Impact of terror on international trade in financial services: Does the development of financial institutions matter?

Abstract

We examine the impact of terror on international trade in financial services and the role of financial institutions in alleviating this impact. Using a sample of 67 countries from 2000 to 2020, we find that a 10% increase in the number of terrorist incidents in the importer and/or the exporter results, on average, in a 1.77–2.05% annual reduction in their bilateral financial service trade which is more economically significant than what has been documented for trade in commodities. Top exporters and importers of financial services, however, are less affected by the incidence of terrorism. Confirming the critically important role of systemic stability, we further find that financial institutions' stability (measured by the Z score) is the most powerful factor in mitigating the detrimental impact of terrorism on trade. There is also some limited evidence that exporting countries where financial institutions exhibit more efficiency (measured as the ratio of overhead costs to total assets) cope better with terrorism.