Tahir MUKHTAR*, Markus BRUECKNER** and Zainab JEHAN***
Abstract
The increasing incidence of terrorist activities and armed conflicts worldwide has significantly increased socio-economic and political challenges. The present study aims to examine the fiscal consequences of terrorism in developing countries, with a particular focus on the role of institutional quality in response to counter terrorism activities. For an in-depth analysis, we classify developing countries into two groups, namely emerging and low-income countries and gauge the fiscal response towards terrorism in the presence of institutional quality from 2002 to 2016.Utilising both static and dynamic panel data techniques, the findings indicate that terrorism has adverse fiscal implications; it tends to reduce the tax revenue of the governments and at the same time, burdens the fiscal account by increasing the defence expenditures. Moreover, terrorist activities trigger fiscal instability by increasing the budget deficit volatility. However, it is interesting to see that institutional quality mitigates the adverse impact of terrorism on fiscal accounts, in all respects.
