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Universit Paris 1 Panthon-Sorbonne


UFR 02 Economics
Pantheon Sorbonne Master in
Economics

FALL OF PEACE
CRIME &TERRORISM IMPACT ON ECONOMIC GROWTH
ASIAN COUNTRIES STUDY

I DEWA MADE AGUNG KERTHA NUGRAHA



Supervised by:
MARIA DEL CARMEN CAMACHO PEREZ
2016

Table of Contents
Abstract.............................................................................................................................. 1
1.

Introduction ............................................................................................................... 2

2.

Literature Review ..................................................................................................... 6

3.

2.1.

Terrorist Attack ............................................................................................................ 6

2.2.

Crime ............................................................................................................................. 9

2.3.

Determinants of Economic Growth .......................................................................... 11

2.4.

The Relationship Between Crime and Economic Growth ...................................... 14

Data .......................................................................................................................... 17
3.1.

The dependent variable .............................................................................................. 17

3.2.

The Independent Variables ....................................................................................... 18

3.3.

Control variables ........................................................................................................ 19

4.

Methodology ............................................................................................................ 20

5.

Result........................................................................................................................ 21
5.1.

Statistical Test ............................................................................................................. 21

5.2.

Total Crime and Economic Growth ......................................................................... 22

5.3.

Terrorist Attack and Economic Growth .................................................................. 25

5.4.

Total Crime, Terrorist Attack and Economic Growth ........................................... 27

5.5.

The Magnitude Crime and Economic Growth ........................................................ 28

6.

Conclusion ............................................................................................................... 31

7.

Limitation ................................................................................................................ 32

8.

Bibliography ............................................................................................................ 33

9.

Appendix .................................................................................................................. 35

Abstract


This paper attempts to seek the impact of crime and terrorist attack on economic
growth. The process was done by examining the effect of crime and terrorist attack on the
economic growth by including a larger set of determinants of growth in the Asian countries.
The purpose of it is to analyze what is the impact of crime and terrorist attack on the
economic growth when they are taken into account with openness to trade and political
environment altogether, after controlling for variables which are included in economic
growth. The conclusion drawn is that there is no statistically significant effect of terrorist
attack and crime on economic growth in the Asian Countries within the year of 2003 2013. The result fails to support that terrorist attack, and crime has a significant negative
impact on economic growth when included in the augmented Solow growth model adjusted
to technological progress. The results also show that terrorist attack and crime do not have
a statistically significant negative impact on economic growth. However, the political
stability has always been affected significantly by the crimes every time in almost every
regression.
Keywords: crime; terrorist attacks; economic growth; Solow growth model, Asian
countries



















1. Introduction
As one of the Sigmund Freuds views on the human race People were naturally
evil or bad. Freud believed that people were naturally evil or bad, it means in ways like
being destructive and selfish. People already have their tendency to do something bad
naturally. He believed that if it were not because of our society telling us what we were
allowed to do and what we were not, civilization would already have collapsed.
There is no universal definition of the crime. In a different era, different definitions
were presented, along the development of advanced science globalization. Any acts or a
form of omission which are forbidden that are against the rule or law and punishable upon
belief could be named as the crime. A crime against an individual includes the actual use
of force against somebody, and also included accidents, which result in death due to a
persons intention. A crime against property, which can also involve or even not violence
against someone while doing the crime, includes any efforts or the real deprivation of
someones belongings and damaging them. Drug crime for instance, which resulted in
someones death, arson, betting and possession of weapons also the power abuse of public
office for private or political abuse are also crimes which may have an impact on people or
property but do not make part of the above two categories. The destruction caused by crime
suppose to have an adverse impact on society welfare, which can lead to serious creation
or maintenance of a developed and well-functioning economy. It causes costs to private
and public sectors which suppose to have an adverse impact on personal state-of-being of
an individual, and also on the welfare the whole society.
There is also an act which is forbidden, called terrorism, it is destructive and can
cause damage to not only an individual, even to the whole nation at any level. Resulted in
someones death and expropriation of someones belonging and property which can lead
to the severe destruction of the economy and a not-well-functioning civilization on the vast
scale. According to The new 2015 Global Terrorism Index, in 2014, the cost of terrorism
to the world was $52.9 billion, the highest since 2001. This chart is taken from Vision of
Humanitys index and is based on IEP calculations, these evaluate the direct (and some of
the indirect) costs of terrorism and is conservative in its method. The chart demonstrates

the global economic costs of terrorism from 2000 to 2015, in billions of US dollars.
Table 1.1. Cost of Terrorism

As shown in the diagram that the cost of terrorism reached its highest point in 2014,
surpassing the economic impact felt in 2001. This represents a ten times increase on the
figure in 2000, and a rising of $20 billion on the previous year. Nevertheless, as a
comparison point, the losses from violent crime and homicide in 2014 reached $1.7 trillion.
However, the report tells us how terrorism can affect the economy regarding the damages
caused by it.
The effect of crime on the economy is a serious matter, because it creates enormous
costs to society at a different stage, from individual to the national. As what happened in
2007 to the United States, it has been found more than 23 million crimes committed that
caused nearly 15 billion US dollars the economic losses to the victims. Moreover 179
billion US dollars in government expenditures on legal and police protection and
corrections and judicial activities (McCollister et al., 2010). These economic losses show
an opportunity cost because the money spent could yield some tangible and intangible
returns if invested carefully. Therefore, it looks reasonable to think that crime supposes to

