Terrorism Effect on Global Economy - Essay Example

TERRORISM EFFECT ON GLOBAL ECONOMY By Name Course Instructor Institution City/State Date Table of Contents Terrorism Effect on Global Economy Abstract Terrorism has become a global business issue having both indirect and direct effect on business at global level. Even though governments across the globe have invested heavily on their countries’ security, businesses are still susceptible to terrorist targets. Terrorism has continually impact the performance and operations of multinational companies, and also poses a serious threat to global economy. A number of scholars have cited the significant economic impact of 9/11 attacks in the United States as proof of world’s economic vulnerability. Besides the physical destruction and casualties brought about by terrorism, it also results in wider economic, social, political, and psychological damage on the targeted societies. Terrorism can indirectly affect the economy in a number of indirect ways: it reduces future expectations of firms and consumers; forces both the private sector and governments to heavily invest on security, which consequently lessens effectiveness in targeted and investment is redirected to uses that are not economic productive. Besides that, terrorism also changes behavior by encouraging actors in the economy such businesses, investors and consumers to shun areas such as tourism or aviation, or geographic areas impacted by terrorism. Another effect of terrorism on economy is that brings about broader geopolitical conflict, which can result in more economic interruptions. This paper seeks to provide evidence on how terrorism affects global economy. Introduction According to Johnston and Nedelescu (2005, p.1), terrorist attacks that have occurred recently across the world have increased awareness globally about the terrorism threat as well as its complicated effects on the international financial markets (see Appendix one). Basically, most financial institutions are involved in financial crime either as instrumentality, perpetrator, or victim (Johnston & Nedelescu, 2005, p.3). International financial institutions are vulnerable to abuse or fraud; they may commit financial-related crimes directly; or third parties may use them to commit crime such as financing terrorists. In the same way, terrorism has numerous effects on financial markets. Financial markets may directly as well as indirectly become terrorism target as evidenced by the 9/11 terrorist attacks on the World Trade Center. Besides that, financial institutions may be instituted specifically to finance terrorism or may be used unknowingly to channel funds for terrorists. The increasing threat of Islamic State has resulted in increased public and private sector expenditures, a slow growth in international trade as well as high business cycles’ volatility. The response by United States to terrorism with regard to measures for tighter security and increased outlays seems to be rooted in the supposition that terrorist in the future could start using weapons of mass destruction that can results to more costs and casualties. Taxpayers and consumers in countries such as U.S. are ready to pay more for diminish terrorist attacks’ threat in their countries (Cosgrove, 2003, p.1). However, some countries depend more on the past civilian casualties in formulating while creating their response. Conceptual Interpretations Terrorism has been defined differently and remains to be a contested global issue, especially in the business world. Measuring the macroeconomic vulnerability according to Oladimeji and Oresanwo (2014, p.247) normally depends on the likelihood of future attacks; therefore, relies on scenario thinking. Terrorism is considered as a man-made disaster whose goal is to destroy property and kill. Normally, terrorist attacks are planned to tactically avoid the preventive measures. Oladimeji and Oresanwo (2014, p.248) define international terrorism as use of violence or a systematic threat whose purpose is to communicate a radical message or achieve a political objective by means of intimidation, coercion or fear of the general public. The main purpose of terrorism is to affect demand and supply so as to introduce damaging effects on the current economic systems. Basically, terrorism direct effects include the instant business repercussions experienced by businesses as single entities and not collectively. The indirect effects normally accrue and is realised only after some time when buyer demand declines; supply and value chains become interrupted, laws and regulations bring about effects that were not intended; and when international perceptions as well as relations affecting investment and trade changes. Such indirect effects as mentioned by Klein (2007, p.3) pose