The economics of terrorism

This week we had the news of a number of terrorist alerts (main­ly in the form of packet bombs travelling on planes), leading to political analysts claiming that there is now in place a new strategy of terror. One could take a very cynical view of things and assume that there is nothing new in all this and we should get on with our lives. At the other extreme, one could create all sorts of conspiracy theories and claim that we are bound to live again the period that the world experienced after September 11, 2001. There is merit in both lines of reasoning, especially as the evolving situation affects the international economy.

Before these packet bombs that were picked up in Athens and had been sent apparently from Yemen and destined to other European countries, we had got used to news from Iraq, Afghanistan, Pakistan, Palestine and other countries of some form of violence or other. However, in the Western part of the world we all thought that these were far away countries and anything happening there should not affect the way we live. Consumers in the world’s leading economies have been grappling with a severe recession – and now severe cuts in public expenditure – and would like to regain the standard of living that they were enjoying two years ago.

After the terrorist attacks of September 2001, the world economy experienced a dip as consumers cut back on their expenditure, mainly travel.

The dip was not so serious as central bankers had adopted a fairly loose monetary policy, encouraging consumption. Admittedly this led to excesses and eventually compounded itself into the crisis in the world’s financial markets in 2008 and then the recession.

There was and still is already enough to dampen consumer sentiment, and consumers in the West will not be too happy to accept another event that would dampen their confidence further.

This is best exemplified by the fact that for some months we have had requests in Western Europe for a loosening of security controls in airports. We did not want any more bad news or reminders of bad news. As a result of the recession and rising unemployment, there has been not a small increase in societies across Europe and North America of the number of people who find it difficult to manage their income till the end of the month. So why should we now have to bother with the threat of terrorist attacks?

One may not find flaws in this line of reasoning too easily. However, we can pose such questions: Could it be that part of the terrorist strategy in 2001 was not simply to hit the United States government but also to create economic havoc? The fact that we did not have economic havoc does not mean that this was not part of the strategy; it may be that this part of the strategy failed. Could it also be that the speculation that we have had in the last 10 years in the financial markets and that is now coming back to the markets after a lull of maybe 20 months, is being fuelled by hedge funds and private equity funds, whose ultimate beneficiaries finance the terrorists?

Thus, is speculation another form of terrorist attack, which has certainly left its mark? Doesn’t it sound odd that, as the world’s leading economies appear to be coming back to some form of normalcy, with the hope that the international economy again gathers speed and health, that we suddenly get a new spate of terrorist threats? Is there a link between economic developments and terrorism?

These questions may sound too exaggerated and the memory of the financial crisis and the recession are too fresh to seek to identify who gained from the negative international economic situation of the last 24 months. We know that the taxpayers and the consumers are the ones that have lost most.

Is this of any relevance to Malta? I believe it is. Another dip in the economies of our key partner countries (be it for investment, be it for our exports, be it for our tourism activity) is really the last thing we need. However, we cannot assume that, because we are a peace loving country, we will not be affected by an economic fallout of any terrorist activity. Terrorism has its economic impact as well.