Terrorism's economic impact
Economists in the United States, with the assistance of the Centre for Policy Studies (CoPS) at Monash University, have investigated the impact of a terrorist attack on a region’s economy.
Dr James Giesecke from CoPS was part of the study published in the current issue of Risk Analysis that investigated the effect of fear and risk perception due to a terrorist attack.
Initial damage and psychological effects of a "dirty bomb" (bomb with radioactive material) attack on the downtown Los Angeles financial district could reach US$16 billion over a decade, according to the research.
“The stigma generated by dirty-bomb radiation could generate large changes in the perceived risk of doing business in the region,” Dr Giesecke said.
“Additionally, with regional economies in competition with one another for customers, businesses and employees, it takes only small changes in perceived risk to generate big losses in economic activity.
Study co-author Dr William Burns, a researcher at US organisation Decision Research, which investigates human judgment, decision-making, and risk, said they decided to study a terrorist attack on Los Angeles not to scare people, but to alert policymakers just how large the impact of the public’s reaction might be.
“This underscores the importance of risk communication before and after a major disaster to reduce economic losses,” Dr Burns said.
Economists most often focus on the immediate economic costs of a terrorist event, such as injuries, clean-up and business closures, the study authors said. In this scenario, those initial costs would total just over US$1 billion.
Fellow co-author Professor Adam Rose, from the University of Southern California’s (USC) Price School of Public Policy and USC's Centre for Risk and Economic Analysis of Terrorism Events (CREATE) said terrorism can have a much larger impact than first believed.
“The economic effects of the public’s change in behaviour are 15 times more costly than the immediate damage in the wake of a disaster.”
To estimate how fear and risk perception ripple through the economy after a major terrorist event, the researchers surveyed 625 people nationwide after showing them a mock newspaper article and newscasts about the hypothetical dirty bomb attack to gauge the public’s reticence to return to normal life in the financial district.
The study translated the survey results into estimates of what economic premiums would be put on wages, and what discounts shoppers would likely require in the aftermath of a terrorist attack.
“After six months, 41 per cent of those surveyed said they would still not consider shopping or dining in the financial district. And, on average, employees would demand a 25 per cent increase in wages to return to their jobs,” Dr Giesecke said.
The study was funded by the US National Science Foundation and the US Department of Homeland Security and is part of a special issue of the international journal "Risk Analysis" which showcases research by CREATE and affiliates at other universities on terrorist attacks, natural disasters and their economic impacts.