The Economic Costs of Conflict: A Case-Control Study for the Basque Country

37 Pages Posted: 5 Dec 2001  

Alberto Abadie

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Javier Gardeazabal

University of the Basque Country

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

This paper investigates the economic effects of conflict, using the terrorist conflict in the Basque Country as a case study. Our analysis rests on two different strategies. First, we use a combination of other regions to construct a "synthetic" control region which resembles many relevant economic characteristics of the Basque Country before the outset of political terrorism in the 1970's. The subsequent economic evolution of this "counterfactual" Basque Country without terrorism is compared to the actual experience of the Basque Country. We find that, after the outbreak of terrorism, per capita GDP in the Basque Country declined about 10 percent points relative to the synthetic control region. Moreover, this gap seemed to widen in response to spikes in terrorist activity. The second part of this study uses the truce declared in September 1998 as a natural experiment to estimate the effects of the conflict. If the terrorist conflict was perceived to have a negative impact on the Basque economy, stocks of firms with a significant part of their business in the Basque Country should have shown a positive relative performance as the truce became credible, and a negative relative performance at the end of the cease-fire. We find evidence that is consistent with this conjecture using event study methods.

Suggested Citation

Abadie, Alberto and Gardeazabal, Javier, The Economic Costs of Conflict: A Case-Control Study for the Basque Country (October 2001). John F. Kennedy School of Government Faculty Research Working Paper Series 01-048. Available at SSRN: https://ssrn.com/abstract=293120 or http://dx.doi.org/10.2139/ssrn.293120

Alberto Abadie (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-4547 (Phone)
617-495-2575 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francisco Javier Gardeazabal Matias

University of the Basque Country ( email )

Department of Economics
E-48015 Bilbao
Spain

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