Your Thoughts: The Cost of Terrorism

Your Thoughts: The Cost of Terrorism

Since the 9/11 attacks in the US, there has been a lot of research and many theses written about the economic cost of terrorism, but with recent events, not only in London, Manchester, and close to home, but across the globe, Lawyer Monthly asks again, what is the cost of terrorism?

Below Lawyer Monthly has from very reputable experts who have provided some inciteful analysis.

Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:

Terrorism and the economy are two very closely interlinked subjects. Terrorism can have a huge effect on an economy in various ways stemming from the fear and lack of confidence it creates. Financial markets are largely driven by these two phenomena; confidence that something will happen and fear that it might not, and vice versa. Ultimately what drives an economy is the behaviour of individuals, and terrorism can have a very direct impact on the behaviours of individuals and businesses.

Looking at the currency markets, terrorism is one of the elements that can influence exchange rates; the other factors being economic news, political uncertainty and acts of god. Together these are the four elements that move currency markets. Exchange rates will generally follow some fairly predictable behaviours on news of a terror attack, safe haven currencies will strengthen and a currency directly affected by the attack may weaken. As a result of the tragic terror attack in Manchester, the Pound fell however the value of the US Dollar, the Japanese Yen and gold all rose as investors moved funds into these safer havens.

Terrorism acts as a disruption but does not in itself halt the economy in the same way a recession would, for example. It is usually a short-term blip, in fact and whilst it is painful to say markets have become more resilient to terrorism, and the impact on the currency market is now less pronounced than it was previously, such as when 9/11 happened, which caused far greater havoc on financial markets.

The Voice of America reports:

Worldwide terrorism is at an all-time high, and violence cost the global economy $14.3 trillion last year, with a $2.5 trillion impact in the United States alone.

These new figures from the latest Global Peace Index, a report on conflict and security, indicate that world peace has been deteriorating for the past decade, largely driven by terrorism and conflicts in the Middle East and Northern Africa.

The study says the decline interrupts long-term improvements the world had been making since the end of World War II.

According to the report, the annual number of terrorism incidents has almost tripled since 2011.

Deaths from terrorism have risen more than 900% since 2007 in the 35 countries that are members of the Organization for Economic Cooperation and Development. Of those members, 23 nations experienced terrorism related deaths over the past year.

Those countries include Denmark, Sweden, France and Turkey.

There are direct costs from the destruction of life and property, emergency services, medical providers and the restoration of systems and infrastructure. Then there are the indirect costs which often have larger implications and include reduced productivity, higher insurance costs and a limit to consumer and investor confidence.

As a case in point, the 9/11 attacks had an immediate $55 billion cost to physical damage with overall economic impact coming in at $123 billion. This was then intensified by the costs to Homeland Security ($589 bn), war funding ($1,649 bn) and future war and veterans care costs ($867 bn). Immediate market effects were the drop of equities – the S&P 500 lost up to 13%, while the safe haven, gold, jumped from $215.50 to $287 an ounce. By the end of the year the S&P 500 was back up 5% and gold leaned back to $276.50.

This is just a brief snapshot of how resilient to terror attacks advanced markets are in the long-term. Globalization means that an attack in London or Paris can and does affect the global markets. However, it is also globalization that allows the impact of these attacks to be absorbed with minimal macro effects.

What perhaps has wider implications are the effects of terror on smaller or emerging markets. If we look at Pakistan around the same time as the 2001 attacks in the US, a more chilling picture of terrorism on economies arises. In 2001-2002, along with the immeasurable loss of life, the economic cost of terrorism to Pakistan was estimated at $35-40 billion. There are many economic casualties in the ongoing war against terrorism. Exports shrink due to drops in production, we see a shift from tradable to non-tradable sectors due to an undermining of banks, consumption and domestic savings fall and foreign borrowing and aid increases.

By 2009 Pakistan’s economic growth almost ground to a halt thanks to the costs of war on terrorism and the rehabilitation of three million displaced people. Foreign Direct Investment fell to $463 million vs $1.116 billion during the same period of the previous year, a decline of 58.5%. Government capital formation and private investments dropped due to budget restrictions and increased uncertainty. Higher government spending allocated towards military meant less was available for social and economic expenditure. The human cost is also huge – increased infant mortality, deteriorating nutrition, health and educational standards, war-induced famines. With halting economic growth coupled with a widening fiscal deficit, it’s not difficult to see where the seeds of future terrorism are being sown.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!