Economic impact of terror may be lasting

Martin Wolk • Profile • E-mail

Friday’s big global stock market rebound offers some reassurance that investors believe Thursday's terrorist attack on London will not cause serious economic damage. And indeed, economists expect the immediate impact to be relatively small and fleeting — provided the bomb blasts turn out to be an isolated incident rather than the beginning of a new wave of attacks across Europe.

But some researchers caution that the indirect economic effects of terrorism may be more significant than many people realize, both because they are so pervasive and because the likelihood of such attacks has been priced into financial markets long before this week’s events.

While true cost of terrorism with its appalling loss of life may be incalculable, a growing body of research since the 9/11 attacks on the United States has tried to accounting of the direct and indirect economic consequences of terrorism.

The cost of the 9/11 attacks, for example, has been estimated at $28 billion in the loss of pure physical assets plus the initial cleanup and rescue efforts. But that was only the beginning, according to a 2002 assessment by the Paris-based Organization for Economic Cooperation and Development.

The attack was the greatest insurance disaster in history, with insured losses of about $32 billion for business interruption, workers compensation, loss of life and other liabilities.

New security requirements could add 1 to 3 percent to the cost of international trade transactions indefinitely, reducing productivity and eliminating some business entirely, the OECD estimates. Increased spending on the military and private security measure diverts resources from more productive uses and could cut gross domestic product by 0.7 percent over five years, according to the OECD.

Other effects are hard to quantify, but many researchers say terrorism has a long-term negative effect on economic growth, similar to other types of political instability.

“I think the evidence is that in countries where there is ongoing terrorism there is a meaningful impact on the economy and financial markets,” said Nouriel Roubini, associate professor at New York University’s Stern School of Business.

He points to the case of Israel, where the so-called second intifada beginning in 2000 caused tourism to collapse, triggered a long stock market slump and contributed to a painful economic recession from which the country is still emerging.

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