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Terrorism is widely regarded as one of the most serious issues confronting humanity today. It is no longer a national matter, but now one of global interest. Its influence can be sensed around the globe. Terrorism makes no distinction between developed and emerging countries. Every country faces the threat of terrorism, and it is the most contentious problem in the world, including how countries should work together to fight it. Terrorism is not a modern phenomenon; in reality, it can be traced back to the first century. Terrorism, like most aspects of life, has evolved and taken new directions over time (Kellner, 250). Today, terrorism is more lethal, widespread, and difficult to control. It stands as a serious threat that the civil society has to deal with today. Every country in the world is either directly or indirectly affected by terrorism. The following academic paper analyses the costs as well as the implications terrorism has on the global economy. The paper is divided into four sections. The first section defines terrorism while the second section analyses the actors of terrorism. The implications of terrorism are explained using the neorealist perspective. That way, the paper will show that the international institutional structures are doing too little to curb the threat of terrorism. Besides, it will argue that every terrorist attack has an impact on the global markets which are only temporally or in the short-run. However, the real implications of terrorism on the economy are usually in the long run. The academic paper also seeks to show that even though terrorism has a negative impact on the global economy, it is not as severe as many people think. That is why there is no coherent international plan to combat terrorism.
Definition of Terrorism
Terrorism can be defined as an unlawful use of violence or threat of violence aiming to inculcate fear among the public. It is a philosophy of violence that terrorists use to cause havoc and destabilize the economy of a country (Kellner, 243). In the contemporary world, terrorism is used to deliberately create tension among the public and disrupt peace of their victim countries.
Actions and Motives behind Terrorism
The fact that terrorists undermine the stability of society by creating chaotic situations that lead to massive deaths and destruction of properties makes them the greatest enemies of the society. Terrorists target public places where one is likely to find many civilians such as airports and railway stations. Besides, they can target large buildings such as the World Trade Center that was attacked during the 9/11 attack or large malls such as Westgate in Kenya. Sometimes, terrorists shift their targets to soft targets such as educational institutions, hospitals, and bus stations where there is a lax in the security and security forces are not vigilant. Some terrorist groups have been brave enough to attack military bases such as one that was experienced in El-Adde where an African Union Mission in Somalia (AMISOM’s) camp.
Every action is usually performed with a specific motive. The most common motives are religious interests, economic interests, and ethnic minority interests. However, the most persistent and most dangerous terrorist groups across the world are associated with religion especially the Muslim religion. For instance, the al-Qaida was the first popular terrorist group that was under the leadership of Osama Bin Laden. Al-Qaida struck for the first time in 1992. They hit a hotel in Aden where the American troops had been housed on their way to Somalia for a peacekeeping mission. Although none of the Americans were killed, two Australian tourists lost their lives in the bomb blast. Osama and his associates were engaged in violence jihad. In 1993, they trained and provided Somali rebels with weapons. The Somali rebels killed eighteen American servicemen in Mogadishu the capital city of Somalia. A series of bombings that followed were associated with the al-Qaida. For instance, the bombing of the New York's World Trade Center, United States National Guard Training Center in Riyadh, they attempted assassination of the Egyptian President in 1995 as well as the bomb that struck Khobar towers in 1996 that was a residence of the American military in Dhahran. On August 7, 1998, two simultaneous bombings took place at the United States Embassies in Nairobi Kenya and Da-re-Salaam Tanzania. More than 200 people lost their lives in the two blasts, and more than 4,500 were injured. In October 2000, a small boat that was loaded with explosives plowed into the U.S.S. Cole hull killing 17 sailors and wounding 38 more. Osama bin Laden took credit for all incidents. While the American federal jury indicted Osama on charges related to the bombing of the Embassies, the al-Qaida was preparing for their grand attack that took place on September 11th, 2001. They attacked the World Trade Center and the Pentagon. Currently, the popular terrorist groups include the ISIS based in Syria, Al-Shabaab of Somalia, and book Haram of Nigeria.
Sometimes the motives of the attacks lie deeper than religious motives. It all revolves around economic resources and political power. This argument can be supported by the fact that these terrorist groups are more active in developing countries rather than in developed countries. The main economic resource associated with the countries affected directly by terrorism is oil. Technology advancement has not left out terrorism. Terrorist groups are more equipped and connected than ever because of digital technology. The armory available to the defense of a country is also available to the terrorists. Terrorists use bombs and explosives. Besides, they use indiscriminative firing, hijacking, and bombarding to terrorize the society. Similarly, nuclear terrorism and bioterrorism are the development of terrorism.
