impact of terrorism on world economy

[Guest]

What are the impact of terrorism on the world's economy?

[Trooth]

I would say generally positive.

Obviously increased defence spending creates jobs in a variety of industries as well as increased funding for R&D.

In addition, much like natural disasters, things that are destroyed are, generally, replaced, which shows up as positive in terms of GDP.

Increased security spending creates a boom in that sector of industry and the increased costs are generally transferrable to the consumer and accounted as increased fixed overheards that are shared by all within an industry. In other words no one company loses out from the increase cost - much like a law change affects every company the law pertains to.

There are negative effects, people lose life, property and business that sometimes is not recovered, but that is localised. People don't like flying - for a while. People avoid certain tourist destinations - for a while. But that recovers and in the meantime other areas benefit from "diversion tourism". People don't stop going on holiday, they just go somewhere different.

We have had international terrorism on a large scale for what, 40 years now? In that time i don't think it has had a negative impact on world economic growth.

[aaronyeo]

The immediate impacts of terrorist acts including loss of life, destruction of property and depression of short term economic activity are compounded by the costs associated with the continuing threat of terrorism.

Counter-terrorism measures should be taken as it is an investment against future attacks.

[cuba]

You must also take into account that terrorists are starting to target vital economic infrastructure. The U.S was hoping to pay for the War in Iraq using revenue generated by oil. In spite of it's efforts in increasing security in these areas, suicide attacks are still prevelant.

Recently, a suicide bomber blew up part of a pipeline somewhere in Iraq (sorry i can't recall it but it happened). Incidents like these have resulted in reduced investment in oil infrastructure in iraq which of course reduces oil extraction and of course revenue generated by its exportation.

As you can see, the impacts on the world economy can be bad depending on the circumstances.

[Guest]

Terrorism is a real threat to all nations in the world.
The motivation to study the impact of terrorism in an open world economy is the following. It has been documented that the direct impact of terrorist attacks on productive capital is relatively modest.

Even if terrorism is a global threat, international investment will
respond to differences in the expected intensity of terrorism across countries.

Terrorism can bring an economy to its knees because of fear. Businesses may be afraid to operate as normal because of fear that another attack will happen. Increased costs in security can cause companies to fall on economic hard time ultimately decreasing the value of their stocks and hurting shareholders.

The loss of human life is undoubtedly the tragic side of terrorism. The effects of the deaths of loved ones are tremendous. The business world does not go unaffected by these human losses; the loss in labor force and other key players in a company can cause significant negative effects.

[Guest]

The targeting of mass public transportation such as buses, planes, and trains for terrorist attacks has made many travelers leery of straying too far from home. Events such as subway bombings and plane hijackings serve to hurt the travel industry as well as the hotel industry, especially in Middle Eastern countries. Both India and Nepal experienced a massive drop in tourism after the September 11th attacks on America in 2001. The reason for this drop in tourism was because of their close proximity to Afghanistan and the subsequent war that followed the September 11th attacks.

Prior to the September 11th attacks that brought terrorism to the forefront of the world’s political scene, tourism was the world’s largest industry. Nearly 10 percent of all the jobs around the world were related to tourism and travel prior to the attacks. After the attacks of 9/11 the public’s reluctance to travel resulted in thousands of employees in the travel and tourism industry to lose their jobs. Since this initial market downturn, fears have cooled and the tourism industry has begun to slowly recover, but this example is an excellent reminder of how fine a line the tourism industry is walking.

Any country that depends heavily on tourism for economical stability is playing with fire. The threat of a terrorist flare up can cause the loss of millions of dollars in revenue and cripple an economy. This realization has prompted many of the leaders of tourism dependent countries to begin efforts to promote other industry in their respective regions in order to safeguard their local economies should terrorism temporarily derail the tourism industry as it did after the September 11th attacks.

[TopHatter]

I would say generally positive.

That's an...interesting point of view, to say the least.

I would also say that there are far more practical ways to achieve the positives you've mentioned without attendent death and destruction and far better things to spend billions of dollars on than more military hardware.

I'm going to go with generally negative, most notably in the short-term, the loss of life and devastating economic impact that high-profile terrorist attacks can cause.

But the long-term is more subtle. Terrorism feeds the hatred of the terrorist and their sympathizers and creates hate on the part of the terrorized.

An on-going cycle of hatred and violence. Hardly positive wouldnt you say?

[TopHatter]

By the way...there wouldn't happen to be any Singaporeans in this thread, are there?

[Shek]

I would say generally positive.

Obviously increased defence spending creates jobs in a variety of industries as well as increased funding for R&D.

In addition, much like natural disasters, things that are destroyed are, generally, replaced, which shows up as positive in terms of GDP.

Increased security spending creates a boom in that sector of industry and the increased costs are generally transferrable to the consumer and accounted as increased fixed overheards that are shared by all within an industry. In other words no one company loses out from the increase cost - much like a law change affects every company the law pertains to.

