The Economic Impact of Terrorism on Developing Countries

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Terrorists can inflict heart-breaking loss of life and costly destruction of property. But does terrorism also have an economic impact that extends far beyond the violent act itself?

Subhayu Bandyopadhyay, a research officer and economist at the Federal Reserve Bank of St. Louis, and Javed Younas, an associate professor of economics at American University of Sharjah, United Arab Emirates, explored the question of whether terrorism can also hurt a developing nation’s economic growth, ability to attract foreign investment and trade flows.

Terrorism creates a feeling of vulnerability in the country where the attacks occur. This can have a broader economic impact, they wrote in a recent Regional Economist article.

“This sense of vulnerability is particularly damaging to trade or foreign direct investment (FDI) because foreign nations always have a choice of conducting business with less-terror-prone nations,” the authors wrote.

Domestic and Transnational Incidents

The table below lists the 12 countries that experienced the most terrorism incidents from 2001 to 2012. These 12 countries accounted for almost 79 percent of global terrorism incidents, and most of these countries are developing nations, according to the authors.

The table also breaks down terrorism incidents by the nationality of the victims:

• Domestic incidents are ones in which the perpetrators, victims and damaged properties belong to the country where the violence occurred.
• Transnational incidents involve those of different nationalities.

The authors found that most terrorist incidents (nearly 87 percent) globally were domestic. That is, the impact was borne by the citizens of the country where the terrorism took place.

“The associated rise in security costs and loss in productivity of the workforce—through damages to labor and capital—are likely to reduce national income,” the authors wrote.

However, the transnational incidents, though smaller in number, involved foreign citizens and received international media attention. “Such publicity makes foreign nations less willing to do business with a terrorism-prone nation, leading to less trade and FDI,” they wrote.

Impact on Growth and FDI

One study the authors cited found that terrorism had no significant impact on economic growth for developed countries, but it did hurt developing countries. The 2009 paper found that an additional transnational incident per million people reduced the affected developing country’s growth rate by around 1.4 percentage points.¹

Bandyopadhyay and Younas also saw a link between terrorism and a developing country’s ability to attract foreign investment.

“Greater terrorism in a developing nation raises the risk for foreign investors of not being able to get the returns to their investments in the future. Such investors will look for safer alternate nations to invest in,” they wrote.

Bandyopadhyay and Younas co-authored a 2014 paper with Todd Sandler that examined terrorism’s impact on foreign investment.² They found that a one standard deviation increase in domestic terrorist incidents per 100,000 people reduced net FDI by between $323.6 million and $512.9 million for the average sample country, while the comparable reduction in the case of transnational terrorist incidents was between $296.5 million and $735.7 million.

The three authors also found that foreign aid can substantially lessen terrorism’s impact on FDI due to greater aid flows.

Trade

Terrorism also raises the costs of doing business with terror-affected countries. This increases the prices of products, which in turn tends to reduce the exports and imports of these nations.

One study cited by the authors found that a doubling in the number of terror incidents from 1960 to 1993 was associated with a decrease in bilateral trade among 200 countries by about 4 percent.³

They noted, however, that other research found more modest effects on trade. The authors hypothesized that this may be due to changes in the country’s production patterns as a result of terrorist attacks.

“For example, if terror disproportionately disrupts an import-competing domestic industry in a developing nation, that nation may be forced to turn to imports for the good in question, thus raising rather than reducing trade,” they wrote.

Conclusion

Knowing the economic costs of terrorism can improve the ability of organizations like the United Nations and World Bank to assist developing countries that experience terror attacks, they noted.

“A greater understanding of terrorism-related damages can help governments and multilateral organizations … to better direct scarce resources to mitigate terrorism-related costs,” the authors concluded.

Notes and References

¹ Gaibulloev, Khusrav; and Sandler, Todd. “The Impact of Terrorism and Conflicts on Growth in Asia.” Economics and Politics, November 2009, Vol. 21, No. 3, pp. 359-83.

² Bandyopadhyay, Subhayu; Sandler, Todd; and Younas, Javed. “Foreign Direct Investment, Aid, and Terrorism.” Oxford Economic Papers, January 2014, Vol. 66, No. 1, pp. 25-50.

³ Nitsch, Volker; and Schumacher, Dieter. “Terrorism and International Trade: An Empirical Investigation.” European Journal of Political Economy, June 2004, Vol. 20, No. 2, pp. 423-33.

Additional Resources

• Regional Economist: Trade and Terror: The Impact of Terrorism on Developing Countries
• On the Economy: Why Doesn't Capital Always Flow to High-Growth Areas?
• On the Economy: Measuring Labor Share in Latin American Countries