The Effects of Terrorism on the Global Economies, Research Paper Example

Abstract

For the past years, the economic sector has been threatened by terrorism due to its uncontrollable attacks on the physical and financial investments of stockholders. Based on the recent studies conducted, the effects of terrorism may be felt directly or indirectly. After the 9/11 attacks, it was presumed that the terrorists found a new way to make the government as well as the economy vulnerable. Likewise, security measures and strategic plans were improved by people behind the corporate world. This research work aims to determine the impacts of terrorism not only on the economy of the targeted region but the global economies as a whole. Various existing studies were employed to come up with solutions on how to minimize the financial and physical losses incurred by firms after a terrorist attack.

Keywords: Terrorism, Economy, 9/11 attack

Introduction

Terrorism is a man-made event that can cause enormous effects not only on the physical aspect of a nation but on its economic status as well. This detrimental activity is frequently out of control and can cause measurable losses in the corporate world. The effects of terrorism may be felt indirectly or directly. The upshots may include “direct economic damage done by terrorist attacks: buildings and infrastructure destroyed, productive lives ended. Even though these losses are the result of an act of man rather than an act of God, they are similar to the costs of a natural disaster such as an earthquake or hurricane,” (Krugman, 2004, p. 1).

Terrorists have the power to induce great damage upon modern economies (Klein, 2007). Terrorism did not start on the September 11 attacks, it has been threatening the world for the past 35 years, wherein almost 20,000 attacks have had been witnessed resulting to almost 90,000 casualties (Phumiwasana & Yago, 2006). For the past years, different researches and analysis were organized to determine the current effects, probable consequences and solutions to this violence. This paper focuses on the effects of terrorism on the worldwide economy and the standpoint of the people behind the corporate world on this unnatural event. Recent studies and investigations were employed to come up with conclusions and efficient solutions.

The Economies After September 11 Attacks

Considering the industrial consequences of 9/11 attacks in the United States of America, the damage that has been inflicted by the terrorists attacks was equivalent to the damages if natural calamities. There was incalculable cost of the deaths and property devastation that moment. “The 9/11 attacks were, from the terrorists’ point of view, as successful as an attack not aided by weapons of mass destruction can get: because of the collapse of the World Trade Center, lightly armed terrorists inflicted huge losses of life and large property damage” (Krugman, 2004, p. 2). The event caused disorder in the financial markets predisposing to detainment of the normal operations of companies due to the possibility that other industries may be susceptible too. According to Klein (2007), the direct forfeiture of physical capital during the 9/11 attacks amounted to $15.5 billion which is only half of the amount of losses recorded during the 1994 Los Angeles Northridge Earthquake.

After 9/11 the new kind of vulnerability has been established on the society and the global economies. Kunreuther and Michel-Kerjan (2004) added that these assailants can use diffusion capacities of a nation’s critical networks to induce harm to the target population wherein in the case of 9/11, aircrafts were used for the completion of the plan and snail mails were used for terrorism using a deadly disease called anthrax. Jackson (2008) discussed that the impact of the attacks on the World Trade Center caused the formation of three camps of forecasters. The first group of forecaster was composed of a few insignificant opinions and assumed that the nation’s economy would worsen leading to a deeper recession and loss in the United States Economy. The second group comprised the majority of forecasters and these people projected that the assaults would not affect the direction of USA’s economy. Lastly, the third group of forecasters assumed that the attacks would benefit the nation by the increase in security and technology development as prerequisites for globalization.

Klein (2007) reported that certain sectors were especially affected in both positive and negative ways by the attacks last September 11, 2001. The author stated that the attacks caused a sudden increase in demand for commercial air trips which seriously affected the airlines industry. Likewise, the insurance industry was bothered by the approximated insurance loss amounting to $35.6 billion which is said to be the highest in the history of terrorism. However, the attacks alarmed the household owners to maximize their safety resulting to the patronization of homeland security industry. Products such as border security technologies, surveillance equipment, chemical, biological and radiological detection and other protections systems were bought by most of the consumers.

Since tourism is a significant portion of the economy, it has been greatly affected after the 9/11 attacks. According to the World Tourism Organization, there was a degree of satisfaction on the number of international tourist arrivals after the attacks. The rate fell by less than 1 percent equivalent to 692.7 million in 2001 from 696.7 million in 2000 (Bonham, Edmonds & Mak, 2006). However, according to their research, based on the data coming from the World Bank, the US citizens have reduced their travel abroad as well as the foreign trips from the US after the terrorism incidence. The foreign trips declined to 54.2 million trips in 2003 from 60.9 million in the year 2000. Few years after the attacks, the United States of America recovered with its growth rate from “1 percent following the terrorist attacks in 2001 to rise to a pre-9/11 level of 3 percent by 2003 and 4 percent by 2004”, (Jackson, 2008, p. 9).

