Terrorism, Credit and Investment: Evidence from a Natural Experiment in Pakistan

This project looks, on the one hand, at the effect of charity donations to terrorist organizations on attacks, and on the other at how firms adjust their lending and investment decisions in presence of increased uncertainty.

Grants Round: 

Guaranteeing a safe economic environment and protecting property rights is acknowledged as central in promoting growth and development. Introducing suitable policies to counter criminal and illegal activities necessitates a thorough understanding of their underlying functioning. Among these is the emergence of terrorism
and its capacity to combine violence against politicians and civilians with para-military activities, infrastructure control and international linkages. While important work has shed lights into the determinants of terrorism, there are still some fundamental open questions. In particular, this research investigates a specific and central aspect behind the functioning of terrorist organizations: their relation with charitable donations and subsequent illicit financing. The questions answered will be the following: 1) Do charity donations cause terrorism? 2) Does terrorism affect firms' credit, investment and growth, and how?

To do so, the project exploits a natural source of exogenous variation, offered by the Zakat levy in Pakistan. Since 1981, the government has been collecting the charitable donation to the poor that Muslims are expected to give at the beginning of Ramadan, in the form of a 2.5% levy on bank deposits. While the government spends these funds directly all over the country through local centres, individuals can still donate above the mandatory contribution, to whomever they wish. Several features of this levy - i.e. the timing, the presence of an eligibility threshold that depends on the price of silver, and the fact that the levy applies only to Sunni Muslin - allow for causal effects to be identified without bias. As a result, robust answers to the questions above can be given.

This project seeks to answer questions that are at the hart of the public discourse in Pakistan. Recently, the Military has explicitly highlighted the existence of a link between terrorist organizations and the economy, requesting further actions from the government to reduce poverty, which has been deemed the main driver of national terrorism. As a result, the evidence provided may have strong implications for Pakistan's Homeland Security department as well as for its Treasury one, providing a quantitative message with strong policy implications.