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Monday, December 10, 2007

"We Know Too Little about the Causes and Consequences of Terrorism"

Fernanda Llussá and José A. Tavares say most of what you heard about terrorism is probably wrong. This is a summary of economic research on the causes and consequences of terrorism:

Do we know enough about terrorism?, by Fernanda Llussá and José A. Tavares, Vox EU: Probably not. Think of terrorists as irrational misanthropes with little education and low income. Think of terrorist attacks as causing major economic damage. Think of fear of terrorism as perfectly rational and well understood. If you think like this, you may gain some comfort from the fact that many people think like you. But you (and they) are wrong. Probably, completely wrong, according to the empirical and theoretical research on the economics of terrorism available. The fact that popular beliefs about terrorism have received little influence from research in the topic – and, to some extent, also the reverse – coupled with the urgency of knowing more, suggests the importance of further research. In other words, given its relevance, we know too little about the causes and consequences of terrorism.

Understanding terrorism has gained actuality after the September 11 attacks in New York. The number of victims – and the direct material damages - is by far the largest in the history of terrorism, even if assessed in relative terms, compared to the US population and output. Despite huge fluctuations in intensity over time, the history of terrorism shows it has evolved from ideologically-based to religious-based, and becoming more lethal over time. Its objectives are to disrupt the economy, destabilize the polity and influence a wide general “audience“, well beyond the immediate targets.[1] Enders and Sandler´s (2002) define terrorism as “the premeditated use or threat of use of extra-normal violence or brutality by sub-national groups to obtain a political, religious, or ideological objective through intimidation of a huge audience, usually not directly involved with the policymaking that the terrorists seek to influence”.[2]

In a recent article, we attempt to portray, in broad brush strokes, the scope and depth of the economics of terrorism[3] and a forthcoming chapter in Terrorism, Economic Development and Political Openness, to be published by Cambridge University Press,[4] presents the existing literature on the topic, highlighting what are the issues that, in our opinion, deserve more attention in the future. The literature on the economics of terrorism is organized along seven self-explanatory topic areas:

  1. The Measurement of Terrorist Activity
  2. The Nature of Terrorists
  3. The Utility Cost of Terrorism
  4. Impact of Terrorism on Aggregate Output
  5. Terrorism and Specific Sectors of Activity
  6. Terrorism and Economic Policy
  7. Counter-Terrorism

It is obvious that some of the areas above lend themselves more naturally to a micro-based approach, while others are best dealt with by models and data that portray the aggregate economy. While work on the nature of terrorists and the utility cost of terrorism is mostly microeconomic and theoretical, work on the impact of terrorism on aggregate and sectoral activity and on economic policy has been mostly empirical and macroeconomic in nature. Topics such as the measurement of terrorist activity and issues of counter-terrorism have drawn widely from both micro and macro approaches. A simple, and obviously subjective, breakdown of the existing research is illuminating.[5]

In the table at the end of this column, which is not in the original paper, we divide the articles surveyed into four little boxes according to the main method (empirical or theoretical) and approach (micro or macroeconomic). As can be verified, almost three-quarters of the papers use a macroeconomic approach, while the literature shows a balance between theoretical and empirical approaches, with the latter covering just a little more than half of the papers. The crossing of the two category axes reveals an interesting fact: while micro papers are mostly theoretical, macro papers are mostly empirical. This may be driven by the fact that individual data on terrorists and terrorism, as well on attitudes towards terror, is scarce, while aggregate datasets of the incidence of terrorism are now amply used by researchers.

Our examination of the economics literature on terrorism shows that most of the studies concentrate on the consequences of terrorist attacks at the aggregate level and in specific sectors of activity. This important literature is empirical in nature, and uses a limited number of datasets that are available. There are notable examples of papers examining the causes or consequences of terrorism in the context of theoretical models of individual, group or aggregate economic behaviour, but the analysis of individual actors is constrained by data limitations. Another strand in the literature is policy oriented and, though presenting neither an explicit theoretical model nor an empirical exercise, does in some cases raise useful insights.