Terrorism focuses more on killing people than just destroying properties. Terrorists take pride in the number of people they have killed rather than the value of the property they have destroyed. That is why their targets are areas concentrated by the public. Technology has allowed the terrorists to work on a global network. They have established contacts across the world. They organize attacks together. They collaborate in financing, recruiting, and training. In most cases, the large terrorist groups finance small or emerging groups.
Implications of Terrorism
Michael Sivy, a columnist in TIME, explained the effects of terrorism following the bombings in Boston in April 2013. According to Sivy (2013), terrorism poisons everything from the society to the economic markets. Anything that creates uncertainty in the world of business affects the operations negatively. International markets are sensitive to any shocks that threaten the exchange rate of a particular currency. For instance, if a country faces threats of terrorism, it triggers the economic stability. The investors pull out their investments in such a country. This affects the foreign reserves in a country causing the local currency to depreciate. Therefore, international markets tend to react negatively to instability brought about by war or acts of terrorism. Sivy (2013) divides terrorism into four groups. The first group is that of terrorism on individual companies. The attacks that happen to a company such as the kidnapping of the employee or striking the offices cause the shares of that specific company to go down. In some isolated cases, the company suffers a significant loss. However, studies show that 75% of the attacks on individual companies have an average loss of the stock market of between 1% and 2%. Besides, such attacks do not affect the rival companies in any way.
The second category involves attacks on the energy sector. The industry of oil and gas is quite vulnerable to acts of terrorism. The supply and the demand of the industry products are closely matched, and the flexibility in either of the two are insignificant. Therefore, the inelasticity in the oil and gas market causes a significant swing of the price if a particular part of the oil supply is impaired. The threat of terror increases a premium on the oil prices. Such premiums can range from $2 to $10 per a barrel of oil. Besides, the threat of terrorism to oil suppliers in the developed countries may be severe and requires military intervention which is quite expensive (Sivy, 3). The third category of terrorism attacks on the financial system. The 9/11 attack is considered to be one of the worst attacks since it caused a disruption in the financial activities of the New York city including the Ney York Stock Market Exchange. The markets were closed for four business days which was the longest period since 1933. Besides, the activities of some banks came to a halt which magnified the effect of the attack even further. The attack on an immense scale is the last category of terrorism acts. A terrorism attack on a large scale, or one that is repeated for a number of times, can have long-lasting economic effects (Sivy, 5). For instance, attacks on shopping malls can have significant effects on the retail sales while multiple attacks on a train station can affect the commuter travel in a country.
Research shows that terrorist attacks have severe effects on the international stock exchange compared to the traditional war escalations though such effects are only short lived. A study by Chen and Siems (2004) compiled a report to show the behavior of Dow Jones Industrial Average following the terrorist attack as well as military invasions (Chen and Siems, 354). Dow Jones Industrial Average managed to rebound much faster following a terrorist attack than it did with military invasions. For instance, it only took the Dow Jones two months to recover from the 9/11 terrorist attack. Similarly, July 7, 2005, bombings in London caused a fall in the stock markets in the UK, Germany, and France; however, the stocks had started to rise even before the close of business that day. That shows that the adverse effects of terrorist attacks are short-lived (Chen and Siems, 357).
Terrorism has been found to have greater and long term impacts on the foreign direct investment (FDI) than in the local or domestic. This is caused by the extra costs imposed on the FIDs as a result of terrorism. Ender et al. (2006) performed a study in which they aimed at discussing the effect of terrorism on the United States' Foreign Direct Investment. The study showed that the country's FDI flows dropped in a significant way in the month that followed the 9/11 attack (Enders, Sachsida, and Sandler, 518). This happened in every market across the world since there was a contraction in the markets because of uncertainty which was heightened by the attack. The Latin American countries and those from the Middle East experienced more decrease than any other country. On the other hand, the decline in the US FDI flows only lasted for a short period since at mid-2002 the investments had risen above those before the attack in most regions. By 2004 the investments had risen in all regions of the world. Therefore, it is evident that terrorist attacks have negative effects in the global market, but such effects are only temporary (Enders, Sachsida, and Sandler, 522).
Terrorist acts can as well have a long-term effect on the economy. The essay focuses on the United States since what happens in the United States economy has either direct or indirect effects on of other countries’ economy. The United States investment is crucial to the growth of today's globalized economy. That means any terrorist attack on the territory of the US is an attack on the world's economy. About 40% of the terrorist attacks are usually targeted at the US and disrupts the economy of the country in one way or another as well as the flows of investment moving from the US to other countries across the world. For instance, the 1998 bombing in Nairobi Kenya targeted the US embassy, and the United States had to compensate the victims. Such effects are long term and cannot be recovered from the loss in the stock markets. In other words, there are costs that are related to the terrorist attacks that are long term.
