where an incident ends.

SEPARATING POSITIVE AND NEGATIVE EFFECTSOF ECONOMIC GLOBALIZATION

We use five indicators to separate empirically the positive and negative effects ofeconomic globalization on transnational terrorism. Three indicators—trade, foreigndirect investment, and financial capital—capture the positive effect of a country’s eco-nomic integration into the global economy, as hypothesis 1 suggests. The remainingtwo indicators measure a state’s own and its top partners’ economic development.They represent the indirect, negative effect of integration on transnational terrorismvia economic development, as hypotheses 2 and 3 suggest. The rationale is that withthe negative effect of economic globalization controlled for by economic developmentvariables, the globalization variables themselves reflect the leftover positive effect.Hence, we expect the globalization variables to be positive and significant accordingto hypothesis 1, whereas we expect the economic development variables to be negativeand significant according to hypotheses 2 and 3.

The three direct indicators of economic globalization are trade openness, foreigndirect investment, and financial capital flows. In the globalization literature, botheconomists and political scientists have widely used these three indicators as standardmeasures of economic globalization and national integration into the global economy(see, e.g., Frankel 2000; Bhalla 2002; Garrett 1998; Li and Reuveny 2003). They cap-ture, respectively, three distinct and significant dimensions of economic globalization:the cross-border flows of goods and services, production capital, and financial capital.They also reflect the degree of a country’s capital account and exchange rate restric-tions that constrain terrorists’ ability to move money around to finance their opera-tions.3

More specifically, TRADE denotes the annual sum of the value of imports andexports of the goods and services of a country, as a percentage of the country’s GDP.


3. Although these indicators do not measure directly the use of informal economic transfers (such asIslamist charities and labor remittances) that terrorists also use to finance their operations, they should corre-late with and hence indirectly capture the level of ease of such informal economic transfers.

FDI is the sum of the absolute values of inflows and outflows of the foreign directinvestments of a country, as a ratio to the country’s GDP. PORTFOLIO is the sum of acountry’s financial flows in equity securities and debt securities, as a percentage of thecountry’s GDP. Each variable is divided by GDP to reflect its relative importance in thenational economy. ECONOMIC DEVELOPMENT denotes the logged yearly GDPper capita in purchasing power parity adjusted to international prices. Data for all fourvariables are taken from the World Development Indicators (World Bank 2002).PARTNERS’ DEVELOPMENT denotes the logged yearly GDP per capita (PPP)average of the largest eight destination countries of a country’s exports.4 This variablecaptures the economic conditions of a country’s major economic partners. Becausecapital flows often follow the flows of commodities and services, and because data onbilateral capital flows are hard to obtain or limited, we use goods flows to proxy theeffect of a country’s trade and capital flows on its partner countries. The variablePARTNERS’ DEVELOPMENT indicates how the economic development of a coun-try’s economic partners, which is affected by trade and investments with this country,can remove an incentive for citizens from those partner countries to engage in terroristactivities in this country. The implicit assumption is that a country’s trade and invest-ments are likely to affect its major economic partners the most. Data on PARTNERS’DEVELOPMENT were computed using data on GDP per capita from the WorldDevelopment Indicators (World Bank 2002) data set and the bilateral trade data fromthe International Monetary Fund (IMF) Direction of Trade Database. Because terroristincidents can affect, in reverse order, trade, FDI, financial capital, and economic devel-opment, we control for this possibility by lagging these five variables 1 year behind thedependent variable. Because the hypotheses are directional, we apply one-tailed teststo the coefficients of these five variables.

CONTROL VARIABLES

We include the following control variables in the statistical model. SIZE denotesthe size of a country, measured as its total population. It is logged to control for skeweddistribution and lagged 1 year behind the dependent variable. The size of a country isoften positively associated with terrorist incidents. Larger countries tend to be moreheterogeneous, where alienated segments of the population may resort to terrorism toinfluence their governments. In addition, according to Eyerman (1998), a larger coun-try is likely to experience more attacks due to the increased difficulty of successfullypolicing a larger population.