have a negative effect on a country's economic growth of (Gaibulloev & Sandler, 2008).
The importance of economic growth has no rejection both in theoretical and
empirical economic literature. The growth of the economy is an objective sole in any policy
decision making. A positive economic growth is important for every country. Thus, the
determinant factors of economic growth have gotten into an increasing attention. The first
theory in emphasizing the role of determinants for the economic growth, which is also the
primary one, was Solows growth model (Solow, 1956). It shows the importance of
investments as a determinant for the economic growth. Further research showed other
fundamental determinants of the economic growth, the stock of human capital (Mincer,
1981) and innovation (Aghion & Howitt, 1992) for instance. Foreign direct investment is
considered as one of the main factors of technology transfer between countries, which adds
relatively more to economic growth (Borensztein et al., 1998; Lensink & Hermesa, 2003).
Howsoever, without trade liberalization, which in the majority of the cases leads to FDI
(Martens, 2008), the economic growth cannot be perceptual. Additionally, the credibility
of governments is an important role in openness to trade by eliminating uncertainty and
stabilizing the market it to create a greater economic growth (Lensink et al., 1999).
The relationship between crime rates and economic trends is not a simple one. It
might be seen that better economic times increase crime. A guess can arise that what
matters is the levels of inequality, rather than the growth of an economy. Another point of
view could be taken into account that tough economy condition makes more people willing
to commit crimes. Bad economies can lead to creates more criminal of property and also
robberies like criminals steal goods which people could not afford to have properly. The
economic anxiety of bad times towards to more violence occur, and greater consumption
could be leading to more violence in general.
This paper aim to see the effect of crime including terrorism on the economic
growth by including a larger set of growth determinants. The purpose of it is to analyze
what is the impact of crime and terrorist attacks on the economic growth when taking into
account those determinants of growth altogether, after controlling variables that are
typically included in growth regressions. The model used on this paper will try to answer
the following research question:

What is the impact of terrorist attacks and crimes on economic growth?


The data used in this research is going to be retrieved from the following databases:
1. The last version (2014) of The Global Terrorism Database (GTD) which was
provided by the National Consortium for the Study of Terrorism and Responses to
Terrorism (START)1 at the University of Maryland, College Park in the United
States.
2. World Bank for the economic growth and its determinants.
3. Crime data retrieved from United Nation Office on Drugs and Crime (UNODC),
which includes homicide, violent crime, robbery and domestic burglary. The rest
of the variables are as described. All the data will be collected for countries from
Asian countries focused only all Asian countries which are available from 2003 to
2013 based on UNODC.


1
https://www.start.umd.edu/gtd/

2. Literature Review
In this part, the literature regarding economic growth determinants will be
presented. Additionally, the overview of different aspects of crime also terrorism will be
given, and the literature concerning the costs incurred to a due economy crime will be
discussed. Afterward, the literature that shows the possible association of crime and
terrorist attacks with different determinants of economic growth will be analyzed. To
elaborate on the relation of crime and terrorist attacks with economic growth in the case of
this thesis, the major findings of the papers will also be discussed and the most relevant
theoretical aspects will result into development of hypotheses.

2.1.

Terrorist Attack

Before we start the analysis, we should determine the notion of terrorism itself. We
will use the standard definition and event inclusion criteria provided by START project
that has been mentioned before.
A terrorist attack is an actual use of unlawful force or the threatened and violence
by a non-state person to attain an economic, political, religious, or social goal through fear,
coercion, or intimidation. In practice this means to consider an incident for inclusion in the
GTD, all three of the following attributes must be presented:

The incident has to be done intentionally the result of a conscious calculation on


the part of a perpetrator;

The incident has to entail some level of violence or immediate threat of violence including property violence, as well as violence against people;

The perpetrators of the incidents have to be sub-national actors. The database does
not include acts of state terrorism.
Multiple researchers do have the different point of view about the impact of the

terrorism on the indicators of the economic growth. According to many researchers,


terrorism is the core cause of the slowdown in economic growth. It is also the reasons for
the feeling of the social and the political stability and thus resulting in the narrowed mindset

of the people. Mostly, this is being termed as the expression of the political and the religious
belief injustice, by the terrorist. However, it has also been viewed that the terrorists have
emerged from the developed and rich countries.
As found by Blomberg, Hess, and Weerapana, (2004), these researchers developed
a model and figured out that the rate of terrorist activity is quite higher in the high-income
countries within the period of the crisis. According to their findings, by the help of the
panel regression controlling for the state fix effects, the terrorist activities has a negative
impact of 0.57 percent points on the GDP growth rate.
They then come up with the point that the economic activities and the terrorism
are not independent of each other. One new finding was about the impact of the terrorist
operations of the economic activities. They say that even though the terrorist activities are
higher in the high income and democratic countries, but still they do not have the high
impact upon the economic activities. The terrorism also has a relationship with the business
cycle, and it is also seen that the economic weakness also increases the probability of the
terrorist activities.
The impact of terrorism can be very direct. People are killed. Pipelines are
sabotaged. Markets, stations and restaurants are bombed with devastating effect. Terrorism
inflicts more than human casualties and material losses. It can also cause the serious
indirect effect to countries and economies by increasing the costs of economic transactions
for instance, because of enhanced security measures to ensure the safety of customers and
employees or those who have higher insurance premiums. Terrorist attacks in Yemen on
the USS Cole in 2000 and on the French tanker Limburg in 2002 damaged that country's
shipping industry seriously. These attacks accounted for an increase of 300 percent in
insurance premiums for ships using that route and directed the ships to bypass Yemen
thoroughly.
The Economic researcher has found that perhaps rich, generous and also various
economies are better able to hold back the effects of terrorist attacks than poor, small, and
more specialized economies. If terrorism gives bad effect on productive activities in one
sector in a diversified economy, resources can easily move to another unaffected sector.
Additionally, developed countries have more and also better resources in devoting

