Terrorism has a significant and long-lasting negative impact on the economy: Moody’s

Global Credit Research: A study by Moody’s Investors Service shows that terrorist attacks significantly weaken economic activity, with long-lasting effects on the economy. 

The study measures the impact of terrorism on a country’s economic growth, investment growth, government expenditure and government cost of borrowing, according to the report ‘Terrorism Has a Long-lasting Negative Impact on Economic Activity and Government Borrowing Costs’.

“For example, in 2013 the 10 countries most affected by terrorism took an immediate and significant hit to growth, dampening GDP between 0.5 and 0.8 percentage points,” says Merxe Tudela, a Moody’s Vice President. “Even worse is that the negative impact continues for years after the attack, taking up to five years for the effects to peter out.” 

Investment growth takes an even greater immediate hit, with Moody’s estimating for the same episodes that investment growth declines between 1.3pp and 2.1pp. During the time period studied, terrorism has been concentrated in a few countries. For example, more than 60% of all incidents in 2013 were in just four countries, with the majority of attacks occurring in Iraq (24%) and Pakistan (19%). 

An analysis of Iraq shows that in the absence of any terrorist attacks from 2008 to 2013, GDP could have been 8.2% higher, and the cost of borrowing, 150 basis points lower by the end of that period. 

A similar analysis of Pakistan indicates that GDP growth could have been 5.1% higher, and the cost of borrowing, 100 basis points lower. Over the same timeframe, the level of investment in Pakistan could have been 9.3% higher, and in Iraq, 15.1% higher. 

“When we break out these numbers, we see that Iraq and Pakistan have lost billions of dollars in GDP and investment,” says Tudela. 

Terrorist events also materially dampen economic activity and investment in mature economies. 

Moody’s analysed the economic impact of the September 11, 2001 attacks in the US, the 2004 bombings in Spain and the 2005 bombings in the UK, all of which resulted in significant human casualties and infrastructure damage. In each case, the effect on economic activity and investment was significant and lasted several years. 

Moody’s study consisted of a sample of 156 countries between 1994 and 2013. Moody’s subscribers can access this report at https://www.moodys.com/.