the economic costs of conflict: a case study of the basque country

The Economic Costs of Con�ict:A Case Study of the Basque Country

Program Evaluation

ALBERTO ABADIE AND JAVIER GARDEAZABAL

Andrés Castañeda

October 2009

Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 1 / 17

One Slide Presentation

Motivation

Investigate the economics e¤ects of con�ict in the Basque Country

Use synthetic control groups

Use ETA�s truce as a Natural Experiment

Basque Country Background

ETA (Basque Homeland and Freedom, "Euskadi Ta Askatasuna"),founded in 1959

ETA�s terrorist strong activity begun in 1973 until the end of the1980�s.

After the end of the 1980�s the kept attacking but not as bad asbefore.

In September 1998, ETA declared the longest cease-�re

MothodologySynthetic Control Group.

For the synthetic group they use the same methodology than thetobacco case

The variable of interes is the per capita GDP

The percapita GDP of the Synthetic Basque Country will beY �1 = Y0W

MothodologySynthetic Control Group.

For the synthetic group they use the same methodology than thetobacco case

The variable of interes is the per capita GDP

The percapita GDP of the Synthetic Basque Country will beY �1 = Y0W

Data and Sample

Panel data for the period 1960-1998

The beginning of terrorist period is in 1975

Synthetic Basque country is meant to reproduce the level of GDPthat the real Basque Country would�ve had without ETA�s attacks

Discarding all the regions but Catalonia and Madrid. (0.8508 and0.1492)

Pre-Terrorism Characteristic

Per capita GDP for the Basque Country and it�s Synthetic

Y1 � Y �1

PLacebo StudyPer Capita GDP for Catalonia

Discussion

What if Basque Terrorism have imposed a negative reputation andforeing investment have chosen alternatives destinations?

What if the con�ict a¤ected the regions which form the syntheticcontrol?

What if the GDP gap was caused by the higher industrialconcentration before the terrorism and the industrial decline after?

Discussion

ETA�s truce as a Natural Experiment 1998-1999

If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information

So, if negative con�ict has a negative impact on the Basqueeconomy....

If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #

The method of event study is implemented to answer those hypothesis

If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "

If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #

Natural experimentProcedure

They asked a group of market analysts

Divide Stocks into Basque stocks and non-Basque stocks

Daily data from 1998 to 2000

Create two Porta�ios: Basque and non-Basque

Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model

Fama-French Three Factor ModelFramework

R jt is the excess return over the risk-free rate on a portfolio j .

Rmt is the excess return in the market portfolio

SMBt is the di¤erence between the returns of portfolios composed bysmall and big size stocks

HMLt is the di¤erence between the returns of portfolios composed byhigh and low book-to-market stocks

AR jt is a zero mean abnormal portfolio return not explained bycommon risk factors

R jt = αj + βj1Rmt + βj2SMBt + βj3HMLt + AR

jt (1)

Fama-French Three Factor ModelAnalysing Returns

Abnormal returns of both portfolio are suited for comparison

They calculated comulative abnormal returns from the day afterannouncement of the truce

CAR jt =�

Πts=1

n1+ AR jt

o�� 1 (2)

CAR jt =�

Πts=1

n1+ AR jt

o�� 1 (2)

CAR jt =�

Πts=1

n1+ AR jt

o�� 1 (2)

Cumulative Abnormal Portfolio Returns

Final Remarks

The Study found a 10-percent average gap between Basque percapita GDP and Synthetics per capita GDP in the terrorism period

Changes in the per capita gap are shown to be associated theintensity of terrorist activity

Basque Stocks outperformance non-Basque stocks as the trucebecame credible

At the end of the truce the Basque stocks showed a negativeperformance comparative to non-Basque�s

the economic costs of conflict: a case study of the basque country

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