Economics of Terrorism

On 22nd, 23rd, and 24th February, Alan Krueger, known to economists as a leading labour economist coming up with innovative (and sometimes controversial) empirical research strategies or known to the general public as a New York Times columnist (the list of his columns), came to LSE and gave this year's Lionel Robbins Memorial Lectures. The topic was - lo and behold - terrorism.

Professor Krueger began his lecture by explaining why economics can investigate terrorism. His answer: it's an application of occupational choice theory. :)

The recurring theme of the three-day lecture series was that poverty DOES NOT matter to terrorism. After the 9/11, the world's political figures all say that one of the important strategies to combat international terrorism is to tackle poverty. But there is NO evidence for supporting such a claim.

The first lecture focuses on micro evidence for causes of terrorism. First, public opinion polls conducted in Islamic countries suggest that poor people are just as likely to justify terrorism as rich people are. If anything, MORE educated people tend to support terrorist acts. Surveys of actual terrorists reveal that they are richer and more educated than the general public, except for the IRA in which terrorists were poor and uneducated. Prof. Krueger provides possible explanations for this anomaly: for Northern Ireland, rich people could leave for the United States easily. Also the Northern Ireland case is more like a civil war, for which recent economic analysis shows that poverty matters.

A possible theoretical explanation for why richer and more educated people become terrorists is as follows. From the supply side, well-off people are drawn to extreme views because information acquisition cost is low. Poor people are unable to learn anything. From the demand side, a terrorist group wants to recruit smart people because it requires high-skilled labour to conduct terrorism and the cost of failure is substantial (if members are arrested, the group as a whole will not survive).

It's not that lack of education matters. It is the content of education that matters.

The second lecture focuses on macro evidence for causes of terrorism. Using the US government data (the reliability of which, though, is severely limited as pointed out in this New York Times column in 2004), the countries of origin of international terrorism are by no means poor while the countries of target tend to be rich. What's correlated with countries of origin is the lack of civil liberty. Investigating nationalities of foreign insurgents in Iraq captured during April to October 2005 yields similar results. They are not coming from poor countries but from countries without civil rights.

The last lecture then focuses on consequences of terrorism. There are two views on economic consequences of terrorism: terrorism having a large effect versus terrorism having a small effect. Evidence seems to suggest that terrorism has a significant impact on the economy if it is repeated for a long period while it has a negligible effect if it is temporary. Abadie and Gardeazabal (2003) convincingly show that terrorism in the Basque region of Spain reduced the region's GDP by 10 percent. Another study (I forgot the author's name - if you know this study, let me know), on the other hand, shows that terrorist attacks against listed companies in the U.S. during 1975 to 2002 (excluding the 9/11 as an attack against airline companies) reduced the stock values of targeted companies just by 0.064 percent of the US GDP per year.

I couldn't follow the lecture part on psychological consequence of terrorism...

If you're interested, here's the list of papers on which the lectures were based upon (on Prof. Krueger's website).