1. IntroductionTerrorism hasbeen defined as “the intentional use of, or threat to use violence againstcivilians or civilian targets, in order to attain political aims.” (Ganor,2002). In the recent the last 30-40years the world has witnessed close to almost thirty thousand terroristincidents ranging from the hostage takeover during the Munch Olympics to morerecent terrorist activities of running down civilians in England in June 2017.Terrorist incidents as of 2005 has resulted in over ninety thousand death ornon-fatal injuries. (Barth, 2006). Even if the core objectives of mostterrorist organizations have remained unchanged over the years, advancements intechnology has allowed them to improvise and has allowed them to use moresophisticated, and at times, deadly tactics. These methods and the increasingglobal scale of terrorism, has raised eyebrows and important questionsregarding the economic impacts of terrorism on a global scale.
Most terroristthat are dealt with today has the objective of damaging their targets`economies as seen by the attack on the American World Trade Center during the9/11 incident. The main objective of such groups is to physically damageproductive assets and to divert assets and productive resources from engagingin productive activities. According to Chen and Siems (2004) Terroristactivities have the ability to affect the financial market in a short livedadverse method. Meaning that as soon as a terrorist attack happens the stockprices may drop but will gradually increase. Also, according to Becker and Murphy(2001) the long-term effects of terrorism on the financial market are lesscompelling. With such conflicted theories, this paper examines the impact thatterrorist activities on Economic growth and formation of capital. The flow ofthis paper is as follows section II will focus on the impacts of terrorism on economicactivities, section III will focus on the impact of terrorism on Trade andtourism Industry. Section IV will focus on Foreign direct investment (for thepurpose of this paper it will be known as FDI from this point onwards.
). SectionV will focus on other Indirect Costs. Section VI will conclude.2. Impacts ofTerrorism on Economic growth Most studiesrelated to economic effects caused by conflict tend to come from research intoconventional forms of war and does not really delve into terrorism per se. Recentinvestigations into economics of terrorism can be classified into two main subdivisions: studies that analyze the economic and socio economic factors behindterrorism and studies that focus on the economic impacts that arises fromterrorist attacks.
For the purpose of this paper, I will be pursuing the lattermethod of the two.Althoughresearch into the economic effects of terrorism were rather new during the late90`s and the early 2000`s, it earned a booming popularity following thedestructive events in the United States on September 11, 2001. In 2004, it wastheorized that the probability of a terrorist incident occurring in ademocratic, high income country is high (Blomberg, Hess and Weerapana, 2004).Their research concluded that terrorism is negatively and significantlyinvolved in the GDP growth rate. They also concluded that an attack on acountry during a given year will reduce the growth of GDP by 0.57 percent onaverage.
An increase interrorist related activities will lead to an increase in political instabilityand studies have showed that political instability will lead to a negativeimpact on economic growth (Alesina and Perotti, 1996). The same study has foundevidence that increase in political instability will also negatively affectinvestment and savings.If terrorismwere to persist, economic costs will be affected permanently. It has beenargued that the economic cost of terrorism is equal to a terrorism tax due the additionalweight it puts in on security (Saxton, 2002). These various costs can be ahumungous load on the economy. For example, a study by the World Bank (2002)conducted on the Israeli-Palestinian conflict concluded that the estimated costof war on the Israeli economy is about 4 percent of the GDP.Thisadditional fiscal cost for security contributes to both direct and indirectadverse effects on growth.Furthermore, terroristincidents have an immediate direct impact on a nation’s capital stock, both physicaland human.
After the 9/11 attack on the United states, the InternationalMonetary Fund (2001) estimated the direct cost of the attack to be on par to$21.4 billion which equals to 0.22 percent of the GDP. While this data showsthe impact to be relatively small, it suggests that terrorist activities mayhave an adverse impact on growth, because these attacks represent a negativeshock to capital formation. 3.
