Estimating the cost of terrorism and the benefits from deterring it

An interesting paper from Nicole and Mark Crain:

In this paper we estimate the macroeconomic consequences of terrorism using panel data for 147 countries for the period 1968-2002. We examine the levels of economic output, as opposed to growth rates in economic output, and include an estimate of the cost of unanticipated terrorist events. The analysis covers nearly 12,000 terrorist acts, and the results provide a foundation to compute the costs of terrorism and the benefits of anti-terrorism activities.

To preview a few of the results, we find that the number of terrorist incidents and casualties from terrorist attacks have a substantial impact on economic performance. For example, if Germany deterred one terrorist incident (reducing its historically average rate from 19 to 18) the GDP gains would be $1.6 billion (in 2003 dollars). In the Philippines, a reduction from 9 to 8 incidents would increase its GDP by an estimated $122 million. As we describe in detail, these estimates of the GDP gains from deterrence depend on the extent of terrorism in a particular country because the impact of terrorism on GDP is not linear. These estimates of the economic gains from marginal reductions in terrorism provide a threshold against which a country’s expenditures on anti-terrorism can be weighed.