DEMOCRACY denotes the level of democracy in a country from the POLITY IVdata set (Marshall and Jaggers 2000). This widely used data set provides a compositeindicator of democracy on an annual basis from 1800 to 1999, based on the differencebetween a democracy index (DEMOC) and an autocracy index (AUTOC). The 10-point democracy index (DEMOC) measures its democratic characteristics. The 10-point autocracy index (AUTOC) measures the autocratic characteristics of the regime.The composite measure of democracy ranges between –10 (the most autocratic


4. Statistical results are robust whether we look at top 8, 10, or 15 export destination countries.

regime) and 10 (the most democratic regime), which is frequently used in many stud-ies on democracy (see, e.g., Londregan and Poole 1996). Because terrorist incidentsmay affect the level of democracy in a country, the variable is lagged 1 year behind thedependent variable. The literature suggests contradictory theoretical expectations ofthe effect of democracy (see, e.g., Eubank and Weinberg 1994, 2001; Sandler 1995;Eyerman 1998). On one hand, democracy provides access for citizens to express andresolve their grievances, removing the need to resort to terrorist activities. On the otherhand, by guaranteeing citizens’ political rights and civil liberties, democracy allowsterrorist groups much greater room to maneuver, lowering the costs and risks forcommitting terrorism.

GOVCAPABILITY denotes the capability or resources a government controls thatmay be applied to control terrorist activities relative to the other countries of the world.Because terrorist groups seek to achieve their goals with minimum costs, they oftenavoid countries that are more capable of preventing and controlling terrorist incidentsand choose to act in those countries that are relatively less capable (Sandler and Lapan1988; Sandler 1997). GOVCAPABILITY is measured as an annual composite per-centage index of a state’s share of the world’s total population, GDP per capita, GDPper unit of energy, military manpower, and military expenditures. It is computed usingdata from the World Development Indicators (World Bank 2002) data set and lagged 1year behind the dependent variable. It is worth noting that this variable captures statemilitary and economic strength in a traditional sense and hence represents merely aproxy for potential resources the government can use to control terrorism.

PAST INCIDENTS denotes the number of transnational terrorist events thatoccurred in a country in the previous year. This variable helps to capture the persis-tence of terrorist incidents within a country or the persistence of the absence of terror-ist incidents in a country. Terrorist organizations tend to operate continuously within achosen country rather than stop their activities after one event due to cost consider-ations. A country that has experienced some terrorist incident is likely to experiencemore of such attacks. According to Midlarsky, Crenshaw, and Yoshida (1980), theactivity of one group may encourage the future activities of other groups within thatstate, thereby producing a greater probability of an increased number of events in thefuture. In addition, countries that experience long periods without terrorist activitiesmay continue to enjoy an absence of such activity because it can be prohibitivelyexpensive for terrorist groups to organized terrorist activities in new countries. Theinclusion of the PAST INCIDENTS variable also helps to control for the effect ofpotentially relevant but omitted structural variables and to deal with possible serialcorrelation in the error term. Many studies in political science recommend and adoptthis modeling strategy (see, e.g., Beck and Katz 1995; Burkhart and Lewis-Beck 1994;Li and Reuveny 2003).

CONFLICT is coded 1 if a state is engaged in interstate military conflict or war and0 otherwise. This measure captures the possibility that a state’s external conflictengenders enmity and causes foreign terrorists to attack its domestic targets or domes-tic terrorists to attack foreign targets within the country. Data are from Gleditsch et al.(2002).


Transnational terrorist incidents are unevenly distributed geographically. Someregions experience a concentration of terrorist incidents, whereas other regions are rel-atively tranquil. To control for these systematic regional variations, we construct fiveregional dummy variables: Europe, Middle East, Africa, Asia, and North and SouthAmerica. We exclude Middle East from the statistical model as the reference category.The estimate for each of the other four regions represents a comparison between thatregion and the Middle East.

Transnational terrorist incidents exhibit particular unit effects over time. Someyears are relatively more tranquil, whereas others are characterized by some extremelylarge number of terrorist incidents. Such yearly unit effects often need to be controlledfor in the pooled design. In addition, Enders and Sandler (1999) also show that globaltransnational terrorist incidents have declined due to the end of the cold war. Mean-while, economic globalization and the per capita income have been rising and expand-ing since 1950 in the global economy (e.g., Frankel 2000; Bhalla 2002). Transnationalterrorist incidents and economic globalization may trend in opposite directions in thesample period. We therefore include year dummy variables to control for year-specificeffects. Although these variables make it harder to find statistically significant results,they ensure that the statistically significant results are nonspurious.

