Terrorism Causes Adverse Effects On Economics 1

TERRORISM CAUSES ADVERSE EFFECTS ON ECONOMICS
Terrorism Causes Adverse Effects on Economies

Chadwick Anderson
Abstract
Looking at data between 1941- present, the relationship amongst terrorism and GDP
was investigated. The health of a countrys economy is immediately affected in the
wake of terrorism. Terrorism brings the level of confidence within consumers down.
Terroristic threats and activity deter economic growth, but by how much? This
research provides a comprehensive analysis of the direct correlation between
terrorism and GDP. Within this research emerges themes, such as the impact of
terrorism on tourism, including airlines, hotels, and other industries. It will
additionally take a look at the physiological effects it has on the people. Later the data
was synthesized in an attempt to connect the relationship. Through the use of cross
sectional and quantitative methods the association between the two was measured.
The findings indicate that terrorism does not have an adverse effect on economies.
This paper concludes that acts of terrorism inflict both direct and indirect economic
costs.
Introduction
The United States has spent $7.6 trillion on military and homeland security
since 9/11 in order to deter terrorism (Holland 2011). The Federal Bureau of
Investigations states that terrorism can be defined as the unlawful use of force or
violence against persons or property to intimidate or coerce a government, the civilian
population, or any segment thereof, in furtherance of political or social objectives in
accordance with Title 18 U.S.C 2331(FBI 2013). The following research proposal
examines the adverse effects of terrorism on global economies. Acts of terror and
terror threats have impacted countrys institutions and this research will question to
what extent terrorism fully distresses the perception of a countrys economy. It will
further encompass terrorist and military attacks and the data associated with them
from the time period of 1941 to current.
The general findings of the literature showed that the relationship between
terrorism and economic growth is quite complex. The immediate costs that terrorism
outlays are not high; however, terrorism is not a simple assault. Its effects have lasting
consequences. The evidence of this is seen through the psychological damage both
by individuals and businesses alike. The availability of the sources found suggests
that particularly the U.S. economies have become more resilient in the wake of
terrorist attacks. Furthermore, governments and industries are also severely affected
by terrorism and if not cautious and concise in their direct response, catastrophic
failure could result in their demise.
Literature Review
The trend that seems to be consistent in all research is that there is significant
financial loss and instability following an attack. However, markets tend to bounce
back with resilience becoming ever increasingly stronger in the wake of attacks.
Using the Dow Jones Industrial Average (DJIA) as a market index provides analytical
data in abnormal returns (ARs) and cumulative abnormal returns (CARs) showing
immediate reaction to unexpected terrorist or military attacks which results in
investor uncertainty (Chen and Siems 2004). The presence of this is emphasized in
the comparison of the Pearl Harbor Attack, Iraqs invasion of Kuwait, and the attacks
of September 11th, all three yielding ARs on the days attack. The 11-day CARs of
these attacks drop however from that of the initial day (Chen and Siems 2004). The
market rebound in terms of days has showed an increasing trend in resilience with
history as well from the Attack on Pearl Harbor totaling 232 days while September
11th only needed 40 days for the market to rebound. Evidence supports that though
global capital markets are interlinked, attacks no matter geography are contagious.
U.S. markets tend to rebound and stabilize quicker, as well as the banking/financial
sector taking less of an impact than foreign markets (Chen and Siems 2004). The
reasoning behind U.S. being able to overcome and stabilize the market is due to the
Federal Reserve System (FED) preemptively providing liquidity in banking and
financial sectors (Chen and Siems 2004).
As the worlds main financial market was disrupted, the effects of 9/11 were
felt on a global proportion, but were short lived due to the resilient structures of the
U.S. and most world capital markets. The complex topic of how terrorism affects the
economy is not one that can be easily concluded. Though it will always be a factor,
with each additional attack more research is being conducted, the trends based upon
this research show that the likelihood that with time terrorism will have less of an
impact on economies. In conclusion the QoG Standard database, provides conclusive
data to disprove the hypothesis that terrorist attacks have an adverse effect on the
global economy (Richman and Santos 2005). The flexibility and vigorous responses
by policy makers played a key role in the reversal of the market as well. Using the
International Capital Asset Pricing Model (ICAPM) for the bases of theories, the
systematic risk of both short and long-term impacts on countries are due to terrorist
attacks (Richman 2005). Research shows that most investors connect the increase in
oil prices with a thriving economy; this is not always the case as the influx in oil
prices due to political or ideological events directly leads to a decrease in corporate