the biggest threat to business activities. Terrorism effects on business and commerce can be categorized into a number of groups: first, the distrust atmosphere brought about by terrorists heightens the cost of running the business. Business plans can be rendered useless by the volatility of the terrorism. Besides that, the pressure and tension caused by terrorism in the society change the consumption patterns as well as production of good and services the country affected by terrorist attacks. Terrorism changes the tourism, transportation and shopping preferences of individuals; thus, it affects international trade. The recent growth of Islamic State has resulted in increased security costs, and in consequence, has led to high marketing costs. Considering that terrorism leads to lack of confidence, marketing a number of products considered unholy has become more risky to market, especially in countries plagued with terrorists such as Somalia, Syria, Nigeria and many others. This in consequence has resulted in businesses losses. Terrorist attacks normally target the supply chains, where the country derives its competitive advantage. A number of countries such as Nigeria produce goods such as oil due to their competitive advantage, and these kinds of advantages have become the main targets of terrorists. Macroeconomic Impacts Terrorist attacks have enormous effects on economy as evidenced by 9/11 attacks, which led to the direct physical capital loss of 15.5 billion US dollars. Besides that, terrorism has an instant macroeconomic impact; for instance, the U.S. consumer confidence index (CCI) dropped to 97.6 after 9/11 from 85.5 before the attacks. Besides that, the rate of unemployment increased by 0.6 per cent and left 60,000 people jobless, especially those working in the travel-related industries (Klein, 2007, p.3). According to Klein (2007, p.3), terrorism results in uncertainty climate, which makes scores of businesses to stop new capital investments as well as recruiting in support of amassing cash. Besides that, investors worried about terrorist attacks are reluctant to invest in countries with high rate of terrorist attacks. Terrorist attacks result in new costs attributed to security measures, especially in travel, insurance, airline and banking sectors. Additionally, a number of multinationals companies have invested heavily on protecting their data and information systems. All these are unproductive costs which does not improve the quality of the product. The 9/11 resulted in economic loss, not just in the United States economy, but also the global economy (Choi, 2014, p.12). Terrorism has coerced almost all countries to invest in security, which have resulted in the worsening of the economic situation. For instance, the economic recovery package approved by US Congress following 9/11 attacks was rather small as compared to the total amount of the federal budget. Impact on World Economy According to Bandyopadhyay and Sandler (2014, p.232), the effect of terrorism on economic activity should not be enormous, since only a small percentage of country’s capital stock is destroyed by terrorist attacks. On the contrary, empirical evidence shows that terrorism has enormous effects on economic outcomes. Abadie and Gardeazabal (2008, p.2) utilizes a simple economic model to prove that terrorist attacks can largely affect the productive capital allocation across the globe, even though it signifies a small percentage of overall risk in the global economy. As emphasized by the model, terrorism does not just increase insecurity, but also decreases the projected return to investment (ROI). In consequence, disparities in terrorism intensity can result in large transfer of capital across the globe, especially when the international economy is adequately open; therefore, different forms of country risks can be diversified by global investors. Abadie and Gardeazabal (2008, p.1) noted that higher risks of terrorism are related to lower FDI, even when other forms of country risks have been controlled. Averagely, high risk of terrorist attacks is related to decline of FDI position of nearly 5 per cent of gross domestic product. As mentioned earlier, terrorism is a deliberate utilization of violence by subnational groups or individuals with the intention of obtaining a social or political goal (ALTAY & Çelebioğlu, 2015, p.22). Even though terrorists; motives always differ, their activities pursue a specific pattern such as suicide attacks, kidnappings, airplane hijackings, threats, assassinations as well as bombings. The majority of terrorist attacks are meant to coerce the current regime to grant them political concessions or to force the public to join a particular religion. In principle, terrorist organizations always seek to realize