Sometimes economic and political tensions go beyond the boiling point and lead to full-scale riots. Riots with clear economic proximate causes have fortunately become very rare in the United States, though they were much more common in the early days of industrialization and unionization and the protests that accompanied the WTO conference in Seattle in 1999 were an uncomfortable reminder. (If you've been a victim, your losses may be deductible. Find out how. See Deducting Disaster: Casualty And Theft Losses.)

IN PICTURES: 7 Currency Blunders You Could Cash In On

Though Canada and North America are fortunate to be in a position where there are multiple nonviolent means of expressing outrage and dissatisfaction, the rest of the world is not so lucky. Economic troubles in Greece led to actual rioting earlier in 2010 and there were worries that Ireland would see similar problems when the government rolled out its austerity measures. Moreover, economic protests in much of Europe often take a violent turn (many of the strikes in France, for instance) and with many countries still straining under large debt and deficits, the risk of future disturbances cannot be ruled out.

It is fair to wonder then what the economic impact of rioting is.

Damage to Property and the Economy
It is not hard to imagine that rioting directly damages property values and economic activity. When people smash windows, steal things, or set buildings and property on fire, that all has direct economic costs. Moreover, if people are rioting they are not working, and even those who are not involved in the disturbances are affected - they cannot get to work, shop or otherwise carry on with business as usual. Some studies have suggested that the LA riots in 1992 ultimately cost the city nearly $4 billion in taxable sales and over $125 million in direct sales tax revenue - that in addition to $1 billion in property damage and the loss of many lives.

Riots also produce a clear disincentive for business owners to locate their operations in riot-prone areas. Who in their right mind builds a factory someplace where they fear there is some reasonable risk that it will be burnt to the ground? Riots are bad for property values, as people do not want to live in those areas and many property owners are hesitant to rebuild or repair in the aftermath (some parts of Washington, D.C. for instance, still carried the scars of riots in 1968 decades later). Riots also appear to be bad for employment - businesses are not going to put valuable capital at risk like that, so they will locate their operations in safer places. (If your business has hit a wall, we've got the answer to break through and increase sales and earnings. To learn more, refer to 10 Breakout Ideas For Small Businesses.)

Nervous Investors, Nervous Tourists
Given the potential impact on business, it is probably not surprising that riots make investors nervous. Rothschild supposedly said that it was wise to "buy on the sound of cannons, sell on the sound of trumpets," but most investors to not share that sentiment. Although the Thai stock market has recovered strongly this year, investors saw a 10% drop while the rioting was going on. Looking at it more broadly, rioting raises investors' uncertainty and leads them to increase the risk premium they assign to securities in that country - all of which spells lower prices in the short term. Moreover, while Thailand no doubt benefited from its reputation as a peaceful and relatively orderly country, countries with chronic troubles risk getting labeled as "basket cases" and virtually eliminated from serious consideration as investment destinations.

Rioting also has a distinct impact on tourism - a vital industry and source of capital for many riot-prone economies. Sane vacationers do not want to arrive in the middle of a riot and will steer clear of areas with a recent memory of these troubles. China reported that disturbances in Xinjiang in 2009 led almost 85,000 travelers to cancel trips to the area, while Thailand has seen a big drop in tourism since its political troubles turned violent this spring.

Perversely, though, there has been a rise in so-called "riot tourism" - activists actually seeking out hotspots and traveling there with a hope of getting involved in disturbances. Suffice it to say, this is certainly not the kind of tourism that countries want to see or encourage.

Perverse Incentives and Moral Hazards
By and large, there is very little evidence that rioting "works" in the sense of leading to any lasting redress of grievances. If anything, many governments tend to respond to riots by enacting more draconian laws and beefing up the budgets of those charged with suppressing trouble. When governments do respond, it usually just with temporary solutions designed to pacify the protesters and get them off the streets; vague promises of redress, government-sponsored reforms, or temporary subsidies (particularly in the case of food or fuel riots) will often mollify the crowds, but seldom lead to any lasting improvement in the quality of life of the people.

IN PICTURES: Top 10 Financial Blessings Of 2009

That said, there are some in Europe who believe that the Greek government successfully manipulated other European governments with its riots. Although the Greek government did not apparently encourage these riots, they certainly did help when they brought up the issue of German war reparations, nor were they hesitant in hinting that the riots could threaten the very stability of the government and democracy in Greece. In contrast, Ireland was much calmer and ended up with a much less favorable bail-out package - suggesting, perhaps, that there could be strategic value for the next country to allow matters to get more out of hand before finalizing a deal with the IMF. (You've heard of the World Bank, now find out how it functions and why some groups oppose it. Check out What Is The World Bank?)

The Bottom Line
Riots are almost never the cause or start of a problem, they are almost always the end of the story and an expression of frustration that the government is not meeting the needs of the people (whether those needs are realistic or not). That said, they can have serious long-term consequences. Investors do not want to place their money in harm's way, and businesses steer clear of areas where the safety of their capital, their employees and their customers is at risk. All in all, riots benefit no one but the demagogues who often egg them on, and there can be some serious economic repercussions, as well as the unacceptable cost of human lives.

Find out what happened in financial news this week. Read Water Cooler Finance: Barack Obama Vs. The World.

Related Articles
  1. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  2. Term

    Public Goods & Free Riders

    A public good is an item whose consumption is determined by society, not individual consumers.
  3. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  4. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  5. Fundamental Analysis

    Emerging Markets: Analyzing Colombia's GDP

    With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
  6. Fundamental Analysis

    Emerging Markets: Analyzing Chile's GDP

    Chile has become one of the great economic success stories of Latin America.
  7. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  8. Economics

    Explaining Capital Flows

    The movement of money for investing, trade or business production, is commonly referred to as capital flows.
  9. Investing

    Yellow Light Trade Risk Management

    Being in the stock market for so long I tend to look at the world through the eyes of a trader, but how to decide when we are presented with two options?
  10. Personal Finance

    Dissecting the Simple Interest Formula

    Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  3. What are the main risks to the economy of a country that has implemented a policy ...

    The main risk to the economy of a country that has implemented a policy of austerity is the potential for a self-reinforcing, ... Read Full Answer >>
  4. What austerity measures can a country implement to curtail government spending?

    Broadly speaking, there are three types of austerity measures. The first is focused on revenue generation (higher taxes), ... Read Full Answer >>
  5. Why have austerity policies failed to stabilize Greece's economy?

    Austerity policies are intended to reduce government debt and bring stability to that nation's economy. Austerity's effectiveness ... Read Full Answer >>
  6. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!