1. and to divert assets and productive resources


Terrorism has
been defined as “the intentional use of, or threat to use violence against
civilians or civilian targets, in order to attain political aims.” (Ganor,
2002).  In the recent the last 30-40
years the world has witnessed close to almost thirty thousand terrorist
incidents ranging from the hostage takeover during the Munch Olympics to more
recent terrorist activities of running down civilians in England in June 2017.

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Terrorist incidents as of 2005 has resulted in over ninety thousand death or
non-fatal injuries. (Barth, 2006). Even if the core objectives of most
terrorist organizations have remained unchanged over the years, advancements in
technology has allowed them to improvise and has allowed them to use more
sophisticated, and at times, deadly tactics. These methods and the increasing
global scale of terrorism, has raised eyebrows and important questions
regarding the economic impacts of terrorism on a global scale.

Most terrorist
that are dealt with today has the objective of damaging their targets`
economies as seen by the attack on the American World Trade Center during the
9/11 incident. The main objective of such groups is to physically damage
productive assets and to divert assets and productive resources from engaging
in productive activities. According to Chen and Siems (2004) Terrorist
activities have the ability to affect the financial market in a short lived
adverse method. Meaning that as soon as a terrorist attack happens the stock
prices may drop but will gradually increase. Also, according to Becker and Murphy
(2001) the long-term effects of terrorism on the financial market are less
compelling. With such conflicted theories, this paper examines the impact that
terrorist activities on Economic growth and formation of capital. The flow of
this paper is as follows section II will focus on the impacts of terrorism on economic
activities, section III will focus on the impact of terrorism on Trade and
tourism Industry. Section IV will focus on Foreign direct investment (for the
purpose of this paper it will be known as FDI from this point onwards.). Section
V will focus on other Indirect Costs. Section VI will conclude.

Impacts of
Terrorism on Economic growth

Most studies
related to economic effects caused by conflict tend to come from research into
conventional forms of war and does not really delve into terrorism per se. Recent
investigations into economics of terrorism can be classified into two main sub
divisions: studies that analyze the economic and socio economic factors behind
terrorism and studies that focus on the economic impacts that arises from
terrorist attacks. For the purpose of this paper, I will be pursuing the latter
method of the two.

research into the economic effects of terrorism were rather new during the late
90`s and the early 2000`s, it earned a booming popularity following the
destructive events in the United States on September 11, 2001. In 2004, it was
theorized that the probability of a terrorist incident occurring in a
democratic, high income country is high (Blomberg, Hess and Weerapana, 2004).

Their research concluded that terrorism is negatively and significantly
involved in the GDP growth rate. They also concluded that an attack on a
country during a given year will reduce the growth of GDP by 0.57 percent on

An increase in
terrorist related activities will lead to an increase in political instability
and studies have showed that political instability will lead to a negative
impact on economic growth (Alesina and Perotti, 1996). The same study has found
evidence that increase in political instability will also negatively affect
investment and savings.

If terrorism
were to persist, economic costs will be affected permanently. It has been
argued that the economic cost of terrorism is equal to a terrorism tax due the additional
weight it puts in on security (Saxton, 2002). These various costs can be a
humungous load on the economy. For example, a study by the World Bank (2002)
conducted on the Israeli-Palestinian conflict concluded that the estimated cost
of war on the Israeli economy is about 4 percent of the GDP.

additional fiscal cost for security contributes to both direct and indirect
adverse effects on growth.

Furthermore, terrorist
incidents have an immediate direct impact on a nation’s capital stock, both physical
and human. After the 9/11 attack on the United states, the International
Monetary 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 shows
the impact to be relatively small, it suggests that terrorist activities may
have an adverse impact on growth, because these attacks represent a negative
shock to capital formation.


Impact of
terrorism on tourism and trade

The costs of
terrorism as a deterrence to trade is discussed in Nitsch and Shumacher (2004).

They found, using data from 200 countries from 1960-1993, that countries that
are dealing with terrorism trade less with other nations. A study conducted by
The Organization for Economic Cooperation and Development (2002) notes that
terrorism acts as a frictional cost and unlike increased taxes or tariffs does
not provide with public revenue.

activites in Sri Lanka affected the country’s ability to form trade
connections, according to Pradhan (2001) after Sri Lanka made a transition from
being a Socialist Economy to a more market economy, which include a more
liberal trade attitude, the economic growth of the country picked up to a
growing economy of 4-5 percent a year. But this was short lived the trade of
Sri Lanka fell due to Terrorist activities Caused by the Liberation Tigers of
Tamil Eelam (1990). Overall trade in 1996 was lower than it was in the 1980’s.

A number of researchers
have tried to calculate the effect of terrorism on the tourism sector.  It was found by these studies that the costs
of terrorism are not insubstantial. In a study conduct in Spain it was found
that 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 number
of European countries that the negative impact of terror attacks on tourism
revenue were fairly considerable. In this study that they found out that the
loss of revenue in the tourism sector due to terrorist related activities
during 1974 and 1988 in Austria amounted to $4.5 billion, Italy lost $1.1
billion and Greece suffered a loss of $0.8 billion, while the whole of
Continental Europe suffered a loss of $16.1 billion.

Furthermore if
the case of Sri Lanka were to be analyzed, the 30-year civil war caused by the
terrorist organization Liberation Tigers of Tamil Eelam (LTTE) adversely
affected 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 the
arrivals numbered up to 322,000 tourists in 1980, three years before the war
started, it fell to 302,000 by 1990.



4.     Impact of
Terrorism on Foreign Direct Investment (FDI)

Terrorist activities negatively affect the FDI of a country.

According to Abadie and Gardeazabal (2005), they found that the Global
Terrorism Index is negatively related to the net FDI over GDP.

In the Sri Lankan context, according to Pradhan (2001), the net
flow 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 bombings
of Colombo’s financial district in January 1996 resulted in a very low level of
private capital inflows. Because of these erratic fluctuations have made
little, 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 on
FDI which amounted a staggering 13.5 percent over the period 1976-1991, Greece
also faced the same impact with a 11.9 percent deduction of FDI over the period
1975 to 1991.


5.     Other Indirect

Other than
these main points regarding economic impact of global terrorism there are other
trivial Indirect costs that affect the economy of a nation due to terrorism. According
to Pradhan (2001), the impacts does not only include those listed above, but
also the human lives lost and injured affect the economy in a negative manner. First
of all when life is lost or injured the government has to pool resources to
facilitate those individuals, thus pooling valuable economic resources that can
be used in further developing the economic goals. Thu loss of life and injuries
caused due to terrorist activities further impact the economy in a negative



6.     Conclusion

In conclusion it can be seen by the examples given above, that
terrorism can produce a sub-optimal allocation of resources and therefore
greatly hinder the economic growth and capital formulation of a country. This
paper with its analysis found that terrorism is indeed in hand in hand with
adverse economic effects. In general, acts of terror have a negative and
significant effect on economic growth. The analysis has also shown that the target
of terror activities also affect the on how well acts of terror will affect
economic growth. Terrorist acts targeting private institutions have shown that
it negatively affects both growth and capital formulation. This can be
particularly seen in the increase of terrorist attacks on private institutions.

Terrorism is associated with adverse effects on overall economic
activity. For the purpose of illustration, in 2001 Israel had 47 cases of
reported terrorist incidents per million people. In this year only, the high
level of terror attacks is associated with a 4 percentage drop in real GDP per
capita growth. These illustrations show the adverse economic effects associated
with global terrorism.