Aside from the obvious damage to lives and property, terrorism also has a serious impact on the economy of a country. This economic damage starts a downward spiral that affects international economies as well. How exactly does terrorism impact the economy? It results in physical destruction, closure of businesses, fear of investing, decreased tourism among other negative effects. Talking to business and financial experts, we have compiled a list of the ways in which the economy is affected by terrorism;
- Physical Destruction
Unfortunately, the economic impact of terrorism and conflict is invariably bad, and physical destruction is a major reason for this. Productive resources that could have been used to create valuable goods and services are destroyed, while other resources are virtually always diverted from other productive purposes to support the military and defense. Even though military spending is frequently erroneously regarded as a stimulant, none of this creates wealth or raises the standard of life; economists refer to this as the broken window fallacy.
Adam Wood, Co-Founder of RevenueGeeks
- Terrorism’s Impact on FDI
It is difficult to assess. Terrorism raises insecurity and uncertainty in a country, forcing foreign investors to withdraw their funds from the host country and invest elsewhere. Terrorism also makes foreign investors nervous about their investment returns. If high levels of terrorism do not enhance foreign investors’ expected profits, they will relocate their resources from the host country to other, safer countries.
Uncertainty reduces returns on FDI due to costly security measures. Territorial infrastructure is also damaged by terrorism. It deters foreign investment by raising operating costs. Terrorism discourages FDI, according to Bandyopadhyay et al. (2014). Terrorism decreases FDI, compared to portfolio investments and external debt, according to Filer and Stanisic (2016). Terrorism in the host country reduces foreign investment.
Adam Fard, Founder & Head Of Design Adam Fard’ UX Agency
- Direct Obstruction of Economic Progress and Indirect Impact
Terrorism affects economic growth in both direct and indirect ways. Terrorism directly obstructs economic progress by destroying infrastructure, causing human capital loss, limiting school enrollment, reducing short-run commerce, causing internally displaced persons (IDPs), and reallocating resources, among other things. Terrorism also has an indirect impact on economic growth through altering macroeconomic factors such as FDI, domestic investment, inflation, non-development government expenditures (law and order), stock market damage, and unemployment, among other things.
Rameez Usmani, Tech and Security Expert The Code Signing Store
- Damage to Property
All terror attacks are associated with destruction of property. For example, the 9/11 attacks caused an estimated $23 billion worth of direct property damage to the area in which it occurred.
- Business Disruption
Terrorist attacks can also have a huge impact on businesses located near terrorist targets, even if they are not directly affected by the attack itself. When there is an increased sense of danger and risk associated with doing business, people will naturally be less willing to do business with you. This can lead to substantially lower revenue and even result in a loss of customers or employees.
- Decreased Tourism Revenue
Terrorist attacks are also associated with decreased tourism in various regions around the world. This is because people may be afraid to travel in areas where they perceive an increased risk for terrorist activity.
- Higher Interest Rates
Another indirect effect that terrorism has on the economy is increased borrowing costs for businesses and consumers. This phenomenon occurs when there is an increased demand for loans from banks, as they attempt to raise additional capital to compensate for decreased money supply due to terrorist activities. Because of this, lending institutions will often charge higher interest rates to compensate for the increased risk associated with these loans.
- Decreased Investor Confidence
Terrorist attacks also hurt overall business and consumer confidence in general and the stock market. When there are high-profile terrorist events, it can lead to decreased spending by businesses and consumers due to fears of job security and economic uncertainty.
Megha Gaedke, Founder at KetoConnect
- Market Uncertainty Has Increased
Even if you do not reside near a terrorist attack, you may be harmed indirectly. This is because all markets despise uncertainty, and terrorism generates a great deal of it. After September 11, the financial markets effectively shut down and did not fully recover until months after the 2003 invasion of Iraq. The extent and pervasiveness of the actual impact on financial markets are hotly debated. Markets appear to be becoming more resilient as global terrorism risks and publicity continue to rise.
Following the terrorist attacks in France that killed at least 129 people in 2015, stock market indexes did not drop much. The horrific incident in Nice, France, in 2016 further adds to the perception that France is becoming a more dangerous place to live and do business. From an investor’s perspective, the actual threat of global terrorism is about the big picture, not individual instances. In a world plagued by terrorism, international investment and cooperation are at an all-time low.
Robert Johansson, CEO & Tech Expert at imgkits