Terrorism and Economic Growth: The Case of Pakistan

Terrorism destroys physical and human capital, creates uncertainty in the market, and reduces government spending on development.

On 16 December 2014, a terrorist attack killed 150 people, out of which at least 134 were students, when Taliban gunmen abruptly attacked the Army Public School in Peshawar, Pakistan (Lewis 2019). As a response to this incident, as well as other terror episodes that were widespread in the country, the state and military of Pakistan implemented a mission to combat terrorism, mainly in the North Waziristan region of Khyber Pakhtunkhwa, under the Operation Zarb-e-Azb.

Terrorism is an extensive and intensive issue in Pakistan. The Global Terrorism Index (GTI) of Pakistan in 2019 was 7.889 out of 10, making it the 5th most terrorism-afflicted country last year (Institute for Economics & Peace 2019). Terrorism poses an immense threat and serves as one of the biggest impediments to Pakistan’s stability and growth. Terrorism has negative impressions on the economy: It destroys physical and human capital, creates uncertainty in the market causing reluctance among investors and entrepreneurs, and urgently demands the government’s expenses on security expansion and anti-terrorist facilities.

The situation of terrorism and extremism in Pakistan primarily escalated in the late 1970s and early 1980s. There are multiple explanations for this. For example, sectarian conflicts began to rise to the political level from 1980 onwards, during the dictatorship of Zia-ul-Haq. Foreign funding injected into Pakistan incessantly during the period of some significant international events; namely, the Iranian Revolution, Iran-Afghan War, Soviet-Afghan War, and the Cold War (Zahab 2002). These global events influenced Pakistan on account of its geopolitical and ideological position.

Presently, we identify various internal factors as reasons for terrorism in Pakistan. These include ethnic conflicts, illiteracy, income inequality, inflation, high population growth, high unemployment, political instability, corruption, poverty, and injustice (Zakaria, Ahmed and Jun 2019).

Economic effects of terrorism

Terrorism incidents, whatever the reason for their emergence, can cause “ripple effects” that have negative impressions on the country’s economy, directly and indirectly (Ross 2019). Directly, terrorist attacks damage the country’s infrastructure and destroy the three major factors of production: land, labor and capital. All these factors play an important role in determining economic growth, but are the direct victims of terrorism. The emotional toll on the community as a whole, although invisible and incalculable, is another kind of direct cost on the country.

Indirectly, the terror activities can decrease domestic and foreign investments, increase inflation, damage the stock market, increase unemployment, and bolster government expenditures on security instead of socio-economic development projects (Zakaria, Ahmed and Jun 2019).

Terrorism has long-term and far-reaching effects on investors’ decisions, industries’ performance, and the government’s behavior. Firstly, it causes uncertainty in the market. Uncertainty portrays a negative image of the country to the investors, reduces the average return on investments, and diverts potential investments to less terror-stricken environments or countries (Abadiea and Gardeazabal 2007). As a result, business activities and entrepreneurship decline on account of intermittent terror episodes.

Secondly, terrorism sways the government towards spending more on defense and anti-terrorism facilities. Normally, military spending is considered a stimulant, but “broken window fallacy” – a parable used by economists to illustrate the negative economic effects of war and destruction – brings to light the adverse costs of terrorism on the economy (Ross 2019). The state’s primary focus diverts from socio-economic development. Development expenditure not only influences the economy positively in the long run, but also helps eradicate the root causes of terrorism such as poverty, illiteracy, income inequality, unemployment, and injustice. Hence, the opportunity cost of expending on defense rather than development is reasonably high, and, as in the case of firms, is included in the economic costs of the country.

The case of Pakistan

A study titled “Effect of terrorism on economic growth in Pakistan: an empirical analysis” (Zakaria, Ahmed and Jun 2019) examined three macro-variables in Pakistan, based on the data for the period 1972–2014, that are indirectly affected by terrorism. These variables were Foreign Direct Investment (FDI), domestic investment, and government spending behavior. The results concluded that the impact of terrorism on FDI and domestic investment is significantly negative, whereas the impact on government spending is significantly positive. The net effect, however, is negative.

We can anticipate that since terrorist attacks demand a swift response from the state, the influence on government spending is positive. But this shift in government’s behavior is contested in terms of the opportunity cost of expending on defense rather than on development, as mentioned earlier.

The impact of terrorism on a country and its people cannot be quantified in economic terms. However, enough estimation can be made to deduce that terrorism has extremely deteriorating effects on various sectors of the economy. Pakistan faces the threat of terrorism from the inside and the outside. According to Global Terrorism Database (GTB), out of the 3043 terrorism incidents that Pakistan faced from 2001 to 2012, 2737 were domestic while 191 were transnational (St. Louis Fed On the Economy 2018).

Terrorism is particularly menacing to Pakistan’s economy for two reasons. Firstly, unlike developed countries, Pakistan is unable to absorb terrorism without displaying adverse economic consequences. Secondly, the internal conflicts (domestic terrorism) – which are skyrocketing in Pakistan – have a greater impact on the economy than transnational attacks (Hyder, Akram and Padda 2015). What should Pakistan do to combat terrorism?

