Monday, November 02, 2009

The Economic Cost of Harboring Terrorism

Another interesting paper on the economics of terrorism:

10. The Economic Cost of Harboring Terrorism
by Efraim Benmelech, Claude Berrebi, Esteban F. Klor - #15465 (LS PE POL)


The literature on conflict and terrorism has paid little attention to
the economic costs of terrorism for the perpetrators. This paper
aims to fill that gap by examining the economic costs of committing
suicide terror attacks. Using data covering the universe of
Palestinian suicide terrorists during the second Palestinian
uprising, combined with data from the Palestinian Labor Force Survey,
we identify and quantify the impact of a successful attack on
unemployment and wages. We find robust evidence that terror attacks
have important economic costs. The results suggest that a successful
attack causes an increase of 5.3 percent in unemployment, increases
the likelihood that the district's average wages fall in the quarter
following an attack by more than 20 percent, and reduces the number
of Palestinians working in Israel by 6.7 percent relative to its
mean. Importantly, these effects are persistent and last for at
least six months after the attack.

This paper does a pretty good job at quantifying the negative effects of a terrorist attack. However, there are so many additional negative psychological effects associated with acts of terrorism that the total impact is likely to be even greater than estimated here.
While I agree with Andrew's comment, I'm curious as to why a successful attack would result in an area being more likely to have wages fall? Would people be less likely to shop or do business in that area because of the potential of a follow up attack? Employers get scared of future attacks and move their business elsewhere?
I think that terrorism might act like any negative externality in influencing residents' or businesses decisions on where to locate.Just like pollution,loud noise, or crime, terrorist acts are disincentives for locating in a particular area.
It would be interesting (in a terrible way) to see what the economic consequence of a terrorist attack on the unemployment benefit collection building would be. *Condundrum*
My initial thpughts were the same as Amalia's. I wondered what percent of the fall in wages was because of fear of another attack, and the movement of businesses away from the area. I also wonder how long it takes to get back to normal or if it ever does. Is there a certain amount of time that leaves those memories behind and allows for a more successful business situation?
It would be interesting to explore which, if any, sectors actually prosper following a terrorist attack. Also, it would be pretty interesting to understand the actual costs of conducting a terrotist attack.
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