The Economic Impact of Terrorism

An analysis by the Institute for Economics and Peace takes an interesting look at a relatively undiscussed aspect of terrorism; the economic cost of terrorist attacks.  The study by IEP looks at data between the years of 2000 and 2015 (the latest year for which data was available at the time that the study was undertaken) and provides us with a glimpse at the real economic cost of terrorism.

As part of its mandate, IEP has created a Global Terrorism Index (GTI) which analyzes the impact of terrorism for 163 nations and produces a score which allows the authors to rank countries on the impact of terrorism.  Scores range from zero to ten when zero represents no impact from terrorism and 10 represents the highest impact from terrorism.  Here is a look at the 36 nations with the highest GTI scores (i.e. the highest impact of terrorism), their ranking and their GTI score:

It is interesting to see that, of the top 10 nations, five are essentially war zones (Iraq, Afghanistan, Syria, Yemen and Libya) and Pakistan is often a target of terrorist attacks because the nation's hinterland lies along the border with Afghanistan.

Here is a summary graphic showing the deaths from terrorism over the years between 2000 and 2015:

As we can see, the War on Terrorism has been a rather spectacular failure, particularly since 2012.  

Here is a graphic showing the proportion of deaths from each of the major terrorist target nations between 2000 and 2015:

Four nations have accounted for 57 percent of all deaths from terrorism since 2000; Iraq, Afghanistan, Nigeria and Pakistan.  It is not terribly surprising to see that two of the targets of terrorists are the nations that were the western coalition targets immediately after September 11, 2001. 

Now, let's look at the economic impact of terrorism.  The economic impact of terrorism is calculated using the following methodology:

1.) Unit costs for deaths and injuries are sourced from McCollister et al (a very thorough study which estimates the cost to society of individual crimes - for example, the cost to society of a murder was estimated at $1.278 million plus a pain and suffering component of $8.442 million in 2008 dollars)) and are then scaled based on the nation's per capita GDP relatively to the source of the unit costs.

2.) Estimates of the value of property destruction are calibrated by the income of the nation (i.e. OECD, high-income non-OECD, upper middle income, lower middle income, lower income country groups).

In addition, where countries have more than 1000 terrorism-related deaths, the model includes losses of national output equal to 2 percent of GDP because of reduced business activity, production and investment.

With that in mind, here is a graphic showing the global costs of terrorism for each year between 2000 and 2015 (in U.S. dollars):

While the economic costs of terrorism in 2015 were lower than in 2014, they were still the second-highest of the past 16 years.  Of the economic costs in 2015, 74 percent or $65.7 billion were related to deaths, 23 percent or $20.9 billion were related to losses in GDP, 2 percent were related to property destruction and 1 percent were related to injuries.

Here are the ten nations that have seen their economies suffer the most as a percentage of GDP as a result of terrorism:

While terrorism has a major psychological impact on societies and its victims, it is a relatively minor cause of death and injury.  It is important to keep in mind that large scale conflicts (like those in Syria, Iraq and Libya) have a far greater impact on local economies than terrorism and that the global homicide death rate is 15 times that of terrorism.  In 2015, the economic cost of terrorism was $89.6 billion, a far cry less than the estimated $13.6 trillion economic impact of global violence during the same year.

Sometimes, as Westerners, we tend to think of the overwhelming impact of terrorism on our own economies, however, this study clearly shows that, in comparison to other terrorist hotspots, our advanced economies have (so far) experienced relatively little economic impact from terrorism outside of September 11, 2001.