earnings, resulting in inflation pressure and ultimately affecting discretionary
spending (Kollias, et al 2013). In a study using the Unrestricted Vector Autoregressive
model (VAR) and implementing the impact of terrorist attacks, evidence shows that
though there is no direct relation between the oil stock and the S and P 500 market
index. Further findings add that as terrorist actions become more regular oil stock is
not widely effected as a result (Kollias, et al 2013). As war in the Middle East was
foreseen due to the attacks on 9/11 oil prices soared, within a day however the prices
were below that of even before the attacks due to fear of weakening the economy
further by demand for oil (Navarro and Spencer 2001).
Bruck (2002) states that most of the serious damage that was done was to the
airline companies, insurance firms and international trade due to global terrorism
(Bruck 2002). The perceived threat of safety has caused the market to consider the
airlines as a risk to the portfolio prior to 9/11. Now airline stock is considered
aggressive shares and has more than doubled their risk (Bruck 2002). As the shock
and grief subsided, anger and fear began to occupy the minds of American citizens,
the largest organized government entity since Word War II was set into progress with
the addition of 57,000 employees to the US transportation Security Administration
(TSA) (Alavosius, et al 2003). The threats of continued terrorism plague the airline
industry causing several companies to declare bankruptcy (Nanto 2004). Security was
further affected with the new types of attacks becoming factors.
International trade is directly affected and linked to the rise in costs of
security. Anthrax or other biological attacks, large-scale computer virus attacks, and
the fear of nuclear war are causing preventative and protective measures of security
for our country (Bruck 2002). Research has shown that with this rise in security, the
costs have reflected this rise as well. Sky Marshals, government takeover of airport
security, retrofitting of aircraft with anti-terrorist devices, new technology fixes and
increased airport delays in the first year following 9/11 added up to a cost of up to
$41 billion dollars (Navarro and Spencer 2001). The higher transaction costs have a
bearing on the trade industry. Agriculture products, textiles, non-metallic minerals
and machinery were worse affected with the ratio of value to weight is particularly
low making them particularly vulnerable to any increase in transaction costs (Bruck
2002). The higher security measures immediately after the 9/11 attacks caused a rise
in transport, tourism and international trade. Calculations representing this decline
would be equivalent to a loss of around $ 70 billion per annum in US GDP (Bruck
2002). Overall the global GDP is calculated to fall by $75 billion which represents
24% of global GDP for 2001.
Insurance as commonly seen throughout the research only showed an
acceleration trend with the increases in catastrophic losses. The attacks of September
11 led to what was probably the biggest single insurance loss in history (Bruck
2002).There are between 50-80 billion dollars in potential insurance claims,
property, life, business interruption, workers compensation, and disability following
September 11 (Alavosius, et al 2003). Since then, insurance companies have had to
change their policies and liabilities drastically. Many have removed or limited
coverage surrounding terrorism from policies all together (Bruck 2002).
Much of the research provides a numerical value of monetary damages

