Foreign Financial Flows and Terrorism: A Case Study of Pakistan

Amar Anwar , Mazhar Mughal

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Abstract

This study examines the differential response of various international financial
flows to the post 9/11 episode of terrorism in the context of a South Asian country. Using monthly data for the period from January 2003 to December 2014, we analyze the impact of terrorism in Pakistan on the inflows of foreign direct investment (FDI), portfolio investments, and migrant remittances. We find that FDI decreases substantially as a result of terrorist activity, whereas portfolio
investments show little change. In contrast, migrant remittances show a significant increase. These differences are also evident in financial flows from major source regions and top sending countries. The results are robust to the use of alternative definitions and indicators of terrorism as well as the inclusion of various macroeconomic variables. These findings indicate that foreign private capital flees an economy suffering from terrorism whereas migrant remittances are the only financial flows that increase during difficult times.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherAsia Research Centre. Copenhagen Business School
Number of pages41
Publication statusPublished - 2016
Externally publishedYes
SeriesCopenhagen Discussion Papers
Number56
ISSN0904-8626

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