their objectives faster by increasing the consequences of its operation. Such consequences as mentioned by Sandler and Enders (2008, p.18) include; destroyed buildings, casualties, increased tension, and uncountable economic costs. The 9/11 terrorist attacks provide clear evidence that an act of terrorism is unbearable cost (see Appendix two). The 9/11 attacks led to economic losses amounting to 90 billion US dollars when workman’s compensation, lost wages as well as reduced trade are included. Terrorism groups like Boko Haram in Nigeria, Islamic State in Iraq and Syria, Al-Qaida in in Afghanistan and Pakistan have resulted in diversion of FDI from such countries, utilization of public investment funds for security purposes, destruction of infrastructure, and reduced trade. Nigeria as a developing country has lost a lot of FDI, which in consequence has resulted in low economic growth. Syria has been plagued not just by terrorist groups, but also civil war; as a result, capital inflows to the country have reduced significantly. Akin to civil conflicts, terrorism can result in spillover costs amongst the bordering countries considering that a campaign by Islamic State have deterred capital inflows not just in Northern Syria but also some parts of Iraq leading to almost no economic activity in the affected areas. Sometimes, terrorism affects particular industries, especially tourism and aviation. A number of countries especially in Europe and America have taken expensive security measures following the increasing threats of Islamic State and other terrorist groups, and such enormous security outlays have led to decline in economic growth. Besides that, terrorism increases the costs of running business in terms of costly security measures, higher insurance premiums, and higher salaries to employees exposed to risk. According to Cosgrove (2003, p.5), FDI growth has slowed down together with the flows of goods, cross-border as well as capital inflows in countries plagued with terrorist attacks. Besides that, trade has been affected enormously since the flows of goods have been moderated by terrorism threats. Companies relying on ‘just in time’, an inventory strategy are suffering shortages because of terrorism since the waiting time has augmented due to security checkups ate the borders while transportation cost both through sea and air has increased tremendously. Strict security measures implemented on containers shipment as well as air cargo have resulted in increased cost of transportation, which in consequence, has negatively affected the economy. According to Johnston and Nedelescu (2005, p.17), terrorism has adverse impacts on developing economies as compared to developed countries since the former tend to export more perishable goods and commodities, which have greater transportation costs. Increased security at national borders, especially in European countries in the wake of immigration crisis has led to slower economic growth and decline in competitive position. High boarder security impacts both supply chain and ‘just in time’ firms; thus, forcing them to change their inventory practices. Cosgrove (2003, p.7) suggests that value-added supply chain management enable firms to carry out business by transporting inventories in smaller quantities and cutting costs. Increased terrorist attacks in Africa and recently in Europe have resulted to addition of protective element to inventory stocking, especially for economic segments that carry one or more inventories. Border Controls Deaths caused by terrorist attacks have significantly increased from 3,329 in 2000 to more than 32,000 in 2014 (Maximino & Ordway, 2015). The increase in terrorist groups, especially Islamic State has resulted to the increase in casualties (see Appendix three). In 2014, 78 per cent of deaths caused by terrorism occurred mainly in countries plagued with terrorist activities: Syria, Nigeria, Pakistan, Iraq and Afghanistan. Nearly half of these terrorist attacks were carried out by Islamic State and Boko Haram. Still, terrorist event was experienced in 93 countries in 2014, which includes Austria, Australia and France (Maximino & Ordway, 2015). Basically, terrorist attacks initiate a series of happenings, which can reduce possible GDP growth. Serious effects to the global economy are taking place via different channels, which results in division of peace and loss of trade. Since the 9/11 attacks, most countries have taken security measures by protecting their border and screening all everything that moves into the country. This in consequence has resulted in reduced mobility at the boarders and decline in economic activities in towns close to the boarders. This mobility slowdown has been experienced in most developed countries such as United States. Reduction