There are negative effects, people lose life, property and business that sometimes is not recovered, but that is localised. People don't like flying - for a while. People avoid certain tourist destinations - for a while. But that recovers and in the meantime other areas benefit from "diversion tourism". People don't stop going on holiday, they just go somewhere different.

We have had international terrorism on a large scale for what, 40 years now? In that time i don't think it has had a negative impact on world economic growth.

Trooth,
You're describing the broken window fallacy. Terrorism does have a negative impact. While growth rates in the developed world have been positive, the rates are slower than they might have been absent terrorism. I suspect that the impact is statistically small, but it is negative nonetheless. The following column illustrates the broken window fallacy.

Good and Bad Economics by Walter Williams -- Capitalism Magazine

Here are a couple of newspaper headlines following Florida's bout with hurricane disasters: "Storms create lucrative times," St. Petersburg Times (Sept. 30, 2004), and "Economic growth from hurricanes could outweigh costs," USA Today (Sept. 27, 2004). The writers, Joni James and Barbara Hagenbaugh, might have been listening to economists like Steve Cochrane, director of regional economics at Economy.com, a consulting firm in West Chester, Pa., who told USA Today, "It's a perverse thing ... there's real pain, but from an economic point of view, it is a plus."

Why are Florida's hurricanes a "plus"? It's simple. According to St. Petersburg Times reporter Joni James, "Construction creates thousands of jobs, insurance provides for billions in consumer purchases, and new facilities built to higher standards might help offset future storm-related losses."

This kind of reasoning, often put forth by poorly trained economists, doesn't even pass a simple smell test. Think about it this way. Using Cochrane's statement, if "from an economic point of view, it (hurricanes) is a plus," would the country have been even better off if the entire East Coast shared Florida's damage and destruction? If it would have been a plus for the East Coast, what about hurricane destruction for the entire nation east of the Mississippi? Almost anyone with a speck of brains would recognize that equating economic growth with destruction is lunacy.

French economist Frederic Bastiat (1801-1850) wrote a pamphlet "What Is Seen and What Is Not Seen," in which he says, "There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen." In the case of Florida's hurricane disaster, what is seen is the employment associated with rebuilding. What is unseen is what Floridians would have spent the money on and the benefits therefrom had there not been hurricane destruction.

Bastiat wrote a parable about this that has become known as the "Broken Window Fallacy." A shopkeeper's window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn't guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

Those are the seen effects of the broken window. What's unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier, who now has a job, to the tailor, who doesn't. Second, it reduced the shopkeeper's wealth. Explicitly, had it not been for the vandalism, the shopkeeper would have had a window and a suit; now, he has just a window.

The broken-window fallacy was seen in a column written by Princeton University professor Paul Krugman after the terrorist attack on the World Trade Center, "After the Horror" New York Times (Sept. 14, 2001). He wrote, "Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could do some economic good." He went on to point out how rebuilding the destruction would stimulate the economy through business investment and job creation. Again, do the smell test. If Krugman is right, wouldn't the terrorists have done us a bigger economic favor if they had destroyed buildings in other cities?

[Tan]

The targeting of mass public transportation such as buses, planes, and trains for terrorist attacks has made many travelers leery of straying too far from home. Events such as subway bombings and plane hijackings serve to hurt the travel industry as well as the hotel industry, especially in Middle Eastern countries. Both India and Nepal experienced a massive drop in tourism after the September 11th attacks on America in 2001. The reason for this drop in tourism was because of their close proximity to Afghanistan and the subsequent war that followed the September 11th attacks.

Prior to the September 11th attacks that brought terrorism to the forefront of the world’s political scene, tourism was the world’s largest industry. Nearly 10 percent of all the jobs around the world were related to tourism and travel prior to the attacks. After the attacks of 9/11 the public’s reluctance to travel resulted in thousands of employees in the travel and tourism industry to lose their jobs. Since this initial market downturn, fears have cooled and the tourism industry has begun to slowly recover, but this example is an excellent reminder of how fine a line the tourism industry is walking.

Any country that depends heavily on tourism for economical stability is playing with fire. The threat of a terrorist flare up can cause the loss of millions of dollars in revenue and cripple an economy. This realization has prompted many of the leaders of tourism dependent countries to begin efforts to promote other industry in their respective regions in order to safeguard their local economies should terrorism temporarily derail the tourism industry as it did after the September 11th attacks.

yea.. i agreed

[Tan]

terrorism and air travel

contribute some information found on the net.

The moment at which terrorists succeed at using airplanes to inspire fear in air travelers they have accomplished their aim. Since 9/11, the airline industry has been wracked with increasing economic problems, from security to increased ticket prices, to a drop in air travelers, along with a host of other fall-out factors. And, now, the increasing cost of oil is forcing once solid industry giants to lose their financial footing

Airlines have had to invest in expensive baggage and passenger scanning equipment, as well as hire many extra security personnel to help regain the public’s trust that air travel is safe. While such responses are necessary to secure the safety of passengers and ensure that further attacks are prevented, the resulting economic losses are large. This is why terrorist attacks that use airplanes have such a profound effect on society. Individuals lose their lives, fears are heightened, and companies lose money. Overall, terror in the air is a horrifying and effective way for terrorists to make their point and results in both economic and human loss that can permanently affect world markets.

