Top 5 Ways Terrorism Impacts the Economy

Reviewed by Michael J BoyleFact checked by Vikki VelasquezReviewed by Michael J BoyleFact checked by Vikki Velasquez

Investors and businesses in the United States have dealt with the realities and tragedies of global terrorism since at least 2001, and the threat has only increased. The high-profile terrorist attacks in Israel, Iran, Nigeria, and Russia represented only a fraction of the more than 3,000 terrorist attacks in 2023 and 2024.

By 2023, even though “significant major strides” were made in dismantling organized international terrorists groups like ISIS, a trend of domestic terrorist groups had developed in countries around the world. The United States has experienced an increase in domestic terrorism and according to the Department of Homeland Security, “violent attacks by lone offenders against minority communities, schools, houses of worship, and mass transit have demonstrated the dynamic and complex nature of the threat environment facing the United States.”

While the human cost is devastating, the economic impact may be larger than most realize. The following are five ways that terrorism has an impact on the economy.

Key Takeaways

• Terrorist acts can cause ripple effects through the economy that have negative impacts.
• The most obvious is the direct economic destruction of property and lives.
• Terrorism indirectly affects the economy by creating market uncertainty, xenophobia, loss of tourism, and increased insurance claims.

1. Direct Economic Destruction

The most immediate and measurable impact of terrorism is physical destruction. Terrorists destroy existing buildings, machines, transportation systems, workers, and other economic resources. On smaller scales, acts of terrorism may blow up cafes, churches, or roads. Large-scale attacks, such as the infamous World Trade Center bombings on September 11, 2001, can destroy billions of dollars worth of property and senselessly kill hundreds or thousands.

The impact of terrorism and war is invariably negative for the economy, and physical destruction is a large reason why. Productive resources that might have generated valuable goods and services are destroyed, while other resources are almost invariably diverted from other productive uses to bolster the military and defense. None of this creates wealth or adds to the standard of living. Though military spending is often erroneously cited as a stimulant, this is a faulty broken window fallacy.

2. Increased Uncertainty in the Markets

Aside from the physical damage, terrorism has far-reaching negative impacts due to the market uncertainty created. For example, after September 11, the financial markets shut down and did not recover until months after the 2003 invasion of Iraq.

There is plenty of debate about the depth and pervasiveness of the actual impact on financial markets. As the threats and publicity of global terrorism continue to rise, markets appear to be more resilient. Stock market indexes did not decline much after the terrorist attacks in France killed at least 129 people in 2015. However, the deadly attack in Nice, France, in 2016 only adds to the sentiment that France may be an increasingly unstable place to live and do business in. The real threat of global terrorism from an investor’s perspective is about the broader picture, not individual incidents. International investment and cooperation are lower in a world full of terrorism.

3. Insurance, Trade, Tourism, and FDI

There are two obvious industries especially vulnerable to the effects of terrorism: insurance and tourism. Not all insurance policies pay out in the event of international terrorism or foreign wars, so the impact is likely less than first expected. Nevertheless, terrorism is a risky business for everyone, and insurance companies hate risk as much as anyone else.

Tourism is even more concerning. In France, for example, tourism accounted for approximately 7% of total gross domestic product (GDP) in 2016, the year of the Nice attacks. Vanguelis Panayotis, a director of MKG tourism consultancy, told Reuters that he expected a 30% decline in visitors to France in the month after the Nice attacks.

On a broader scale, terrorism hurts international trade. This may be due to imminent threats, such as compromised trade routes and distribution systems, or because of the psychological and physical reactions to terrorism. This also means less foreign direct investment (FDI), especially in unstable countries.

$55 Billion

The estimated cost of the toll and physical damage of the 9/11 terrorist attacks. If the number includes indirect effects such as economic impact (estimated at $123 billion) and increased spending in homeland security, the total impact is estimated around $3.3 trillion.

4. War Is the Health of the State

There is an old saying in the study of political economy that reads “war is the health of the state.” It means that during times of conflict, reactive governments and nervous citizens are far more inclined to give up economic and political freedoms in exchange for security. This could result in higher taxes, higher government deficits, and higher inflation. During wartime, the government often implements price controls and, sometimes, even the nationalization of industries.

Governments are less effective at managing resources for productive economic activity than private individuals, especially when those resources are co-opted to achieve a strategic military objective. When governments militarize, the private economy suffers. As economist and historian Robert Higgs demonstrated in his book, “Crisis and Leviathan,” many government controls stay in place long after military campaigns end.

5. Increased Nationalism and Foreign Skepticism

The final risk to the economy is a political risk. This is already on display in the United States and Europe in 2024 where there has been a rise in skepticism of foreign cultures, businesses, immigrant workers, and refugees. Populist movements already won a victory of sorts in the United Kingdom where anti-globalist and anti-trade sentiments helped pass Brexit. These kinds of major political events have an uncertain economic fallout on everything, from currency to trade to even diplomacy.

Closing down borders to trade and immigrant workers reduces the size and diversity of economic transactions and limits productive resources. Economists as early as Adam Smith contended that the division of labor and gains from trade are limited to the size of available factors of production. Just as a single household or town is less productive if it only relies on internal resources, so too do national economies limit themselves to the extent that they wall off external producers and consumers.

Which Countries Are Most Affected by Terrorism?

According to a 2024 study by the Institute for Economics and Peace, the global epicenter for terrorist attacks has moved from the Middle East to the Sahel region of Africa, which accounted for half of all terrorism-related deaths in 2023. Burkina Faso was the country most affected by terrorist attacks, while Mali, Somalia, Niger, and Nigeria ranked among the top ten.

How Much Does Terrorism Cost the World Economy?

It’s difficult to place a precise price tag for the cost of terrorism due to the uncertainties associated with the term ‘terrorism.’ A 2021 study by the Institute for Economics and Peace calculated that terrorism cost the global economy a total of $855 billion between 2000 and 2018. The most expensive year was 2014, when terrorism caused 33,555 deaths and cost the global economy $111 billion.

How Does Terrorism Affect the World Economy?

In addition to the loss of human life and property destruction, terrorism introduces additional risks that increase economic transaction costs. For example, attacks on global shipping tend to increase shipping costs, and those risks are felt throughout the economy in the form of higher transportation costs, higher insurance premiums, and lower profits for investors. However, the defense and arms industries tend to benefit from terrorist attacks because of the associated increase in security spending.

The Bottom Line

Terrorism has been a major source of global uncertainty since the attacks on September 11, 2001. In addition to the human costs of terrorism, these attacks also have a significant economic price, forcing governments and companies to spend more on security and discouraging economic activity in conflict-affected regions.

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