on border mobility has undesirably impact capital inflows, immigration, flows of services and goods as well as FDI. Furthermore, border control has resulted to low labor mobility; for instance, in U.S. augmented security measures at the boarder have slowed issuance of student and work visas and also illegal immigration. The slowdown in issuing students visas has serious impacted the supply of students needed to consume educational services offered in U.S., while for those who successfully het the visas find it challenging to remain in the country after completing their education. Longer waits’ opportunity costs to enter developed countries for purposes of education as well as probability of remaining in those countries after completing their education proves that the labor force across the globe are impacted adversely. Still, online education has to some extent reduced the supply disruption; however, there is no likelihood of growth since labor mobility for skilled employees has been reduced by security measures taken to reduce terrorist risks. According to Cosgrove (2003, p.5), tighter border measure on work visas issuance has progressively reduced foreign-born workforce bearing in mind that 13 per cent (18.4 million) of U.S. labor force constitutes of foreign-born workforce. This is an increase from 5 percent in 1970; therefore, a slowdown in issuance of education and work visas bring about labor cost pressures which create more economic challenges. Terrorism has made the cost of entering some boarders higher and countries like U.S. have implemented large bureaucracy so as to further improve its border security. Conclusion In conclusion, the report has offered provide evidence on how terrorism is affecting the global economy. Even though, diverse and rich economies such as that of developed countries have failed to withstand major terrorist events; therefore, terrorism has led to macroeconomic consequences. As evidenced in the report, terrorism incidence can negatively impact the economic growth of the targeted country, even if the attack is significantly less persistent and smaller as compared to that related to either internal conflict or external wars. As discussed in the report, terrorism has significantly as well as adversely affected FDI, economic growth, and total-factor productivity across the globe. Terrorism economic cost as mentioned in the report includes property and life destruction. Responding to disasters generated by acts of terrorism such as restoring affected infrastructure and systems as well as offering short-term living help is very expensive and consequently impact economy. Terrorists always target supply chain, and in consequence, has led to increase in transportation cost and increase in cost of goods and services. References Abadie, A. & Gardeazabal, J., 2008. Terrorism and the world economy. European Economic Review, vol. 52, pp.1-27. ALTAY, H. & Çelebioğlu, F., 2015. The Impacts of Political Terrorism on Gross Domestic Product in Eurasia: A Spatial Data Analysis. Eurasian Journal of Business and Economics, vol. 8, no. 15, pp.21-37. Bandyopadhyay, S. & Sandler, T., 2014. The Effects of Terrorism on Trade: A Factor Supply Approach. Federal Reserve Bank of St. Louis REVIEW, vol. 1, pp.229-42. Choi, S.-W., 2014. Economic growth and terrorism: domestic, international, and suicide. Oxford Economic Papers, vol. 1, no. 1, pp.1–25. Cosgrove, M., 2003. Terrorist Strategy and Global Economic Implications. Journal of Business and Economics Research, pp.1-11. Johnston, R.B. & Nedelescu, O.M., 2005. The Impact of Terrorism on Financial Markets. IMF Working Paper. Washington DC: International Monetary Fund. Klein, A., 2007. The Costs of Terror: The Economic Consequences of Global Terrorism. Facts & Findings. Berlin: Konrad-Adenauer-Stiftung. Maximino, M. & Ordway, D.-M., 2015. The relationship between terrorism and economic growth: Research. [Online] Available at: HYPERLINK "http://journalistsresource.org/studies/international/conflicts/relationship-between-economic-growth-terrorism-new-research" http://journalistsresource.org/studies/international/conflicts/relationship-between-economic-growth-terrorism-new-research [Accessed 29 November 2015]. Oladimeji, M.S. & Oresanwo, A.M., 2014. Effects of Terrorism on the International Business in Nigeria. International Journal of Humanities and Social Science, vol. 4, no. 7, pp.247-55. Sandler, T. & Enders, W., 2008. Consequences of Terrorism in Developed and Developing Countries: An Overview. In P. Keefer & N. Loayza, eds. Terrorism, Economic Development, and Political Openness. Cambridge: Cambridge University Pres. pp.17-47. Appendices Appendix One; Terror attacks impact on economy Appendix 2; Effect of Terrorism Appendix 3: Deaths caused by terrorist attacks Read More