Terrorism Impact When a Terrorism

Terrorism Impact

When a terrorism attack hits a country, such as September 11, 2001, naturally the citizens of that nation are most affected. They are the ones who are immediately impacted by the injuries and deaths of peers, friends and loved ones, the shut down of production and services, and the psychological and physical long-term effects. However, such an attack also impacts the rest of the world economically, either through the way that the national organizations have difficulty fulfilling their international obligations or the way that other countries perceive that they, too, are being threatened by these same terrorists. In the future, it surely can be expected that such terrorist attacks will continue. It is up to the organizations to prepare their processes and people for such an occurrence. Because of the connections among regional and international economic activities, terrorism in one economy can significantly impact other economies. Thus, it is necessary that all economies place importance on ways to cooperate to decrease the threat of terrorism. Those economies that fail to challenge terrorism and ensure the safety of trade and people can expect to face considerable costs in terms of lost investment and trade opportunities. Collective anti-terrorism activities are the most effective action to take, since the positive domino effect promotes advantages for all economies from a more secure trading and investment environment, as well as reduces negative impacts from inaction.

The economic results of terrorism can be mainly broken down into short-term direct effects; medium-term confidence consequences and longer term productivity impacts. The direct economic costs of terrorism, which includes the destruction of life and property, responses to the emergency, restoration of the systems and the infrastructure impacted, and the availability of temporary living support, are greatest in the immediate aftermath of the attacks and therefore matter more in the short run. Direct economic costs are likely to be in proportion to the strength of the attacks and the size and the characteristics of the economy affected. The indirect costs of terrorism can be major and possibly impact economic matters in the medium term by shaking consumer and investor confidence. A destruction of confidence that is associated with an attack can lower the desire to spend as opposed to save, a negative trend that can move through the economy and the remaining world through regular business cycles and trade channels. Similarly, declining investor confidence could lead to an overall decrease in asset prices and an impact on quality that raises the costs for riskier borrowers. Overall, the degree of the effects over nations, sectors, and time depends on numerous issues, such as the type of attacks, the multiplier effects, the form of policies adopted in response to the terrorism, and the strength of the markets (Bruck and Wickstrom, 2004).

The biggest disruption to the trading infrastructure of 9/11 was caused by damage to the communications infrastructure of the Bank of New York (IMF, 2001). Both Bank of New York and J.P. Morgan Chase, the two main clearing banks for government securities, were located a few blocks from the World Trade Center and had to relocate to other sites (Lacker, 2004). Having to conduct manual processing of securities and payment transactions resulted in major delays in financial clearing and settlement, causing uncertainty about the completion for liquidity trades and demand (IMF, 2001). Similarly, the government securities market was significantly impacted by the loss of the largest broker, Cantor Fitzgerald, and other smaller brokers who had offices in the World Trade Center (Lacker, 2004).

The New York Stock Exchange and the NASDAQ Stock Market never opened for trading on September 11, because of the time of the attack. The U.S. securities markets went back to trading on September 17, with agreements between the private sector and the Securities and Exchange Commission that considered factors such as the safety of the personnel and the viability of the infrastructure and communication systems (Pitt, 2001). Overall, the U.S. stock markets were down throughout the first day of trading, which continued in the following days. Between September 17th and 21st, Standard and Poor's 500 index fell by 11.6% and the NASDAQ by 16.1 (IMF 2001). The September 11th attacks that were seen across the globe by the major equity markets, experienced acute and fast falls and showed how market participants were shocked by the events. The European stock markets, which started operating before the U.S. markets were opened, had even more declines after September 17th due to spillover effects. In total, the Dow Jones Euro STOXX index fell 17.3% between September 11th and the 21st.

