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This article investigates the economic effects of conflict, using the terrorist conflict in the Basque Country as a case study. We find that, after the outbreak of terrorism in the late 1960's, per capita GDP in the Basque Country declined about 10 percentage points relative to a synthetic control region without terrorism. In addition, we use the 1998-1999 truce as a natural experiment. We find that stocks of firms with a significant part of their business in the Basque Country showed a positive relative performance when truce became credible, and a negative relative performance at the end of the cease-fire. (JEL D74, G14, P16)
Political instability is believed to have strong adverse effects on economic prosperity. However, to date, the evidence on this matter is scarce, probably because it is difficult to know how economies would have evolved in absence of political conflicts.
This article investigates the economic impact of conflict, using the terrorist conflict in the Basque Country as a case study. The Basque conflict is especially interesting from an economic perspective. At the outset of terrorist activity in the early 1970's, the Basque Country was one of the richest regions in Spain, occupying the third position in per capita GDP (out of 17 regions). In the late 1990's, after 30 years of terrorist and political conflict, the Basque Country had dropped to the sixth position in per capita GDP.1 During that period, terrorist activity by the Basque terrorist organization ETA resulted in almost 800 deaths. Basque entrepreneurs and corporations had been specific targets of violence and extortion (including assassinations, robberies, and kidnappings-for-ransom). Not surprisingly, the economic downturn suffered by the Basque economy during those years has been attributed, at least partially, to the effect of terrorism. However, little research has been carried out to assess the economic effects of the conflict.2
This type of study is difficult. On the one hand, a pure time-series analysis of the severity of terrorism and the evolution of the Basque economy will be contaminated by the economic downturn which Spain suffered during the second half of the 1970's and the first half of the 1980's, at the peak of terrorist activity. On the other hand, at the outset of terrorism, the Basque Country differed from other...