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Previous research has shown that trust is an important component that encourages investment and capital formation which, in turn, enhances economic performance. This article investigates the effect of terrorism on income, including its indirect role through lowering trust. We consider terrorism as a factor that can increase the cost of investing in technology and capital formation due to its ability to diminish trust in an economy. We then develop a novel and rich dataset spanning 179 countries from 1968 to 2007 using associated community, social, cultural, political, and economic factors from the World Values Survey and international terrorism incidence data from ITERATE. Using empirical tests, we first show that terrorism has a negative and statistically significant impact on individual income. This impact is larger than what has previously been found, possibly due to aggregation effects and data selection. We then estimate the societal impact of terrorism on economic growth by examining the extent to which terrorism taxes trust and how this, in turn, hinders economic performance. Consequently, we develop a measure of the economic consequences of terrorism through sizing the magnitude of the 'trust tax' from terrorism. We find that the trust tax is relatively minor compared to the direct impact of terrorism on income.

Since 1995, growth in sub-Saharan Africa has averaged more than 5% per year reversing a two-decade decline of real income per capita. In this paper, we explore the extent to which the nascent growth is sustainable or not due to higher incidences of terrorism and commodity price declines. Our analysis is based on a rich unbalanced panel data set with annual observations on 46 countries from 1968 to 2004. We explore these data with cross-sectional and panel growth regression analysis and quantile regressions. We estimate the economic and statistical effect of terrorism on growth in sub-Saharan Africa, controlling for a variety of other factors. We then investigate the extent to which there appears to be a structural break in the estimated relationships. We find that the terrorist-oriented fragility of sub-Sahara has increased in the most recent period. We find that most of the fragility can be explained by the growth in countries that are primary fuel exporters. Indeed, our evidence points to the fact that resource-rich countries have not done an adequate job of investing in counter-terrorist policies. [Copyright Elsevier B.V.]

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In this paper, we develop and explore the implications of an economic model that links the incidence of terrorism in a country to the economic circumstances facing that country. We briefly sketch out a theory, in the spirit of Tornell (1998), that describes terrorist activities as being initiated by groups that are unhappy with the current economic status quo, yet unable to bring about drastic political and institutional changes that can improve their situation. Such groups with limited access to opportunity may find it rational to engage in terrorist activities. The result is then a pattern of reduced economic activity and increased terrorism. In contrast, an alternative environment can emerge where access to economic resources is more abundant and terrorism is reduced. Our empirical results are consistent with the theory. We find that for democratic, high income countries, economic contractions (i.e. recessions) can provide the spark for increased probabilities of terrorist activities.