A report by the OECD showed that the terrorist costs associated with the 9/11 were approximately $120 billion. Some of the costs were to cater for the practical necessities that resulted from the attack such as removing of the rubbles (Scott, 571). However, the largest percentage of the costs was invested into the long-term effects of the attack. Countries and companies are forced to engage in practices that whose objective is to protect the resources or the assets. The resources may be the people, buildings, or natural resources (Schneider and Troeger, 627). For a company, the resources or the assets may comprise of major production plants, buildings or computer systems especially with the increased cyber terrorism. There is a considerable amount of costs that the company or the country incurs in its effort to protect its assets. For instance, a country needs to recruit more people in the military to protect its people. The salaries are paid to the military and sustaining the operations of the military is high and long-term. Besides, investment in weapons and computerized systems to monitor the movements of people and objects to detect any abnormality which may be acts of terrorism requires experts, machinery, and technology which are expensive to maintain. In the United States, the creation of the Homeland Security Department had a significant impact on the country's Gross Domestic Product (GDP). The cost of domestic security rose from $15 billion in 2001 to $32 billion as at 2003 which represented a more than 50% increase (Kellner, 253). Similarly, the cost incurred by a company to protect its assets from terrorism is spread in the line of production such that the consumer has to spend more on the same product which would not be the case if the costs associated with terrorism were not incurred. Companies in the insurance industry have come up with a policy that a company can take to protect itself against acts of terrorism. The monthly insurance premiums paid are reflected as costs of production, thus affects the selling price of a product. Such costs are long term, and they affect even the last person in the chain of distribution who happens to be the consumer.
Analyzing the implications of terrorism in a neorealist perspective explains why there are no significant international institutions to fight terrorism. Neorealism was first proposed in 1979 by Kenneth Waltz. It has become a major theory in explaining international relationships. It states that countries tend to act as rational units in a global system that is anarchical where that there is no an overall governing authority (Schneider and Troeger, 640). The nature of the systems is in such a way that relative gains as well as power are of great importance in ensuring the security of a country. Therefore, a fundamental component in the current system is the wealth of a state. For instance, military spending is an example that a country needs money to ensure its security. As seen from the above analysis terrorism attacks have no significant impacts on the overall economy of a country since it is only short lived (Scott, 575). The stock markets manage to recover within a short duration (Schneider and Troeger, 642). Neorealism would argue that there is no need to invest in an international institution to combat a problem that has no significant impact on the global economy.
The essay has shown the short term as well as the long-term effects of terrorism acts in the global economy. It is evident that the costs of terrorism have a modest impact on the global economic system because they are experienced in the short run and are easily recovered. The shock on the stock markets caused by uncertainty created by terrorist attack or threat of terrorism is only short lived. The long-term costs of terrorism are associated with a county's or a company's protection of its assets from acts of terrorism. Besides, there is no major economic incentive to establish an international institution that is solely committed to identifying and destroying the actors of terrorism. It is more effective for a country to act on its own or on a small collection in curbing terrorism rather than under an international institution. Conclusively, terrorism acts have negative impacts on the global economy, but not on a large scale, and such effects are short lived.
Chen, Andrew H., and Thomas F. Siems. "The effects of terrorism on global capital markets." European journal of political economy 20.2, 2004, pp. 349-366.
Enders, Walter, Adolfo Sachsida, and Todd Sandler. "The impact of transnational terrorism on US foreign direct investment." Political Research Quarterly 59.4, 2006, pp. 517-531.
Kellner, Douglas. "Globalization, terrorism, and democracy: 9/11 and its aftermath." Frontiers of Globalization Research. Springer US, 2007, pp 243-268.
Schneider, Gerald, and Vera E. Troeger. "War and the World Economy Stock Market Reactions to International Conflicts." Journal of conflict resolution 50.5, 2006, pp. 623-645.
Scott, Catherine V. "Imagining Terror in an Era of Globalization: US Foreign Policy and the Construction of Terrorism after 9/11." Perspectives on Politics, 7.03, 2009, pp. 579-590.
Sivy, Michael. "What the Boston Bombing Means for the Economy and the Stock Market." TIME, 16 Apr. 2013, http://ti.me/ZnznVY Accessed 21 Mar. 2017.
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