TERRORISM AND THE ECONOMY
AROOJ ASGHAR (firstname.lastname@example.org)
Feb 8 - 14, 2010
Studies on various types of conflicts and their economic effects tend to focus on conventional forms of war and, to a much lesser extent, on terrorism.
Terrorist incidents have an immediate and direct impact on a nation's capital stocks-both physical and human. The effect of terrorism on investment can be analyzed by considering its impact on government spending. This analysis would suggest that terrorism redirects resources from public spending.
There are some ways in which the economy is negatively impacted by terrorism.
1) Capital stocks (human and physical) of a country are weakened as a result of terrorists' attacks.
2) Terrorism threats fan high level of uncertainty, increase counter-terrorism expenditures; drawing resources from productive sectors, affect negatively industries (e.g. tourism).
FOREIGN DIRECT INVESTMENT & TERRORISM
The acts of terrorism have negative impact on flows of foreign direct investment (FDI). Logically, the shaky foreign investors' confidence following acts of terrorism prompts large outflows of capital from the affected countries, and that once a country is branded as a terrorist target it fails to attract investments further.
However, foreign investor sentiment is not always dictated by common sense. Although the growth of global terrorism is indeed an important element during brainstorming by corporate decision makers, for example when they contemplate whether or not to invest abroad, it has not apparently prevented many of them from deciding to invest in the post-9/11 developing world.
OIL AND TERRORISM
Terrorists recognize the dependency of world on oil. Terrorists know that economies are seamlessly dependent on importing and exporting of oil. In order for many businesses to operate, transportation is needed and in order to have transportation there must be oil. That is why terrorists have turned to suicide bombings and other horrific measures to destroy oil and gas supplies. Attacks on oil and gas sources push the price of oil upward, induce erratic market behavior, and get the attention of oil dependent countries.
The reaction to such attacks on oil supplies is always security escalation. In recent years, there has been a movement towards finding alternative forms of energy. This would result in less harm to the environment due to the reduced amount of fossil fuel usage as well as depriving terrorists of key weapon that is often used by terrorists. Terrorists may be able to destroy hundreds of oil drums and supplies.
An increase in oil prices means an increase in shipping costs. This hurts virtually every business that relies on imported goods. Oil products must be shipped in order to reach the consumers. The increase in shipping costs can eat into a company's bottom line and cause a decrease in stock value on the market. Thus, the company makes less money, the stockholders suffer, and the market as a whole takes a hit. With so many negatives associated with oil supplies hurt by terror acts, it is easy to see why measures are being taken to stop such acts as well as reduce the dependence of economies of the world on oil.
Terrorism is a real threat to all the nations in the world. The human tragedies that result from terrorist acts are horrifying and the economical impacts that follow can be almost as devastating.
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 occur. Increased costs in security can cause companies to endure economic hardships ultimately decreasing the value of their stocks and hurting shareholders. Fear can often lead to erratic stock market behavior. Those that play the stock market are looking for predictability and terrorist attacks provide anything but a stable market.
The typical reaction of the market to a terrorist attack is an immediate downturn. This has historically resulted in markets recovering from their short term slumps and even going on to long term bull periods.
The loss of human life is undoubtedly the tragic side of terrorism. The loss of death of loved ones is immeasurable. The business world is affected by these human losses; the loss in labor force and other key players in a company can cause significant negative effects.
In reaction to terrorist activities, governments often call for increases in defense spending. This often translates into tax hikes for the average citizen as governmental spending increases. This may ease the minds of citizens and actually provide a higher level of security for a nation. Every dollar that is given to the government as military assistance is taken out of the cash flow of a nation's market economy.
In US or arms exporting countries, it can be argued that a war can be good for an economy since a war creates a new demand for supplies such as ammunition, planes, and other military supplies. This can create new jobs as the market responds to increased demands. Thus, terrorist activities that trigger an increase in defense spending can actually serve to stimulate the economy within certain sectors, especially those related to producing military supplies and weapons. Often, terrorism causes governments to increase regulation on imports and exports as well as beef up security. The result is an increased demand for security personnel which in turn creates more jobs.
TERRORISM AND INSURANCE
The basic concept of insurance is simple; pay a premium in exchange for the comfort against a disaster. An insurance company bears the bill of the comfort. Therefore, it is only natural that insurance agencies evolve to offer higher levels of insurance against terrorist attacks in a world that has become increasingly aware of terrorism's devastating effects.