Our reading of the literature is that there are additional issues, methods, and data, which can yield important new insights into the causes and consequences of terrorism, at a time they are much in demand. On the measurement side, existing datasets need to be improved to cover the type and nature of terrorist attacks, according to several classifications. Econometric and statistical techniques that deal with censored data and outliers need to be more actively employed, in order to assess the underlying level of terrorist activity. This is key, since terrorist attacks are extremely volatile, and much important activity does not lead immediately or directly to actual attacks. Terrorists, as evidenced by much of the existing research, are rational actors that organize and make decisions in pursuit of given objectives. They substitute between means, targets and over time, in response to the costs imposed on them by counter-terrorist measures. More work is needed on the “industrial organization of terrorism”, since most terrorists act in groups, as well as on the “psychological incentives” of individual terrorists. Needless to say, progress on the latter depends crucially on inter-disciplinary work, ranging from psychology and political science to media studies. The “utility cost” of terrorism, recognized to be well above a simple “rational”, expected value estimate, can and should be assessed directly through careful individual surveys that use contingent valuation techniques of the sort already in use in public and environmental economics. The economic cost of terrorism is almost consensually estimated to be small, even in the short-run, but there should be an effort to relate the cost of terrorism to the literature on volatility and growth. Evidence on the differential sectoral impact of terrorism suggests that it is important to identify which characteristics of terror attacks affect which components of output, be it investment – private and public – or consumption. A related line of research is to use the very wide data on tourist movements, including origin and destination, with information on cost and length of stay, to evaluate more finely the impact on and the substitution effect between tourist destinations that are targeted by terrorists. The research on counter-terrorism can focus on the actual or alleged asymmetries between the terrorists and the government actors, in terms of information and cost of action. A final but most important unexploited avenue for research is the detailed analysis of how the specifics of the media coverage of terrorism attacks may affect the dynamics of terrorism.

If we accept as given the findings of the existing research, the perceived utility cost of terrorism is enormous in comparison with its economic and political costs. This suggests that knowing more about the nature of the “beast” – an adjective, as we have seen above, that should be used here in metaphorical terms - and how to counter it, are the main tasks ahead in terms of research. If we go back to the seven topics along which we organized the economics of terrorism, the nature of terrorism and the effectiveness of counter-terrorist measures are two areas where micro and macro approaches have mixed very well so far, despite a scarcity of empirical work. We need to add solid new databases to that “conversation”, and bring together researchers from other scientific fields to address head on the important questions at hand.

Unfortunately, and also for the worst of reasons, terrorism will be high on the political agenda for years to come. It should also remain high in the research agenda, to inform policy that aims at countering its effects. Given the nature of the actors, the interactions between them and the high stakes involved, the role of economics in that research effort is likely to remain central.

The Literature on the Economics of Terrorism in 4 Little Boxes
  Mostly Theoretical (42) Mostly Empirical (56)
Mostly Microeconomic in Approach(27)
  • Arce, D.aniel G. and Todd Sandler (2005)
  • Becker, Gary S. and Yona Rubinstein (2004)
  • Berman, E. and Laitin, D. (2005)
  • Berman, E. (2003)
  • Enders, W. and T. Sandler (2003)
  • Epstein,Gil and Ira N.Gang (2004)
  • Ferrero, Mario (2005)
  • Figueiredo, R. and Weingast, B. (2001)
  • Garoupa, Nuno, Jonathan Klick and Francesco Parisi (2005)
  • Glaeser, Edward L. (2005)
  • Kydd, Andrew and Barbara F. Walter (2002)
  • Lapan, Harvey and Todd Sandler (1993)
  • Laitin, David D., and Jacob N. Shapiro (2007)
  • Lee, Dwight R. (1988)
  • Siqueira, Kevin (2005)
  • Sunstein, Cass R. (2003)
  • Wintrobe, R. (2001)
  • Woo, G. (2002)


  • Berman, Eli, and Stepanyan, Ara, (2004)
  • Berrebi, Claude (2003)
  • Charney, C. and Nicole Yakatan (2005)
  • Downes Le Guin, Theodore and Bruce Hoffman (1993)
  • Frey, Bruno S., Simon Luechinger, and Alois Stutzer (2004)
  • Krueger, Alan B. and Jitka Maleckova (2003)
  • Pape, Robert A. (2003)
  • Shambaugh, George and William Josiger (2004)
  • Viscusi, W. Kip and Richard J. Zeckhauser (2003)


Mostly Macroeconomic in Approach(71)
  • Abadie, Alberto and Javier Gardeazabal (2005)
  • Azam, J. (2005)
  • Aziz, Heba (1995)
  • Berrebi, Claude and Esteban F. Klor (2004)
  • Blomberg, S. Brock, Gregory Hess and Akila Weerapana (2004c)
  • Bueno de Mesquita, Ethan (2005a)
  • Bueno de Mesquita, Ethan (2005b)
  • Bueno de Mesquita, Ethan (2007)
  • Crenshaw, Martha (1981)
  • Eckstein, Zvi and Daniel Tsiddon (2004)
  • Enders, Walter and Todd Sandler (1995)
  • Enders, Walter, Sandler, Todd, and Jon Cauley (1990)
  • Fitzgerald (2004)
  • Frey, Bruno S. and Simon Luechinger (2004)
  • Frey, Bruno S. and Simon Luechinger (2003)
  • Garfinkel, M. (2004)
  • Harrigan, James and Philippe Martin (2002)
  • Lenain, Patrick, M. Bonturi and V. Koen (2002)
  • Mills, Edwin S. (2002)
  • Mueller, D. C. (2004)
  • Organization for Economic Development and Cooperation (2002)
  • Rosendorff, Peter and Todd Sandler (2004)
  • Sandler, Todd and Kevin Siqueira (2003)
  • Rossi-Hansberg, Esteban (2003)