counterterrorism efforts, which presumably reduces the number of terrorist activities which
they have to cope.
Conversely, small developing economies, which are specialized in a few sectors,
may not have such strength. Assets, for example, workers or capital might either spill out
of an influenced sector to less productive activities inside of the nation or move altogether
to another nation.
Besides, developing economies are prone to need specific assets, for example,
observation new technology or an innovatively propelled police power or armed force that
can be utilized in counterterrorism. This permits the terrorist risk to continue, which can
frighten off potential financial specialists. A terrorist assault against such a country is liable
to force bigger and all the more lasting macroeconomic expenses.
In the Asian countries context, the developed countries have the ability to bear
terrorist activities regardless of showing any effect on growth. While emerging economies
the transnational terrorist attacks increases the governments expenditure on security
measures and decrease the per capita income and Ultimately, it is drawing the wealth of
necessary private and public assets (Gaibulloev, K. and T. Sandler, 2009).
Another point of view could be taken into account is through poverty. Poverty could
also be the cause of the terrorism. The terrorist activities are lasting longer will decrease
growth either in direct or indirect form. The best example is in the era of 1970 when the
terrorism resulted in the GDP of Spain to reduce by 10% (Abadie, A. and J. Gardeazabal,
2003). The internal conflicts and external wars, compared to the terrorist activities, have a
much higher negative effect on the economic growth. The diversion from the spending of
the government operations also impacts the terrorist activities.
The impact of terrorism activities is subtle and is statistically insignificant, but
according to the writer, these results need too much attention to be interpreted properly.
According to them, these results are due to the poor form of the data. In the countries having
developed institutions the cost of the terrorism is being reduced. However, overall the
terrorism indicators have a negative effect on the GDP growth rate (Tavares, J., 2004).
According to Gupta, Clements, Bhattacharya, & Chakravarti (2001),

armed

conflict and terrorism lead to a higher share of defense spending in total government

expenditure, which has a negative effect on growth by diverting resources away from
spending on socially and economically productive sectors that promote economic growth.
To obtain the political aim, intentionally threatening of the society by doing the
violence is called the terrorism. Terrorist mostly uses this to create the chaos among people
through the tool of violence. Moreover, this is mostly done by the one or more group of
individuals by menacing the other citizens of noncombatant state. For this research,
terrorist attacks have been chosen in a given year as an indicator of terrorist activities.

2.2.

Crime

Crime is an instance or an act of negligence that is against the law and punishable
upon conviction. Crime comprises a broad view of characteristics because it is a complex
socio-economic phenomenon and it can be performed by an individual or a group of
persons, just as the impact of it can affect either an individual or a group of people.
A crime against property, which can likewise include or not brutality against a man
while carrying out the crimes, incorporates any endeavor or the real hardship of some
individual's assets and additionally adamantly harming them. Drug offenses, debilitated
driving which brought about somebody's death, illegal conflagration, wagering and
ownership of weapons and also the abuse of public office for private or political addition
are likewise crimes which may affect individuals or property, yet don't make part of the
above two categories.
Crime has an importance impact on the society. On one hand, criminal activity
permits the consumption of illicit goods and services which cannot otherwise be consumed.
On the contrary, crime imposes enormous costs either to public or private sectors, such as
death, stolen and damaged goods, pain, suffering, and security spending. The estimation of
such social expense of crime has shifted a major area of study in the last few decades
(Czabanski, 2008), which explains how crime imposes a significant burden on society. For
example, (Brand and Price, 2000) estimate the total crime costs in Wales and England for
the Home Office using survey data. They estimate a total expenditure equals to the 6.5%
of the Gross Domestic Product (GDP). Anderson (1999) finds that the total annual cost of
criminal activity in the United States accounts for 11.9% of the GDP. A recent work of
(Detotto and Vannini, 2009) evaluates the burden of a subset of crime offenses in Italy

(about 65% of all crime offenses) during the year 2006. The estimated total social cost
exceeds the 2.6% of Italian GDP.
A further step was conducted by McCollister et al. (2010) who quantify the tangible
and intangible economic loss per criminal activity. The authors mention a large number of
studies that were done to develop crime-costing methods which try to measure those costs.
In their paper, they perform calculations to evaluate the per-offense tangible and intangible
costs, as well as total per-offense costs. They conclude that the average expenses of a
murder are 8,982,907 US dollars, of robbery are 42,310 US dollars, of a rape/sexual assault
are 240,776 US dollars, of a household burglary are 6462 US dollars and of stolen property
are 7974 US dollars, values converted for the year 2008 (McCollister et al., 2010).
Moreover, they evaluate that the costs due crime incurred by the United States, in 2007,
were off nearly 179 billion US dollars in government expenditures and 15 billion US
dollars to the victims and on legal and judicial activities, police protection and corrections
(McCollister et al., 2010).
The damage brought on by crime significantly affects society which comes about
into disadvantages for the economy. It forces huge expenses to the private and public sector
which negatively influence the individual condition of being a person and also to the
welfare of the general public. The effect of crimes on the economy is significant because
it creates awesome substantial and elusive expenses to society at various levels, from
individual to the national one. The measure of cost lost due to the crime displays a big
monetary misfortune to an economy, which generally could have been utilized as a part of
different viewpoints. The opportunity cost of crimes, the advantage one could have gotten
by making an option move, is a speculation which could have yielded some substantial and
immaterial positive returns if contributed with consideration, along these lines it appears
to be sensible to expect that crimes negatively affects the monetary development of a nation
and that the investigation of this issue is of an incredible significance.

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2.3.

Determinants of Economic Growth

As the positive economic growth is necessary for every nation, therefore the
determinant factors of it have to be put much concern. The first theory which stresses the
role of determinants for the economic growth was Solows growth model (Solow, 1956).
It underscores the role of capital stock, which is the summation of previous investments
into machines and buildings, in the short run economic growth. It figures out how to extend
the apprehension of economic growth partially because it towards to the progress of
technological as exogenous to the economic model. According to this model, because of
the convergence in growth rates, developing countries grow faster compared to the
developed countries. As the technological progress was the fundamental motivation behind
why the Solow growth model is just mostly clarified, it will be proper to break down its
part in the economic growth. Technological change is a result of a cognizant venture
embraced by people looking for amplifying their profits.
The human capital is considered as crucial to the economic growth and the first to
mention this was Mincer (1981). In his paper, Mincer showed that the acquired abilities of
individuals were the ones which have an effect on economic growth. With an increase in
the physical capital, they created the framework of the yield a higher economic growth and
aggregate production function (Mincer, 1981). The summation of individual human capital
that refers to workers acquisition of knowledge by knowing how through education and
acquiring skills and training (Mincer, 1981) generates personal economic growth. The
personal level aggregation, the human capital on a national level, create an economy
growth. The greater the number of contributors, the higher the growth could be. The author
also concluded that the relationship between the growth of human capital and the economic
growth is pertinent, the human capital stock become a consequence and condition of
economic growth (Mincer, 1981).
Foreign direct investment (FDI) is one of a source in transferring technology
between countries, which adds relatively more to economic growth. Hence, this
determinant is considered to be of great importance as well (Borensztein et al., 1998).
Nevertheless, it is highly dependent on assimilation potential of the human capital stock of