accrued after a terrorist attack. Navarro and Spencer, gives both the direct and indirect
costs following the 9/11 attacks. The four aircrafts alone involved in the attacks that
day were valued at $385 million dollars. The destruction of the buildings resulted in
an estimated replaced cost to fix amount of $4.5 billion for the trade center, $1 billion
to the Pentagon repairs, and another $1.3 billion for the rubble clean up at the crash
sites (Navarro and Spencer 2001). Corporate property such as office equipment and
software damages added up to $3.2 billion. Additionally, streets, public utilities and
infrastructures had a loss of $2 billion. Damage to fire trucks, ambulances, and police
cars amounted to $35 million. Lost airline and cargo shipping revenues added up to a
loss of $4.7 billion, Lost hotel industry revenues $700 million, Lost advertising
revenues in television and radio during commercial free coverage in the first two days
totaled $1 billion. Two day partial work stoppage and loss of productivity equaled
$35 billion, and lastly, the lost consumer spending and retail was estimated at $6
billion (Navarro and Spencer 2001). In the intermediate aftermath of 9/11, an estimate
of the lost economic output was $94.8 billion dollars.
Looking further into the economic costs the US faces after terrorist activity,
research shows the psychological effects it has on individuals. There is much
evidence that terrorism negatively affects an individuals life satisfaction (Williams,
et al 2013).Shock, horror, and grief swept us following the events of September 11.
Anger, fear, and insecurity swelled as people attempted to go on about their business
(Alavosius, et al 2003). It has been shown that more people are taking time to
reassess life- taking more vacation time, spending more time with family and friends,
highly qualified individuals are taking less prominent positions due to safety reasons,
people are moving to more safer locations where less terrorist threats exist
(Alavosius, et al 2003). Security services, entertainment, production and sales of
comfort goods, and home construction have boomed according to Alavosius.
Cigarette sales also increased after the attacks (Alavosius, et al 2003).
Countries that show higher performance in wealth and democracy are more
likely to experience terrorist attacks and greater association with market validity than
those countries still within the devolvement stage (Essaddam and Karagianis 2014).
Their studies show that terrorist activity triggers substantially low returns on the day
of the attack, as a result of psychosocial reactions within investors. Further adding
that international terrorist attacks increase uncertainty in in decision in the matter of
international investments, these risk avoidant behaviors in return causes a slow down
in trade relations (Essaddam and Karagianis 2014).
Many federal programs were impacted due to the terror attacks. Immediately
following the attack on September 11, military retaliation was triggered beginning the
global war on terror. Troops were sent to occupy Iraq and Afghanistan (Alavosius, et
al 2003). This leads to more money being allocated to security and defense and less to
programs such as education, health care, and other social programs (Alavosius, et al
2003). Placing an increase in funds in a massive military build up and spending less
in other departments, there is now a major imbalance of power among departments
(Alavosius, et al 2003).
Political instability can lead to economic instability. Williams stated that
governments could fail if they encounter critical events and do not act appropriately
(2003). For example, a short while ago, we had a president who barely won the
election yet now has the highest approval ratings of any president in our lifetime
(Alavosius, et al 2003). Furthermore it is found that terrorism can draw a society
together and also decrease the odds of a government acquiescing to terrorist demands
(Williams, et al 2013). The publics approval or disapproval with the government can
directly be linked to the actions of how an administration handles terrorist situations.
The population may look for the government to do something about terrorism or look
for a new government to fix the problem. Additional research suggests that
conservative parties tend to support strengthening and expanding military presence
while left sided parties stress a reduced military presence (Williams, et al 2013).