  • Abadie, Alberto (2004)
  • Abadie, Alberto and Javier Gardeazabal (2003)
  • Berrebi, C. and Klor, E. (2005)
  • Blomberg, S. Brock, Gregory Hess and Athanasios Orphanides (2004a)
  • Blomberg, S. Brock, Gregory Hess and Akila Weerapana (2004b)
  • Blomberg, S. Brock, and G. Hess (2007)
  • Bram, Jason, Andrew Haughwout and James Orr (2002)
  • Brauer, J., A. Gómez-Sorzano, S. Sethuraman (2004)
  • Brown, Jeffrey R., J. David Cummins, Christopher M. Lewis and Ran Wei (2004)
  • Brück, T. and Bengt-Arne Wickström (2004)
  • Chalk, Peter, Bruce Hoffman, Robert Reville and Anna-Britt Kasupski (2005)
  • Chen, Andrew H. and Thomas F. Siems (2004)
  • Choudhry, Taufiq (2003)
  • Cummins, J. David and Christopher M. Lewis (2003)
  • Drakos, Konstantinos (2004)
  • Drakos, Konstantinos and Ali M. Kutan (2003)
  • Eichenbaum, Martin and Jonas D.M.Fisher (2004)
  • Eldor, Rafi and Rafi Melnick (2004)
  • Enders, Walter and Todd Sandler (1991)
  • Enders, Walter and Todd Sandler (1996)
  • Enders, Walter and Todd Sandler (2000)
  • Enders, Walter and Todd Sandler (2002)
  • Enders, Walter, Todd Sandler and Gerald F. Parise (1992)
  • Fielding, David (2003a)
  • Fielding, David (2003b)
  • Fleischer, Aliza and Steven Buccola (2002)
  • Im, Eric Iksoon, Glaeser, Edward L. and Jesse M. Shapiro (2002)
  • Gupta, Sanjeev, Benedict Clements, Rina Bhattacharya and Hobijn, Bart (2002)
  • Im, Eric Iksoon, Jon Cauley and Todd Sandler (1987)
  • International Monetary Fund (2001)
  • Ito, Harumi and Darin Lee (2004)
  • Jon Cauley and Todd Sandler (1987)
  • Krueger, Alan B., and David D. Laitin (2007)
  • Kunreuther, H., Erwann Michel-Kerjan and Beverly Porter (2003)
  • Lacker, Jeffrey M. (2004)
  • Navarro, Peter and Aron Spencer (2001)
  • Nitsch, Volker and Dieter Schumacher (2004)
  • O´Brien, Sean P. (1996)
  • Sandler, Todd and Walter Enders (2004)
  • Shamit Chakravarti (2004)
  • Sloboda, Brian W. (2003)
  • Tavares, José (2004)
  • Treverton, Gregory F., Adams, Justin, Dertouzos, James, Dutta, Arindam, Everingham, Susan S. and Eric V. Larson (2007)
  • Walkenhorst, Peter and Nora Dihel (2002)
  • Wildasin, David E. (2002)
  • World Bank (2002)
  • World Bank (2003)


Note: Constructed by the authors, based on information available in “Economics and Terrorism: What We Know, What We Should Know and the Data We Need”, CEPR Working Paper DP6509. Please see paper for complete references.

Footnotes and References

1 The origins of the term terrorism go back to the state use of violence during the French Revolution, in the 18th century, and refer precisely to its wide, “irrational” impact on an “audience”.
2 See Enders and Sandler (2002), “Patterns of Transnational Terrorism, 1970-1999: Alternative Time-Series Estimates”, International Studies Quarterly.
3 “Economics and Terrorism: What We Know, What We Should Know and the Data We Need”, published as CEPR Working Paper DP6509
4 See the book page at http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521887585
5 In this article we have decided to exclude monographs, many of which have derived from or find further reflection in academic papers. We also excluded survey articles.

    Posted by on Monday, December 10, 2007 at 10:44 AM in Economics, Terrorism | Permalink  TrackBack (0)  Comments (5)


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