As analyzed in the previous articles, the impact of a terrorist attack can affect a country’s peace dividends[i] and, as a consequence, its whole economy.[ii] In addition, according to rough calibrations, an increase in public military-security spending by 1% of GDP and private security spending by 0.5% of GDP would reduce output by about 0.7% in five years.[iii]
With these premises, the primary consequence of tighter security is the reduction of the level of productivity as, for instance, waiting times lengthen at airports or borders, and public financial support to strategic industries and protectionist measures could also distort competition and reduce productivity growth.[iv]
Moreover, the economic impact of transnational terrorism, as Islamic-inspired terrorism, spreads in more than one country. This international aspect can stem from the victims, targets, institutions, supporters, terrorists, or implications[v].
Indeed, in an economically interconnected world, terrorist incidents have the potential to generate an international network of consequences on the rules of the economy, reverberating in the perception of globalization of both private and public entities.[vi] In Europe, macroeconomic repercussions of jihadist terrorist attacks need to get monitored by acknowledging interdependencies among member-states, their links to other countries, and how the EU as a whole connects to the rest of the world. In this respect, the analysis needs to focus on the most relevant fields affected by terrorist attacks that, by definition, require interactions among different countries.
Effects on trade in the aftermath of large-scale jihadist attacks
In most developed countries, terrorism generally does not affect the entire macroeconomic environment. For instance, terror attacks that occurred in the EU in 2015, 2016, and 2017 appear to have had no significant influence on foreign exchange markets or the value of any member-states’ currency, very differently from what happened to currency pairs[vii] in previous attacks that occurred in Western countries. This finding suggests that market participants have probably learned how to better assess such events, thus, react more calmly and rationally to them, not treating them as unexpected events likely to significantly affect the foreign exchange market.[viii]
Nonetheless, by affecting various sectors, terrorism still has the potential to impact relations among states and, even in developed countries, become a primary consideration in formulating investment decisions.[ix]
The first sector affected by the symptoms of an altered relation with foreign countries after terrorist incidents is trade.
In this field, so far, existing studies report a variety of findings on the effects of terrorism. For instance, one set of studies, by analyzing annual panel data sets of aggregate bilateral trade flows, find that terrorism has a statistically significant and robust negative effect on trade, quite similar to civil wars[x], because terrorism may divert government expenditures from more productive public investment to less productive security activities, thereby reducing economic growth, export production, and import demand.[xi]
Other studies highlight possible variations in the terrorism-trade nexus at a product level; by analyzing trade in primary commodities and manufactured goods separately, their results suggest that the reduction in total trade induced by terrorist incidents is caused by a decline in trade of manufactured goods while, in a multi-sector model, trade in primary commodities may even increase after a terrorist attack, by shifting from a terrorism-impacted manufacturing sector to a less-impacted primary sector, thereby lowering costs in the latter. In particular, the 2018 study by Bandyopadhyay, Sandler, and Younas asserts that domestic terrorism reduces manufactured exports and increases primary exports, while transnational terrorism reduces primary exports.[xii]
A recent study focused on the effects of three large-scale terrorist incidents in France (January 2015, November 2015, and July 2016), thus, concentrating the analysis on the incidents that received massive public attention rather than observable outcomes as the number of casualties or fatalities, which still represents the most popular approach to weight attacks in the empirical literature, documents an immediate and lasting decline in cross-border trade after a mass terrorist attack. The reduction in trade mainly takes place along the intensive margin (i.e. exports per exporting firm),[xiii] with particularly strong effects for partner countries with low border barriers to France, for firms with less frequent trade activities, and for homogeneous products (i.e. products with the same physical characteristics and quality as similar products from other suppliers). The study identifies the casualty of these patterns mainly in the increase in trade costs due to stricter security measures.[xiv]
In this respect, a variable constructed by the World Bank, ImportTime, in its “Doing Business project[xv]” measures the time burden of procedures faced by importers. By using ImportTime variable, researchers found that terrorist attacks in a neighboring country cause a 4% decrease in bilateral trade and that about half of this reduction is caused by the time to import increases, proving that stricter trade-related counter-terrorism regulations depress trade through increased time delays[xvi].
