Economic effects of terrorism

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Economic effects of terrorism

The identification and the estimation of the impact of terrorism has received broad attention in economic literature and research, especially since the events around 9/11. According to Krugman (2004) , the economic impact of terrorism can be divided into three groups:

  1. The direct (or primary) economic impacts
  2. The indirect (or secondary) economic impacts (on the urban environment)
  3. Budget effects of preventive security measures against terrorism. The economic impacts of terrorism are illustrated below:

File:Economics of crime.png
Figure: Illustration of relationship between a security threat and the urban object/environment

Primary economic effects of terrorism

Primary economic impact of terrorism “refers to the effects arising from the immediate aftermath of a terrorist event” . These effects include the physical destruction of urban objects, and the human casualties (injuries and losses of human life). Primary economic impact of terrorism refers to the effects arising from the immediate aftermath of a terrorist event[1]. These effects include the physical destruction of urban objects, and the human casualties (injuries and losses of human life).

Micro-economic impact

On a micro-economic level, terrorist events influence three main types of economic actors, namely individual households, the private sector (firms), and the public authorities. After a terrorist event, these economic agents suffer from impact through losses in physical and human capital, and, at the same time, they themselves may influence the economy through their immediate responses to the violent shock that occurred[1].In general, the direct economic losses of terrorism do not bulk very large[2], with an exception for the unprecedented magnitude of the 9/11 attacks[3]. Terrorism in general, and especially in Europe, can, according to Schneider et al. (2009), be characterized as small scale, but frequent events, more focused on objects with a symbolic or political value and not so much on economic symbols like the World Trade Center in New York.

Primary impact at individual household level

There is not much available literature when it comes to the primary costs that households experience due to terrorism itself[4]. Surveys in France, the Republic of Ireland and the UK illustrate that terrorist attacks have a negative effect on reported life satisfaction[5]. Other empirical research found out that terrorism will produce more fear than other, more probable risks[6].

Primary impact on businesses and firms

Businesses and firms, especially the ones operating to or from insecure countries, are frequent victims of terrorist events. According to Schneider et al. (2009), this is also due to the fact that public buildings are better protected in general. The actual direct losses of terrorism depend on the nature of the attack (property damage or ransom payments for hostages), but overall, Enders and Sandler (2008)[7] conclude that most sectors recover quickly, given that the economy does not face sustained terrorist attacks, like in Israel and Northern Ireland.

Primary impact on the public sector

On the subject of 'primary impact on the public sector' there is not much literature available. The costs arising from physical destruction from small-scale terrorist events are not structurally measured, except for major events like 9/11 and the terror events in London and Madrid[8]. Costs for the public sector arise whenever public infrastructure or buildings are destroyed (including military structures and equipment), but are generally considered to be relatively small (Schneider et al., 2009).

Secondary economic impact of terrorism

Terrorist strikes not only cause primary economic impacts, but will also produce considerable secondary (or indirect) impacts. This, because in an interdependent economic system, terrorist strikes causes the disruption of economic entities which have not been direct targets of the attack[9]. A survey review by Frey et al. (2004)[10] describes the following indirect economic aspects of terrorist events:

Effects on tourism

Terrorism systematically influences tourists' choice of destination and can, therefore, substantially negatively affect a host country[10]. Enders and Sandler (1991)[11], for example, concluded that a typical terrorist act in Spain scares away over 140,000 tourists. Moreover, the effect is long-lasting and has also an impact on the demand for tourism in neighboring countries.

Foreign direct investment (FDI)

Enders and Sandler (1996)[12] found out that countries like Spain and Greece saw their foreign direct investments decrease in the period 1975 - 1991 due to a series of terrorist events. This decrease in FDI inflow was worth around USD 0.5 Billion for each country, which can be considered substantial. However, the impact on FDI in three larger European countries (France, West-Germany and Italy) was zero, implying that the impact on FDI also depends on the size of the economy.

Savings and consumption

Consumption and saving rates, may be affected by terrorism, but according to Frey et al. (2004), it is still unclear if this effect is positive or negative. According to them, it depends on the local situation: If people are afraid they are going to lose their savings, they will consume more. If they expect a decline in income, on the other hand, they will increase their savings and decrease their consumption.

