Macroeconomic Consequences of War and Terrorism in Lebanon

The Lebanese economy faced many difficulties since the civil war in 1975. In fact, the country has been frequently hit by civil clashes, civil war and terrorist attacks. This paper analyzes, in a SUR model, the pre and post conflict impacts of such events on the Lebanese economy between 1977 and 2011. Hence, we estimate in this paper the consequences of terrorism on the trend and business cycle of the Lebanese economy. Mainly, the consequences on real GDP per capita, balance of trade, real investment per capita, and real consumption per capita. Since these variables exhibit a structural break in 1987, two dummies that account for structural shifts in the mean and the slope will be included in the model as exogenous variables along with a dummy variable that accounts for the Lebanese civil war. In order to control for the intensity of the civil war we include the battle deaths as another exogenous variable. Moreover, the index for terrorism is treated as an endogenous variable depending on some socio-economic variables. Our results show that war and terrorism have a negative effect on the economy, and that an increase in RGDP per capita would decrease terrorism. In order to compare the economic situation in the presence and the absence of terrorism; three scenarios are forecast. The first one forecasts the economy between 2012 and 2018 under the assumption of the absence of terrorist attacks. The second and the third one analyze the economy under the assumption of the presence of terrorist attacks (with different intensities) between 2012 and 2018.