Large companies, especially airlines, have seen insurance prices skyrocketing due to the costs associated with insuring against terrorist attacks. Prior to 9/11, businesses were paying premiums that were substantially lower. After 9/11, the premium rose to an estimated $6.9 million for a coverage of only $150 million. This is how terrorism affects the economical structure of the insurance industry. As the threat of attack rises, so do premiums, while the amount of coverage that is provided falls. This translates into business paying more and getting less. The insurance cost is even higher in countries like Pakistan where foreign insurance companies are demanding higher premium due to continuous terror attacks.
For many in west, a vacation means a respite from hefty workloads in order to refresh the mind and body and relax in the hustle and bustle of everyday life. It is not the case in Eastern parts and in Pakistan due to other socio economic issues. Countries and regions that depend on tourism to keep their economy afloat are especially susceptible to the negative effects that terrorism can have on tourism. The fear that is caused by terrorist attacks generally compels people to stay close to home and to play it safe rather than risk lives.
The tourism and travel industry are in a much better financial position when there is a minimal amount of terrorism. In Pakistan, Swat was one of the main tourist areas but in recent years terrorists have badly affected the area and despite successful military operation in Swat people are hesitant to go there. It will take time (years) to restore the confidence of people to visit Swat.
The targeting of mass public gatherings and transportation such as buses, planes, and trains has made many travelers leery of straying too far from home. Prior to the 9/11 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 9/11 the public's reluctance to travel resulted in job loss of thousands of employees in the travel and tourism industry. Since this initial market downturn, fears have cooled and the tourism industry has begun to slowly recover, but this example is grim reminder of how fine a line the tourism industry is walking on.
Any country or area that depends heavily on tourism for economical stability is playing with fire. The threat of a terrorist can cause the loss of business and cripple the economy.
IMPORT AND EXPORT
Every country has its own special blend of natural resources that are indigenous to its particular region. These resources help to drive a country's economy and fuel the markets around the world. However, very few countries can be entirely self-sufficient in every aspect of the marketplace. Even if a country does have the resources to produce all its basic products domestically, there is always a market for imported luxury items.
One of the cost plus factors in the exports of Pakistan is high security checks. The high security checks are making exports from Pakistan expensive. The effects of heightened security surrounding the importing and exporting of goods result in high costs passed on to the consumer. Such price increases serve to shape the financial world.
Due to high costs of business, companies may decide that importing or exporting a particular product is no longer cost effective. If importing and exporting continues to occur, profit margins may be effected which will in turn hurt the overall performance of the company and its value on the market. This is how terrorism serves to shape the world economy by affecting the importing and exporting habits of virtually every nation around the globe.
AIR TRAVEL AND TERRORISM
It is common for an individual to have a fear of heights. Others fear moving at very high rates of speed. Combine these two fears together and you are left with a fear of flying. Although thousands of people travel on airplanes safely everyday, it is a logical fear to fly high. People are placing their lives in the hands of mechanical parts as well as other humans. This can be a scary proposition in itself, but coupled with the threat of terrorism the fear can be petrifying. Although the hijacking of planes is more common in movies than in real life, terrorist attacks such as those that happened in America on September 11, 2001, turned the worst nightmare of many air travelers in to horrifying reality.
Airplanes are soft targets of terrorists for one simple reason, the helplessness that passengers have while onboard. If a terrorist tries to take hostages on the ground, people can try and run, the police will soon arrive, and the situation may be controllable. On an aircraft, there is nowhere to run and no police in sight. This poses a very difficult problem to law enforcement agencies that are incapable of overcoming the terrorism bids.
The moment terrorists succeed in inspiring fear in air travelers they have accomplished their main aims. Since 9/11, the airline industry has been wracked with increasing economic problems, from security to increased airfares, to a drop in air travelers, along with a host of other fallouts. And, now the increasing cost of oil is forcing once solid industry giants to loose their financial footing.
Airlines have to invest in expensive baggage and passenger scanning equipments, 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. Terrorist attacks that target airplanes have profound effect on society and economy. 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.
When terrorism strikes victims are often unsuspecting and helpless. The reports of such attacks often make others feel anger towards the perpetrators of such attacks and in some instances can motivate individuals to seek out personal protection in the form of guns. Many see reports of terrorist activities on television or read about events in the newspapers and think of acquiring personal weapons. This can result in a large increase in gun sales. This natural response to a perceived increased threat on personal safety can help stimulate the growth of companies related to the production of guns and weapons as well as ammunition.