The research “Effect of terrorism on economic growth in Pakistan: an empirical analysis” has pointed out, based on the data for the period 2002-2015, that there is an inverse relationship between GDP and terrorist (suicide) attacks in Pakistan. That is, when terrorism is low, economic growth is high and vice versa (Zakaria, Ahmed and Jun 2019). The following graph shows, fairly accurately, the inverse relationship between economic growth and deaths of civilians due to terrorist incidents for Pakistan, for 2000-2019. The values for GDP growth (annual %) are on the primary y-axis and deaths of civilians are on the secondary y-axis. The years (time) form the base or x-axis.

The inverse relationship between terrorism and GDP
Inverse relationship between Death of Civilians (due to terrorist violence) and GDP Growth (annual %). Data for these variables are taken from South Asia Terrorism Portal (SATP) and The World Bank respectively.

Combating terrorism with human development

Considering the economic consequences of terrorism, a practical solution should mitigate terrorism and extremism in the long run, and contribute to economic growth simultaneously.

Human capital development in the areas of education and health at the national level is proven to contribute to economic growth in developing countries and also reduce terrorism by eradicating its root causes (Ritter 2016). Human capital is defined as “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being”. The Human Capital Index (HCI) of Pakistan is currently 0.406 out of 1. This displays room for massive improvement.

The government and the business sector of Pakistan should progressively invest in human capital development, especially in the spheres of education, health and entrepreneurship, to actualize socio-economic growth and combat terrorism at the same time.


Abadiea, Alberto, and Javier Gardeazabal. 2007. Terrorism and the world economy. ScienceDirect.

Hyder, Shabir, Naeem Akram, and Ihtsham Ul Haq Padda. 2015. “Impact of Terrorism on Economic Development in Pakistan.” Pakistan Business Review (ResearchGate) 704-722.

Institute for Economics & Peace. 2019. Global Terrorism Index 2019: Measuring the Impact of Terrorism. Sydney: Institute for Economics & Peace.

Lewis, Robert. 2019. “Peshawar school massacre.” Encyclopædia Britannica. Encyclopædia Britannica, inc., December.

OECD. 2018. “Human Capital – The Value of People.” OECD Insights. OECD.

Ritter, Benjamin. 2016. “Human Capital Development in Developing Countries.” Journal of Global Leadership (ICGL) IV: 129-134.

Ross, Sean. 2019. “Top 5 Ways Terrorism Impacts the Economy.” Investopedia.

St. Louis Fed On the Economy. 2018. “The Economic Impact of Terrorism on Developing Countries.” Federal Reserve Bank of St. Louis.

Zahab, Mariam Abou. 2002. “The Regional Dimensions of Sectarian Conflict in Pakistan.” In Pakistan: Nationalism Without a Nation, by Mariam Abou Zahab, 115–30. London: Zed Books.

Zakaria, Muhammad, Haseeb Ahmed, and Wen Jun. 2019. “Effect of terrorism on economic growth in Pakistan: an empirical analysis.” Economic Research-Ekonomska Istraživanja (Informa UK Limited) 1794-1812.

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The views presented in this article do not necessarily represent the views of Effective Thoughts.


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Comments to: Terrorism and Economic Growth: The Case of Pakistan
  • November 13, 2020

    Nicely written! I liked the part about the indirect effects of terrorism, especially, the fact that you mentioned defense spending is normally considered a stimulant, but the effect is net-negative in the case of terrorism.

    I have some questions which I hope you can help me with. You said, \”Human capital development in the areas of education and health at the national level is proven to contribute to economic growth in developing countries and also reduce terrorism by eradicating its root causes.\” Can you elaborate which root causes of terrorism will human capital development in education and health eradicate?

    Also, you concluded, \”The government and the business sector of Pakistan should progressively invest in human capital development, especially in the spheres of education, health and entrepreneurship, to actualize socio-economic growth and combat terrorism at the same time.\” Why do you think the government couldn\’t implement this solution earlier?

    • November 13, 2020

      Thank you for your kind remarks, feedback, and those thought-provoking questions. Let me address them one by one, to the best of my knowledge, and in the context of the article.

      1. We have identified multiple internal factors/root causes of terrorism in Pakistan, including, but not limited to, illiteracy, income inequality, poverty, corruption and unemployment. These factors, by their very nature, induce frustration in the masses, increase conflicts, and give space to corrupt and vain people, who bring instability and turmoil in the country. Human capital development – in education, health and entrepreneurship – is a long-term solution to illiteracy, poverty, unemployment, and inequality. Improvement in education, entrepreneurship and national health profile not only serve the masses by bringing stability, better institutions and equality of opportunity, but also prevent corrupt people from obtaining undue power.

      2. There can be multiple social, economic and political explanations as to why Human Capital Development has not been earnestly exercised in Pakistan. For the sake of brevity, let’s just say the “institutional structure” of Pakistan has proven inefficient in combating rent-seeking, corruption and injustice. That is why Pakistan has seen many leaders that were occupied with their own self-centered interests, and not with the betterment of the people or the country. Perhaps, an institutional makeover is needed – which is achieved, in my opinion, through developing an education and innovation infrastructure. Transformation is a long-term process; let us speak up and do our part!

      I would also love to hear your opinion on this: So far, why has the government failed to implement a solution?


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