STATISTICAL METHOD

Because the dependent variable is an event count variable, ordinary least squares(OLS) estimates can be inefficient, inconsistent, and biased (Long 1997). The Poissonregression model is often applied to model event counts, in which the mean of the Pois-son distribution is conditional on the independent variables. But the Poisson regres-sion model assumes that the conditional mean of the dependent variable equals theconditional variance. This assumption, which is often violated, causes underestimatedstandard errors and spurious statistical significance. Therefore, we apply the negativebinomial regression, which allows the conditional variance of the dependent variableto exceed the conditional mean by adding a dispersion parameter to model theunobserved heterogeneity among observations.

Statistical models for the pooled time-series, cross-sectional data often sufferheteroskedasticity and serial correlation in the error term. To deal with these potentialproblems, we estimate robust standard errors clustered over countries. These esti-mated standard errors are robust to both heteroskedasticity and to a general type ofserial correlation within any cross-sectional unit (Rogers 1993; Williams 2000). Theinclusion of the lagged incidents and the year dummies also helps to absorb temporaldependence in the data.

FINDINGS AND IMPLICATIONS

In this section, we discuss the statistical findings. Table 1 presents results for thebenchmark model 1 and its variants for the robustness check. Table 2 includes addi-


(text continues on p. 248)

TAB

LE

1

Eff

ects

of

Eco

nom

ic G

loba

lizat

ion

on T

rans

natio

nal T

erro

rist

Inc

iden

ts w

ithin

Cou

ntri

es, 1

975-

1997

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

Mod

el 5

Mod

el 6

Mod

el 7

Mod

el 8

Tra

de–0

.001

–0.0

002

–0.0

01–0

.001

–0.0

01–0

.001

–0.0

02(0

.48)

(0.1

3)(0

.36)

(0.4

4)(0

.60)

(0.3

6)(1

.28)

*FD

I0.

019

0.01

6–0

.007

0.01

90.

024

0.02

00.

035

(0.8

0)(0

.70)

(0.2

5)(0

.82)

(1.0

4)(0

.87)

(0.9

9)Po

rtfo

lio–0

.018

–0.0

19–0

.017

–0.0

21–0

.018

–0.0

22–0

.018

–0.0

50(0

.97)

(1.0

9)(0

.94)

(1.1

3)(0

.98)

(1.2

7)(1

.00)

(3.2

7)**

Eco

nom

ic d

evel

opm

ent

–0.2

15–0

.204

–0.2

15–0

.236

–0.1

87–0

.130

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93(2

.16)

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.09)

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ners

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men

t–0

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23–0

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44–0

.725

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347

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cy0.

043

0.04

30.

043

0.03

50.

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0.03

50.

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5(4

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over

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ty0.

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0.41

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urop

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91–0

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(1.2

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(1.5

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(0.2

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244

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–0.4

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1,99

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5.11

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3.6*

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0.1*

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TAB

LE

2

Eff

ects

of

Eco

nom

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loba

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ion

on T

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natio

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rist

Inc

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: Alte

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ific

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ns

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el 1

Mod

el 2

Mod

el 3

Mod

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Mod

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Mod

el 6

Mod

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Tra

de–0

.001

–0.0

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–0.0

01–0

.001

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.002

(0.3

8)(0

.46)

(0.3

8)(0

.36)

(0.5

1)(0

.32)

(0.9

1)FD

I–0

.007

–0.0

09–0

.039

–0.0

07–0

.004

–0.0

05–0

.005

(0.2

7)(0

.37)

(1.3

3)(0

.27)

(0.1

4)(0

.19)

(0.1

5)Po

rtfo

lio–0

.006

–0.0

05–0

.006

–0.0

11–0

.006

–0.0

11–0

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36(0

.35)

(0.3

2)(0

.31)

(0.6

6)(0

.34)

(0.5

9)(0

.35)

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Eco

nom

ic d

evel

opm

ent

–0.1

28–0

.137

–0.1

28–0

.138

–0.0

60–0

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–0.3

91–0

.392

–0.3

95–0

.390

–0.3

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.32)

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364

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203

0.19

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–0.2

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–0.2

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(0.9

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**

246

Am

eric

as–0

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–0.3

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–0.1

93–0

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–0.2

90–0

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52(1

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0)(1

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Afr

ica

–1.0

39–1

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34–0

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–1.0

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(3.9

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1,99

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1,99

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1,99

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247

tional robustness tests based on alternative model specifications. Below, we first focuson the results of the benchmark model and then discuss the sensitivity analysis.

