Global Risk Insights

What is the economic cost of terrorism?

Terrorist attacks have the potential to gravely impact economic markets. The attacks in Paris and the downing of the Russian jet in Egypt raise questions as to how markets respond to security shocks in the short and long term.

Security shocks, such as terrorist attacks, have the potential to cause damage to a nation’s domestic economy, particularly investment and consumer confidence. Attacks carried out against civilians, for example, can harm a nation’s tourism industry, while attacks against major financial institutions such as the World Trade Center have the potential to harm global financial systems. While it is difficult to measure the exact economic cost of terrorist attacks on short and long term markets, there remains a visible relationship between terrorist attacks and market based volatility.

Terrorism’s short-term costs

Terrorist attacks almost always have an immediate impact on short-term markets. One of the most obvious consequences is the rise of uncertainty in investor confidence, causing indexes and consumption to dip following an attack.

Consumers are likely cancel travels plans in wake of a major attack, impacting revenue from restaurants, hotels, and airlines. Hotels in Belgium, for instance, saw 40% of reservations canceled in one weekend as security forces shut down the city for three days last month.  

Despite this, however, the short-term impact of terrorist attacks on strong market economies such as the United States and Europe is often minimal. Evidence shows that markets in developed nations where stability and security are the norm remain resilient post-terrorist attacks.

In the United States after 9/11, for example, GDP dropped by only half a percentage point while the stock market recovered all of its losses within a month. After the Paris attacks, France’s CAC-40 index ended just 0.1% lower for the day. In London after the 2005 suicide attacks, UK markets bounced back within days and British GDP rose .8% that quarter.

Market resilience, however, does not necessarily apply to countries that see repeated violence, such as in Egypt, and where much of a national economy depends upon tourism revenue. The decision by the UK and Russia to halt flights to Egypt immediately after the downing of a Russian passenger plane over the Sinai resulted in a high number of hotel and restaurant reservations in Egypt. These short term losses have had a profound impact on Egypt’s struggling economy and could cost the country $280 million per month due to flight cancellations.

Long-term, hidden costs

In developed nations, terrorist attacks are less likely to have significant long-term economic repercussions. Market conditions in stable, prosperous nations have the ability to bounce back quickly, as economic resilience and consumer confidence overshadow short-term setbacks.

In the tourism industry, consumption is often “postponed” to another economic period, rather than abandoned altogether as people may change travel plans but visit a different time. For nations that frequently experience terrorist attacks and violence, however, the longer-term economic implications are more obvious and severe.

The wars in Syria and Iraq, for example, have devastated these countries’ indigenous economies, causing inflation, high unemployment, labor migration, and overwhelming amount of damage to key infrastructure. This trend is likely to continue in both countries until stability is achieved.

Additionally, there are other less obvious economic costs that are difficult to measure. Terrorist attacks can result in greater spending on unproductive activities such as heightened counterterrorism measures, expanding military and police forces, and stricter border controls. The money diverted to extra surveillance and policing rather than investment and trade balancing may eventually pose a drag on growth.

Overtime this friction in the economic system can have visible effects. In Israel, a nation that is constantly threatened by the fear of violence, experts say that the country’s per-capita GDP would have been 8.6% higher between 1994 and 2003 had there been no violence. Likewise, the Paris attacks could inspire more complex economic challenges for the European Union, particularly if border controls in the Schengen area become more strict. Tougher laws and regulations cross-borders could affect the cost of trade and operations of manufacturing industries.

Risk of economic unproductivity

Overall, while the physical and emotional impact of terrorism is evident, the longer-term economic costs of terrorist attacks on national economies are more obscure. A growing complex security environment, however, is likely to have negative effects on national economies moving forward, hindering substantial economic growth as unproductive costs are endured. Nations must work to balance spending on defense with greater societal investment and efficiency to offset these potential long-term losses.