Chapter 26 Terrorism: An Empirical Analysis

The chapter surveys the empirical literature concerning the measurement of terrorism, effectiveness of counterterrorism policies, the economic consequences of terrorism, and the economic causes of terrorism. In Section 2, terrorist incidents are grouped according to incident type, victim, and location. It is shown that terrorism began a steady decline in all regions (except for Eurasia) during the early to mid-1990s. However, the severity of the typical incident has been increasing over time. Also, several different data sets are compared in order to judge the reliability of alternative methods of obtaining and coding the data. Section 3 discusses a number of empirical studies that measure the effects of counterterrorism policies on the overall level of terrorism and on the various subcomponents of the overall series. In accord with the rational-actor model, an increase in the “relative price” of one type of terrorist activity induces a substitution out of that activity and into the now relatively less-expensive activity. Logistically similar activities display the greatest substitution possibilities. Moreover, periods of high-terrorism seem to be less persistent than periods with less terrorism. This is consistent with the notion that terrorists face a resource constraint. Section 4 pays special attention to the changes in terrorism due to the events of September 11, 2001 (9/11) and the resulting changes in counterterrorism policy. It is shown that the post-9/11 counterterrorism policies hampered al-Qaida's ability to direct logistically complex operations such as assassinations and hostage takings. The main influence of 9/11 has been on the composition, and not the overall level of terrorism. There has been a ratcheting-up of serious terrorist attacks against the US targets so that Americans are safer at home, but not abroad, following 9/11 and the enhanced homeland security. Section 5 surveys a number of empirical papers that attempt to estimate the macroeconomic and microeconomic costs of terrorism. Papers surveyed in the first part of the section indicate that the overall macroeconomic costs of terrorism are low. However, it is argued that the methodological complexities of estimating the macroeconomic costs of terrorism on a cross-section of widely disparate nations are nearly insurmountable. The macroeconomic costs of terrorism are best measured on a country-by-country basis. The second part of the section summarizes empirical studies of the microeconomic costs of terrorism on tourism, net foreign direct investment, international trade flows, and financial markets in selected countries. Section 6 considers the economic determinants of terrorism. Particular attention is paid to the common presumption that terrorism is caused by a lack of economic opportunities. Conclusions and directions for future research are contained in Section 7.