Moneymanagement’s Weblog

Economics of Terrorism

Posted in economics by moneymanagement on September 13, 2008

The terrorist attacks on New Delhi in crowed market areas on a saturaday evening have chilled most Indian to the soul….we are all wondering – are our loved ones safe? Will we be next?

Here are some thoughts on how the econmics of terorism works


Terrorism specifically affects…

• Tourism

• Stock markets

• Trade:bilateral trade 4% 

• Insurancec costs rise, loss to insurers

• Oil markets: reduce Supply (Iraq); reduce Demand (London)

• Foreign direct investment

• Portfolio investment (size and composition)

• Saving and consumption 

• Investment 

• Utility: personal impact costs (life and property;disruption to production; fear and grief; injury; response costs, e.g. medical; etc.)



Terrorism beliefs

Terrorists are not desperately poor uneducated people from the Middle East. A surprisingly large share of them have college and even graduate degrees. Increasingly, they seem to be from Britain, like the shoe bomber Richard C. Reid and most of the suspects in the London Underground bombings and the liquid explosives plot.

This has left the public wondering, Why are some educated people from Western countries so prone to fanaticism? Before trying to answer that question, though, some economists argue that we need to think about what makes a successful terrorist and they warn against extrapolating from the terrorists we catch. It is a problem economists typically refer to as “selection bias.”

Most terrorists really are committed true believers, willing to die for their cause. Within the Muslim world, the researcher found a positive relationship between level of education and support for terrorism — the higher your level of education, the more likely you are to support terrorism against Western (including Israeli) targets. Suicide bombers also tended to be better educated than the average population. 


The economic impact of terrorism

The “impact” part of the attack is trivial from an economist’s point of view (sad, to be sure, and it involves such dicey moral and technical issues as how to value the loss of lives, but nonetheless trivial). 

To understand terrorism we need to analyze its elements:

There are four elements in this definition:

(a)   the inducement of intimidation or fear;

(b)  the use, or threat of use, of extra-normal violence;

(c)   the premeditated character of such violence; and

(d)   the political objective.

 The last element – the political objective – is of particular interest because it requires that terrorists must reveal their identity and that they must communicate their demands.


Bombings are by far the preferred method of terror. The reason, once more, has to do with the cost of the action. Hostage taking is logistically more complex and operationally more risky than is bombing. Bombing is not only cheap for the terrorist but more costly to detect for government (far fewer communications available for interception for instance, making it harder to track down potential bombers). Once more, as theory predicts, a lower cost will attract more activity.

Terrorism is not a “crime of passion.” Contrary to public opinion, terrorists do not take lives indiscriminately. Instead, terrorists are rational: they take lives

deliberately, or else they use the threat of taking lives as a tool of negotiation to achieve their objectives at least-cost


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