Indeed, the just-in-time supply chain management system depends to a large degree on the efficiency of border crossings. A strong increase in security measures at borders may increase the ad valorem tax (a tax based on the assessed value of an item, such as import duty taxes on goods from abroad) of trading internationally by 1% to 3%, leading to a significant drop in international trade, negatively affecting openness, productivity, and medium-term output growth.[xvii]
In this respect, Pham and Doucouliagos, according to synthetic data representing a sample of a nation that imports from 88 exporters, calculated that each additional terrorist attack in a neighboring country reduces bilateral trade by nearly 0.013% on average which translates into a reduction of approximately $6.4mn in its total trade. In these terms, on average, due to the increase of trade both economic and time costs, a terrorist attack would be able to affect bilateral trade up to five years after the event.
Taking the foreign investor perspective
The consequences of terrorist attacks could bring investors and market analysts to reassess expectations related to the economy of one country[xviii] and reduce the expected return to investment.[xix] This assessment is likely to influence the actions of market participants and the way financial markets react to the specific event[xx], including the time they will require to feel reassured by increasing uncertainty.
According to the FDI Confidence Index, annually published by the consulting firm Kearney, even in a strong economy as Belgium, foreign direct investments (FDI) flows fell dramatically in 2016 due to the jihadist terrorist attacks, causing a GDP growth holding steady at 1.4% annually for the next 2 years instead of 2%.[xxi] Even though the behavior of foreign investors is difficult to predict and depends on several factors, including long-term objectives,[xxii] protracted domestic terrorism or terrorist attack which cause a huge conventional or social media cover (e.g. jihadist attack in Belgium in 2016[xxiii]) leads to the anticipation of future events and, among other financial forecasts, the possibility of rising costs of doing business due to expensive security measures. Thus, investors, both at home and abroad, may decide to direct their assets to safer activities in other countries,[xxiv] thus, changing their investment plans not only in terms of their amount but also in terms of their composition.[xxv]
In the aftermath of jihadist attacks, the economic threat doesn’t only come from foreign investors doubting the socio-economic stability of a country, but also from the investors that from member-states are willing to invest abroad.
Arab countries may be affected by this perception of threat and uncertainty too. For instance, tensions[xxvi] over the response of the French government to the murder of teacher Samuel Paty by an Islamist extremist in northern Paris sparked dozens of protests, outside French embassies and consulates, in multiple countries (e.g. Turkey, Bangladesh, Jordan, Qatar, Iran, Mali, Mauritania, Libya, Pakistan, and Indonesia)[xxvii]. This sentiment caused widespread calls for boycotting French goods in Muslim-majority countries, with the protest being supported at a political level by Turkish President Erdogan and several other Muslim leaders, targeting other European countries too[xxviii]. Many of the countries involved in the protests enjoy a profitable bilateral relationship with France. For instance, in 2019, Bangladesh exported goods worth $1.7 billion to France, making France its fourth biggest export market. French companies have investments in Bangladesh, from cement to energy, telecommunications, and pharmaceuticals[xxix].
The Arab boycott of French products is not only negatively affecting France regional reputation in the Middle East but is likely to reduce the revenue that the French government could derive from taxing its successful companies active in the region, as the supermarket chain Carrefour or luxury brands such as L’Oréal, Garnier, and Lancôme, heavily targeted through social media in the lists of brands to avoid. This context shouldn’t be underestimated, because a previous Muslim boycott of Danish goods in 2006, caused by the caricature of Prophet Muhammad published by a Danish newspaper,[xxx] led exports to Saudi Arabia fall by 40% and by 47% in Iran.[xxxi]
Preventing a reluctancy to openness that comes from within
As written by Guéhenno “the nature of threats” is changing with globalization and “the threat is no longer another competing community, but rather the internal weakening of communities”.[xxxii]
In this context, globalization let disorders and uncertainty outside the EU directly affect the domestic economy of member-states on issues such as migration, security, trade, and the threat of cross-border conflict and lawlessness. Jihadist attacks are the tip of a complex environment and, as previously analyzed, they spread with soft or hard long-lasting consequences that are able to permeate every layer of society. These aspects are translated, in the middle/long-run, into domestic socio-economic unbalances likely to shift policy-makers and public opinion pendulum toward protectionism. This view may impact also economic initiatives aimed at promoting lasting stability in those developing and unstable countries that are fundamental to address the roots of security issues connected to jihadist terrorism. As an example, can be mentioned the protests arose all over Europe when, in 2016, the European Parliament voted in favor of a measure allowing Tunisia to export 70,000 tons of olive oil in the European Union in two years. That agreement was a first step towards the creation of a safer socio-economic environment, in one of the EU neighboring countries most afflicted by the foreign fighters phenomenon, helping to change the perspective of European action in the area of the Southern Mediterranean.[xxxiii]
Indeed, programs aimed at the de-escalation of conflicts and the long-term construction of more resilient and legitimate state structures by improving foreign economic cooperation, are key strategies to provide the best foundation for the EU’s objectives. Promoting development in, for instance, the MENA region would create an economic hinterland for the EU, increasing its scope for investment in areas that could meet future European needs, such as those in renewable energy[xxxiv], providing a double benefit by effectively addressing security issues and creating a profitable mutual environment for business opportunities. So far, a lack of European consensus in these terms has prevented the EU from acquiring the influence it could otherwise have had.