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the economy which obtains the FDI inflow (Borensztein et al., 1998; Lensink & Hermesa,
2003).
Openness to trade is another vital factor of economic growth. It is counted by
dividing the sum of exports and imports of goods and services to GDP, and it affects
economic growth by increasing the competitive advantage. The industries develop
attributes that help them to distinguish themselves and surpass other competitors.
Companies in the meanwhile are motivated to be more competitive in the industries.
Additionally, trade augments the knowledge and technology transfer. Plus, by opening the
economy to the external world, it helps to increase the economies of scale. Kraay and
Dollar (2004) also analyze the relationship between economic growth and openness to
trade then conclude that emerging countries benefit the most from opening their economies
to the external world, by having an increase in GDP per capita2 growth of 5.0 %.
Consequently, developed countries had an increase of 2.2% and countries which were
closed to trade increased only 1.4% (Kraay & Dollar, 2004).
Political stability has been turned out to be a critical component promoting
economic growth. At last, it results in a hampered economic growth. Lensink et al. (1999)
show some empirical evidence on the political environment have a significant influence on
economic growth. They conclude in their paper that credibility of governments enhances
the economic progress by eliminating uncertainty, additionally the implementation of
policies which stabilize trade aid to the creation of a greater economic growth (Lensink et
al., 1999).
In this paper, crime is focused as a cause and but not a consequence of the economic
growth. Thus, the decision to observe the factors mentioned above was taken due that they
might be influenced by crime or the other way around. Crime has a looming adverse effect
on human and capital stock, which is the important economic determinants since it
diminishes both the physical and intangible welfare of individuals and the whole societies
(Anderson, 1999; McCollister et al., 2010). As previously mentioned, FDI inflow and
technological change rely heavily on the human and capital stock. Therefore, the effect of
crime on the following group of determinants expands first to set as well, which in turn has
an effect on economic growth as aggregate. Moreover, crime has a direct impact on FDI
inflows acting as a preventive for foreign investors (Daniele & Marani, 2011; Gaibulloev

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& Sandler, 2008). Crime also affects openness to trade. Governments firstly are concerned
of their human capital and before engaging in trade, one government would search for
countries where their trading agents would be relatively safe. Therefore, high crime rates
might constrain the effect of openness to trade, by generating a price markup similar to a
hidden tax (Marcouiller et al., 2002).
Another economic determinant which is negatively influenced by crime is political
stability. In countries with high crime rates, individuals are apprehensive about their
security and they look for the administration to be successful in this sense. When the
government does not succeed to reduce the crime rates, political stability is decreasing
because people lose their confidence and demand more qualified governance. Inverse to
the preceding factors, determinants of economic, for example, institutions which influence
the economic performance, welfare inequality, socio-cultural factors, geographic location
and the demographic trends have a tendency to have an impact on crime. Poverty increases
because of income inequality induces the crime rates growing. A government which are
not able or tend to tolerate corruption, to govern inappropriately and excite the crime rates
to rise. Socio-cultural factors are profoundly established into a countrys way of life.
Therefore, crime may be a result of a culture or the other way around. Geographic location
and demographic trends may also be affecting crime because of migration, age-distribution,
and population density. The investigation of determinants which influence crime is passed
the extent of this proposition. By investigating the right components, a target answer to
how does crime affect the economic growth will be presented.

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2.4.

The Relationship Between Crime and Economic Growth

The relationship between crime, corruption, and economic growth appears to be


obvious to most people. Both crime and corruption increase uncertainty and the cost of
economic activities, thus crime and corruption must discourage economic activities that
cause economic growth. However, the relationship between crime and growth and
corruption and growth is much more complex than it first shows up.
Academia studying corruption have conjectured both how corruption can decrease
and increase economic growth. Academia also taking step further by focusing on which
economic growth determinant, crime has the biggest impact. In the empirical research
which its purpose is to figure out the reasons of Colombias economic growth deceleration,
the retardation of growth started in 1980, Cardenas (2007) found out that human capital
accumulation and physical had no effect on the decrease of economic progress, and the
only cause of it was productivity loss. When exploring further the reasons for productivity
loss, the author observed that this was due to increase levels of crime, specifically homicide
rates due to increasing drug-trafficking capacity (Crdenas, 2007). The author concluded
that the increase in crime rate had a significant negative impact on the economic growth.
Another study done by Peri (2004), observed the impact of socio-cultural variables,
such as civic involvement of its citizens and presence of organized crime as revealed by
murder rates on the economic success of Italian provinces using data from 95 provinces
over the period from 1951 to 1991. The author concludes that civic involvement does not
have a clear impact on economic progress, but crime does have a significant effect on
reducing per capita income and employment growth (Peri, 2004). As mentioned earlier, the
costs of crime present an opportunity cost and Gaibulloev & Sandler (2008) confirm it by
exploring the effect of crime from transnational and domestic terrorism perspective on the
economic progress of 18 Western European countries, using data from 1971 to 2004. They
conclude that terrorism crowds-out growth-enhancing monetary inflows, such as foreign
direct investment (FDI), and in addition to that, it increments growth-neutral government
spending which could have otherwise be used to stimulate the economic growth
(Gaibulloev & Sandler, 2008).

