Terror and its Effect on International Trade in Financial Services Does the Development of Financial Institutions Matter?

Abstract

Using a sample of 67 countries from 2000 to 2014, we find robust evidence that terrorist incidents in either the importer or the exporter territory significantly reduce bilateral trade in financial services. A 10% increase in the number of terrorist incidents in a trading pair, which is typically of a small and non-fatal scale, results on average in a 1.32% to 1.72% annual reduction in bilateral financial service trade. The impact of fatal terrorist incidents is, unsurprisingly, twice more severe while non-fatal terrorist incidents alone have no significant impact. Importantly, we find that countries where financial institutions exhibit more depth (measured as the ratio of total assets held by deposit taking institutions to GDP) and more stability (measured by the z-score) export more financial services and cope much better with terrorism.