In model 1, the test of the dispersion parameter indicates that the conditional vari-ance of the dependent variable exceeds its conditional mean at a statistically signifi-cant level. It justifies the use of the negative binomial model over the Poisson regres-sion. The Wald test of the model fit is statistically significant at the 1% level as well.

Now we turn to the key independent variables in model 1. The globalization vari-ables do not have the positive effect on transnational terrorist incidents expected byhypothesis 1. Trade openness and portfolio investments are both negative and FDI ispositive, but none of the three coefficients is statistically different from 0. One mayargue that the lack of statistical significance may have resulted from collinearityamong the globalization variables. To assuage this concern, we test the joint hypothe-sis that all three variables have no effect simultaneously. The chi-square statistic of 1.6is far from rejecting the hypothesis. In addition, the correlation matrix in Appendix Bdoes not show unreasonably high correlation among these variables (highest correla-tion = 0.48 between FDI and trade). Therefore, the lack of significance does not resultfrom high collinearity. Rising integration of a country into the world’s goods and capi-tal markets is not associated with an increasing number of transnational terrorist inci-dents within the country. The finding offers no support for the argument that greatereconomic integration of a country causes more transnational terrorist incidents withinits borders.

The indirect, negative effects of the globalization variables, as hypothesized inhypotheses 2 and 3, receive support in model 1. A country’s GDP per capita, measur-ing its own level of development, is statistically significant and negative, consistentwith hypothesis 2. As a country becomes more developed, the number of transnationalterrorist incidents decreases within its borders. In addition, the average level of devel-opment of the country’s top export destination countries, measured by their averageGDP per capita, is also statistically significant and negative. Consistent with hypothe-sis 3, as the level of development in a country’s economic partner countries improves,the number of transnational terrorist incidents decreases within the country. Thisimplies that growing economic integration between the country and its economic part-ners can help to remove some incentive for foreign terrorists from those partnercountries to attack targets within this country.

Based on the coefficients of model 1, a 1% increase in the GDP per capita of a coun-try decreases the expected number of transnational terrorist incidents within the coun-try by 19.3%, holding all other variables constant. A 1% increase in the average GDPper capita of the country’s top eight export destination countries decreases theexpected number of transnational terrorist incidents within this country by 47.5%,holding other variables constant. Although the globalization variables have no directpositive effect, their indirect negative effect through influencing economic develop-ment appears large and important.

We also find interesting results for the control variables. The size of a country ispositively associated with the number of transnational terrorist incidents inside thecountry. As expected, larger countries are exposed to greater risks of transnational ter-rorist incidents than smaller countries. A 1% increase in a country’s population size is


associated with a 40.6% increase in the expected number of transnational terroristincidents within the country.

The level of democracy variable is positive and statistically significant. As thedemocracy score of a country increases by 1 point, its expected number of transna-tional terrorist incidents increases by 4.4%, which is not a very substantial increase.The evidence is consistent with the argument that democracy, by ensuring the politicalrights of its citizens, gives terrorist groups more freedom in association, reducing thecosts of their engaging in terrorist activities. Eubank and Weinberg (1994, 2001) alsofind that democracy is positively associated with terrorism. There exists, however, thepossibility that the positive result of democracy may have been amplified by theITERATE data’s reliance on open media sources for data collection on the dependentvariable (see, e.g., Sandler 1995). Maybe incidents in democratic countries are moreoften reported in the media as a result of the fewer restrictions that democratic coun-tries place on the media. Because of these limitations, we should interpret the positiveeffect of democracy with caution. More future research is in order.