Impact ofterrorism on tourism and tradeThe costs ofterrorism as a deterrence to trade is discussed in Nitsch and Shumacher (2004).They found, using data from 200 countries from 1960-1993, that countries thatare dealing with terrorism trade less with other nations. A study conducted byThe Organization for Economic Cooperation and Development (2002) notes thatterrorism acts as a frictional cost and unlike increased taxes or tariffs doesnot provide with public revenue. Terroristactivites in Sri Lanka affected the country’s ability to form tradeconnections, according to Pradhan (2001) after Sri Lanka made a transition frombeing a Socialist Economy to a more market economy, which include a moreliberal trade attitude, the economic growth of the country picked up to agrowing economy of 4-5 percent a year.
But this was short lived the trade ofSri Lanka fell due to Terrorist activities Caused by the Liberation Tigers ofTamil Eelam (1990). Overall trade in 1996 was lower than it was in the 1980’s.A number of researchershave tried to calculate the effect of terrorism on the tourism sector. It was found by these studies that the costsof terrorism are not insubstantial. In a study conduct in Spain it was foundthat a terrorist incident decreased the number of visitors to Spain by 140,000(Enders, Sandler and Parise, 1992). They found out by using data for a numberof European countries that the negative impact of terror attacks on tourismrevenue were fairly considerable. In this study that they found out that theloss of revenue in the tourism sector due to terrorist related activitiesduring 1974 and 1988 in Austria amounted to $4.
5 billion, Italy lost $1.1billion and Greece suffered a loss of $0.8 billion, while the whole ofContinental Europe suffered a loss of $16.1 billion. Furthermore ifthe case of Sri Lanka were to be analyzed, the 30-year civil war caused by theterrorist organization Liberation Tigers of Tamil Eelam (LTTE) adverselyaffected the revenue generated by Tourism in Sri Lanka. According to Pradhan(2001) the number of tourists sharply fell since the war started in 1983. According to data from this research thearrivals numbered up to 322,000 tourists in 1980, three years before the warstarted, it fell to 302,000 by 1990. 4.
Impact ofTerrorism on Foreign Direct Investment (FDI)Terrorist activities negatively affect the FDI of a country.According to Abadie and Gardeazabal (2005), they found that the GlobalTerrorism Index is negatively related to the net FDI over GDP. In the Sri Lankan context, according to Pradhan (2001), the netflow of FDI has been more erratic than the fluctuations on domestic Investment.FDI flows danced around 1%of GDP between 1983 and 1996. The terrorist bombingsof Colombo’s financial district in January 1996 resulted in a very low level ofprivate capital inflows. Because of these erratic fluctuations have madelittle, if any, contribution to the economic growth of Sri Lanka.
During a study of Greece and Spain by Abadie and Gardeazabal(2005), they found out that Spain had a greater negative impact of terrorism onFDI which amounted a staggering 13.5 percent over the period 1976-1991, Greecealso faced the same impact with a 11.9 percent deduction of FDI over the period1975 to 1991. 5. Other IndirectCostsOther thanthese main points regarding economic impact of global terrorism there are othertrivial Indirect costs that affect the economy of a nation due to terrorism. Accordingto Pradhan (2001), the impacts does not only include those listed above, butalso the human lives lost and injured affect the economy in a negative manner. Firstof all when life is lost or injured the government has to pool resources tofacilitate those individuals, thus pooling valuable economic resources that canbe used in further developing the economic goals. Thu loss of life and injuriescaused due to terrorist activities further impact the economy in a negativemanner.
6. ConclusionIn conclusion it can be seen by the examples given above, thatterrorism can produce a sub-optimal allocation of resources and thereforegreatly hinder the economic growth and capital formulation of a country. Thispaper with its analysis found that terrorism is indeed in hand in hand withadverse economic effects. In general, acts of terror have a negative andsignificant effect on economic growth.
The analysis has also shown that the targetof terror activities also affect the on how well acts of terror will affecteconomic growth. Terrorist acts targeting private institutions have shown thatit negatively affects both growth and capital formulation. This can beparticularly seen in the increase of terrorist attacks on private institutions.Terrorism is associated with adverse effects on overall economicactivity. For the purpose of illustration, in 2001 Israel had 47 cases ofreported terrorist incidents per million people. In this year only, the highlevel of terror attacks is associated with a 4 percentage drop in real GDP percapita growth. These illustrations show the adverse economic effects associatedwith global terrorism.