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There are observations which show a vague relationship between crimes and
economic growth which opposites to previous studies that presented that crime indeed hurts
economic growth. Goulas and Zervoyianni (2012) check the effect of the crime interaction
and macroeconomic uncertainty on economic growth using a panel of 25 countries during
the period 1991 to 2007. The authors conclude that the increasing levels of crime do not
have an independent effect on economic growth under favorable economic conditions, but
are highly significant in bad economic times, i.e. when worsening the economic conditions.
(Goulas & Zervoyianni, 2012). Burnham et al. (2004) examine the link between inner-city
crime patterns and suburban income growth using data on metropolitan areas of 32 US
states from 1982 to 1997. The results show that the bigger the distance from the central
city, the lower the negative effect of crime is, and at a certain point the impact even
becomes positive (Burnham et al., 2004). They believe that crime has no clear effect on
growth.
Mauro and Carmeci (2007) argue that crime has no effect on economic growth,
explore the associations between crime, measured in homicides, unemployment, and longrun economic growth, using annual data for 19 Italian regions over the period 1963 to 1995.
Their observations show that crime has no significant impact on long-run growth even
though it has a significant negative effect on income levels (Mauro & Carmeci, 2007).
Another author Ray et al. (2009) also find the relationship between crime and corruption
and economic growth, data obtained from International Crime Victim Surveys used for
both European Union (EU) and non-EU countries from 1989-2005. They deduce that there
is no strong evidence of any significant link between crime and growth rates. Various
research show which crime does have a very significant adverse effect on economic growth
(Crdenas, 2007; Peri, 2004; Gaibulloev & Sandler, 2008), whereas other conclude
inversely that the effect is not clear (Goulas & Zervoyianni, 2012; Burnham et al., 2004)
or even absent (Mauro & Carmeci, 2007; Ray et al., 2009)
From the theoretical debate and discussion based on their research findings
regarding the relationship between crimes, terrorist and economic growth, some hypothesis
will be made concerning the effect of crimes and terrorist attacks on economic growth in
the Asia.

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To see the impact on economic growth, total crime will be regressed indirectly
through the augmented Solow growth model adjusted to the technological change. And to
see another result of regression then it will be directly regressed with economic growth
Hypothesis 1
Total crime does have a statistically significant negative impact on economic growth with
the augmented Solow growth model adjusted to the technological change.
Hypothesis 2
Total crime does have a statistically significant negative impact on economic growth.
Terrorist attacks would be treated the same as total crime. It will be regressed
indirectly through the augmented Solow growth model adjusted to the technological
change. Moreover, to see another result of regression then it will be directly regressed with
economic growth
Hypothesis 3
The total terrorist attack has a statistically significant negative impact on economic growth
with the augmented Solow growth model adjusted to the technological change.
Hypothesis 4
A terrorist attack has a statistically significant negative impact on economic growth.
Now both of terrorist attack and total crime will be regressed through the
augmented Solow growth model adjusted to the technological change and directly to the
economic growth.
Hypothesis 5
Total terrorist attacks and total crimes have a statistically significant negative impact on
economic growth with the augmented Solow growth model adjusted to the technological
change.
Hypothesis 6
Total Crimes and Terrorist Attacks have a statistically significant negative impact on
Economic Growth of Solow Model adding some more control variables.

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The last one is total crime would be spread into its factor to see their effect on
economic growth
Hypothesis 7
The magnitude of the crime impact on the economic growth depends on the type of crime.

3.

Data
This part is to describe the variables that are used in this thesis. In the appendix,

there is the summary statistics of the variables. This thesis focuses on the effect of crime
on economic growth within the Asian countries between the period of 2003 and 2013 from
the UNODC. The Global Terrorism Database (GTD) which was provided by the National
Consortium for the Study of Terrorism and Responses to Terrorism (START), the list of
the country contains of countries which are very vary in terms of crime data, from the
countries that has really high rate of crime in particular area into countries that even some
crime very least exists. The data set is composed of a balanced panel of annual
observations. It contains all components observed for all the years, missing observations
being infrequent.

3.1.

The dependent variable

Economic Growth is the dependent variable on this thesis, and it is defined as GDP
growth. Gross domestic product (GDP) is the pecuniary value of all the finished goods and
services produced by all the resident producers within the borders of a country, usually
computed on an annual basis, and which includes any product taxes and excludes the
subsidies in the value of the goods (The World Bank Group, 2014). GDP per capita growth
is the annual percentage growth rate of GDP per capita, GDP per capita being the total
output of a country that takes the gross domestic product (GDP) and divides it by the
midyear number of people in the country (The World Bank Group, 2014). The data is
retrieved from The World Bank database (The World Bank Group, 2014) which is

17

considered a reliable one and which provides a significant number of observations for a
large set of countries, over a vast period.

3.2.

The Independent Variables

Log(TotalCrime) Log(Terrorist Attack) are the independent variable, and they are
counted as the natural logarithm of a total number of crimes and terrorist attacks recorded
by the police. According to the study of Goulas and Zervoyianni (2012) to test the first two
hypotheses, data on Total Crime will be used, yet the numbers in the crime data is relatively
high, then the variables will be logarithmized and so will the Terrorist Attack. The natural
logarithm (Log) transformation is used to decrease the fluctuations, build the pattern of
Total Crime and terrorist attacks variable more interpretable and be able to reach
conclusions that broaden beyond the data itself. Moreover, those variables are changed to
be normalized as the residuals. Using the Log, the initial variables are replaced to alter the
configuration of distribution. Each data point of the Total variable Crime and Terrorist
Attack are replaced with the transformed value Log(TotalCrime) and Log (Terrorist
Attack) where logarithm to base n (Log) express the base of an irrational number e, which
has an approximate value of 2.7183. The initial values are replaced as the power to which
e (2.7183) would have to be raised to be equal. Testing the third hypothesis data on different
types of crime is important. According to McCollister et al. (2010) the costs of each type
of crime are different, so it is assumed that the magnitude impact of each type of the crime
on the economic growth will be different as well. As a result, Assault, Total Violence,
Robbery, and Theft variables will be used as independent. First, the data on Assault is going
to be used. It is considered as the crime against an individual which resulted in death due
to an individuals intention and expected to have the impact on economic growth. Second,
the data on Total Violence will be tested. It is described as a crime against an individual
which includes any threat of force against somebody, as well as accidents. Robbery and
Theft will be tested as the last type of crime. These variables are described as crimes against
an individual or property, and that can also involve or not violence against a person while
committing the crime, and include any occurrences of someones belongings also will
damaging them. These variables are expected to be statistically significant. All the data on
crime is expressed in units, and it was retrieved from the UNODC also The Global

18

Terrorism Database (GTD) which was provided by the National Consortium for the Study
of Terrorism and Responses to Terrorism (START).