The government capability variable is statistically significant but positive. Theresult implies that although more capable governments may have more resources tocontrol terrorist incidents, they also constitute more effective and valuable targets forterrorist groups. The ability to engage in terrorist activities against more capable gov-ernments gives a terrorist group more media coverage and wider influence. Althoughterrorist groups may have to pay higher costs to act against more capable governments,the returns can be expected to be much higher as well.

The past incidents variable is statistically significant and positive, consistent withthe expectation that both the presence and the absence of terrorist activities tend to bepersistent. Terrorist groups, once operational organizationally, tend to engage in activ-ities continuously. Similarly, terrorist groups may experience greater difficulties insetting up operations in countries that rarely experience terrorist incidents. The inter-state military conflict variable is positive as expected, but it is not statisticallysignificant.

Results for the regional variables suggest certain patterns in the geographical distri-bution of terrorist incidents. With the Middle East serving as the reference group,Europe, Asia, America, and Africa all have a negative sign, and they are all statisticallysignificant except for Europe. The Middle East appears to have the highest concentra-tion of transnational terrorist incidents, with Europe ranking in second place. Theother regions experience fewer transnational terrorist incidents than the Middle Eastand Europe. Asia, America, and Africa experience 65%, 33.3%, and 69.1% fewer inci-dents, respectively, than the Middle East.5

Are these results of model 1 robust to alternative model specifications or other vari-ations? Models 2, 3, 4, 5, 6, and 7 present results from variants of model 1. Models 2, 3,and 4 investigate further the possible influence of collinear variables by excluding


5. The effect of the end of the cold war is subsumed by the year dummy variables. The dummy vari-ables for the years 1991 to 1997 are not statistically significant. In addition, a dummy variable representingthe end of the Cold War is statistically significant in a model excluding the year dummy variables. Theseresults are consistent with Enders and Sandler’s (1999) finding that the end of the cold war has led to adecline in transnational terrorist incidents worldwide.

FDI, trade openness, and economic development variables sequentially. Statisticalinferences for the globalization and development variables, whenever present in themodels, remain consistent with those for model 1. Trade, FDI, or portfolio investmentremains insignificant even when we take out the correlated trade or FDI. The develop-ment variables remain significant and negative.

One might argue that economic development of a country is endogenous to theglobalization variables and that the results in model 1 may be sensitive to thisendogeneity bias. Model 5 assesses this possibility, with the country’s own economicdevelopment variable endogenized. We first estimate a two-way, fixed-effects modelof economic development by regressing the logged GDP per capita on trade, FDI,portfolio investment, democracy, lagged dependent variable, and country and yeardummies, with robust standard errors estimated. Then we obtain the predicted value ofthe GDP per capita and substitute it into model 1. Results for the first-stage develop-ment equation are presented in Appendix C. Trade openness and FDI have a positiveand statistically significant effect on GDP per capita, whereas portfolio investmentsare not statistically significant. Results of the second-stage estimation, included inmodel 5, show that statistical inferences remain unchanged for the globalization andeconomic development variables. Results of model 1 are not sensitive to the endo-geneity of development.

One may also argue that the effect of economic development in the developed coun-tries differs from that in the developing countries. Maybe the negative effect onlyexists in the developed countries, but not in the developing world. In model 1, eco-nomic development variables may have just captured such a developed country-lessdeveloped country (DC-LDC) distinction. In addition, factions that are against moder-nity and prone to attack foreign targets often operate in the less developed countries,which also implies that the negative effect of economic development may not apply tothe developing countries. To assess the sensitivity of model 1 to this possibility, weconstruct an interactive model in which we include into model 1 three additional vari-ables: (1) an Organization of Economic Cooperation and Development (OECD)dummy, which equals 1 if a country belongs to the OECD and 0 otherwise; (2) an inter-action term between the OECD dummy and economic development; and (3) an inter-action term between the OECD dummy and partners’ development. Economic devel-opment and partners’ development as main effect variables capture the effect ofeconomic development for the non-OECD countries only. The interaction terms mea-sure the additional effect of being an OECD country.

