1. The fast lane: Economic cost of terror

The fast lane: Economic cost of terror

At Davos, business leaders list global terrorism as their primary concern. What impact does terrorism have on the global economy?

By: | Updated: January 25, 2015 12:46 AM
world economic forum, world economic forum 2015, world economic forum Davos

This year, the World Economic Forum is meeting in the shadow of the tragic events in Paris, which may explain why many delegates are putting terrorism at the top of the risk chart. (Reuters)

The global business elite gathered in Davos have one thing in common with insurance salesmen and that is risk assessment. Whether it is the price of oil, interest rates, investment climate, climate change or income inequality, most sessions are devoted to evaluating risks and emerging crisis points. This year, the World Economic Forum is meeting in the shadow of the tragic events in Paris, which may explain why many delegates are putting terrorism at the top of the risk chart. Adi Godrej and Rahul Bajaj, both Davos veterans, have ranked terrorism as the biggest threat to global stability and, by extension, the global economy. Bill Johnson, former CEO of Heinz, asserted that the Paris terror attacks will have an impact on the global economy. “We’re in a global economy, so we’re all interrelated and I think eventually those pressures, we’ll all pay a price for.” The most immediate consequence of international terrorist attacks is human loss. According to the Global Terrorism Index 2014, in 2013, terrorist activity increased substantially with the total number of deaths rising from 11,133 in 2012 to 17,958 in 2013, a 61% increase. Over the same period, the number of countries that experienced more than 50 deaths rose from 15 to 24. This shows that not only is the intensity of terrorism increasing, its breadth is increasing as well. A massacre in the heart of Paris in broad daylight raises the bar even higher as far as global consequences are concerned. The more fatalities caused by a terrorist attack, the greater the psychological effect it has on the population. This might not seem like a direct economical consequence, but panic actually influences the economy dramatically. Panic affects the patterns of consumption and investment behaviour of individuals and companies, and can lead to distinct market disturbances.

According to terrorism expert Michael Williams, the main effect of terrorist attacks is their ability to disrupt the population’s spending pattern. It inevitably leads to a drop in demand in the tourism sector, hotels, restaurants, travel agencies and other tourism-related businesses, which confronted a sharp drop in demand immediately after 9/11 in the United States and in India after the 26/11 Mumbai attacks which targeted two iconic five-star hotels. Another study by the John F Kennedy School of Government and Harvard University used a unique data set on terrorism and other country risks, and concluded that “higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5% of GDP.” Further, terror attacks on large facilities like office towers (the Twin Towers in New York) or hotels (Taj and Trident in Mumbai) have had a significant effect on the way insurance is underwritten and risks are assessed. Terror-related insurance now comes at a very high premium, adding to a company’s costs. Then, there is the reinforcement of security and military sectors in the wake of a terror attack. Both these aspects have a prominent impact on the economy of the country which enforces them. Increasing the budget of the military sector is inevitable, but also takes a toll on the GDP of the country concerned. Similarly, security reinforcement also imposes costs on the economy. Moreover, security measures also have a direct effect on trade: stronger security regulations imply that trade becomes more expensive, such as by increasing delivery times, and frequent evacuation of major public spaces—airports, Metro and train stations, malls and business districts—disrupting economic activity.

Globalisation is, in a way, helping shape the agenda of international terrorism. Williams argues that there has been, throughout history, three main waves of terrorism: anarchist, nationalistic (separatist) and leftist, and that we are now witnessing a fourth wave, one of mainly religious terrorism, which is more global, but also more capable of unifying the different groups. He says that terror groups, like ISIS in Iraq and Syria, and al-Qaeda, act on a much more international basis and have new objectives: to strike in order to trigger an international impact. One authoritative source is the Senders and Sandler study on the effect of terrorism on capital flows across countries. The authors estimated a negative 13.5% effect of terrorism on FDI for Spain (for the period 1976-1991). They also found that terrorist attacks against US interests in OECD countries significantly reduced stocks of US direct investment. Another study, the Blomberg and Mody report, found a significant impact of terrorism on the inflow of direct investment in a sample of 43 countries. Closer home, we have the Asia Economic Institute study which calculated that the overall damage to India’s economy in the wake of the Mumbai attacks was about $100 billion arising from crucial institutions, such as the stock exchanges, commodities and money markets, and business and commercial establishments which remained closed. Further, FDI was hit by an estimated $20 billion. It also cost India R25 crore to keep Ajmal Kasab in custody before he was hanged. Now, the events in Paris have brought the new reality home to Europe and its echoes are being heard the loudest in the heavily-guarded fortresses of Davos.

The writer is Group Consulting Editor, Features & Special Projects, The Indian Express

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Tags: WEF 2015
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