Investment

Next to (macro)economic stability, political stability is generally recognized as the most important factors that determine investments in a local economy[13]. Not only the amount of investments are influenced by terrorist events, but also the investment composition (in particular the investments in machinery and equipment)[14]

Stock markets

The impact of terrorist events on financial markets is a famous phenomenon. Since share prices reflect (in theory) expected future gains of a company, a terrorist attack will negatively influence the share prices since:* Expected profits will decline if security measures increase the costs of production and trade costs, and consumers will decrease their consumption.* The risk premium will increase due to the increased uncertainty about a firma's prospects on the market[14].On the other hand, share prices already reflect expected terrorist attacks before any actually occurs. So, the conclusion is that only single unexpected events or an unexpected intensification will lead to negative effects.

Foreign trade

Terrorist events not only increase the sense of insecurity and uncertainty for foreign traders, but will also increase transaction costs (due to augmented security measures) and can lead to the destruction of export goods (oil pipes for example)[14]. Nitch and Schumacher (2004) illustrate that countries that are targeted by terrorism, will trade less with each other than countries not affected by terrorism. Moreover, these effects are large: a doubling of the number of terrorist events reduces the bilateral trade flows by 4% (idem).

National income and growth

The overall effect of terrorism on the economy can only be determined when it is known how an economy would have developed without the terrorist event. Attempts to illustrate these differences by Blomberg et al. (2004), conclude that the effects of terrorism on the economic growth are small and only statistically significant for development countries, and not for the more advanced OECD countries[15].

Related subjects

References

  1. ↑ 1.0 1.1 Source: Schneider, F., T. Brück and D. Meierrieks (2009). The Economics of Terrorism and Counter-Terrorism: A Survey.
  2. ↑ Source: Krugman (2004).
  3. ↑ The 9/11 attacks caused for over USD 25 Billion physical damage to buildings, equipment and infrastructure (Source: New York Times, September 2011).
  4. ↑ Source: Schneider et al., 2009, p.35.
  5. ↑ Frey and Luechinger (2005) and Frey et al. (2009) in: Schneider, F., T. Brück and D. Meierrieks (2009). The Economics of Terrorism and Counter-Terrorism: A Survey. P. 36.
  6. ↑ E.g. Viscusi, W., K. and R.J. Zeckhauser (2003). Sacrificing Civil Liberties to Reduce Terrorism Risks. Journal of Risk and Uncertainty. No. 27(1), p. 5-76. In: Schneider, F., T. Brück and D. Meierrieks (2009). The Economics of Terrorism and Counter-Terrorism: A Survey. P. 36.
  7. ↑ Enders, W., T. Sandler (2008). Economic Consequences of Terrorism in Developed and Developing Countries: An Overview. Terrorism, Economic Development, and Political Openness. P. Keefer and N. Loayza, Cambridge University Press: New York: 17-47. In Schneider, F., T. Brück and D. Meierrieks (2009). The Economics of Terrorism and Counter-Terrorism: A Survey. P. 38.
  8. ↑ Inflicted damage after the Madrid train bombings is estimated to be 5 Million Euro, which is about 2 percent of the total direct economic effects and practically 0 percent of Spain's annual GDP.
  9. ↑ Source: Schneider, F., T. Brück and D. Meierrieks (2009). The Economics of Terrorism and Counter-Terrorism: A Survey.
  10. ↑ 10.0 10.1 Frey, B.S. et al. (2004). Calculating Tragedy: Assessing the Costs of Terrorism. Journal of Economic Surveys, 2006.
  11. ↑ Source: Enders, W. and T. Sandler (1995). Terrorism: Theory and Applications. In: Frey, B.S. et al (2004).
  12. ↑ Source: Enders, W and T. Sandler (1996). Terrorism and Foreign Direct Investment in Spain and Greece.
  13. ↑ Source: The Worldwide Survey of Foreign Affiliates conducted by UNCTAD and the World Association of Investment Promotion Agencies (WAIPA).
  14. ↑ 14.0 14.1 14.2 Source: Frey, B.S. et al. (2004). Calculating Tragedy: Assessing the Costs of Terrorism. Journal of Economic Surveys, 2006.
  15. ↑ Negative economic effects are especially present when a small country/region like the Basque country or Israel face a long and intense era with terrorist events.

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