Results in model 6 show that after controlling for development in the OECD coun-tries, a non-OECD country’s economic development and its top trading partners’development still reduce the number of transnational terrorist incidents inside thecountry. The coefficients do not differ substantially in size from those in model 1. Inaddition, the interaction term between the OECD dummy and economic developmentis statistically significant and negative. This suggests that an OECD country’s eco-nomic development has a greater negative effect on the number of terrorist incidentsthan another non-OECD country’s development. The interaction term between theOECD dummy and partners’ development is statistically insignificant. This indicatesthat the effect of partners’ development of an OECD country does not differ from that


of partners’ development of a non-OECD country. Hence, we conclude that the nega-tive effect of economic development on the number of transnational terrorist incidentsexists in both developed and developing countries.

Finally, economic globalization is sometimes argued to raise income inequality incountries, causing an increase in transnational terrorism. Whereas economic global-ization encourages development, the benefits and costs of globalization are oftenasymmetrically distributed, generating winners and losers and widening the gapbetween the rich and the poor in societies. Groups marginalized by economic global-ization may resort to more terrorist activities. To assess the sensitivity of model 1 tothis possibility, we include the Gini coefficient as a measure of national incomeinequality. The Gini coefficient ranges from 0 to 100, with larger values indicatinggreater inequality. We use the high-quality data on Gini from Deininger and Squire(1996), one of the most comprehensive data sources on income inequality. BecauseGini is computed based on national income surveys, which are not conducted everyyear for every country, the Gini data contain many missing values. We fill up the miss-ing values using two alternative strategies. For model 7 in Table 1, the missing valuesare filled with predictions from estimating Gini as a function of GDP per capita, GDPper capita squared, and regional dummies, following Feng and Zak (1999) and Li andReuveny (2003). For model 8, the missing value of Gini is filled with the previousavailable value in a country, assuming income inequality remains stable for a period oftime.

In model 7, results for trade, FDI, and portfolio investment remain insignificant asbefore, even when we control for income inequality. Partners’ development stillretains the same negative, significant effect. Although economic development still hasthe negative sign, it is no longer significant. This result is to be expected because miss-ing values of Gini are filled based on GDP per capita, and these two variables arehighly correlated (–0.74) in the estimation sample. High collinearity causes economicdevelopment to become statistically insignificant. Not surprisingly, Gini is positive asexpected and significant for the one-tailed test. The size of the effect is not very sub-stantial. As income inequality rises by 1 point along the 100-point scale, the expectednumber of incidents in a country increases by about 2%. In model 8, based on an alter-native Gini measure, economic development and partners’ development remain nega-tive and significant as in model 1. FDI is still positive and insignificant. Although tradeand portfolio investment remain negative, trade becomes marginally significant andportfolio investment is highly significant. Gini is statistically significant and positive,encouraging transnational terrorism. The size of the effect is about the same as inmodel 7. Based on this model, economic globalization appears to increase terrorismmainly by raising income inequality. In addition, trade and portfolio investmentreduce transnational terrorism even further, once we control for income inequality anddevelopment. Although the finding is interesting, we should interpret it with caution,given the crude nature of the Gini data. The issue warrants future investigation.Overall, the results of model 1 are, broadly speaking, robust even when we control forincome inequality.

In Table 1, we have followed the general-to-specific approach to model specifica-tion and used rather extensive statistical controls, particularly the lagged dependent


variable and the year dummies. This approach helps to prevent spurious findings froman underspecified model (see, e.g., Dougherty 2002, 362). In addition, as noted, theinclusion of the lagged dependent variable and the year dummies is motivated theoret-ically and empirically. One may argue plausibly, however, that the lagged dependentvariable and the year dummies generate high collinearity and inefficiency, competingfor explanatory power particularly against the globalization variables. The time framefrom 1975 to 1997 is not long enough to justify including the lagged dependent vari-able. The results on the globalization and development variables may be an artifact ofincluding these “irrelevant” variables. To examine this possibility, we estimate allmodels in Table 1 again, excluding the lagged dependent variable and the yeardummies. The results are presented in Table 2.

Statistical inferences from this sensitivity analysis are almost identical to those inTable 1. Trade, FDI, and portfolio investment remain statistically insignificant, exceptfor portfolio investment in model 8. In general, as in Table 1, trade, FDI, and portfolioinvestment are not found to increase transnational terrorism. A country’s economicdevelopment and its major economic partners’ development are still found to reducethe number of transnational terrorist incidents within the country. As an exception, thenon-OECD country’s economic development in model 6 of Table 2 is still negative butbecomes statistically insignificant now. One may also note that the coefficients for thekey independent variables—trade, FDI, portfolio investment, economic development,and partners’ development—have decreased in size almost by half. Whereas thelagged dependent variable and the year dummies may have generated collinearity andinefficiency for the models in Table 1, the results in Table 2 suggest that their inclusionis important for capturing relevant confounding forces. More important, the effects oftrade, FDI, portfolio investment, economic development, and partners’ developmentare generally quite robust to alternative model specifications.

