Nexus Between Terrorism and Shadow Economy in Developing Countries: An Empirical Investigation by Using Structural Equation Models (SEMs)

Abstract

This study delves into the empirical relationship between terrorism and the shadow economy using Structural Equation Modeling (SEM). This study scrutinize the observed indicators and causal factors by employing Confirmatory Factor Analysis (CFA) and Multiple Indicators, Multiple Causes (MIMIC) estimation techniques. To empirically probe this relationship, our investigation utilizes unbalanced panel data spanning 65 developing countries from 2000 to 2019. By introducing terrorism control and the shadow economy as latent variables, we aim to clarify the ambiguous conclusions prevalent in recent empirical studies. Our empirical results validate the widely held notion that unregulated shadow economic activities nurture terrorism, particularly in regions with weak economic and political infrastructures. Notably, expanding the shadow economy in developing nations is associated with diminished terrorism control. Furthermore, our findings highlight the relationship between terrorist activities and ethnic and religious conflicts while underscoring the positive influence of enhanced freedom of movement on counterterrorism accomplishments. Inadequate governance intensifies involvement in the shadow economy, creating fertile ground for the proliferation of terrorism. Moreover, our study clarifies how expanding shadow economies facilitate underground cash flows, fueling terrorism. Governments are urged to prioritize efforts to curb the size of the shadow economy and eliminate hidden financial transactions that intensify internal and external tensions. As policy recommendations based on our empirical findings, the introduction of digital currencies is a deterrent to shadow economic activities and terrorism. Global governments must implement robust economic reforms to foster legitimate economic activities, effectively mitigate the shadow economy and terrorism, and foster inclusive growth, resilience, and prosperity for future generations.