The economic costs of a well-placed bomb. Lebanon and the assassination of Mr Hariri

Abstract

Destabilizing political incidents may have dramatic effects on economic conditions. Foreign creditors and investors, in particular, may be reluctant to lend resources to a country whose internal stability seems shaky. We use a dynamic computable general equilibrium model to quantify the effect of a single bomb–the bomb which killed Lebanon's former Prime Minister Rafiq al Hariri in February 2005. We show that the economic loss caused by this bomb was larger than the expected gains from even the most optimistic scenarios of Lebanon's recently implemented trade liberalization strategy.

Notes

¹ Naturally, trade policy may influence credit constraints. But quantitative investigations of trade liberalization typically neglect this, and here we refer to such an analysis to point out the importance of improving stability relative to the direct effects of (broad) trade liberalization.

² The total number of produced commodities M is therefore equal to the total number of industries N.

³ We thank Salam Said for very helpful research assistance.