What is the economic cost of terrorism?

It is one of the central issues with which policymakers and investors are grappling.

November 17, 2015 11:18 pm | Updated November 17, 2021 02:01 am IST

Ten simultaneous explosions killed 182 people on packed Madrid commuter trains on March 11, 2004 — one of Europe's bloodiest attacks ever. — File photo

Ten simultaneous explosions killed 182 people on packed Madrid commuter trains on March 11, 2004 — one of Europe's bloodiest attacks ever. — File photo

It feels frivolous to ask about the cost of terror after the horrific Paris attacks, but it is one of the central issues with which policymakers and investors are grappling.

The conventional wisdom is that an act of terrorism accounts for a mere blip in economic damage. Economists often point to research showing that after the Madrid train bombings in 2004 and the London subway bombings in 2005, gross domestic product in those countries barely budged and showed little direct correlation to the attacks.

But that reaction — and the reaction to previous attacks — may belie the true cost of terrorism and, more important, underestimate the potential cost of the Paris killings.

“The aftermath of the November 13 Paris attacks may not in itself prompt extensive market-based volatility,” Citigroup wrote in a report, suggesting that financial markets “treat such developments as idiosyncratic and the unfortunate reality of a world where large-scale carnage has become an almost daily, if sickening, development.”

The report, however, said: “We think this time is different.”

That view is consistent with the opinions of some security experts, who in recent days have said that the attack in Paris represents just one in a continuum.

“We have upgraded the risk of terrorist attacks not only in the Middle East but also in the West, as well as the likelihood of increased international military intervention in IS strongholds in Syria, Iraq and Libya,” Citigroup said, referring to the Islamic State.

The events in Paris could add to the pressure to close borders in the Euro Zone. It is also reigniting a debate about privacy and surveillance that could have big implications for technology companies.

Over the weekend, Evercore ISI, the research arm of the investment bank Evercore, published a note to its clients suggesting that the events in Paris could threaten the political support inside Germany for its chancellor, Angela Merkel, who has been a big supporter of open borders.

“The connection between the terror threat and migration flows threatens to rupture the border-free Schengen zone,” the note said, describing the borderless, passport-free zone known as the Schengen area. “It challenges Merkel’s position at home and in the wider EU, nudging higher the tail risk that Europe’s indispensable leader could fall from power.”

The economic implications of this are significant, to say the least. Evercore ISI even speculated it was possible that Merkel could ultimately be replaced by Wolfgang Schauble, Germany’s finance minister, who has seemingly been inclined to let Greece leave the Euro Zone.

Policymakers and investors estimating the cost of terrorism often miss the larger picture: While the stock market quickly rebounded after September 11, the true economic damage may have been as high as $3.3 trillion.

An analysis of the cost of September 11 conducted by The New York Times added up the physical damage ($55 billion) and the economic damage ($123 billion). It also included other costs: the cost of developing the Homeland Security Department ($589 billion), war funding ($1.6 trillion) and what was determined to be the continuing cost of those wars and taking care of veterans ($867 billion).

Some economists might say much of that actually increases economic growth. That’s true. Sort of. The truth is it’s an unproductive form of spending. And the development of Homeland Security and the war creates a so-called economic friction in the system that slows down just about everything; it’s hard to measure, but it’s there.

One place to look the cost of terror is Israel. An academic study that examined the economic damage of the attacks in Israel between 1994 and 2003 showed that the country’s per-capita GDP “would have been 8.6 percent higher than it was,” had there been peace.

Conducted by Dotan Persitz, a scholar at Tel Aviv University, the study found that “Palestinian terror increased the shares of consumption and government expenditures” while it “decreased the shares of investment and trade balance in GDP.”

— New York Times News Service

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