[i] Peace dividend is the possibility of a State, which is no longer at war, to reduce military spending
[ii] E. Fieser, M. Bristow (March 8, 2019) What Peace Dividend? Terror Attacks on Colombia Pipelines Double. Bloomberg. https://www.bloomberg.com/news/articles/2019-03-08/what-peace-dividend-terror-attacks-on-colombia-pipelines-double
[iii] P. Lenain, M. Bonturi, V. Koen (July 2002) IV. Economic consequences of terrorism. Public spending on security threatens fiscal consolidation. OECD. http://www.oecd.org/economy/outlook/1935314.pdf – https://www.oecd-ilibrary.org/economics/the-economic-consequences-of-terrorism_511778841283
[v] T. Sandler, W. Enders (2007) ECONOMIC CONSEQUENCES OF TERRORISM IN DEVELOPED AND DEVELOPING COUNTRIES: AN OVERVIEW. University of Texas – Dallas. https://personal.utdallas.edu/~tms063000/website/Econ_Consequences_ms.pdf
[vii] Price quote of the exchange rate for two different currencies traded in Foreign exchange markets
[viii] C. Hassapis, S. Katsikides, S. Markoulis (November 5, 2018) Terror Attacks, Foreign Exchange Markets and Class Dynamics. InTech Open. https://www.intechopen.com/books/classes-from-national-to-global-class-formation/terror-attacks-foreign-exchange-markets-and-class-dynamics
[ix] D. Wagner (February 2006) The Impact of Terrorism on Foreign Direct Investment. IRMI. https://www.irmi.com/articles/expert-commentary/the-impact-of-terrorism-on-foreign-direct-investment#5
[x] A. Abadie, J. Gardeazabal (March 2003) The Economic Costs of Conflict: A Case Study of the Basque Country. American Economic Review Vol 93. NO. 1. https://www.aeaweb.org/articles?id=10.1257/000282803321455188
[xi] Blomberg, Hess, Orphanides examined a pooled cross section of 177 countries from 1968 to 2000 and found that if a country experienced transnational terrorist incidents on its soil in each year of the sample period, then per capita income growth fell by 1.587% points over the entire sample period. S.B. Blomberg, G.D. Hess, A. Weerapanac (April 15, 2004) Economic conditions and terrorism. European Journal of Political Economy. https://bit.ly/36M6qwv
[xii] By using augmented gravity model’s variables applied to bilateral trade, for a world sample of 151 countries over the period 1995–2012, Bandyopadhyay, Sandler, and Younas found that both domestic and transnational terrorism have a detrimental effect on manufactured imports. Bandyopadhyay, T. Sandler, J. Younas (April 17, 2018) Trade and terrorism: A disaggregated approach. Journal of Peace Research Volume: 55 issue: 5. https://journals.sagepub.com/doi/full/10.1177/0022343318763009#_i24
[xiii] A. Fernandes, P.J. Klenow, S. Meleshchuk, M. Denisse Pierola, A. Rodriguez-Clare (December 7, 2018) The Intensive Margin in Trade. International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2018/12/07/The-Intensive-Margin-in-Trade-46389
[xiv] V. Nitsch, I. Rabaud (November 24, 2019) Under Attack: Terrorism and International Trade in France, 2014-16. Document de Recherche du Laboratoire d’Économie d’Orléans Working Paper Series, Economic Research Department of the University of Orléans (LEO), France DR LEO 2019-12. https://hal.archives-ouvertes.fr/hal-02411649/document
[xvi] C. S. Pham, H. Doucouliagos (June 2017) An Injury to One Is an Injury to All: Terrorism’s Spillover Effects on Bilateral Trade. IZA Institute of Labor Economics – Initiated by Deutsche Post Foundation. http://ftp.iza.org/dp10859.pdf