The Domino Effect

Terrorists can induce negative effects on economies in several indirect ways such as “reducing consumers’ and firms’ expectations for the future, forcing governments and the private sector to invest in security measures, which reduce efficiency in vulnerable industries (such as transportation and trade) and redirect investment away from more productive economic uses, altering behavior by inducing economic actors (consumers, investors, businesses) to avoid areas of perceived risk (either sectors, such as aviation or tourism, or geographic areas affected by terrorism), and triggering wider geopolitical conflict, which may cause further economic disruptions” (Klein, 2007, p. 3).

The presence of investors in a country is significantly influenced by the national security. The primary objectives of the stockholders are to find a safer place for their money and to secure the stability of their businesses. Karolyi and Martell (2010) stated that the terrorist’s assaults can affect the corporate world by destroying to different types of assets which include concrete assets like plant and equipment, property and intangible assets like the capital resources. According to the authors, the second asset is connected to the sudden death of executives because of the stock price reaction.

Frey, Luechinger & Stutzer (2007) explained that the economic activities are troubled by these acts of man in four different ways. Just like the findings of Karolvi and Martell (2010), terrorists’ attacks belittle the nation’s capital stock as well as the human and physical investment. These also cause the side-tracks of resources from an affected country to other places just like in the case of tourism and foreign direct investment. Third way is that terrorism inflicts a greater level of insecurity resulting to alteration of resource allocation, individual’s savings, stocks and consumption behavior. Lastly, because of the increase in security measures, inflation on the transaction costs and other resources is observed.

In contrast, there are regions that benefit from terrorism once they become the alternatives of investors and tourists because of their higher security and lower vulnerability. “Thus large losses to particular regions subject to terrorism risks may be misleading indicators of the losses to society as a whole”, (Krugman, 2006, p. 5-6). Terrorism’s effect on traded goods is felt worldwide just like in the situation of “repeated attacks on oil pipelines in Iraq after the fall of Saddam Hussein, which temporarily paralyzed oil exports” and “the attack launched on the French supertanker ‘Limburg’ off Yemen’s coast in October 2002”, (Frey, Luechinger and Stutzer, 2007, p. 11). All these assaults resulted to the inflation of demands and price of oil products thus affecting the consumers and the economy in general.

The Future of Businesses in the Presence of Terrorism

What happened in 9/11 upheaval can possibly occur in the future because of the presence of terrorism groups such as Al Qaeda. Karolyi and Martell (2010) found out that there is a $401 million worth of decrease in market capitalization in every attack based on their assessments on 75 individual attacks that took place between the years 1995 and 2003. Businesses are attractions to the activities of terrorist because of their locations and high vulnerability. According to Frey (2009, p. 781) firms are good targets of terrorists because of various reasons such as “(1) Some ?rms are highly visible targets; an attack on them is certain to attract the attention of the media, wide sections of the population, and, of course, the government thus supply terrorists with the publicity they seek. (2) Many ?rms are soft targets in the sense that it is impossible to prevent potential terrorists from coming near or even entering the premises. (3) When ?rms are attacked, the economic process is disrupted. The ?rms directly or indirectly affected may be induced to relocate to other areas or countries. International ?rms are less likely to undertake direct foreign investments in that area. The economic situation within the affected country may worsen, leading to dissatisfaction and possibly even revolts, making it more likely that the proclaimed goals of terrorists become more acceptable and reasonable. (4) And some companies may be part of the control and authority on which the power of the government that is opposed by the terrorists rests. The ?rms may be owned by the government or by members of the government. Companies may support the government ?nancially, or help it by providing advice and technological means. Attacking such ?rms reduces the government’s possibilities to pursue its own objectives.” These issues may be considered in reducing the susceptibility of businesses to terrorists’ attacks.

Likewise, based on the study of Krug and Reinmoeller (2003), the hazards of terrorism are more concentrated on firms with features including exposure, geographical spread, and choice of organizational form. According to the authors, exposure is influenced by the symbolic values of a company which may be regarded as successors, archetypal of a lifestyle, colonial power, uncontrolled capitalism and close companion of a rejected political regime.

