Terrorism the Effects of Terrorism Term Paper

Excerpt from Term Paper :

No matter the actual cost of terrorism in terms of the economic damage, the perception that investment is going to incur higher risk will inevitably lead to the conclusion that it will also incur higher costs. Since higher costs are generally an anathema to transnational business, it stands that capital would move away from areas that have experienced terrorism. In fact, this is born out by the numbers. As already mentioned, FDI in the U.S. dropped by a factor of ten following the September 11th terrorist attacks. No one person, business, institution, or government had to organize this shift; rather it occurred organically as a function of the market itself. In the aftermath of the attacks, the U.S. suddenly seemed like a riskier place to do business and capital would have been shifted towards areas of the world that had the perception of being safer.

In fact, surveys conducted among major international corporations found that, with regard to FDI, the presence or absence of a significant terrorist threat was cited as a significant factor in determining where to invest capital (Abadie and Gardeazabal 3). In an open, yet integrated, global economy where capital can easily be shifted from one locus to the next it is not surprising that it would move from areas of high risk to areas of low risk -- whether or not terrorism represents a significant long-term threat to doing business. From this we see that terrorism does have an impact on the global economy because of the perception that it will negatively impact business. In the aftermath of September 11th, FDI evaporated from the U.S. And was shifted to other parts of the world. Whether or not that capital will eventually be shifted back to the U.S. seems to be largely a matter of perception. As the perceived risk of doing business in the U.S. diminishes, it will become more likely that investment will return and be shifted away from other parts of the world that are perceived to be at greater risk from terrorism.

Despite the fact that terrorism does, then, have an impact on the global economy, it would appear that said impact is largely a function of perception rather than of actual cost. Fortunately, other analyses have been conducted in the last few years to calculate the actual financial impact of terrorism on the global economy that use the September 11th attacks as case examples. These studies illustrate that there has been an actual global financial cost to the world economy because of major terrorist attacks, though the cost seems to be significantly less than perception of danger leads many to believe. In other words, the dramatic shifting of capital and investment away from perceived danger sites is not commensurate with the actual financial cost of doing business in those areas.

Of course, at first brush, the numbers do not seem to confirm this point. For instance, when comparing world economic growth in 2000 versus 2001, we find that it dropped by almost 3%, from a modest 4.1% growth rate to a recessionary 1.4% growth rate (Nanto 3). However, these numbers do not tell the whole story. In fact, it had already been predicted that world economic growth rates were going to drop around the time of the September 11th attacks. Economists had already predicted a slowdown in the economic growth rate of the world economy. However, the actual rates that manifested were significantly lower than what had been anticipated. After September 11th, actual global economic growth averaged about 1% below where it had been expected (Nanto 4). While this is not unequivocal proof that the terrorist attacks were behind this larger-than-anticipated slowdown, it is suggestive that there was a global economic response to the terrorist attacks.

While the economic effects of September 11th were large and varied, they were incredibly small when weighed against the total productive capacity of the world economy. The global GDP currently hovers around $40 trillion. If the attack caused a global economic slowdown of roughly 1%, then the total cost to the world economy should be somewhere between $300 billion and $400 billion (Nanto 4-6). This amount of financial loss is certainly impressive considering it rippled through the global economy as the result of a single coordinated terrorist attack. Nonetheless, when spread across the entire global economy, the total loss to any one government, corporation, or even individual would have been incredibly minute. In other words, the actual economic cost of the terrorist attack was not commensurate with the significant shift in capital that occurred away from the U.S. In the immediate aftermath of the attack. The perception of danger, risk, and cost was significantly higher than the actual danger, risk and cost. Regardless, it is apparent that perception is a powerful factor in the global economy. The idea that terrorism represents an incredible economic risk is a strong incentive to shift capital away from regions that are afflicted with terrorism.

Because there is a disconnect between the actual cost of terrorism to the global economy and the perceived cost, it is crucial that the perception of the dangers of terrorism be minimized. The actual costs are so low in terms of the global economic output that it borders on the ridiculous to invest significant amounts of capital into anti-terrorism efforts. That investment could be spent in other ways to strengthen the structure of the global economy itself so as to minimize the actual and perceived impacts of terrorism for the complete economy. Notably, security efforts must be adaptive and flexible, the economic gaps between developed and developing worlds must be minimized, and stronger commitments to free trade must be established (Carafano 26). Strengthening and improving the global economy in these ways can minimize the effects of terrorism. After all, global terrorism will respond to the market conditions extant just as any other transnational corporation might. Place a barrier in front of it -- such as heightened security -- that increases the cost of doing business -- in this case terrorism -- and it will adapt in whatever way necessary to minimize the cost of that obstacle. Unless the obstacle is significantly large, it is unlikely that it will utterly eradicate terrorism, just as new tariffs on certain kinds of products don't necessarily run every corporation out of business. Therefore, since it is unlikely that terrorism can ever be eliminated, the more reasonable course of action would be to minimize the economic effects of terrorism by strengthening the global economy and reducing the perceived threat of terrorist actions.

In conclusion, it seems clear that the economic costs of terrorism can be global in nature. Most notably, there is a definite shift of capital that occurs at the transnational level following terrorist attacks as well as in response to potential attacks. Businesses will inevitably shift resources from areas of high-risk to areas of low-risk no matter the actual costs involved. This is a natural function of the market. However, under closer scrutiny, it seems evident that actual global economic costs of terrorism are significantly lower than we might expect based on the perceived dangers. At best, the September 11th attacks caused a global economic slowdown of less than 1%, or roughly $300 billion. While certainly significant, it pales in comparison to the total global productive output of the international economy. Taken in these terms, the global economic costs of terrorism become so diffused as to be almost insignificant. Regardless of the perception of danger that causes global shifts in capital in response to terrorism, we find that the economic costs themselves are much lower, though still statistically significant, than anticipated.

Works Cited

Abadie, Alberto and Gardeazabal, Javier. "Terrorism and the World Economy." Aug. 2007. 29 Nov. 2007 http://ksghome.harvard.edu/~.aabadie.academic.ksg/twe.pdf.

Carafano, James Jay. "Global Terrorism and the Global Economy: Unpeaceful Coexistence." Chapter 2 in 2005 Index of Economic Freedom. 2005. 29 Nov. 2007 http://www.heritage.org/research/features/index/chapters/pdfs/Index2005_Chap2.pdf.

Nanto, Dick K. "9/11 Terrorism: Global Economic Costs." CRS Report for Congress. 5 Oct. 2004. 29 Nov. 2007 http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-7725:1.

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