Against a background of alarm concerning recent atrocities in Paris and elsewhere, this article explores the economic costs of such brutality.

Possibly the most serious issue of our time, even surpassing alleged man-made global warming, is terrorism. Readers need no reminding of this, as recent atrocities in Paris and Mali demonstrate. The main cost of terrorism is human life; a question that is worth asking, meanwhile, is the economic cost. It is not a dry matter to think of the economics – losses in output and market exchange have real human impacts, such as fewer jobs, more poverty and stress. With this in mind, Nikolas Xenofontos, director of risk management of the online trading firm easy-forex, goes into some of the numbers. The views contained in this article are not necessarily shared by the editors of this publication but they are pleased to share this article with readers and invite responses. 

Since the 9/11 attacks in the US there has been a lot of research and many theses written about the economic cost of terrorism. There are direct costs from the destruction of life and property, emergency services, medical providers and the restoration of systems and infrastructure. Then there are the indirect costs, which often have larger implications and include reduced productivity, higher insurance costs and a limit to consumer and investor confidence. 

As a case in point, the 9/11 attacks had an immediate $55 billion cost to physical damage with overall economic impact coming in at $123 billion. This was then intensified by the costs to Homeland Security ($589 billion), war funding ($1,649 billion) and future war and veterans' care costs ($867 billion). 

Immediate market effects were the drop of equities – the S&P 500 Index of stocks lost up to 13 per cent, while the safe haven, gold, jumped from $215.50 to $287 an ounce. By the end of the year the S&P 500 was back up 5 per cent and gold leaned back to $276.50. 

This is just a brief snapshot of how resilient to terror attacks advanced markets are in the long term. Globalisation means that an attack in London or Paris can and does affect the global markets. However, it is also globalisation that allows the impact of these attacks to be absorbed with minimal macro effects.

What, perhaps, has wider implications are the effects of terror on smaller or emerging markets. If we look at Pakistan around the same time as the 2001 attacks in the US, a more chilling picture of terrorism on economies arises. 

In 2001-2002, along with the immeasurable loss of life, the economic cost of terrorism to Pakistan was estimated at $35-40 billion. There are many economic casualties in the ongoing war against terrorism. Exports shrink due to drops in production, we see a shift from tradable to non-tradable sectors due to an undermining of banks, consumption and domestic savings fall and foreign borrowing and aid increases.

By 2009 Pakistan’s economic growth almost ground to a halt thanks to the costs of war on terrorism and the rehabilitation of 3 million displaced people. Foreign direct investment (FDI) fell to $463 million versus $1.116 billion during the same period of the previous year, a decline of 58.5 per cent. Government capital formation and private investments dropped due to budget restrictions and increased uncertainty. Higher government spending allocated towards military meant less was available for social and economic expenditure. The human cost is also huge - increased infant mortality, deteriorating nutrition, health and educational standards, war-induced famines. With halting economic growth coupled with a widening fiscal deficit, it’s not difficult to see where the seeds of future terrorism are being sown.

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