Terrorism’s effects on economies

The dreadful events in Paris, and the ongoing just 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.

Politics dominates, political theatre more so.

In the US, we see the chilling reaching into the dustbin of history by the Republicans, with the leader of the that party’s presidential 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 dialogue is the role of economics.

Several economic issues are intertwined in the present farrago that passes for world policy.

Climate change 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 have their roots in the impoverished regions.

At a research level, there is an extensive body of study on the economic effects and determinants of terrorism.

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 footsoldiers are drawn .

Institutional and government effectiveness are also seen as dampeners on terror, while the very economic and institutional openness to trade, that leads to modernisation and globalisation, 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, Britain and the US are all stable, wealthy States but which have suffered homegrown terror.

Thus, although economic globalisation might exacerbate within country tensions, and trade openness facilitate cross national terror, the end result of great wealth dampens the impulse.

At the level of individual actors we also have a significant amount of detail of the economic issues involved in being engaged in terror.

Those who become terrorists are generally more educated, and have better economic prospects.

Surprisingly, the economic effects of terrorism seem small.

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.

Of course, anti-terrorism policies also have costs and benefits, from an economic perspective.

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.

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 infuriate the population while doing little to deter terrorists, and then? They win.


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