LOCATION OF INCIDENT AND TARGET CHOICE OF ATTACK

In this analysis, we have focused on the effect of economic globalization on thevenue of the terrorist attack. We do not analyze its effect on the target choice by terror-ists. The ITERATE database, on which we rely for terrorist incident data, is the mostcomprehensive database on transnational terrorist incidents. The database does nothave data on the targets of terrorist attacks because the motives of the terrorists areoften not known. The database contains a variable that identifies the victim’s national-ity. Two issues thwart our effort of using the victim variable to capture the target of anattack. First, the victim may be only collateral damage, not really the target. Second,the victim nationality variable in ITERATE does not list exhaustively all nationalitiesinvolved in each incident but rather three nationalities at most. Hence, targets ofterrorist attacks are not observed in the ITERATE database.

The key issue for our analysis is to what extent studying the venue of a terroristattack does and does not inform us about the attack target choice, if such choice issolely what one is concerned about. The relationship between the location and the tar-get of a terrorist attack involves four substantively meaningful scenarios: (1) country


A’s citizens are targeted and attacked at country A by foreign terrorists, (2) country A’scitizens are not targeted but attacked at country A, (3) country A’s citizens are targetedbut attacked at country B, and (4) country A’s citizens are not targeted but attacked atcountry B. The conceptualization suggests that the location and the target provide dif-ferent information regarding transnational terrorism. First, focusing on the attacklocation sheds light on the causes of scenarios (1) and (2), in which a country’s citizensare attacked domestically either as the target or merely as collateral damage. It doesnot explain scenarios (3) and (4), that is, why a country’s citizens are attacked abroad.Second, focusing on targeting, assuming data on targeting were available, explainsscenarios (1) and (3), in which a country’s citizens are targeted and attacked at home orabroad. But it does not account for scenarios (2) and (4), in which a country’s citizensbecome collateral damage in terrorist incidents at home or abroad.

Within the context of our analysis, such a conceptualization has two importantimplications. First, the effect of economic globalization is relevant to both scenarios(1) and (2). Although rising economic integration may render a country’s citizens tar-gets of terrorist attacks based on scenario (1), it also reduces the costs of conductingterrorist attacks within the country, making it a desirable attack venue and causing itscitizens to become collateral damage, based on scenario (2) (even though citizens ofthe country are not really the target of attacks). Apparently, focusing on the attackvenue captures both scenarios (1) and (2), whereas focusing on targeting alone missesscenario (2), an important implication of economic globalization for terrorist activi-ties. Second, economic globalization also affects scenario (3), in which rising integra-tion of country A into the global economy may generate animosity, causing countryA’s citizens to be targeted and attacked abroad rather than at home. Focusing on thevenue of the terrorist attack does not explain to what extent economic globalization hasthis effect. Hence, findings of this analysis apply specifically to the question of howeconomic globalization affects transnational terrorist incidents within countries. Thefindings do not explain whether economic globalization causes a country’s citizens tobe targeted and attacked abroad. This limitation of the analysis is caused by the lack ofdata on targeting choice and should be dealt with in future research.

CONCLUSION

After the September 11 terrorist attacks, the association of economic globalizationand transnational terrorist activities has attracted wide attention from policy makers,journalists, and academics. Many believe that economic globalization contributes totransnational terrorist attacks, whereas a few others posit that economic globalizationhelps to prevent terrorist incidents. Despite heated public discourse, there has beenno systematic, rigorous analysis of the relationship between economic globalizationand transnational terrorist incidents. In this study, we analyze statistically the effectof economic globalization on the number of transnational terrorist incidents withincountries.


