Dotan Persitz 1 Counterfactual Analysis of Terrorism Effects on the Economy: the Case of Israel
Transcript
Slide 1
Dotan Persitz1 Counterfactual Analysis of Terrorism Effects on
the Economy: the Case of Israel
Slide 2
Dotan Persitz2 Master Thesis for the MA studies in TAU. Under
the supervision of Prof. Dani Tsiddon and Prof. Zvi Eckstien.
Slide 3
Dotan Persitz3 Three Questions First: How large is the adverse
effect of terror on the GDP per capita since Israel suffered its
first suicide attack ? Second: How did this long period of terror
change the open economy national accounts composition of the GDP ?
Third: Did this terror intensive period cause a structural change
to the Israeli economy ? To answer those questions I will use
counterfactual methodology following Abadie and Gardeazabal
(2003).
Slide 4
Dotan Persitz4 Main Results If there was no terror in Israel in
the last decade, the GDP per capita in 2003:3 was 8.6% higher. The
portion of Investment, Exports and Imports in the GDP pie decreases
while that of the Consumption and Government Expenditure increases.
Weak evidence for structural change.
Slide 5
Dotan Persitz5 Order of Discussion Short literature survey.
Brief introduction of the Methodology and the data. Results.
Slide 6
Dotan Persitz6 Literature Survey Results Eckstein and Tsiddon
(2004): Lagged terror index is significantly negative in the GDP,
Investment and Exports equations. If the terror had terminated in
2003:3 the GDP per capita would increase in 2.5% annually and
recover in two years half of the reduction since the beginning of
the second Intifada. If the terror had continued in its average
level for two years then in 2005:3 the annual growth rate relative
to 2003:3 would be -2% (-1% for non durable consumption). Fielding
(2003): No terror inside the green line will lower consumption by
7.4% and increase GDP through savings by 4%. No literature
concerning terror and the structure of the economy.
Slide 7
Dotan Persitz7 Literature Survey Counterfactual Abadie and
Gardeazabal (2003) try to distinguish the effect of ETA's terror
from the economic behavior of Spain. They use a linear combination
of other Spanish regions, which construct a "synthetic" control
region that resembles the economic characteristics of the
pre-terror Basque country. They compare the evolution of this
control-region's GDP per capita to the actual output of the Basque
country and find that the level of terror significantly and
positively affects the difference between the two regions.
Slide 8
Dotan Persitz8 Methodology 1 Important remarks: This method
assumes: The OECD members' economies are independent of the
Palestinian terror. Israel economic behavior resembles the economic
behavior of an average OECD member. This method enables the
analysis of the adverse effect of the terror on the Israeli economy
to be free of international economic effects on the local economy
and focus on Israeli internal processes.
Slide 9
Dotan Persitz9 Methodology 2 The data set includes: Two
databases were tested. The first starts at 1980:1. The second
starts at 1984:1. 7/11 variables (regarded as growth indicators) of
11/12 OECD countries and Israel over 95/75 quarters. 3 variables
represent various characteristics of the Palestinian terror
(identical to Eckstein & Tsiddon (2004)).
Slide 10
Dotan Persitz10 Methodology 3 First, I find the linear
combination of the OECD countries that best resembles Israel in the
pre-terror period. Each country coefficient is non-negative and
less than 1 and the sum of the coefficients equals 1 (another
specification allows for different coefficient for each variable).
This linear combination is used to build the counter factual for
the within-terror Israel. Due to time limitations I will not
specify the process of choosing the coefficient vector. I will just
note that it is closely related to OLS coefficients under the above
mentioned constraint.
Slide 11
Dotan Persitz11 Methodology 4 The third stage is to use the
counterfactual in order to estimate Palestinian terror effect on
the Israeli macroeconomics. Define DIFF to be the difference
between actual Israel and pseudo-Israel (dependent variable). We
will use two main independent variables: Terror index (Eckstein and
Tsiddon (2004)) TER. Peace Process dummy variable (Periods 1993:3-
1996:2 and 1998:4-2000:3 got the value 1 and periods 1996:3-1998:3
and 2000:4-2003:3 got the value 0) PP.
Slide 12
Dotan Persitz12 Results - Introduction 4 pseudo Israel were
built: Using DB80 and restricting one coefficient for each variable
in the same country. Using DB84 and restricting one coefficient for
each variable in the same country. Using DB80 with one coefficient
per country and variable. Using DB84 with one coefficient per
country and variable. In many sections an average of these four
configurations was used. First, growth results will be shown.
Second, national income components will be analyzed. Third,
structural change will be tested.
Dotan Persitz15 Growth results - 3 The counterfactual is built
using data on the periods preceding the massive terror attacks of
the Palestinians. Therefore, the counterfactual is characterized as
a potential terror-free Israel. Another characteristic of the
counterfactual is that it is a peace process free Israel, since
during most of its construction period (except of the last 4
quarters) there was no substantial progress in the negotiation with
the Palestinians. Therefore, the main assumption in the basis of
the following analysis is that if there was no terror, but also no
peace process, Israel should have been observed, economically, as
the counterfactual.
