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The Economics of Terrorism and Counter-Terrorism: a Survey

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The Economics of Terrorism and Counter-Terrorism: a Survey 14.12. 2009 The Economics of Terrorism and Counter-Terrorism: A Survey by Friedrich Schneider *), Tilman Brück **), and Daniel Meierrieks ***) The economics of security is one of the most important issues in our discipline, yet, the one least researched (Martin Feldstein (5. 1. 2007), Former President of the American Economics Association “Economic theory in particular can offer key insights, enabling governments to optimise their efforts to enhance security and growth” (ESRAB, 2006) *) Prof. Dr. Dr.h.c.mult. Friedrich Schneider, Johannes Kepler University Linz, Department of Economics, Altenbergerstraße 69, A-4040 Linz-Auhof, AUSTRIA, Phone: +43-732-2468- 8210, Fax: -8209, E-mail: [email protected], http://www.econ.jku.at/Schneider/ **) Prof. Dr. Tilman Brück, DIW Berlin, Department of International Economics, Königin- Luise-Straße 5, D-14195 Berlin, Phone: +49-30-89789-591, Fax: -108, E-mail: tbru- [email protected], http://www.tilmanbrueck.de/ ***) Daniel Meierrieks, M.Sc., University of Paderborn, Department of Economics, Center of International Economics, Warburger Straße 100, D-33098 Paderborn, Phone: +49-5251/60- 2113, Fax: -3540, E-mail: [email protected] Contents Contents 1 INTRODUCTION ............................................................................................................... 4 2 DEFINTIONS AND CONCEPTS...................................................................................... 8 2.1 Risk and insecurity......................................................................................................... 8 2.2 Security .......................................................................................................................... 9 2.3 Terrorism...................................................................................................................... 10 2.4 Security economics ...................................................................................................... 11 2.5 Methodological considerations .................................................................................... 11 3 ECONOMICS OF INSECURITY – CAUSES OF TERRORISM ............................... 14 3.1 Explaining the Causes of Terrorism ............................................................................ 14 3.2 Micro-economic analyses ............................................................................................ 19 3.3 Macro-economic view: Case study and region-specific evidence............................... 21 3.3.1 Case studies ....................................................................................................... 21 3.3.2 Region-specific evidence................................................................................... 22 3.4 Macro-economic view: cross-country evidence .......................................................... 24 3.4.1 Origins of Transnational Terrorism................................................................... 24 3.4.2 Targets of Transnational Terrorism................................................................... 27 3.4.3 Domestic Terrorism........................................................................................... 29 3.4.4 Suicide Terrorism .............................................................................................. 30 3.5 Summary ...................................................................................................................... 31 4 ECONOMICS OF INSECURITY – ECONOMIC EFFECTS OF TERRORISM ..... 34 4.1 Micro-economic impacts ............................................................................................. 34 4.1.1 Impacts at household level ................................................................................ 35 4.1.2 Impacts on private sector................................................................................... 38 4.1.3 Impacts on public policy / public sector............................................................ 40 4.2 Impacts across sectors.................................................................................................. 42 4.3 Impacts on Financial Markets...................................................................................... 44 4.4 Macro-economic impacts............................................................................................. 46 4.4.1 Growth 47 4.4.2 Trade and FDI.................................................................................................... 50 4.5 Political consequences of terrorism ............................................................................. 51 4.6 The determinants of the economic impacts of terrorism ............................................. 52 5 INTERACTION OF ACTORS OF INSECURITY AND SECURITY ........................ 56 5.1 Defensive policies........................................................................................................ 57 II Contents 5.1.1 Protecting targets against attacks....................................................................... 57 5.1.2 Mitigating impacts............................................................................................. 58 5.2 Proactive policies......................................................................................................... 60 5.2.1 Targeting terrorists’ infrastructure..................................................................... 60 5.2.2 Targeting root causes of terrorism..................................................................... 62 5.3 The determinants of the dynamics between security and insecurity............................ 64 6 ECONOMIC EFFECTS OF ANTI-TERRORISM POLICY ....................................... 68 6.1 Micro-economic impacts ............................................................................................. 70 6.1.1 Security measures of consumers and households.............................................. 71 6.1.2 Security measures of the private sector ............................................................. 71 6.1.3 Security measures at government level ............................................................. 74 6.2 Impacts across sectors.................................................................................................. 75 6.3 Macro-economic impacts............................................................................................. 81 6.3.1 Fiscal effects...................................................................................................... 81 6.3.2 Growth 82 6.3.3 Trade 83 6.3.4 Investment ......................................................................................................... 84 6.4 Political effects of counter-terrorism measures ........................................................... 85 6.5 The determinants of the economic impacts of anti-terrorism policy ........................... 87 7 AN EUROPEAN PERSPECTIVE ON THE ECONOMICS OF INSECURITY........ 90 7.1 Trends of terrorism in Europe...................................................................................... 90 Causes of terrorism in Europe ............................................................................................. 92 7.1.1 Domestic terrorism ............................................................................................ 92 7.1.2 Transnational terrorism...................................................................................... 94 7.2 Consequences of terrorism in Europe.......................................................................... 95 7.2.1 Economic effects ............................................................................................... 95 7.2.2 Political and social effects ................................................................................. 96 7.3 Counter-terrorism policies in Europe........................................................................... 97 7.3.1 Policy actions..................................................................................................... 97 7.3.2 Effects of counter-terrorism policies ................................................................. 99 7.4 Summary .................................................................................................................... 100 8 CONCLUSION AND RECOMMENDATIONS .......................................................... 102 9 LITERATURE................................................................................................................. 103 III Literature 1 INTRODUCTION In particular after the devastating attacks on New York and Washington on September 11, 2001 (henceforth 9/11), the (economic) analysis of terrorism has gained in importance in (economic) research. Some contributions have focused on the causes of terrorism, asking, e.g., whether terrorism is rooted in poor political and economic conditions (i.e., in repression and poverty). Others have centered on the consequences of terrorism. For instance, (global) terrorism may damage economic growth and globalization, e.g., by reducing trade flows and investment flows. The interaction of terrorism and counter-terrorism has also been the center of some academic interest, given that the fight against terrorism also has noticeable economic consequences of its own accord, e.g., by affecting the ease of travel and trade and by diverting public investment to internal security. This survey provides an in-depth analysis of existing research on the economic analysis of terrorism and
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