3.3.

Control variables

Economic growth does have some determinants which were used by prior research
and would also be used as control variables. It is expected that crime and terrorist attack
will have the impact on economic growth by having an impact on its determinants whether
it is positive or negative. A brief explanation on all of the determinants used in this thesis
is described below:
According to The World Bank Group, 2014, Population Growth is the rate of
midyear population exponential growth from year t-1 to t, expressed as a percentage and
the data for this control variable was retrieved from The World Bank. Additionally, the fact
that population growth is a determinant of economic growth, and that the data on crime is
expressed in units, population growth expressed as a percentage and included to the model.
Education is defined as tertiary education for both sexes, and it is represented as
the gross enrollment ratio which is the rate of high school graduates, regardless of age, that
have enrolled into a university. It is represented in the percentage of the total population.
Moreover, Goulas and Zervoyianni (2012) also use the ratio of tertiary gross enrollment.
Education is expected to decrease crime, since people who are educated are assumed to
perceive crime as an opportunity cost, thus increase the economic growth. The data was
obtained from The World Bank (The World Bank Group, 2014)
Savings is seen as savings as a rate of GDP, and it represents the capital stock of a
country. It is the total of previous investments such as buildings and machines in the shortrun of economic growth. According to Goulas and Zervoyianni (2012), it is defined as
gross capital formation as a percentage of GDP, and it is a way to describe the capital
accumulation. Crime is expected to decrease the savings rate because it generates
additional costs to the economy (Anderson, 1999). This may, in turn, decrease the
economic growth, because the money which could have been used for capital
accumulation, have to be used to cover crime expenses. The data has been retrieved from
The World Bank database (The World Bank Group, 2014).

19

Openness to Trade is defined as a trade, which is the summation of imports and


exports of goods and services, and it is counted as a percentage of GDP (The World Bank
Group, 2014). Crime is expected to eliminate the amount of goods and services traded, due
to lowering the available human and financial resources for manufacturing the products.
As a result, this will have a negative effect on the economic growth. The data on trade has
been retrieved from The World Bank (The World Bank Group, 2014).
Political Stability is seen as political stability and absence of violence/terrorism,
captures view of the likelihood which the government will be overthrown or destabilized
by violent means or unconstitutional, including politically-motivated violence and
terrorism (The World Bank Group, 2014). The data is represented in units of standard
normal distribution, as scores on the aggregate indicator, ranging from -2.5, very politically
unstable, to 2.5, politically very stable (The World Bank Group, 2014). Increasing crime
is expected to influence political stability negatively, due to decreasing the credibility of
the citizens. This would result in a lower support for the governance and a hampered
economic growth. The data was obtained from The World Bank (The World Bank Group,
2014).
Foreign Direct Investment (FDI) inflows and is computed in a percentage of gross
domestic product (GDP). These investments are from foreign investors. In accordance with
Borensztein et al. (1998), FDI is a source of technology transfer between countries, which
adds relatively more to economic growth. As previously described, crime has an impact on
the human capital stock, then affects the stock of human capital ability to absorb the FDI
investments (Borensztein et al., 1998; Lensink & Hermesa, 2003). As the result, FDI inflow
is expected to have an adverse impact on economic growth.

4.

Methodology
This thesis aims to see the effect of crime and terrorist attacks on economic growth

in a panel model. According to the causality testing framework, VIF test is needed to use
to ensure that the error term of the independent variable is not correlated with the error
terms of other control variables and that the coefficients are independent. This makes the
estimated variances of the coefficients be properly interpreted. Ordinary least squares

20

method (OLS) is used to test the three hypotheses. OLS is a method in statistics which
estimates the unknown parameters in a linear regression model. A Correlation analysis is
used to check statistically significant linear relationships between the variables or to find
whether two explanatory variables are measures of the same thing. If that is true and
variables are indeed highly correlated, meaning that one variable can linearly predict the
other, then the variables have to be eliminated. Otherwise, the effect of each of the
independent variable is not clear If no correlation is observed then no such omitted needed.
Before testing the first hypothesis, a couple of regressions will be run to check the
relationship between the independent variable and the dependent ones also the control
variables. It is expected that the first set of control variables, specifically the ones who will
be used to test the first hypothesis, to be of major importance, therefore it is crucial to
investigate how the independent and the control variables interact with each other. First,
the dependent variable will be regressed with the independent one, consequently adding
one by one the control variables until it finishes to second and third also the rest combined
model.

5.

Result
5.1.

Statistical Test

Before testing the first hypothesis, a couple of regressions will be run to check the
relationship between the independent variable and the dependent ones also the control
variables. It is expected that the first set of control variables, specifically the ones who will
be used to test the first hypothesis, to be of great significance, therefore it is crucial to
investigate how the independent and the control variables interact with each other. First,
the dependent variable will be regressed with the independent one, consequently adding
one by one the control variables until it finishes to second and third also the rest combined
model. However, the correlation test will be run as a requirement checking to see the
relationship between variables before the regression.
The results of two tables below can help us see the partial correlation between the
variables, and to note is the relationship between the Independent Variables Dependent

21

variable (positive or negative correlation). If the value of the relationship between


Independent variables and Dependent variables is subtle, e.g. below 0001, then it is very
small anyhow independent variables can explain Independent variables. Elimination is
done only if a certain correlation coefficient has a total value of VIF more than ten as a
bound of moderate strength correlation and which is the threshold of the minimum value
of correlation coefficient. Moreover, it is shown below that the result of the VIF is not more
than a ten so overall it is considered as a good result.
Table 5.1. VIF Test

Table 5.2. Correlation Test

5.2.