Slide 16
Dotan Persitz16 Growth results - 4 TER: TER coefficient average
across configurations is -0.0032. The negative sign means, that the
Palestinian terror caused significant reduction to the Israeli GDP
per capita since the mid-90's compared to the possible behavior of
the Israeli economy in a peaceful environment. PP: The average of
the sum of the three PP coefficients is 0.0128. Their weight is of
the same scale of TER but, evidently, to the opposite
direction.
Slide 17
Dotan Persitz17 Growth results 5
Slide 18
Dotan Persitz18 National accounting results - 1 The previous
subsection asserts that the "pie" got smaller. Now, the change in
the portion of each "slice" will be examined.
Slide 19
Dotan Persitz19 National accounting results - 2 During
1994:3-2003:3: The consumption "slice" grew from 53% to 60% while
the counterfactual did not change over the time. The investment
"slice" reached its pick in mid 1996 and decreased continuously
until 2003:3. The counterfactual is almost constant. Before the
Intifada the government expenditure were mostly constant (while the
counterfactual was mostly decreasing) and during the Intifada it
rose (while the counterfactual was constant). The exports are close
to the counterfactual until the end of 1998. In 1999-2000 the
exports had a faster growth rate than the counterfactual until the
beginning of the Intifada. In 2001 the share of exports fell
dramatically and stayed constant up to 2003:3. The average
counterfactual rose by 3% during the Intifada. The imports are
close to the counterfactual until 2002. From 2002 the actual
portion of the imports is constant while the counterfactual
increases.
Slide 20
Dotan Persitz20 National accounting results - 3 The regressions
were done using the average configuration. * - 10% significance
level. Conclusion: Intensive terror (Successful peace process)
increases (decrease) the consumption and the government expenditure
portions, while it decreases (increases) the investment, exports
and imports portions.
Slide 21
Dotan Persitz21 National accounting results - 4 Private
consumption decreases due to adverse wealth effect and increases
due to its larger portion in the GDP pie. The increase in the
portion of consumption might be attributed to stronger time
preferences or to individuals transitory conception of terror. The
serial correlation of the fixed capital formation might suggest a
long memory. The effect of terror on the investment share is not as
small as it looks, since its portion is quiet small to begin with.
Moreover, its accumulative effect makes it even stronger.
Government expenditures are extremely sensitive especially to the
peace process intensity. Two bad quarters of terror might reduce
the export portion in the GDP by almost 1.5%. While, a quarter with
meaningful peace process the exports are up by 1.4%. The
explanation might be the low cost of portfolio substitution by the
foreign countries. The high sensitivity of imports to terror might
follow from the diversion of output to the local markets, which
lowered the local demand for foreign products.
Slide 22
Dotan Persitz22 Structural change results - 1 The discussion
over the burden sharing between industries in a terrorized
environment is absent from the literature. This analysis will try
to give a very preliminary answer to the "burden-sharing" question
in Israel. The Israeli economy was divided into four broad
industries (the standard OECD division): Agriculture (including
hunting, forestry and fishing). Manufacturing (including mining,
electricity and gas sectors). Construction. Services.
Slide 23
Dotan Persitz23 Structural change results - 2 The agriculture
industry share in the GDP decreased continuously from 1985 to 2000.
Since then it is constant. The counterfactual was constant since
the beginning of the 1990's. The manufacturing industry share
decreased until 1996 and stayed constant until 2000. In 2000 there
was a significant drop of the manufacturing share that was
compensated until 2003. The counterfactual was steady. The
construction industry share was constant except of the period
1991-1997 in which it rose. The counterfactual was constant. The
services industry share grew gradually since 1992 (almost 1% per
year). The counterfactual experienced a slow growth since 1984
(0.17% per year).
Slide 24
Dotan Persitz24 Structural change results - 3 The first look at
those data leads to believe that the Palestinian terror and\or the
peace process had little effect on the structure of the Israeli
economy in the last decade. Dominant factors: Worldwide process of
movement away from classical industries like agriculture to modern
industries, which are mostly accounted as services (The
counterfactual does not necessarily control for this effect, as
opposed to the national accounts analysis). The intensive
immigration from the former Soviet Union countries of highly
skilled labor force. Those immigrants demand for housing caused the
construction boost in the mid 1990's and their high quality skills
created the dramatic growth of the services industries on the
expense of the traditional hard labor manufacturing.
Slide 25
Dotan Persitz25 Structural change results - 4 The DIFF series
are highly serially correlated. This correlation can not be
explained by TER or PP (as it was in the national accounts). The
exception is the agriculture series: TER lagged by one period has a
small and positive 10% significant coefficient. PP has a small and
negative 5% significant coefficient. The interpretation might be
that bad times enlarge the agriculture industry share in the
economy. Apart from the agriculture regression there is no evidence
that might refute the conjecture that the geopolitical situation of
Israel in the last decade changed the economy in a fundamental
manner.