The need to act on terrorism before it is too late

I wrote a longish article on impact of terrorism and economics. Here it goes:

The recent serial bomb blasts in Bangalore and Ahmedabad were another of those series of blasts happening around the world. Every day we keep hearing about bombs taking off in some part of the world – London, Madrid, Jaipur etc. Terrorism and Counter-terrorism is a subject that has been heavily discussed on various international and political forums. I don’t understand the political aspects, so will discuss economics of terrorism.

Terrorist attacks put economies under severe strain. They not only lead to damage of the private property but also important public goods like bridges, roads etc which take years to develop. Applying behavioral economics, terrorism shatters the confidence of the population and makes them more conscious before taking any business decisions. This further delays productive activity in an economy. If the region receives foreign investment, then this also dries up as well.

Further, the counter-terrorism policies can further damage the economy by diverting resources (which are scarce) to manage warfare. In economist’s parlance the Production Possibility Frontier moves towards guns instead of butter. Moreover, it could derail the expenditure program of the government. The US economy is the best example. The US government’s budget which has always been in deficit became surplus in 1998 but again moved into a deficit zone from 2003 onwards. The Bush Administration in 2002 had projected a budget surplus of around USD 1.29 trillion through 2004 but it became a deficit of USD 850 billion. There were other reasons for this swing like but financing counter-terrorism in Iraq and Afghanistan was one of the main reasons. Hence the budget surplus that could be used for more public goods for instance, infrastructure (which is in bad shape) instead became a deficit with government needing additional resources.

Terrorism has also become transnational and sophisticated with times. It poses numerous challenges for economic policymakers as these attacks can put years of good work to zilch. The policymakers fight for stable economic conditions can be eroded in a fraction of a time. Jaipur has been a peaceful city and has always been popular with tourists. It was also emerging as a hub for gems and jewelry. The eight blasts were spanned over 12 minutes and have undone a number of years of good work. Even for US, to counter this terrorism, it requires more resources and not less and balancing the budget is going to be an arduous task.

The economists have done a lot of research on the subject as well. The earlier strand of research looked at impact of internal conflicts in the economy. This has now been expanded to look at terrorism. The research shows that terrorism leads to lower capital inflows, impacts industries like tourism and airlines, and diverts government expenditure to more security. Infact, all the above-suggested economic consequences have been proven empirically as well. Though, the camp is divided on the issue of whether counter-terrorism is important or not. 

Martin Feldstein in a paper wrote countering terrorism is “enormously important to the domestic economy, to international trade and to all of us individuals”. He argues in order to prevent terrorism, US needs a new set of institutions and there is a need to have more international cooperation. In another article, Feldstein argues for a higher budget layout for defense and modernizing its military and weaponry.

On the other hand, Todd Sandler et al (an expert on these matters) in a research paper say, “terrorism can be put into remission but it cannot be eliminated”. The authors say far more people are killed on US highways but more focus is on the counter-terrorism and not on better roads. Theirs is a very comprehensive paper on the topic and helps us understand many economic aspects of terrorism.

Keeping research aside, terrorism is an important economic issue. United Nations has intensified efforts to negate terrorism. Copenhagen Consensus 2008 also included terrorism as one of the ten main challenges confronting the World policies. The forum started in 2002 debates research papers on both sides- one defending the challenge, other nullifying it. Todd Sandler paper (mentioned above) has been presented in the Consensus in the second category and there are two papers defending the challenge (by S. Brock Blomberg and Michael D. Intriligator respectively). 

The way forward is what Feldstein has said- modernize defence and increase cooperation. It will be difficult to counter it using existing set of defence mechanism as the terrorism has become highly sophisticated and uses state of the art mechanisms to communicate or attack. It will be interesting to see how governments respond to these developments as most are under pressure to cut their budgets. Indian Prime Minister has already indicated at setting a Federal Agency to counter terrorism. International cooperation has suddenly become the buzzword amidst subprime and food crisis. There has been international cooperation to reduce global imbalances but it has been with difficulty. We have still not been able to conclude on the Doha Trade Round initiated in 2001. We need some serious discussions on the matter to come out with fresher ideas.

Coming back to Copenhagen Consensus (CC), in 2004 it cited financial instability as one of the challenges but was not ranked as the panel noted it as complex and uncertain. It said:

Four proposals before the panel addressed the issue of international financial stability. The panel, noting the complexities and uncertainties in this area, chose not to come to a view about which, if any, of these proposals to recommend. They were therefore not ranked.

Interestingly, in 2008 CC couldn’t come to any conclusion on terrorism either:

The panel chose not to include any of the proposed solutions to the challenge of terrorism in the overall ranking. Though the paper presented innovative and new work on the economic costs and benefit of terror prevention, the panel found that there was not sufficient evidence regarding the proposed options.


Notice the similarity??  We have all seen how destabilising financial instability can be and surely can’t follow the sit and wait approach in case of terrorism.  Time to act and act fast.

3 Responses to “The need to act on terrorism before it is too late”

  1. new frontier industries Says:

    […] of those series of blasts happening around the world. Every day we keep hearing about bombs taking Sen’s Party Wins 73% of Seats in Cambodia Poll Update2 Bloomberg.comJuly 28 Bloomberg — […]

  2. Terrorism and financial stabilty in the same boat? « Mostly Economics Says:

    […] and financial stabilty in the same boat? By Amol Agrawal The Mumbai Terror attacks takes me back to a longish post I had written a while back. In that post I had said we should, take terrorism a lot seriously than […]

  3. empirical formula Says:

    At the sidelines of our last ICD breakfast forum, as we discussed the events that had occurred in the financial circles in the West, particularly, in the US, our speaker asked us if we were familiar with the

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