Since the members of the corporate world are already threatened by the possible terrorist attacks, they have equipped themselves with various methods to keep their businesses intact and money safe. On the study of Barth et al. (2006) using the data from the 2005 Memorial Institute for the Prevention of Terrorism (MIPT) knowledge database with around 20,000 terrorism occurrences, their findings were categorized by four specifications and included a set of control variables and four various measures of terrorism. According to the quantitative analysis of the authors, the greater the number of terrorist incidents per million population, the lower the real GDP per capita growth and the higher the number of terrorist incidents per $U.S. billion GDP, the lower the real GDP per capita growth. Secondly, the higher the number of terrorist incidents per million populations, the lower the capital formation as a proportion of GDP. Also, the higher the number of terrorist incidents per $U.S. billion GDP, the lower the capital formation as a percentage of GDP. Finally, the higher the fatalities and injuries per $U.S. billion GDP, the lower the capital formation as a percentage of GDP” (Barth et al. 2006, p. 4). Aside from these findings, the possible effects of terrorism in the future may cause airlines, airports, utilities, telecommunications, and other transportations to have lower real GDP per capita growth and capital formation to GDP.

Once a business encountered the catastrophe inflicted by terrorists, it is recommended to “prepare for quick intervention after an attack, prepare for the rapid reconstruction of physical capital, and prepare for the rapid reconstruction of human capital”, (Frey, 2009, p. 784-785).

Conclusions

Terrorism is something that the economy cannot predict but can be prevented. According to Krug and Reinmoeller (2003), obscurity would be a remedy for terrorism wherein keeping a company’s low profile by using native joint venture associates is a way to reduce high exposures. Likewise, looking for safe havens, relocation of production areas as well as operations to regions with low threats would also be a solution. Studies suggest that decentralization of decision making gives the terrorists a smaller motivation to attack particular business leaders thus resulting to less susceptibility of the company. “Decentralization of decision-making is not only important and useful for the top echelon of a ?rm (such as the president, the CEO, CCO, CFO, CIO, etc.) but also for the administration department and back of?ces of a corporation,” (Frey, 2009, p.783).

Since terrorists usually target places where there is large quantity of casualties and property damages, studies suggest that “rather than investing in additional security measures, firms may prefer to move their locations from large cities to less populated areas to reduce the likelihood of an attack”, (Kunreuther & Michel-Kerjan, 2004, p. 8). Berman (2009) stated that there are very few efficient terrorist organizations that can cause great fears among the probable casualties, these organizations include Al-Qaeda, Al-Qaeda Iraq, the Sri Lankan LTTE, Hamas, and Hezbollah. These groups are said to have caused 5,880 out of 6,975 casualties due to their suicide attacks from the year 1983 to 2003. The identification of these groups will help the government protect its economy as well as its citizens because it will reduce the cost of counter terrorism.

In spite of the widespread occurrence of terrorism, one should know that this is not found or rampant in all countries, likewise this act of man is not a stable incidence in the corporate world (Krug & Rainmoller, 2003). With this, all companies may or may not be vulnerable to future attacks of these radicals. Since numerous literatures and studies are available nowadays discussing the nature of terrorism and counter-terrorism, impacts of terrorism and strategic planning to combat terrorism, the firms are expected to do precautionary actions to protect their investments. In summary, terrorism can inflict a lot of damages and fear not only to the business groups and government but also to the locals of a targeted nation. The psychological fear that these terrorists induce can discourage investors from sharing their stocks with a particular nation. However, based on the present studies, it is clear the economic sector members are more careful now and are investing more on security to reduce the losses incurred from terrorist attacks.

References

Barth, J.R., Li, T., McCarthy, D., Phumiwasan, T., & Yago, G., (2006, October). Economic Impacts of Global Terrorism: From Munich to Bali. Retrieved from http://www.milkeninstitute.org/pdf/econ_impact_terrorism.pdf

Berman, E. (2009). Radical, Religious, and Violent: The New Economics of Terrorism. Cambridge, MA: The MIT Press.

Bonham, C., Edmonds, C., Mak, J., (2006). The Impacts of 9/11 and Other Terrible Global Events on Tourism in the U.S and Hawaii. East West Centre Working Papers, 87, 1-5.

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Frey, B. S., (2009). How can business cope with terrorism? Journal of Policy Modeling, 31, 779–787

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Jackson, O. A., (2008, March 3). The Impact of the 9/11 Terrorist Attacks on the US Economy. Retrieved from http://www.journalof911studies.com/volume/2008

Karolyi, A., & Martell, R., (2010, June). Terrorism and the Stock Market. Retrieved from http://www.humanrisksolutions.com/sites/www.humanrisksolutions.com/

Kunreuther, H., & Michel-Kerjan, E. (2004, April 26). Dealing with Extreme Events: New Challenges for Terrorism Risk Coverage in the U.S. Retrieved from http://grace.wharton.upenn.edu/

Princeton University. (2004). The Costs Of Terrorism: What Do We Know? Princeton, NJ: Krugman, P.