One of the most immediate costs of a terrorist attack is the lack of ability of continuing production or services, and thus the loss of revenue and the necessary reduction of the workforce. Terrorism increases the risk and cost of doing business, whether that business is diplomacy, manufacturing, or sales. For example Associated Press reported in October 2002 nearly 200,000 employees were let go after 9/11, including nearly 40,000 in the aerospace industry, alone. An airline industry spokesperson estimated that the world's airlines may have lost up to $15 billion due to passenger and freight cut backs. The comptroller of New York City believed that the attacks would result in $1.7 billion in lost sales and $1.75 billion in lost rent by the end of FY 2003. The international insurance industry was hit by about $50 billion. In 2005, New York City still had 181,000 fewer jobs than it did at the economy's peak in 2000. The downturn began in January 2001, and the attacks themselves cost New York an estimated 28,000 to 55,000 jobs over the next two years, according to a report by the New York Federal Exchange (Taylor, 2002).

The terrorism also impacts the flow of trade between countries. According to Raby (2003), the increased risk and pervasiveness of global terrorism exists as a significant threat to regional development. Terrorism has already placed significant rising costs on world economies. The first cost of terrorism, such as loss of life and property and short-term economic downturn, are further exacerbated by the price of coping with the ongoing threat of another attack. It is estimated that if the U.S. has to incur 10% more in inventories and pay 20% more for commercial insurance premiums due to increased terrorism threats, it would respectively cost 0.1% and 0.3% of GDP or U.S.$7.5 billion and U.S.$30 billion per year (Crise, 2001).

Terrorism fear raises anxiety, negatively impacts confidence levels and increases risk perceptions and premiums that result in lower investment rates and economic growth. Terrorist activities can, and have, severely dismantle international trade and impact costs. Becker and Murphy's (2001) analysis estimates the U.S. investment decline from ongoing terrorism threats is about 0.2 per cent of GDP. This decline, and resulting income, affects other economies, due to lower U.S. demand for imports. Since developing APEC economies are greatly dependent on trade and capital inflows, they may face higher costs relative to GDP from terrorism.

Any terrorist attack, especially one where a number of people are killed, disturbs people psychologically. They will act and react differently in the future than they did in the past. This can have a major impact on business and industry, because buying habits can change. For example, a study by Dermisi (2007) shows how fear and the resulting economic recession after September 11, 2001 impacted the Chicago downtown office market cycles of vacancy rate and rents (per square foot). After 9 / 11, the Chicago Joint Terrorism Task Force assigned threat levels to each high-rise building that were based on the probability of a terrorist attack occurring at that location. It was found that the higher the risk that buildings face due to their location, tenant base, or other security-related challenges, the more prolonged their total vacancy rates.

The most severe impact of 9/11 was on trophy building (such as Sears Tower) rents, caused by escapting tenants who chose not to renew their terminating leases and moved to other less high profile buildings. A trophy or landmark property is one that is well-known by the public and highly sought by institutional investors, such as pension funds and insurance companies. They usually have unique architectural designs, with the highest quality of materials and finish, expensive trim. Normally, such properties are more desirable than Class a buildings. In addition to these regular renters, the available space in trophy buildings, particularly those in the higher floors, was more difficult to lease and triggered the reduction of rental levels. A search of the database of occupied buildngs indicated that among Chicago's three trophy buildings (Sears Tower, Aon Center, and Hancock Tower), most of the unrented space, even at the end of 2005, was located above the 20th floor (at 84%) and the 30th floor (at 65%) (Dermisi 2007).

Shipping is another service to both consumers and organizations where it is possible to define a credible counterfactual -- that is, what would the state of affairs been in the absence of 9/11? For instance, although there are now security requirements, six months after the attacks indices showed little evidence of a growth in shipping costs. Some rates had even decreased. Maritime shipping rates grew by 5 to 10% on average in the two weeks after the attack, but that rise was soon reversed. Airfreight rates, however, were about 10% higher in late 2001 than before the attacks. Due to the abrupt slowing of cumulative demand starting in 2000 and the decline in fuel costs after the terrorism, there should have been a steeper falling off in freight costs. The stability of freight rates, despite power fuel prices and underused shipping capacity would suggest that transportation costs may have increased as a result of the 9/11 attacks (Looney).

