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Terrorism Takes Toll on World Economy - 2003-11-24

A recent report by the Australian Department of Foreign Affairs and Trade documents the threat terrorism poses to the world economy, and in particular to the developing world. The report goes on to say that counter-terrorism costs should be viewed as investments that will pay for themselves over the long run. Yet many developing countries still see the threat of terrorism as something that doesn't concern them.

The October 2002 bombing of two nightclubs in Bali, Indonesia, reduced the nation's total gross domestic product by an entire one-percentage point, according to a recent report by the Australian government. Yet despite this staggering blow to Indonesia's economy, many people in the developing world still think terrorism is something that primarily affects the United States and its Western allies.

Geoff Raby is Deputy Secretary of the Australian Department of Foreign Affairs and Trade. He says the Australian government's report found that terrorism has a direct and immediate economic impact on the country where an attack took place. “But secondly, and more importantly in some ways from a policy perspective, are flow-on effects across borders into other countries which may not have been the target of primary incidents. Following on from that is that terrorism therefore requires a collective response from economies. And thirdly, and quite significantly, is that the costs fall disproportionately on developing countries.”

Geoff Raby says there are several reasons why developing countries are hurt disproportionately by the economic shock waves a terrorist attack in one country generates. “Developing countries on average tend to be more exposed to trade. That is trade tends to be a larger share of GDP. Also, they're disproportionately more dependent on foreign direct investment flows and these are two areas which are highly susceptible to disruption from terrorist activity.”

Geoff Raby says the greater the perceived risk is in any given country, the costlier capital becomes. When that happens, businesses tend to avoid investing in long-term deals, particularly in areas of infrastructure. Instead they invest in short-term ventures. That means fewer companies are willing to spend money on the very kinds of projects developing countries need most, such as highways, rail-lines or water treatment plants.

Ross DeVol, Director of Regional Economics at the Milken Institute, an independent economic research organization in California, says there's another reason developing countries' economies are more susceptible to terrorism. “I think the developing countries that have large travel and tourism bases were the most exposed. So you think about Bali bombing and what impact that has had on their travel and tourism industry. And a lot of Asian developing countries have a large tourism base in their economy. And most of it comes from foreigners coming to their countries. So those types of countries certainly have been hit.”

There are a number of things that can be done to lessen the economic impact of terrorism. Ross DeVol says first and foremost is improving security: “I would argue an investment in improved security could actually reduce the cost of terrorism in the future. It's a big price tag up front, but it could certainly reduce costs in the future. And of course, the long-run solution behind combating future terrorist attacks is to reduce the conditions that foment terrorist acts, which gets back to resolving some very important Mid-East issues, such as the Israeli-Palestinian conflict. As long as you have those deep-rooted conflicts unresolved without prospects for hope, it breeds people who are going to take a look at terrorist acts as a way to lash out.”

The economies of the Middle East many of them already stagnant as a result of poor government economic policies have been hit by the double blow of the ongoing Israeli-Palestinian strife and the conflict in Iraq.

Egypt's multi-billion dollar tourism industry has never fully recovered from a series of terrorist attacks in 1997 that were carried out by Islamic radicals against foreigners. Since then, the U.S. State Department warning against travel to the Middle East and North Africa has caused further damage.

The attacks in Egypt, like the twin blasts that recently rocked two Istanbul synagogues, killing at least 24 people and wounding more than 300 others, show that Muslim countries are not immune to terrorism.

Neil Livingstone, CEO of Global Options, an international risk management company and author of nine books on terrorism, says many developing countries, including Muslim ones, have done too little in terms of dealing with terrorists in their own backyards:

“Many of these countries have taken the view that they don't have the resources or they're not central to the struggle and therefore they can ignore it. And that's to live in a fool's paradise. We need more help with identifying terrorists that are on their soil. We need more help in exchange of intelligence data. We need a stronger effort, particularly by Muslim countries, including those in Southeast Asia which have been victims of terrorist attacks in the past year or two. They need to cooperate with us and shut down some of the radical elements that are in their countries right now that are giving rise to terrorism.”

Neil Livingstone says the Bali bombing was a wake up call to the developing world. Another kind of alarm was sounded by the SARS epidemic that struck in early 2003.

SARS, or severe acute respiratory syndrome, is a viral respiratory illness first identified in February 2003. The virus infected more than 8,400 people and killed more than 900 before health officials contained it.

Neil Livingstone says this illustrates just how connected countries are at present: “We live in this very interdependent world today, and disease some place or a terrorist attack some place can affect every country that does business with the country where that problem is located. It can undermine essentially economies around the world, and we're all much more vulnerable today because we're much more interdependent. A terrorist attack that may seem like it's a long way from the United States may have a big impact on perceptions in the United States in terms of whether we want to invest in that country, whether Americans want to travel to that country, and whether the United States has good relations with that country.”

The Australian government's report was presented this October at the APEC, or Asia-Pacific Economic Cooperation summit in Bangkok. Geoff Raby of the Australian Department of Foreign Affairs and Trade says the mood at the conference reflected the realization that terrorism has a very real economic dimension:

“It's not enough for countries to say "Well, this is a problem for the United States. Or this is a problem for Australia." Because of the spillover effects it does have all the characteristics of what economists call a classic case of public good. And that means that the most effective response to that problem is collective action. And I think we're starting to see countries understand that there is a real economic and development dimension to this problem and they are starting to understand that it's in their interest individually to act collectively to respond to this.”

Economists and counter-terrorism experts insist governments and citizens have to step back and look at the broader picture when discussing the war on terror. Although improving security measures obviously adds to costs, they can be a very solid investment in averting future terror attacks.