The expert of international politics, J.D. Kiras, author of "Globalization and Terrorism", has identified four factors behind the rise of terrorism as a direct consequence of globalization. The expansion of commercial air travel, the availability of televised new coverage, the deregulation of financial markets and convergence of political, and ideological interests among extremists, led to the birth of transnational terrorism by the late 1960s.
So the economic effects of terrorism are many and varied, yet they are very difficult to accurately gauge, especially since Terrorism grew from a local to a transnational threat.
The Nobel laureate in Economics, Paul Krugman, suggests in his “The Economy of Fear” a strong similarity between the costs related to crime and those associated with the terrorism. Terrorism is also designed to strike fear into the heart of the targeted society, and it generally succeeds in doing so. As a consequence, to better measure the economic effects of terrorism, it is necessary to understand what people are willing to spend to change their daily lives because of fear of a terroristic attacks.
Fear can also provoke both rational and irrational behaviours. This is especially true if there are broader cultural links with the country with high exposure to tragic events. As the Economist reported in November 16th, three days after the slaughter in Paris, “Europeans still flock to the US for holidays, even though American guns kill far more people than terrorism (11,500 so far this year and counting) because they are familiar with the country and do not feel threatened”.
But how do stocks react to terrorism? Past experiences seem to suggest that the effects of terrorist attacks are relatively limited to the short term and also potentially diminish over time. But what would happen if Europe was faced with the prospect of endemic terrorism on their own soil? Before we answer that, we should note that the stock prices for companies that manufacture things such as weapons, ammunition and aircraft sharply increased just after the terrorist attacks in Paris last week. Just enough to prevent the world stock markets from collapse.
Particularly important is the distinction between the direct and the indirect costs. Whilst many terrorist attacks cause substantial amounts of property damage and create casualties, most of the indirect consequences include the costs imposed on the population of the targeted country by the political reactions. To combat the threat of Islamic State, public spending on homeland security and military operations are likely to be on the rise in the European countries. This may divert resources away from welfare and more productive uses and led to severe border controls too, intensifying barriers to the movement of people and goods.
After the attack on the headquarters of the satirical weekly Charlie Hebdo, the French government announced its intention to trade less with close-to-terror countries. History repeats itself after one year. As a result of the Paris terror attacks, President Hollande said closing France's frontiers will ensure that nobody can enter France to commit further acts of terror.
Yet the loss accumulated in those sectors of the economy that have been singled out as potentially suffering the most harm from the terrorist attack in the medium term, would be partially offset by the so called "reconstruction activities". They refer to the ability of an entity or system to maintain function, when shocked.
But many questions are still waiting to be answered in order to get an idea of the economic impact of large scale terrorism. Where do terrorists get their money? And what is the role of the Islamic State in the economy and foreign investment in the Middle East?
Photo: Getty Images/BULENT KILIC