By Ashwath Komath

Edited by Namitha Sadanand, Associate Editor, The Indian Economist

Terrorism is not a very popularly studied subject in Economics. While people do know that terrorism has an impact on economy, it isn’t very clearly understood as to how that happens. This is because the discussion of terrorism as an issue itself is actually quite short lived. Terrorism is discussed more often when it is a looming threat; so terrorism and its impacts are more likely to be discussed in the aftermaths of a terrorist attack. Additionally, public memory about terrorism tends to be a little short. So what really are the costs associated with terrorism?

There are both direct and indirect costs of terrorism. The direct costs of terrorism would involve the direct damage caused by terrorists to the economy. If we take the 26/11 attacks as an example, the direct costs would be perhaps the damage to the Taj and the Oberoi in the fires as well as the other direct costs to infrastructure and people. If terrorists were to attempt attacks on larger targets such as power plants and other more valuable targets, the direct costs of terrorism would actually be much larger. So here, we are talking about nuclear power plants, water treatment facilities, major industrial complexes, oil terminals, airports, seaports and other such high value infrastructure that costs a lot to build. Indirect costs of terrorism refers to the potential loss to the economy as a result of terrorist activities. So here we are talking about the loss of investor confidence, the loss of tourism revenues, the loss in workdays as a result of closures for security reasons and several other such avenues that have been potentially affected due to terrorist attacks Even if it may seem large, direct costs of terrorism is not as expensive as indirect costs of terrorism. Direct costs of terrorism has an immediate impact, but indirect costs of terrorism speak about the loss of potential earnings, which is a very large sum and has a much larger impact than others. For example, after 9/11, the aviation sector plummeted for weeks and even months after the attacks. People refused to fly in planes. This happened despite the fact that aviation was shut down in the United States for over two days after the attacks. The airline industry incurred losses of over $22 billion between 2000 and 2001. This had a snowball effect. Before the attacks, the aviation sector in the United States employed 520,600 people. In 2003, this number decreased to 444,700. The US had to pay $5 billion to the airline industry and also promised them future loan guarantees. Subsequently, as a result of such tense climate, Sabena and Swissair had to declare bankruptcy.

And this is the story of just the aviation sector.

This far outweighs the cost of the loss of four planes, the World Trade Centre and damage to the Pentagon as well as the financial costs of 2,990 deaths. Now these costs are strictly financial losses. The human cost of these attacks cannot be measured and the comparison made above is in no way trying to measure suffering and human loss. Human life is of infinite value and can be neither compared nor measured.

Terrorism, like economics, is a lot about psychology. Perceptions matter to both areas. In fact, perceptions may be the only thing driving each other. As the adage goes, ‘Terrorists want a lot of people dead, not a lot of people watching’. This goes on to show that it isn’t the attack itself that provides success to a terrorist attack; it is the fear that it generates in people’s minds. This fear plays out in the economic situation of any country. In India, for example, after the 26/11 attacks in Mumbai, USA and UK issued travel advisories and India was suddenly placed on list of the world’s most dangerous places. India featured in a list with the likes of countries like Iraq, Afghanistan and Pakistan on the one indicator that they are the worst at, which was terrorism.

This drives away tourists, businessmen, investors and so many others from the country. Investors view this as climate not conducive for businesses for two reasons. Firstly, it shows that the government and authorities cannot protect their investments and secondly, adding the costs of security makes investing more expensive. Not to mention the fact that terrorism has some implied costs that needs to be borne by governments in order to somehow prevent further terrorist attacks. Sometimes such measures, even after considerable investment and time don’t bear fruit. So when the government now chooses to set up a new NSG hub near Mumbai, increase the strength of the Central Industrial Security Force or buy new helicopters with infrared and tracking technology, we are talking precious tax money that could have been used for other areas of development.

Unfortunately enough, these costs become necessary. Such security has no longer become a luxury, but a necessity. Even businesses bear the cost of security. So when governments mandate that hotels install new metal detectors, bulletproof glass, advanced CCTV systems and hire security personnel, the buck passes on to the customer and eventually the taxpayer. Your bill for a cup of coffee at a pricey cafe in Colaba costs you much more because the cost of the added security is now incorporated in your bill. You are shelling out extra for this security. Even your taxes are now inflated to accommodate these added security costs.

As stated earlier, perceptions matter. When governments spend money in trying to bolster the security by putting in armoured vehicles, armed policemen, barricades and other manners of security; that this makes us look more secure, therefore we can attract more people to invest in us.

Unfortunately, such measures only show that you are constantly under threat. This only brings about more fear in people, because their presence is not reassuring, it’s a reminder. Security is something you understand when you don’t feel threatened without such measures. If this is the kind of security that is needed on a daily basis, then it says that the threat persists, and this only heightens the feeling of insecurity.

To sum up, true economic costs, pretty much like the stock market, depend on perceptions. Understanding the true economic costs of terrorism is possible only if we understand how it changes our perceptions and our image and how we deal with the threat. Security and the economy are two sides of the same coin. They are deeply interlinked and cannot be studied in isolation. One needs to understand the threat to insulate oneself from the shocks it brings with it.


Ashwath is a graduate in Political Science from Fergusson College, Pune. He is an aspiring diplomat and hopes to join the Indian Foreign Service someday. He enjoys writing about foreign policy, international security and international affairs. When he is not writing or reading, he enjoys playing pool with his friends, watching foreign cinema and listening to instrumental music.

Posted by The Indian Economist | For the Curious Mind