[Ironduke]

Obviously increased defence spending creates jobs in a variety of industries as well as increased funding for R&D.

In addition, much like natural disasters, things that are destroyed are, generally, replaced, which shows up as positive in terms of GDP.

I disagree. Terrorism creates an atmosphere of fear and uncertainty and doesn't destroy enough or the right kind of stuff that natural disasters and wars do. For example, the German bombing of London cleared out a vast area of decrepit buildings, as did the Great Fire of 1666. Rome burned and was rebuilt in brick.

[Trooth]

Trooth,
You're describing the broken window fallacy. Terrorism does have a negative impact. While growth rates in the developed world have been positive, the rates are slower than they might have been absent terrorism. I suspect that the impact is statistically small, but it is negative nonetheless. The following column illustrates the broken window fallacy.

But that article is facile in places. When the gunmen opened fire around the pyramids in 1996, it caused a downturn for Egypt. But people still went on holiday somewhere amd those locations benefited from the increased tourism.

The original question was not "are there any economic impacts of Terrorism" it was "What are the impact of terrorism on the world's economy?".

Even in the airline industry we have seen growth from airlines from muslim countries because they have picked up some passenger miles as they may be less of a target than non-muslim carriers.

For terrorism to have a depressing effect on the world's economy there would have to be a sustained attack on the main sources of economic flow which we haven't seen. We have seen a few blips that would have impacted local tourism and depressed some of the local economies. But we have also seen a truly massive influx of money into security, defence, arms, "business continuity", news reporting and so on. All of which is new development, new build, new purchases.

Also the "broken window fallacy" pre-supposes that people have not already bought replacement glass. However "business continuity" plans happen at all level of businesses where they have already spent huge amounts of money on just such a scenario. In fact money that would be "wasted" if it was never used. But money that when spent was positive on GDP figures.

[1 Observer]

"Yes, and no"... at least that’s what I think I hear.
A sense in insecurity, in my understanding, does not actually provide for negative influence as it is already one of the 2 primary motivations to market trade. (fear and greed)
I was impressed by the level of disruption, related to 9-11's aftermath.... 2 buildings ... we're not talking about a whole city ... 2 buildings, turned the world market on its ear.
I wonder, how much impact would the loss of the crude on one tanker have? Would it change fuel prices? Just how much loss of oil would it take to upset the cart? What would that shift in fuel prices do? How much can the western world absorb?
It occurs to me, that too much consideration goes to public opinion. (Related to military action)
Just about anyone that would be on this site can appreciate the FACT, that they (much of the Moslem world, and those that are not, surely sympathize.) are at war with us, and we (because of our pathetic un informed public and media) operating under intolerable constraints. I do not presume to have answers … (plenty of questions …. plenty) … I do feel safe making the observation that:”Any effective course of action (possessing even the remotest chance of success) will be much more unpleasant than we have been thus far.”
Adhering to “laws of war” that our esteemed foe are unfettered by, is NOT how one destroys ones enemies will to fight!

[Shek]

But that article is facile in places. When the gunmen opened fire around the pyramids in 1996, it caused a downturn for Egypt. But people still went on holiday somewhere amd those locations benefited from the increased tourism.

The original question was not "are there any economic impacts of Terrorism" it was "What are the impact of terrorism on the world's economy?".

Even in the airline industry we have seen growth from airlines from muslim countries because they have picked up some passenger miles as they may be less of a target than non-muslim carriers.

For terrorism to have a depressing effect on the world's economy there would have to be a sustained attack on the main sources of economic flow which we haven't seen. We have seen a few blips that would have impacted local tourism and depressed some of the local economies. But we have also seen a truly massive influx of money into security, defence, arms, "business continuity", news reporting and so on. All of which is new development, new build, new purchases.

Also the "broken window fallacy" pre-supposes that people have not already bought replacement glass. However "business continuity" plans happen at all level of businesses where they have already spent huge amounts of money on just such a scenario. In fact money that would be "wasted" if it was never used. But money that when spent was positive on GDP figures.

The expenditures you are talking about are just happening in different forms. Is creating the TSA in the United States a positive impact on the economy? Taxes must increase at some point to pay for this increased government expenditure, which will crowd out investment and growth.

What you are describing is the distributional effects and not the aggregate effects. In the aggregate, terrorism hasn't increased growth or grown the pie. Instead, it has changed how big are the slices that different folks get.

If you switch the question to what is the impact terrorism has had on national/local economies, then you can drop the redistributional effects into gain or lose buckets.