The Economics of Terror

d9ed0090-7db0-4750-a6eb-ef3cba201aef-2060x1236The dreadful events in Paris, and the ongoing as dreadful but happening far away in places we don’t go to for long weekends events in the middle east have brought the issue of terrorism to the forefront again. Politics dominates, political theatre moreso.

trump-saluteIn the USA we see the chilling reaching into the dustbin of history by the Republicans,  with the leader of the republican challenge, Donald Trump, musing on the need for special Muslim ID – a cheerful yellow cloth crescent sewn on their clothes mayhap? . In the UK the Daily Mail revisits its roots with a cartoon subliminally equating refugees with rats.  Slovakia only wants Christians. And so on.  What is missing in the dialog is the role of economics.

inequality-brazil-oxfam_1220x763Several economic issues are intertwined in the present farrago that passes for world policy. Climate change, for example, is at base an economic issue. We discount the future far too fast, and engage in short-term damaging actions. A three-year drought in Syria led to unprecedented migration to the cities, straining already fragile services, leading in the end to the spark that lit the conflict.  In Nigeria Boko Haram, the gang of rapists masquerading as Islamic insurgents have their roots in the deeply impoverished regions. Despite being the powerhouse of west Africa Nigeria is mired in corruption and mismanagement, the further north and east one goes the worse. And it is there that Boko Haram has its roots, in an Islamic self help and anti group.  Of course, revolutionary organizations tend to stray fast and far from roots but the root causes, the inequality in which it grew, they remain as bad as ever. Northern Ireland of course saw the growth of the IRA out of a group which protested economic inequality and unequal opportunity as much as it did political gerrymandering.

20151121_woc539At a research level there is a fairly extensive body of research on the economic effects and determinants of terrorism, at both individual actor and organisational level. At the macroeconomic level, apart from the issues of relative economic inequality within country, there are other issues that are associated with the extent and intensity of terror. Modernisation has winners and losers, and it is typically from the latter that the terror foot soldiers are drawn (while, interestingly, it is from the former that the leaders emerge).  Institutional and government effectiveness are also seen as dampeners on terror,  while the very economic and institutional openness to trade that leads to modernization and globalization are of course facilitators of easier cross national terror. Finally, we are familiar with financial contagion but there is a great deal of evidence of terror contagion – terror spreads through geographically contiguous regions more easily than otherwise, regardless of economic conditions. These issues are, it should be noted, relative. Higher income countries produce less terror than lower, even in the face of economic inequality and dislocation. They also have more stable political and social orders, again reducing terror. But they are not immune. Japan, the UK, USA are all stable, wealthy polities but which have suffered home grown terror.  Thus although economic globalization might exacerbate within country tensions, and trade openness facilitate cross national terror, the end result of greate wealth dampens the impulse (eventually).

While poverty and disconnectedness from economic dislocation provides the seedbed, the terrorists and especially their leaders are those who are most liable to be beneficiaries of the dislocation. Lenin, himself from the minor nobility, in “What is to be Done?” noted the importance, for the cause, of educated and indeed connected persons.  Studying the “productivity” of terrorism , research shows this aggregate relationship clearly. At the level of individual actors we also have a significant amount of detail of the economic issues involved in being engaged in terror.Much of the study of individual terrorists has emerged from the Israeli – Palestinian conflict but beyond that the relationship holds.  A seminal 1983 paper showed that terrorist cadres were generally quite well situated in society.  Those who become terrorists, especially leaders,  are generally more educated, come from wealthier backgrounds and have better economic prospects.    This is somewhat strange, as we might think a different relationship holds. After all, economics is about the relative costs and benefits of things. A more educated person has, all things equal, more opportunity costs of being a terrorist than someone who is poorer or less educated.  One suggestion is that we should not see terrorism as crime, where there is a well attested negative education-activity link but as political engagement where the link is positive. In addition, the demand for terrorists should result in those who are more capable, with higher human capital, being selected.

While of course terrorism matters a great deal to those who are caught up in it on either side, the evidence is fairly clear that the economic effects are, so far surprising small. Thus some research suggests that the events of 9/11 cost somewhere of the order of $60b, most of this from the destruction of human rather than physical capital, via reduced health and the loss of economic value from deaths. Tourists will, in the short run at least, be scared away from places associated with terror but (assuming that the terror campaign eventually ends) the overall losses estimated are of the order of 1-2% GDP.  More serious, from an economic perspective, is the reduction of FDI, with estimates of up to 20% reduction in the face of terror campaigns. However, put another way – 80% of those who would have invested in a region do so anyhow even in the face of  low grade civil conflict.. Finally, terror attacks have the potential for dramatic, but short lived and almost always reversed impacts on the stock market, with larger effects being associated with “human capital” events than material events

tsa-annoying-enoughOf course, anti-terrorism policies also have costs and benefits, from an economic perspective. The massive increase in global military spending post 2011 acts as a stimulus.  At one level they can act as a stimulus to certain parts of the economy.  At another level they may induce effects which, from an economic perspective, may be as damaging as some terror activities. There is significant evidence that there has been a downward shift in demand for air traffic in the USA.Anyone who has had the misfortune to deal with the TSA in the USA will know that the chilling effect on tourism is not inconsequential from the security theatre they enact, badly. The greater part of this has not, it seems, been from fear of terrorist activities but from the added costs and complexities of baggage and personal screening. Persons who do not fly usually drive, again with costs to the economy and society. This cascading of usually unintended consequences ripples onward.

Terrorism has its effect more through fear than consequence. Even allowing for that, the evidence is that its economic effects are, thankfully, muted. Terrorists win when they change our lives for the worse, whether through economic or social effects. Knee jerk political reactions towards security theatre immiserate and infuriate the population while doing little to deter terrorists, and then? They win.


A shorter version of this was published in the Irish Examiner, Saturday 21 November 2015

1 thought on “The Economics of Terror

  1. Arthur Doohan

    Great article, thank you.

    2 small things, a typo ( greate > greater ) and a confusing (to me) phrase (disconnectedness from economic dislocation provides the seedbed).

    Did you mean ‘connectedness’…??


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