Based on a sample of 112 countries from 1975 to 1997, we find interesting patternsof statistical association between economic globalization and transnational terroristincidents. In general, trade, FDI, and portfolio investment of a country do not directlyincrease the number of transnational terrorist incidents inside its borders. Economicdevelopment of the country and its top trading partners reduces the number of terroristincidents inside the country. To the extent that economic globalization promotesdevelopment, globalization can have an indirect negative effect on transnationalterrorism.

We should note that our analysis has focused on the linkages between economicglobalization and terrorism as a first cut. We raise caution about generalizing the find-ings to other aspects of the globalization phenomenon. Future research should alsolook at the effects of immigration, cultural globalization, and the role of transnationalnongovernmental organizations if we want to understand fully the effect of globaliza-tion on transnational terrorism. Our analysis is informative in terms of how a country’seconomic integration affects the number of terrorist incidents within the country. Ourresearch findings should, therefore, be interpreted accordingly. Future research couldalso investigate how economic integration affects the target choice of terrorists.

Despite the caveats, our analysis suggests important policy implications for the waragainst terrorism. National governments should realize that economic globalization isnot the cause of, but a possible partial solution to, transnational terrorism. Althoughopening up one’s border facilitates the movement of terrorists and their activities, ourresults show that the effect of such facilitation appears weak. It does not precipitate asignificant rise in transnational terrorist attacks within countries. This is an importantlesson for policy makers who are designing antiterrorism policies.

More important, economic openness, to the extent that it promotes economic devel-opment, may actually help to reduce indirectly the number of transnational terroristincidents inside a country. Closing borders to foreign goods and capital may produceundesirable effects. Economic closure and autarky can generate more incentives toengage in transnational terrorist activities by hindering economic development.Antiterrorism policy measures should be designed with caution. They should not bedesigned to slow down economic globalization.

Promoting economic development and reducing poverty should be important com-ponents of the global war against terrorism. Such effects are structural and system-wide. It is in the best interest of the United States not only to develop by itself but alsoto help other countries to grow quickly. The effect of economic development on thenumber of transnational terrorist incidents is large. The role of economic developmentdeserves much more attention from policy makers than it currently enjoys.



AlbaniaAlgeriaAngolaArgentinaArmeniaAustraliaAustriaBahrainBelarusBoliviaBotswanaBrazilBulgariaBurkina FasoBurundiCameroonCanadaCentral African RepublicChadChileChinaColombiaCongo, Republic ofCosta RicaCôte d’IvoireCyprusDenmarkDominican RepublicEcuadorEgypt, Arab Republic ofEl SalvadorEstoniaEthiopiaFijiFranceGabonGermanyGhana

GreeceGuatemalaGuyanaHaitiHondurasHungaryIcelandIndiaIndonesiaIran, Islamic Republic ofIrelandIsraelItalyJamaicaJapanJordanKenyaKorea, Republic ofKuwaitLao Peoples’ Democratic

RepublicLatviaLesothoLithuaniaMalawiMalaysiaMaliMauritaniaMexicoMoroccoMozambiqueNamibiaNepalThe NetherlandsNew ZealandNicaraguaNigerNigeria

NorwayPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalRomaniaRussian FederationRwandaSaudi ArabiaSenegalSierra LeoneSingaporeSloveniaSouth AfricaSpainSri LankaSwazilandSwedenSwitzerlandSyrian Arab RepublicTanzaniaThailandTogoTrinidad and TobagoTunisiaTurkeyUkraineUnited KingdomUnited StatesUruguayVenezuela, RBZambiaZimbabwe

APPENDIX AList of Countries in the Estimation Sample

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APPENDIX BIn-Sample Correlation Matrix of Key Independent Variables

ForeignDirect Economic Partners’

Trade Investment Portfolio Development Development

Trade 1.00Foreign direct investment 0.48 1.00Portfolio –0.11 –0.10 1.00Economic development 0.11 0.23 0.03 1.00Partners’ development –0.03 0.15 0.06 0.33 1.00

APPENDIX CEffects of Economic Globalization on Development

Two-Way Fixed-Effects Model

Trade 0.0003** (2.13)Foreign direct investment 0.0022*** (4.19)Portfolio –0.0003 (0.50)Democracy –0.0002 (0.61)Economic developmentt – 1 0.9118*** (95.86)Constant 0.7715*** (9.60)Observations 2,430R2 0.998

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