[xvii] P. Lenain, M. Bonturi, V. Koen (July 2002) IV. Economic consequences of terrorism. Public spending on security threatens fiscal consolidation. OECD. http://www.oecd.org/economy/outlook/1935314.pdf – https://www.oecd-ilibrary.org/economics/the-economic-consequences-of-terrorism_511778841283
[xviii] A.H. Chen, T.F. Siems (2004) The effects of terrorism on global capital markets. European Journal of Political Economy. https://www.sciencedirect.com/science/article/pii/S0176268003001022?casa_token=Yb5kn2pKRY8AAAAA:EZyIGHeOGWzzYkvFnKYg-FWLCA1WAL8ttSHykGnF8udiuXFR35NgtWk2y6Iqj6QkJDFYAsBq1g
[xx] (March 22, 2016) Terror attack in Brussels sends stock markets lower. The Irish Times. https://www.irishtimes.com/business/markets/terror-attack-in-brussels-sends-stock-markets-lower-1.2582961
[xxi] (2017) The 2017 Kearney Foreign Direct Investment Confidence Index. Kearney. https://www.kearney.com/foreign-direct-investment-confidence-index/2017-full-report
[xxii] D. Wagner (February 2006) The Impact of Terrorism on Foreign Direct Investment. IRMI. https://www.irmi.com/articles/expert-commentary/the-impact-of-terrorism-on-foreign-direct-investment#5
[xxiv] T. Sandler, W. Enders (2007) ECONOMIC CONSEQUENCES OF TERRORISM IN DEVELOPED AND DEVELOPING COUNTRIES: AN OVERVIEW. University of Texas – Dallas. https://personal.utdallas.edu/~tms063000/website/Econ_Consequences_ms.pdf
[xxv]Human Rights Council – Advisory Committee – Twenty-first session (July 6-10, 2018) Draft report on Negative Effects of Terrorism on the Enjoyment of Human Rights.
[xxvi] France Diplomacy (29/10/2020) Call for maximum vigilance – risk of attack. https://www.diplomatie.gouv.fr/fr/conseils-aux-voyageurs/informations-pratiques/article/appel-a-la-vigilance-maximale-risque-d-attentat-29-10-2020
[xxvii] GardaWorld (October 29, 2020) Middle East/North Africa: Tensions over response to Islamist attacks in France increase threat against French nationals and interests across MENA region. https://www.garda.com/crisis24/news-alerts/394411/middle-eastnorth-africa-tensions-over-response-to-islamist-attacks-in-france-increase-threat-against-french-nationals-and-interests-across-mena-region
[xxviii] G. Yildiz (November 6, 2020) Turkish-French Culture War over Islamist Radicalism and Islamophobia May Unite Europe against Turkey. SWP German Institute for International and Security Affairs. https://www.swp-berlin.org/en/publication/turkish-french-culture-war-over-islamist-radicalism-and-islamophobia-may-unite-europe-against-turkey/
[xxx] H.M. Fattah (January 31, 2006) Caricature of Muhammad Leads to Boycott of Danish Goods. The New York Times. https://www.nytimes.com/2006/01/31/world/middleeast/caricature-of-muhammad-leads-to-boycott-of-danish-goods.html
[xxxi] A. Haine (October 26, 2020) Economists shrug off boycott threat to French products from Muslim nations. The National News. https://www.thenationalnews.com/business/economy/economists-shrug-off-boycott-threat-to-french-products-from-muslim-nations-1.1100136
[xxxii] J. Guéhenno (December 7, 2010) The impact of globalisation on strategy. Survival – Global Politics and Strategy. https://www.tandfonline.com/doi/abs/10.1080/713660009
[xxxiii] S.M. Torelli (March 16, 2016) The EU’s olive oil diplomacy: Italian fears and prospects for Tunisia. ISPI. https://www.ispionline.it/it/pubblicazione/eus-olive-oil-diplomacy-italian-fears-and-prospects-tunisia-14834
[xxxiv] J. Barnes-Dacey, A. Dworkin (December 1, 2020) Promoting European strategic sovereignty in the southern neighbourhood. European Council on Foreign Relations. https://ecfr.eu/publication/promoting-european-strategic-sovereignty-in-the-southern-neighbourhood/