The Toll of Terrorism

• Author: Subhayu Bandyopadhyay, Todd Sandler, and Javed Younas
• Position: Research Officer at the Federal Reserve Bank of St. Louis and Research Fellow at IZA, Bonn, Germany. is Vibhooti Shukla Professor of Economics and Political Economy at the University of Texas at Dallas. is Associate Professor of Economics at the American University of Sharjah, United Arab Emirates. The authors write in their personal capacity...

New technology has lowered transportation costs and increased trade and capital flows across nations. But the same technology that has fostered international economic growth has also allowed terrorism to spread easily among countries whose interests are tightly interwoven. Terrorism is no longer solely a local issue. Terrorists can strike from thousands of miles away and cause vast destruction.

The effects of terrorism can be terrifyingly direct. People are kidnapped or killed. Pipelines are sabotaged. Bombers strike markets, buses, and restaurants with devastating effect. But terrorism inflicts more than human casualties and material losses. It can also cause serious indirect harm to countries and economies by increasing the costs of economic transactions—for example, because of enhanced security measures to ensure the safety of employees and customers or higher insurance premiums. Terrorist attacks in Yemen on the USS Cole in 2000 and on the French tanker Limburg in 2002 seriously damaged that country’s shipping industry. These attacks contributed to a 300 percent rise in insurance premiums for ships using that route and led ships to bypass Yemen entirely (Enders and Sandler, 2012).

In this article we explore the economic burden of terrorism. It can take myriad forms, but we focus on three: national income losses and growth-retarding effects, dampened foreign direct investment, and disparate effects on international trade.

Disrupting production

Economic researchers have found, perhaps unsurprisingly, that rich, large, and diversified economies are better able to withstand the effects of terrorist attacks than small, poor, and more specialized economies.

If terrorism disrupts productive activities in one sector in a diversified economy, resources can easily flow to another unaffected sector. In addition, richer economies have more and better resources to devote to counterterrorism efforts, which presumably reduces the number of terrorist activities with which they must cope.

In contrast, small developing economies, which are specialized in a few sectors, may not have such resilience. Resources such as labor or capital may either flow from an affected sector to less productive activities within the country or move to another country entirely. Moreover, developing economies are likely to lack specialized resourcesâsuch as surveillance equipment or a technologically advanced police force or armyâthat can be employed in counterterrorism...