Investors and businesses in the United States have dealt with the realities and tragedies of global terrorism since at least 2001, and the threat has only increased. Not far from recent memory, the high-profile terrorist attacks in the United States, Bangladesh, Iraq, France, and Istanbul represented only a percentage of the more than 22,000 known terror attacks that occurred throughout 2015 and 2016.
By 2020, even though 'significant major strides' were made in dismantling organized international terrorists groups, like ISIS, a trend of domestic terrorist groups had developed in countries around the world. The United States, itself, has experienced an increase in domestic terrorism and according to the June 2022, "several recent violent attacks by lone offenders against minority communities, schools, houses of worship, and mass transit have demonstrated the dynamic and complex nature of the threat environment facing the United States."
- Terrorist acts can cause ripple effects through the economy that have negative impacts.
- The most obvious is the direct economic destruction of property and lives.
- Terrorism indirectly affects the economy by creating market uncertainty, xenophobia, loss of tourism, and increased insurance claims.
1. Direct Economic Destruction
The most immediate and measurable impact of terrorism is physical destruction. Terrorists destroy existing plants, machines, transportation systems, workers, and other economic resources. On smaller scales, acts of terrorism may blow up cafes, churches, or roads. Large-scale attacks, most infamously the World Trade Center bombings on Sept. 11, 2001, can destroy billions of dollars worth of property and senselessly kill hundreds of thousands.
The impact of terrorism and war is always negative for the economy, and physical destruction is a large reason why. Productive resources that might have generated valuable goods and services are destroyed, while other resources are almost invariably diverted from other productive uses to bolster the military and defense. None of this creates wealth or adds to the standard of living, even though military spending is often erroneously cited as a stimulant; this is the "broken window fallacy" sometimes mentioned by economists.
2. Increased Uncertainty in the Markets
Even if you do not live anywhere near terrorist attacks, you might still be negatively impacted indirectly. This is because all kinds of markets hate uncertainty, and terrorism creates a lot of it. The financial markets literally shut down after Sept. 11 and did not really recover until months after the 2003 invasion of Iraq.
There is plenty of debate about the depth and pervasiveness of the actual impact on financial markets. As the threats and publicity of global terrorism continue to rise, markets appear to be more and more resilient. Stock market indexes did not decline much after the terrorist attacks in France killed at least 129 people in 2015. However, the deadly attack in Nice, France, in 2016 only adds to the sentiment that France may be an increasingly unstable place to live and do business in. The real threat of global terrorism from an investor's perspective is about the broader picture, not individual incidents. International investment and cooperation are lower in a world full of terrorism.
3. Insurance, Trade, Tourism, and FDI
There are two obvious industries especially vulnerable to the effects of terrorism: insurance and tourism. Not all insurance companies payout in the event of international terrorism or foreign wars, so the impact is likely less than you might first expect. Nevertheless, terrorism is a risky business for everyone, and insurance companies hate risk as much as anyone else.
Tourism is even more concerning. In France, for example, tourism accounts for approximately 7% to 8% of total gross domestic product (GDP) for nine consecutive years. Vanguelis Panayotis, a director of MKG tourism consultancy, told Reuters that he expected a 30% decline in visitors to France in the month after the Nice attacks.
On a broader scale, terrorism hurts international trade. This may be due to imminent threats, such as compromised trade routes and distribution systems, or because of the psychological and physical reactions to terrorism. This also means less foreign direct investment (FDI), especially in unstable countries.
The estimated cost of the toll and physical damage of the 9/11 terrorist attacks. Including indirect effects such as economic impact (estimated at $123 billion) and increased spending in homeland security, the total impact is estimated to be around $3.3 trillion.
4. War Is the Health of the State
There is an old saying in the study of political economy that reads "war is the health of the state." It means that during times of conflict, reactive governments and nervous citizens are far more inclined to give up economic and political freedoms in exchange for security. This could result in higher taxes, higher government deficits, and higher inflation. During wartime, the government often implements price controls and sometimes even the nationalization of industries.
Governments are less effective at managing resources for productive economic activity than private individuals, especially when those resources are co-opted to achieve a strategic military objective. When governments militarize, the private economy suffers. As economist and historian Robert Higgs demonstrated in his book "Crisis and Leviathan," many government controls stay in place long after military campaigns end.
5. Increased Nationalism and Foreign Skepticism
The final risk to the economy is a political risk. This is already on display in the United States and Europe in 2016, where there has been a rise in skepticism of foreign cultures, businesses, immigrant workers, and refugees. Populist movements already won a victory of sorts in the United Kingdom, where anti-globalist and anti-trade sentiments helped pass Brexit. These kinds of major political events have an uncertain economic fallout on everything from currency to trade and diplomacy.
Closing down borders to trade and immigrant workers reduces the size and diversity of economic transactions and limits productive resources. Economists as early as Adam Smith contended that the division of labor and gains from trade are limited to the size of available factors of production. Just as a single household or town is less productive if it only relies on internal resources, so too do national economies limit themselves to the extent that they wall off external producers and consumers.