Total Crime and Economic Growth

In Table 5.3, the first model comes to answer the first hypothesis. Technological
Change has been added to the augmented Solow Model. This variable is statistically
significant as 0,026 and has much effect on the Total Crime; it affects the coefficient on

22

Total Crime becomes negative. Technological Change has negative coefficient -0,025108;
it can be said that an increase of 1% in Technological Change leads to a decrease 0,0251081
in economic growth. This case might be explained by the fact that technological change
has the effect of creative destruction, thus causing old technology, skills, ideas, and
equipment to become obsolete (Library of Economics and Liberty, 2008).
Table 5.3. Total Crime, Solow Variables and Economic Growth

Population Growth has a statistically significant adverse effect on Economic


growth with a value of -0.5712216, thus confirming the hypothesis of a negative linear
relationship between the variables. The interpretation of results is an increase in 1 unit of
Population Growth leads to a decrease of -0.5712216 units in Economic Growth. Since
GDP per capita growth explains economic growth, it seems to be logical that GDP growth
has a negative effect on population growth. The bigger the number to which the GDP has
to be spread, the lower the outcome will be. A negative correlation between these variables
is in accordance with the study of Temple (1999). When the Savings variable is added
which represents the capital stock, the coefficient of Savings variable is 0.1473, meaning
that a one unit increase in capital stock will increase the Economic Growth with 0.1473
units. The accumulation of capital stock seems to have beneficial twofold effects. First, it
enhances the economic growth per se, and second it improves the economic conditions by
diminishing the effect of total crime. Moreover, investing in the capital a government
diminishes unemployment (Karanassou et al., 2007), thus, this result shows that by

23

increasing the government consumption, it might discourage people to engage in criminal


activities due to different reasons, but the most plausible one being financial stability.
Table 5.4 observed that the relationship between Total Crime and Economic growth
directly without the Solow model variabes. It shows a positive yet statistically insignificant
at 5% significance level. Since the natural logarithm of the Total Crime variable has been
taken, the data will be interpreted a bit different than with the basic variable. When
interpreting a regression where there is & log, where is the dependent variable and is the
independent one, then an increase in 1% in would lead to increase/decrease in, therefore it
can be said that an increase of 1% in LogTotalcrime leads to an increase of 0.0374953 %
in Economic Growth without any explanatory variables added to be performed expect the
LogTotalCrime itself. Since the Total crime is played alone here without any other
explanatory variables, so the effect of the crime on the economy is not as bad as it was
expected apparently. Then we also might say that crime is treated as a sign if there is an
economy activity. Hence, it gives positive impact on economic growth as a whole, one
thing to be remembered is that other explanatory variables are not included in the
regression. Mauro and Carmeci (2007) also even argue that crime has no effect on
economic growth, explore the associations between crime, measured in homicides,
unemployment, and long-run economic growth. Their observations show that crime has no
significant impact on long-run growth even though it has a significant negative effect on
income levels, since in this regression the R-squared value is too low also.
Table 5.4. Total Crime on Economic Growth

24

5.3.

Terrorist Attack and Economic Growth

Next regression that has been performed was about the terrorism in Table 5.5. The
finding highlights the positive effective of population growth on economic cycles. It has a
coefficient of 0,2343855 but still insignificant. Kuznets (1976) showed more empirical
evidence on the beneficial effects related to population growth named a more
comprehensive critique and analysis of Malthusian theories. Kremer (1993) has
empirically confirmed that larger population was related to higher population growth and
faster technology progress, which is a consequence of population growth, and leads to an
increase in a productivity of labor, per capita income and improvement in living standards.
The LogTerroristAttack also shows the positive relationship with economic growth
insignificantly with the number of coefficients is 0,01842353. When defining a regression
where there is & log , where is the dependent variable and is the independent one, then an
increase in 1% in would lead to increase/decrease in, therefore, it can be said that an
increase of 1% in LogTerroristAttack leads to an increase of 0,01842353 % in Economic
Growth with other explanatory variables added to be performed not only the
LogTerroristAttack itself. In the Asian countries context, the developed countries have the
ability to bear terrorist activities regardless of showing any effect on growth. The overall
impact of terrorism on the economy can be determined only by knowing how an economy
would have developed without the terrorist effect. Attempts to describe these differences
by Blomberg et al. (2004) deduce that the terrorism impact on the economic growth is only
statistically significant and small for developed countries. Terrorism inflicts a significant
economic effect on societies and will not only lead to direct material damage, but also to
long-term effects on the local economy. As the variable is not played alone in the regression
that also included other augmented Solow growth variable such as saving, it might be the
one that makes terrorist attack has a positive impact on GDP growth. Saving rates that will
lead to the GDP growth may be affected by terrorism. However, it is still not clear if this
effect is positive or negative (Frey et al, 2004). This effect of terrorist attack will be seen
more logic on the next result if it is regressed as one variable that will affect GDP growth.

25

Table 5.5. Terrorist Attack, Solow Variables and Economic Growth

In the context of Asian countries, developed countries will have more ability to bear
terrorist activities regardless of showing any effect on growth. While emerging countries,
the transnational terrorist attacks increase the governments expenditure on security
measures and decrease the per capita income and Ultimately, it is drawing the wealth of
necessary private and public assets (Gaibulloev, K. and T. Sandler, 2009). It is clear as
highlighted on the result of regression in Table 5.6 below.
The Terrorist attack is regressed as a single variable that will be seen has an effect
on economic growth, and the result is clear that it has a negative effect on economic growth.
It has a different result as before because it is not regressed with other augmented Solow
variable as previously. According to Gupta, Clements, Bhattacharya, & Chakravarti
(2002), which supported this result, they found that terrorism drives to a higher share of
defense spending in overall government expense, which has a negative effect on growth by
veering resources away from spending on socially and economically productive sectors
that promote economic growth. The impact of a terrorist attack here is indeed subtle and is
statistically insignificant, but according to the Tavares, J, (2004), this result needs too much
attention to be interpreted properly. This result might be due to the poor form of the data.
In the countries having developed institutions the cost of the terrorism is being reduced.
However, overall the terrorism indicators have a negative effect on the GDP growth rate.