Research Design
The data used in the research originates from The Quality of Government
Institute (QoG) Standard Data, from the University of Gothenburg Sweden. The
independent variable is terrorism, which can be defined as a systematic use of
violence to create a general climate of fear in a population and thereby to bring about
a particular political objective. (PTS) is used to measure political violence and terror
in which a country experiences in a given year based on a 5- level ordinal scale. The
yearly country reports of Amnesty International and the U.S. State Department
Country Reports on Human Rights Practices are the two sources used in compiling
the research behind PTS. The PTS compiled by Reed M. Wood and Mark Gibney is
broken into a human rights scale based on 5 points.
gd_ptsa Political Terror Scale Amnesty International
Human rights score (1 to 5 ordinal scale):
10
(1) Countries under a secure rule of law, people are not imprisoned for their
view, and torture is rare or exceptional. Political murders are extremely rare.
(2) There is a limited amount of imprisonment for nonviolent political activity.
However, few persons are affected, torture and beatings are exceptional.
Political murder is rare.
(3) There is extensive political imprisonment, or a recent history of such
imprisonment. Execution or other political murders and brutality may be
common. Unlimited detention, with or without a trial, for political views is
accepted.
(4) Civil and political rights violations have expanded to large numbers of the
population. Murders, disappearances, and torture are a common part of life. In
spite of its generality, on this level terror affects those who interest themselves
in politics or ideas.
(5) Terror has expanded to the whole population. The leaders of these societies
place no limits on the means or thoroughness with which they pursue personal
or ideological goals.
For the process of this research, our dependent variable, the economy, I will
be operationalizing as GDP growth percentage. This derives from the World Bank
Development Indicators and will be used as a single factor to gauge the strength of an
economy.
wdi_gdpgr GDP Growth (%)
Based on a ration scale, the annual percentage growth rate of GDP at market prices on
constant local currency. Aggregates are based on constant 2000 U.S. dollars. GDP is
11
the sum of gross value added by all resident producers in the economy plus any
product taxes and minus any subsidies not included in the value of the products. It is
calculated without making deductions for depreciation of fabricated assets or for
depletion and degradation of natural resources.
wvs_e069_02 Confidence: Armed Forces
Military Confidence Scale (1 to 4 ordinal scale):
(1) A great deal, (2) Quite a lot, (3) Not very much, (4) None at all
The introduction of the third variable is an aggregated perception of an individual
countrys in military confidence. The World Values Survey covering years between
1981-2008 encompassing 52 countries.
Findings
The empirical analysis associated with this research was processed by first,
running a cross tabulation of the two principle variables (GDP) and (Political
Terrorism). The findings presented in Table 1, show that of 157 countries reported,
70% of the data is between the -5 -5. Within that subset of GDP the scale of terrorism
is across the board. The one country with the highest GDP growth rate also reflects
the highest terrorism levels. The data depicted in Figure 1, plots the effects of
terrorism on GDP. As evident in Table 1 and Figure 1 below, the findings indicate that
as terrorism increases a likewise effect is present in GDP.
12
Table 1. The effect of Terrorism on Gross Domestic Product
GDP
-20- -15
% within
Terrorism
*0-1
0
0.0%
-15- -10
% within
Terrorism
2
5.9%
1
2.0%
1
2.3%
0
0.0%
-10- -5
% within
Terrorism
% within
Terrorism
% within
Terrorism
% within
Terrorism
% within
Terrorism
% within
Terrorism
% within
Terrorism
9
26.5%
11
32.4%
12
35.3%
0
0.0%
0
0.0%
0
0.0%
34
100.0%
5
10.2%
19
38.8%
11
22.4%
9
18.4%
3
6.1%
0
0.0%
49
100.0%
2
4.7%
12
27.9%
19
44.2%
9
20.9%
0
0.0%
0
0.0%
43
100.0%
2
10.0%
3
15.0%
10
50.0%
5
25.0%
0
0.0%
0
0.0%
20
100.0%
-5-0
0-5
5-10
10-15
20-25
Total
1-2
Terrorism
2-3
0
0.0%
1
2.0%
3-4
0
0.0%
*Scale is: [1 = least amount of terrorism, 5 = most amount of terrorism]
4-5
0
0.0%
0
0.0%
0
0.0%
2
18.2%
7
63.6%
1
9.1%
0
0.0%
1
9.1%
11
100.0%
13
Figure 1. How Terrorism affects GDP
*Scale is: [1 = least amount of