In 2005, Songster looked at the impact that terrorist acts have around the world on the hospitality industry, which has become a prime target in a number of threatening situations. Hotels, restaurants and bars around the globe have increasingly become scenes of terrorist atrocities not enjoyment and relaxation. The question is what kind of impact are such attacks having on the trade and how can hospitality operators work to reduce their threat? For example, in 2005, there was a terrorist attack in Amman, the capital of Jordan. Sixty people died in the horrible hotel bombing-- the Grand Hyatt, the Radisson SAS and the Days Inn. This was not an isolated incident, however. It followed attacks earlier in the year in Indonesia, Egypt, India, Pakistan and the UK. Such ongoing events have greater long-term impact.

Although the costs of terrorism appear high, everything is relative. The costs from one incident of terrorism are usually not great in comparison to the size of the total economy. In New York City, included in the activities that suffered significant losses after 9/11 were finance; air transportation as the decrease in air traffic impacted employment and income associated with the two major airports, Kennedy and LaGuardia; and businesses related to tourism, including hotels, restaurants and the theater.

For 9/11, despite the fact that the personal costs faced by those directly involved were considerable and lingered for substantial periods of time, and while the magnitude of loss measured in dollars was huge -- $33 to $36 billion in New York City alone -- according to one estimate, the loss of physical and human capital and related output was somewhat small in relation to the size of the economy (Bruck, Tilman and Wickstrom, 2004). Although business activity, and especially air travel, suffered setbacks, and some activities remained weakened even after two-and-one-half years, the total regional and national economies recovered quickly. Within a year, they were again dominated by the trends and cyclical patterns in place prior to 9/11.

The extent of the terrorism will vary the economic impact. For example, the terrorist attacks in Madrid on March 11, 2004 led to different results than 9/11. The Spanish attacks had much less of an impact on the capital markets and on the financial markets overall. The Dow Jones EURO STOXX fell by approximately 3% on March 11 for several days, but recovered nearly by the end of the month. Similarly, after a small decline, the Standard and Poor's 500 returned to the pre-March 11 levels in less than a month.

When terrorism lasts in a similar location for long periods of time, the costs mount more significantly. Nations or regions that rely significantly on tourism have been found to suffer considerable economic losses from the persistence of terrorism. This is true, for example, for the Basque region in Spain, as well as for Austria, Egypt, Greece, India, Israel, Italy, Kenya, and Turkey. Terrorism in such areas seems to lower incoming direct foreign investments. When there is an ongoing threat of terrorism, usual business relationships and spending activities demand more time, additional security measures and greater risk because they frequently require higher compensation as well.

For example, the Bank of Israel estimated that the country's 2002 GDP fell between 3 and 3.8% due to the second Intifada that started before the end of 2000. The initial negative effects on tourist numbers, exports to the Palestinian territories, and building trade were exacerbated as people began to worry that the result of the continuation of terrorism would decrease their income and, as a result, reduce their amount of spending. Responses such as this can then produce greater effects, as lowered demand results in less production, demand for labor, investment, and an overall slowing in economic activity. What occurred in Israel demonstrates the way that terrorist acts can negatively impact future behavior that also influences a greater spectrum of consumption activities. Instead, the relatively fast recovery in economic activity in the U.S. after 9/11 may demonstrate a general perception that this was a single event and not part of a pattern that was likely to be repeated over time.

There were also several other factors at play with 9/11, some that were not even known at the time, that made this event have less of an impact than expected -- even with an unknown recession around the corner. These were defined by Kubarych (2002). First, consumers were in reasonably good financial shape. Since businesses were reluctant to layoff employees who were in short supply only months before, consumer incomes did well. They were supported partly by President Bush's first installment of tax cuts that had just been approved by Congress. Inflation was low, and interest rates had fallen considerably as the Federal Reserve had taken steps to ease monetary policy as the economy slowed. Also, the housing market was very strong: Low interest rates and rising home prices gave owners the ability to refinance their mortgages without difficulty. It was possible for them to save on monthly interest or have cash from some of the capital gains they had from their homes. About 40% of all residential mortgages turned over in the last year and had put close to $100 billion into the pockets of the American consumer.

