The Hindu Business Line : Economic implications of terrorism

To counter terrorism, governments and businesses have to incur additional expenditure on arrangements for safety and security, insurance payments, surveillance and intelligence gathering and training and equipping anti-terror squads. As all this additional expenditure impacts consumption and savings, as well as investment, the government has to go all out to curb terror groups by using various models, says Asuri Vasudevan, describing how the deterrence system works.

THE terrorist attack on the campus of the Indian Institute of Science in the last week of December 2005 has sharply changed the perspectives about terrorism and the instruments that must be wielded to contain it. The attack is an assault on the scientific spirit that provides the foundation for a nation to achieve high and sustained economic growth.

In launching the attack that resulted in the loss of life of an academic and injuries to many other persons endowed with evolved minds, the terrorists have widened their agenda from mere political purposes to a complex set of objectives. In the process, they have raised the costs of containing terrorism.

The costs inflicted by terrorism are not merely in terms of loss of human lives. The material losses in the form of destruction or damage of buildings, both privately owned and public property, destruction of infrastructure, including transportation outlets such as bus stations, power generating and distributing companies, naval docks and airports could also be substantial, should such attacks occur.

It is erroneously believed that the costs inflicted by terrorism are so large that societies suffer in silence. While terrorism undoubtedly evokes fear at the individual level, at the societal level, it does not. For persons that are targeted or likely to be targeted by terrorists would respond positively to safeguard their interests — economic, social and political. At the societal level, again, the prospective risk of being attacked also would not engender fear.

Societies do not fear terrorists because they know that terrorists are not born with any unique DNA or astrological constellations in their horoscopes. Terrorism has much to do with factors such as widespread unemployment, widespread illiteracy, ideology of violence and religious bigotry.

To these, one may add the more recent phenomenon of terrorists being led by considerations of economic or political power or seeking illegal wealth accumulation or destabilising progress.

Assuming that the influence of ideology and religious bigotry would be neutral, the rest of the factors behind the prevalence of terrorism have to be tackled by economic or political management. If policies to counter terrorism are not in place or are delayed, or suggest no well-defined strategy, the higher the cost that societies will have to bear.

To counter terrorism, governments, private individuals and businesses will have to incur additional expenditure on arrangements for safety and security or, where available, on insurance payments. These have to come from a compression of consumption or from savings. To the extent that such expenditures impinge upon saving, investment would be correspondingly reduced.

However, the additional expenditure on security arrangements would produce second- and third-round effects that impact on consumption and saving, depending on the propensities of the newly employed security force and insurance companies. If the marginal propensity to consume is less than unity, there would be additional saving. However, the additional saving is not likely to make a difference to the overall saving rate.

It must be noted that the security arrangements that individuals or private organisations can make are purely in the nature of prudential measures. They can hardly be sufficient in the event of a terrorist attack. Governments would, therefore, have to come to the rescue of individuals and private organisations, besides taking care of the government's own assets, material and human.

Governments, therefore, would have to spend enormous sums of money for intelligence gathering, training anti-terrorist squads, setting up sound chains of command, and acquiring modern gadgets such as wireless transmitters, and latest weapons.

Governments have also to constantly monitor and have surveillance systems over the areas (e.g., transportation outlets, political rallies, legislative bodies, public offices) vulnerable to terrorism. They may even have to undertake counter-spying on suspected terrorist outfits and take measures to cut off sources of finance for such groups.

Smuggling operations, poppy sales and arms trafficking, for example, are areas where illegal money is generated. As such money is used for terrorist and criminal activities, financial reforms should focus on anti-money laundering strategies.

In cases where cross-border financial transactions are involved, co-operation through institutional mechanisms is a vital requirement among central banks for exchanging information on secure electronic systems and for triggering legal action on those in the money-laundering business.

To deter innocent persons from being used as proxies in such activities, it would be useful to put out information, both in the print and electronic media and on Web sites on the costs and consequences of money-laundering. It would be also worthwhile if internal and external assessments of the anti-money laundering mechanisms are widely disseminated.

Are these perceptions in line with the literature on the economics of terrorism? The earliest models in the literature are the retaliation and prevention models. Punishment and deterrence are the key features of the retaliation model, while the prevention model believes in policing in suspect areas.

Both the models, also referred to in the literature as deterrence system, are expected to eliminate or at least curb terrorism. Deterrence need not succeed, though, as the examples of Ireland and Kashmir show. But almost all societies subjected to terrorism have resorted to it out of political compulsions.

Of the many reasons for the insufficient effectiveness of the deterrence system, the complex one relates to cross-border terrorism. To overcome it, governments are often forced to resort to cooperative strategies rather than the `never-negotiate' strategy. Cooperative strategies could throw up a host of opportunities, including increased people-to-people contacts, and economic cooperation.

Is the deterrence system the only model to fight terrorism? There are some economists who believe that they could dissuade potential terrorists by adopting what they called a `benevolence system', as well as by raising the opportunity cost rather than the material cost to terrorists.

The benevolence system essentially implies decentralisation of the polity and the economy. It would mean less centralised control along with greater and more efficient division of power, establishment of strong democratic institutions and adherence to the rule of law. It would also imply the creation of a market economy where incentives work and where regulations are mainly prudential in character.

The issue of increasing the opportunity cost depends on how well the terrorists perceive the gains they would reap by not engaging in terrorism. Increasing incomes is often cited as a way out but this could aggravate the prevailing economic inequalities. Incentives such as visits to foreign countries, universities and research institutions would provide opportunities to engage with others in civil society and dissuade the participants in such processes from taking to terrorism.

It is difficult to know whether this kind of incentive would actually work. Other incentives like reduced punishment and guarantee of a secure future in the event of the terrorist leaving the organisation with which he is involved are expected to increase the opportunity cost. There is, however, no certainty that the benevolence system will be efficient while the measures for raising the opportunity cost may not be sufficient.

It is possible that the leaders among the terrorist organisations may well adopt counter-strategies. Besides, there could be perverse incentives in that the terrorists receive future awards for assurances to abandon terrorist activities without being punished for the past and present activities, or being certain that the assurances would be implemented.

Emerging economies like ours have no choice but to pursue the overarching objectives of a decentralised polity and economy and cooperation with neighbouring countries and simultaneously adopt a deterrence system, even if this means a higher fiscal burden.

India has to be prepared for the long haul of fiscal management that focuses as much on law and order — in particular, anti-terrorism — as on development and egalitarian objectives.

Meeting large unavoidable expenditures is a challenge that has to be addressed essentially by raising the tax-GDP ratio but, as the ratio cannot improve dramatically in the short run, there is no option but to resort to disinvestment of some public sector enterprises.

(The author is a former Executive Director of the Reserve Bank of India. He can be reached at asurivasudevan@hotmail.com)