terrorism, 5 = most amount of
terrorism]
To enhance the validity of the research a third variable, (Confidence: Armed

Forces) was introduced. The implementation of the third variable into the
crosstabulation significantly reduces the sample size to 52 countries. The additive
relationship is plotted in Figure 2, which represents 38 countries who lack confidence
in military while the remaining 14 have confidence; however, this relationship lacks
significance to support how terrorism affects GDP. Both countries, lacking in military
confidence and countries that exhibit confidence, have increasing gains when
associated with the variable in the X-axis and Y-axis.
14
Figure 2. How Terrorism and Military Confidence affects GDP
To further understand the implications that these variables impose on GDP

growth, a bivariate correlation was done and the results are annotated in Table 2.
There is a positive relationship between both of the independent variables and the
dependent variable. The stronger correlation occurs in the relationship of the
dependent variable and the independent variable (political terror) than that of the
dependent variable and the independent variable (confidence in armed forces). As
both political terror and confidence in armed forces raises, GDP growth does the
same. In relation to GDP growth and political terror they are statistically significant
with .306, because p = less than .01; however, the correlation of .241 between GDP
15
growth and confidence in armed forces as well as .085 between political terror and
confidence in armed forces are not statistically significant
Table 2. Correlation: GDP, Political Terror, Confidence
GDP Growth
(%)
Political Terror
Confidence:
armed forces
.306**
.241
.306**
.085
Confidence:
.241
.085
Armed Forces
**. Correlation is significant at the 0.01 level (2-tailed).
GDP Growth (%)

Political Terror
Political terror and confidence in armed forces in relation to gross domestic

product are not statistically significant. The results in Table 3 below show the results
of the regression. The p-value for political terror is .164 and the p-value for
confidence in armed forces is .098 both are greater than .05 making it unable to reject
the null hypothesis. From the data I cannot conclude enough statistical support to
form my hypothesis that terrorism has an adverse effect on gross domestic products.
Looking at the R2 in Table 4 only 9.5% of variation within the dependent variable can
be explained by both independent variables; however, a determining factor for this
could result from the limitation in sample size. Further testing with an influx in
sample size may result in an altered outcome.
16
Table 3. Regression Coefficients: How Terrorism and Military Confidence affect GDP
Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error
Beta
t
Sig.
1
(Constant)
3.641
4.323
.842
.404
Confidence:
2.999
1.775
.230 1.689
.098
Armed Forces
Political Terror
.822
.582
.192 1.412
.164
a. Dependent Variable: GDP Growth (%)
Table 4. Implication Summary of Variance in GDP

Adjusted R
Model
R
R Square
Square
Std. Error of the Estimate
a
1
.308
.095
.058
4.81222
a. Predictors: (Constant), Political Terror, Confidence: Armed Forces
Conclusion
The complex topic of how terrorism affects GDP is not one that that can be
easily concluded, though it will always be a factor, with each additional attack more
data will continue to be collected and further investigated. While many factors affect
economic growth, terrorism and military confidence are contributors in instilling fear
and instability resulting in negative trends within the economy. The relationship
between the dependent and independent variables can explain gaps within a countrys
GDP. Both the quantitative and qualitative research that was complied regarding this
paper suggests that terrorism has a minute impact on GDP, and with time this trend
should continue. The ability to use SPSS software for the purpose of empirical
analysis proved to be extremely vital, by allowing ease of access in obtaining;
frequency analysis, bivariate correlations, and multivariate regression. Though there
were limitations, such as the sample size in the data collected through the QoG

Standard database, relevancy in the data provides enough statistical inference to
disprove the hypothesis that terrorist attacks has an adverse effect on the global
economy. Future research should expect insignificant causation between the
dependent and independent variables, unless other variable are motivating factors.
17
18
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19

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TERRORISM CAUSES ADVERSE EFFECTS ON ECONOMICS

Terrorism Causes Adverse Effects on Economies