Second, explained Kubarych (2002), the motor vehicle manufacturers decided after 9/11 that fearful consumers were not apt to purchase a new car. Therefore, these companies acted aggressively to create this demand for self-preservation purposes. They had to eliminate tremendous excess inventories that had been building up in the first eight months of 2001, since they had not prepared for a slump in demand. So these manufacturers slashed prices and, even more importantly, attracted more buyers with the newly introduced zero-percent financing. As a result, consumers had an unprecedented spending spree for automobiles in the months of October and November. Also, consumers went to the malls in droves, so that the total retail sales boomed as well. Personal purchase expenditures rose 6% per annum in the fourth quarter of this year, which led to not less than 4 percentage points of economic growth.

Third, noted Kubarych (2002), the Bush administration greatly expanded the military budget with military action against the targets of Al Qaeda, and the Taliban regime in Afghanistan sheltering bin Laden's terrorist organization. The combination of a tremendous growth in consumption and the defense build-up cut short the recession. It allowed a major inventory correction to move rapidly ahead, and as that ended, it boost a steep increase in real GDP for the first 2002 quarter.

As noted, the impact of 9/11 was not as considerable as would have been expected. Also, one major terrorist attack vs. long-term, ongoing terrorism has less of an overall impact. However, this does not mean that measures should not be taken to prepare for economic impact if, and when, another such attack occurs. Raby (2003), for example, notes that organizations should recognize that the cost of taking steps to counter terrorist acts needs to be seen as an important investment that will lower risk premiums and the tendency to shy away from long-term productivity strategies created by uncertainty and risk. Technology improvements that strengthen security can decrease trade inefficiencies and costs. Especially those industries most vulnerable, such as real estate, insurance and tourism, need to have strategies in place for possible future terrorist events.

According to Kevin Coleman (2004), the insurance and financial services industries "need to adopt new strategies, tactics and technologies to protect against the implications of a terrorist attacks." There is no person who could dispute that the events on September 11th, 2001, changed the world forever. Due to this event, understanding about terrorism increased considerably and industries started to acquire and learn the countermeasures necessary to protect different areas of business, government and society. The economic effects of such terrorist attacks frequently exceed the direct costs associated with them. Although it is impossible to ever put a price on human loss, financial impact can be measured. For instance, if an explosion were to go off in at a single world airport, the entire global trading system would be all but shut down. The economic implications would be catastrophic.

Business is used to managing risks and methods. Strategies and techniques used to develop programs for dealing with risks are in place in most major organizations today. However, such techniques have not been changed to adapt to the risks associated with terrorist acts. Instead, they are merely superficial security measures that address only a few aspects of the total risks from terrorism.

Coleman notes that a risk management system consists of the following factors: 1) risk identification or the steps taken to analyze and determine the potential sources of loss faced by an organization; 2) risk analysis, or the assessment of the possible effects in relationship to the economic loss that different exposures can have on the organization; 3) risk mitigation, or any step taken to reduce at optimal cost those losses that could impact the organization; 4) risk finance, or the acquiring of funds at optimal cost to pay for these losses that could effect the organization; and 5) and risk monitoring, or implementing and evaluating risk management policies and procedures. This five-step approach has been followed by modern management for years.

However, stresses Coleman (2004), a piece of the complete puzzle goes missing in this approach that could make these five-step programs ineffective to deal with risk. Similar programs, such as business continuity planning, disaster recovery site development and contingency planning, are also risk management approaches used by other businesses and organizations. The problem is that the impact on the economy, and specifically the financial services and insurance industries, is not within the scope of such mitigation strategies. Most attention is placed on physical damage that results from terrorist acts and not to other areas of planning that need to be done to react to these horrific acts of violence.

According to INTELOMICS, a technology research and development provider targeting the intelligence community, terrorism is a multidimensional problem that can be described in an nth-dimension tensor. Each classification of target has a one-of-a-kind parameter of characteristics, and every dimension measures the effect of an attack against a uniquely categorized target. The notation for a tensor is like a matrix although it has an exact number of indices. Intelligence technology will not relay the unique number nor the scoring algorithm utilized to determine the impact due to the sensitive nature of the information. A large number of concerns and questions exist about how the finance and insurance companies would respond to a continued threat of terrorism, although disclaimers now placed on insurance policies as well as higher premiums for insurance policies and government back reinsurance already give some evidence as to the corporate response.