26

Table 5.6. Terrorist Attack on Economic Growth

5.4.

Total Crime, Terrorist Attack and Economic Growth

In order to see the effect of both terrorist attacks and crime then the regression was
performed. They have been performed with the augmented Solow growth adjusted to
technological change. The results are not as expected apparently. They both have positive
effect on economic growth with the coefficient of 0,0493722 for the total crime and
0,2306525 for terrorist attacks. Both of them also have insignificant result statistically. As
can be seen, not only there is no significant effect on economic growth, but also even after
these two variables added into regression, they do not give any significant change to the
other Solow variables as well. Population growth still the same with its positive effect,
especially for the Technological Change that almost remains the same during the
regressions. However, some changes happened when they were regressed with the control
variables as in Table 5.7. After the control variables added into the regression, they give
an impact on the political stability becomes negatively significant with a coefficient of
0,068405.
Terrorist attacks then also changed to the variable that has negative effect on
economic growth, contrary as previous regression. This might due to what happened with
the condition of politics stability in a country if terrorist attacks occurred, then the effect
will lead to the economic growth through weakening foreign direct investment and other
development projects. This also supported by the finding of Aisen and Veiga (2011) that
political instability is linked with lower growth rates of GDP per capita. Concerning the
channels of conveyance, it was found that political instability adversely affects growth by

27

decreasing the rates of productivity growth and, to a smaller degree, human capital, and
physical accumulation. However, the circulation of international trade that is seen from
openness to trade through export and import activities seem has not been affected but still
have a positive on the economic growth.
Table 5.7. Total Crime, Terrorist Attack, and Economic Growth

5.5.

The Magnitude Crime and Economic Growth


Now we arrive at the last hypothesis. In order to see the result, different types of
crime will be used. The variables of Robbery, Total Violence, Assault, and Theft then have
been tested through the Solow model and control variable included to see the impact on
economic growth. The results are getting make more sense along the regression compares
to previous ones. There are two type of crimes that have positive impact on economic
growth, they are Robbery and Assault. And the other two as total Violence and and Theft
have negative coefficient which means they have negative impact on economic growth.
However, from all the type of crime, there is only one variable that is statistically
significant, which is Total Violence with the beta coefficient of 0,0351256 and its
significance is under 0,050. Now we have a better understanding of in which part of crimes
does it actually affect economic growth if they are tested with Solow and control variable.
One thing that is considerable to be highlighted from the control variable is political
stability. It is clear that in almost every regression of type of crime, political stability has

28

always been affected by the crimes, that will lead to economic growth. And the result is
strong, it has significant effect of the crimes that happened with it significant coefficient
almost perfect.


Table 5.8. Robbery



Table 5.9. Total Violence

29

Table 5.10. Assault


Table 5.11. Theft

30

6.

Conclusion
This thesis has conducted that there is no statistically significant effect of terrorist

attack and crime on economic growth in the Asian Countries within the year of 2003 2013. The regression analysis result fail to support the hypothesis that terrorist attack and
total crime have a statistically significant adverse impact on economic growth when
included in the augmented Solow growth model adjusted to technological progress.
Nevertheless, although terrorist attack and crime are not statistically significant they still
give some determinants, population growth and saving contributing more to economic
growth.
The results fail to support the second hypothesis that terrorist attack and total crime
have a statistically significant negative impact on economic growth. The results showed
that although crime does not have a statistically significant effect on economic growth, it
stresses the importance of savings on economic growth, and it affects the population
growth which contributes more. Additionally, crime underscores the importance of
political stability contribution to an economic growth.
The purpose of this thesis was to explain the magnitude of the effect of crime on
economic growth, depend on the type of crime. The findings from the regression analysis
suggest that different types of crime do not have any statistically significant effect on
economic growth, expect the Total Violence variable. Additionally, similar to the results
from testing the first two hypotheses, the presence of different types of crime has an effect
on the determinants, in particular through the political stability.
So, the debate appears to keep continue on behalf of crime and terrorism in their impact
on economic growth. It is not about which one is right or wrong because science evolves
and world changes and society moves dynamically. We all just have to harmonize them
all.

31

7.

Limitation
Constraints of this research exhibit some areas for further advancement in

investigating the impact of crime and terrorist attack on economic growth. The first
limitation is the inadequate scale of years used to analyze this matter, hence enlarging the
data set will be beneficial in generating a better result. The majority of the Asian countries
are considered as developing, hence, maybe the analyzed dataset for the number of
recorded crimes and terrorist attacks were insufficient to achieve statistically significant
results.
The second limitation might be the proxies used since it is not yet clear which of the
determinants must be used to study the impact of crime on economic growth. Furthermore,
using crime rates instead of absolute values of crime might give further insight the impact
of crime on economic growth. By dividing the number of crimes to the population sizes of
the countries, crime variables may function as a proxy for country sizes as well, thus taking
into account for additional relationship that might be between population size and growth.
Forth limitation might be the region analyzed. By investigating separately such as
Western and Eastern Asian countries, this might add much value to this research and result
in a sharper effect of crime and terrorist attack. The fifth limitation might be the types of
crime analyzed. The impact of crime on economic growth might be made by investigating
an extensive set types of crime and a more precise analysis of the crimes magnitude.
Moreover, the last one is the sort of terrorist attack, which could be focused particularly on
the economic damage caused by the terrorist attack. Victims and the motive or doer could
be included as well if necessary.

32

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9.

Appendix


Table 9.1. Summary of Statistic

35