Terrorism consequences for the Economy

Introduction

We use a simple economic model to show that terrorism can have a big impact on the distribution of productive assets in different countries, even if it represents a small fraction of the total economic risk. The model emphasizes that in addition to increasing uncertainty, terrorism reduces the expected return on investment (Emerson 57). As a result, changes in the intensity of terrorism may lead to greater movement of capital between countries if the global economy SU ± open enough, so foreign investors can diversify other types of country risks. Using unique data on terrorism and other risks of the country, we find that ¯, in accordance with the predictions of the model, a higher level of terrorist risk associated with lower levels of net foreign direct investment, even after accounting for other types of country risks. The average increase in standard deviation in the terrorist risk to the fall of net foreign direct investment position is about 5 percent of GDP.

There is a lot of volatility in the market. For example, whenever a "crisis" in the Middle East (Iran threatens Israel, etc.), the price of oil goes up (Bergenpg 44). This is because the war in this region will lead to disruptions in oil supply; therefore, any hint of the problem causes a jump in prices. In addition, the attacks of 9 / 11 put the U.S. economy into recession. Whenever there is a lot of uncertainty (and the threat of terrorism makes this easy), he creates a lot of risk aversion, which has many negative consequences for the economy, such as less investment, less costs and less risk-raking. There is a perception that terrorism should not have a big impact on economic activity, because terrorist attacks destroy only a small fraction of stock capital.

In contrast to the empirical assessment of the consequences of terrorism typically suggest large effects on economic outcomes that mobility of productive capital in an open economy can be as much of a difference between direct and balance the impact of terrorism.

The value of estimated effect is large, indicating that open economy channel "impact of terrorism can be considerable. Foreign direct investment in the U.S. before and after September 11 attacks provide some noteworthy features of the open economy channel of terrorism (Daoud 55). In 2000, a year before the attacks Foreign direct investment in flows account for about 15.8 per cent of gross fixed capital formation in the U.S. this · figure fell to just 1.5 percent in 2003, two years after the attack. On the other hand, foreign direct investment from the network · flows from the United States increased from about 7.2 percent of gross fixed capital formation in the U.S. in 2000 to 7,5 percent in 2003 (see UNCTAD, 2004). Of course, not all of these changes in FDI may be associated with the effect of 11 September attacks. As of September 2001, foreign direct investment flows in dropped from its peak of 2000 not only in the ...