Terrorism impact on economy long-term: Study

7 October 2015 03:17 am

By Shabiya Ali Ahlam
A study facilitated by international credit rating agency, Moody’s Investors Service has established that terrorist attacks significantly weaken economic activity and its effects on the economy are long lasting.

It is well acknowledged world over that terrorist events directly destroy infrastructure, reduces production and economic growth, while increasing uncertainty in the process.

Moody’s asserted that countries most affected by terrorism took an immediate and significant hit to growth, dampening GDP between 0.5 and 0.8 percentage points.

Investment growth takes an even greater immediate hit, with Moody’s estimating for the same episodes that investment growth declines between 1.3pp and 2.1pp.

“Even worse is that the negative impact continues for years after the attack, taking up to five years for the effects to peter out,” said Merxe Tudela, a Moody’s Vice President in a media release that was shared alongside the launch of the study titled “Terrorism Has a Long-lasting Negative Impact on Economic Activity and Government Borrowing Costs”.

The study, covering a sample of 156 countries for the period between 1994 and 2013 (greater emphasis was on terrorist events that took place in 2013), defines terrorist incidents as “the threatened or actual use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal through fear, coercion, or intimidation.”

Moody’s did not consider acts of state terrorism in the study.

Focusing on the type and frequency of terrorist events in 2013 alone, immediate weakening of GDP growth by 0.51 to 0.80pps was observed in the top 10 countries, ranked by the value of ‘Index of Terrorism’, translating to the fact a country’s GDP could be 1.1 percent to 1.7 percent higher in the absence of terrorist events.

The study revealed that such single-year events also affected the government’s cost of borrowing and investments, resulting in the growth of the latter to shrink between 1.3pps and 2.1pps in the year of the attack. While such outcomes resulted in the levels of investment to stand between 1.8 percent and 2.8 percent lower, the cost of borrowing was observed to have jumped between 41bps and 65bps within one year, and a further 51bps to 81bp one year after the attack. Exploring what the scenario would have been in the absence of any terrorist attack, an analysis of Iraq from 2008 to 2013, showed that its GDP could have been 8.2 percent higher, whereas the cost of borrowing could have dropped 150 basis points lower by the end of that period.

A similar analysis of Pakistan indicates that GDP growth could have been 5.1 percent higher, and the cost of borrowing, 100 basis points lower. The level of investment could have been 9.3 percent and 15.2 percent higher in Pakistan and Iraq.

Despite the study having taken into account terrorist activities and its impact on economic development 19 years from the year 1994, it does not analyse the impact of the 30 year war on the Sri Lankan economy. However, the number of terrorist incidents in the island nation was used for comparison. To shed light on economic consequences terrorist activities on Sri Lanka, an analysis by Asia Economic Institute facilitated soon after the end of the war pointed out that the cost of the conflict significantly weighed down Sri Lanka’s economy. Looking at defence loans alone, in 2008 the government borrowed $1.5 billion from international financial markets, virtually double the amount used in 2007. With the nation striving to keep moving forward, during the conflict Sri Lanka was unable realise its economic goals despite its keenness. The terrorist attack on Bandaranaike International Airport in 2001 sent the country’s economy reeling as the country’s growth hit negative 1.4 percent amid the tourism industry sliding more than 15 percent. 

Even aftermath of the war in May, 2009, the results of the three decade war can be seen as Sri Lanka’s economy is still entangled in a vicious cycle of deficit increasing the debt and debt increasing the deficit.