Transcript National accounting results

Counterfactual Analysis of
Terrorism Effects on the
Economy:
the Case of Israel
Dotan Persitz
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Master Thesis for the MA studies in
TAU.
Under the supervision of Prof. Dani
Tsiddon and Prof. Zvi Eckstien.
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Three Questions
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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).
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Main Results
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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.
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Order of Discussion
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Short literature survey.
Brief introduction of the Methodology
and the data.
Results.
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Literature Survey –
Results
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Eckstein and Tsiddon (2004):
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Fielding (2003):
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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).
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.
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Literature Survey –
Counterfactual
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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 controlregion'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.
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Methodology – 1
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Important remarks:
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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.
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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.
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Methodology – 2
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The data set includes:
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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)).

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Methodology – 3
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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.
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Methodology – 4
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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 1993:31996:2 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 .
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Results - Introduction
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4 pseudo Israel were built:
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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.
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Growth results – 1
GDPPC: Actual Vs. Pseudo Israel (1980:1-2003:3)
Yearly GDP Per Capita in Thousands 1995 USD
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The start point of the
internal process
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17
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The beginning of the
second Intifada
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11
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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Actual
Pseudo (DB84, Constrained)
Pseudo (DB80, Constrained)
Pseudo (DB84, Unconstrained)
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Pseudo (DB80, Unconstrained)
Quarters
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Growth results - 2
1994:3
2000:3
2003:3
DB80C
14.92435
17.1774
17.77502
DB80UC
DB84C
15.74298
14.91689
18.04546
16.68307
18.61736
17.0866
DB84UC
CF AVERAGE
15.94738
15.3829
18.4358
17.58543
19.02577
18.12619
ACTUAL
15.80449
18.23776
16.68974
Mean Loss
-0.42(-2.7%)
X  X , X ,, X
1
2
T

-0.65(-3.6%) 1.44(8.6%)
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Growth results - 3
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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.
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Growth results - 4
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TER:
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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:
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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.
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Growth results – 5
Real GDP Per Capita of Israel Under Various Scenarios (Average)
Yearly GDP per capita in thousands of1995 USD
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Second Intifada
18.5
Prediction
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17.5
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16.5
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1998
1999
2000
2001
2002
2003
2004
2005
Quarters
No Terror and No Peace Process
1 Year Terror and No Peace Process
2 Years Terror and No Peace Process
No Terror and Ongoing Peace Process
1 Year of Terror and Ongoing peace Process
2 Years of Terror and Ongoing Peace Process
actual point for 2005:2
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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.
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National accounting results - 2
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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.
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National accounting results - 3
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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.
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National accounting results - 4
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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 it’s 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.
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Structural change results - 1
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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):
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Agriculture (including hunting, forestry and fishing).
Manufacturing (including mining, electricity and gas sectors).
Construction.
Services.
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Structural change results - 2
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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).
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Structural change results - 3
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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:
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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.
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Structural change results - 4
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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:
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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.
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