“I have begun the process of the destruction of the infidel economy, and thus of its power.”

Remark attributed to Osama bin Laden, September 2001

“OW!!!”  Remark attributed to Osama bin Laden, May 2011

"Terror is nothing other than justice, prompt, severe, inflexible," Maximilien Robespierre

In between these two quotes from the Prince of Terrorists, the economy of the Western World has indeed been grievously damaged, and much of the damage can be safely attributed to the reactions and over-reactions of the West, and particularly the United States, to the attacks on the World Trade Center in New York and the Pentagon in Washington. 

With the death of Bin Laden, questions arose about the future directions that terrorist organizations such as Al Qaida will take. What is pertinent in that regard is not only the ideological and religious aspects of the motivations behind terrorism, but, significantly, the economic underpinnings that drive terrorist activity.

Throughout history, terrorism has been a well-utilized element of the foreign policy toolkit of states. An early example: The Gunpowder Plot, 1605 (replacing James I with his infant daughter and creating closer links with the Catholic countries of Europe).

The economics of terrorism is a topic that has been grievously ignored, although some good work has been done by Professor Alan Krueger of Princeton University and a handful of others.  The central element that needs to be emphasized is one that is not lost on insurance actuaries:  the risk of a terrorist attack is very low and thus expensive countermeasures are not cost-effective.  This is why terrorism insurance is inexpensive and natural disaster insurance can be very expensive depending on where it is written. 

In modern times, it has become the backbone for non-state actors to lay claims of power – witness the rise of Sinn Fein and Hamas as political forces. And again, the economic underpinnings are present. Another element that is often ignored is economic terrorism, which is normally considered to be the purview of non-state actors trying to destabilize the economy of a state, via means that could be violent or not, but that result in disruption of specific economic activities.

The various tsunamis, floods, droughts, earthquakes, hurricanes and tornadoes in recent years have killed hundreds of thousands of people, injured millions and done gigantic property damage.  The economic costs have been horrendous.  In contrast, terrorist attacks generally affect a few hundred people at most and the property costs are minimal.  The exception in both respects was the attacks on the World Trade Center on September 11, 2001.  Nevertheless, state-perpetrated terrorism against its own people, in places like Rwanda, Cambodia, Bosnia, Libya, Syria and elsewhere has resulted in vastly greater human and property damage than that perpetrated by all the terrorist groups put together, ETA, Provisional IRA, FARC, Hezbollah, Hamas, al Qaida, and so on.

This calculation, however, overlooks an important aspect of terrorism. Unlike natural disasters, which have no human intelligence, rationality or calculation behind them, terrorism is a human phenomenon, planned and executed by human beings.  Thus, even though the cost-benefit calculations may be highly negative, the very lack of expensive preventive measures will exponentially increase the likelihood and incidence of terrorist

 attacks.  Additionally, while the direct effects of a successful terrorist attack may be relatively minor, the indirect effects can be huge:

n       A successful terrorist attack will reduce economic activity in the region or country where it takes place, far beyond the actual physical damage inflicted, unlike a natural disaster, which also seriously effects economic activity, but in proportion to the damage caused.

n      The costs of reaction to the incident can be very large and very long-lasting, precisely because of the phenomenon mentioned above of encouragement of repeat attacks in the face of insufficient measures taken by the authorities.

n      Discouragement of desired immigration and encouragement of undesirable emigration from the affected areas.

n      The reduction of investment, travel and other productive activities in the affected area.

All these effects, unlike natural disasters, are long-lasting and repetitive.  Once a flood has happened it has happened and the natural human tendency is to assume it won’t happen again for a substantial time (think of the eruption of Vesuvius and how long ago that was).  In the case of terrorism the exact opposite in true.  In the absence of expensive preventive measures it is indeed likely to happen again because of the presence of human calculation in the equation.

Thus, the terrorist organization has low costs and can inflict on its victim very high and continuing retaliatory costs.  Compare the cost of 9/11 to al Qaida compared to the cost of two wars and countless expensive counter-measures.  It should be noted, however, that when a terrorist movement is also an insurgency, as in the case of the FARC, Hamas and Hezbollah, costs rise with the formation of insurgent armed forces and the control of territory which brings with it the costs of governing.  In those cases financing becomes a serious consideration, and terrorist financing will be the topic of a future issue of this series.

Given the economic nature of terrorism, a number of things need to be done, many of which are very inadequately performed:

n      Attention must be paid to the issue and much analytical work is necessary which has not been done.

n      Emergency response planning by localities and businesses should be encouraged.

n      Plans should be drawn up and regularly updated to protect productive assets and infrastructure.

n      Legal and financial countermeasures should be readied, perhaps financed in whole or in part by a small fee on businesses and other organizations.

n      Preparations for the rapid rebuilding of productive infrastructure.

n      Adjustments to insurance procedures and coverage.

There are two major considerations that determine the economics of terrorism. The prevalent concern is with the cost of terrorism, in particular the direct cost. The direct economic cost of terrorism is miniscule compared with the equilibrium cost of terrorism, which is orders of magnitude larger  due to the growing mobility of capital and labor. The cost element is comprised in general of the depletion of human and physical capital, increased levels of uncertainty, increased economic commitments to anti-terrorist measures, and negative impact on specific industry sectors. Terrorism also affects direct investment into a country, in particular direct foreign investment.

The other aspect of the economics of terrorism, however, which does not appear to have gained public prominence, is the benefit to be gained from terrorist activities. This is an issue that often determines the long- term strategies of terrorist organizations or the rationale for state-sponsored terror campaigns, as was the case of the Reign of Terror after the French Revolution.

Today’s terrorism appears to have been able to reap some substantial economic rewards – for example, Hamas, a former terrorist organization, is the governing party in Gaza, while the Irish Sinn Fein is currently the second largest party in the Northern Ireland Assembly.

As with all human activities, terrorism has its costs and benefits.  In this case, however, the costs are all economic as well as psychological and political, whereas the benefits, if any, are psychological and political only.  As a result, the infliction of economic pain by the terrorist has no meaningful response on the part of the victims.  Score one for terrorism.

Looking specifically at the relevance of the economics of terrorism to the global economic equilibrium, and setting aside the moral and human impact, it can be concluded that terrorism as a tool of economic policy can distort global economic relations and balances, providing those parties that are prepared to stoop to such ignominious means with a competitive advantage. In effect, terrorism as means of achieving economic ends could become a preferred tool to resolve economic conflicts, which would in turn alter the way in which the market and the global economy work, rendering state or regional economic policies moot.