Business Cost of Terror– It’s Elephant in Room for Many Global Companies: Unpredictable, Shifting, Disruptive…

Business, economics, terrorism– are inextricably linked and represents a significant threat to global financial and social stability, growth… According to Elvis Picardo; markets detest uncertainty, which is why the knee-jerk reaction of markets to a terrorist attack is initially invariably downward, but markets prove to be enormously resilient to these attacks... such that after an initial negative market reaction, then focus turns to businesses’ economic fundamentals– as conviction grows that these attacks are usually the work of radicalized elements acting in isolation…

But no matter where a major terrorist attack occurs, in the world, the feelings it elicits are universal, i.e.; revulsion, shock, dread, uncertainty… Uncertainty reigns supreme in the immediate aftermath of a terrorist attack, with regard to things, such as: Who were the perpetrators? How did they go about planning a major attack undetected? Was the terror act an isolated instance or first of a series?

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The horrific multiple attacks in Paris on November 13, 2015, by suspected Islamist radicals that claimed an estimated 132 lives– making it the worst terrorist attack in Europe in a decade– have raised some similar, uncomfortable questions, e.g.; the coordinated attacks bear some resemblance to the terror attacks inflicted on Mumbai, India, in November 2008, making some counter-terrorism experts wonder if this pattern of deadly attacks unleashed on vulnerable public places is the new template for terrorist activity in future…

According to Jan W. Rivkin; for business, terrorism is risk-management issue and to address it, business and government must act both strategic and tactical… protective tactics can be hard to justify on an ROI basis, but not investing is short-sighted. Risk management tactics include; building resilience into supply chains, infrastructures, increasing the speed and sharing of information, implementing security measures, leveraging diversity-focused and culturally focused intelligence…

In the article How can Business ‘Cope’ with Terrorism? by Bruno S. Frey writes: The term ‘coping with’, rather than ‘fighting’, terrorism has been chosen on purpose. In line with all serious scholars, I start with the position that terrorism always has existed and always will exist… It’s impossible to eradicate terrorism completely, not even if the most stringent deterrence policies are employed. Business leaders should not fall prey to the illusion that terrorism is a transitory phenomenon that will disappear in due course. Rather, they need to muster ingenuity and resources and set out to deal with terrorism as a part of the many other challenges they face… Terrorists can be considered rational actors in the sense that they want to reach their goals as efficiently as possible…

The specific goals of a terrorist group may appear outlandish and difficult to appreciate by outside observers but terrorists nevertheless, will endeavor to reach goals as efficiently as they can… Empirical research has convincingly established that terrorists indeed opt for those kinds of actions from which they expect the highest ‘benefit/cost’ ratio… If for instance, the police make some kind of terrorist act more difficult to accomplish, terrorists quickly shift to a different attack mode… Hence, it’s necessary to consider ‘benefit/cost’ relationships of various strategies from the point of view of the terrorists… Businesses are used as targets by terrorists for many different reasons:

  • Some firms are highly visible targets; an attack on them is certain to attract the attention of– media, wide sections of population, government… this gives the terrorists the publicity they seek…
  • Many firms are soft targets in the sense that it’s impossible to prevent potential terrorists from coming near or even entering the premises…
  • When firms are attacked, the economic process is disrupted. The firms directly or indirectly affected may be induced to relocate to other areas or countries. And, some multinational firms are less likely to undertake direct foreign investments in effected area…
  • Some companies may be part of the control and authority on which the power of the government rests, which is opposed by the terrorists… Attacking such firms reduces the government’s options to pursue its own goals…

The stronger the impact terrorists expect their acts to have on a business, the more likely it is that they will attack the firm. Firms represent attractive targets as they are situated almost anywhere and therefore are difficult to protect. In contrast, government organizations are often concentrated in certain parts of cities, which may be cordoned off and protected through security measures. Moreover, private firms have to provide and finance their own protection. They have to hire commercial security firms and have to install expensive equipment raising their costs of production…

Business must devise strategies, which make acts against them less attractive to terrorists because their ‘benefit/cost’ ratio is low… An important goals for terrorists are to receive as much publicity as possible and to induce business, governments… to yield to their demands…

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Costs of Terrorism on Business: According to International Monetary Fund (IMF) by Barry Johnston and Oana Nedelescu; acts of terrorism inflict direct and indirect economic costs: The direct economic costs are shorter-term and include; the destruction of life and property, responses from emergency services providers, restoration of systems and infrastructure, provision of temporary living assistance… Whereas, indirect costs of terrorism can undermine; consumer confidence, markets viability… and affect the very survive of some firms, as well as, impact the economy in general…

Terrorism can also have a long-term cost by reducing productivity because of increased security measures, higher insurance premiums, increased costs of financial and counter-terrorism regulations… To appreciate just one aspect of these incalculable costs consider; the billions of hours expended by millions of passengers in airport security lines over the years, and costs for rigorous security checks… However, the ‘equity markets’ reaction to terror attacks is somewhat passive, e.g.; although the economic cost of a major act of terrorism may be significant– after an initial drop in ‘market indices’, the resilience of business, consumers, investors… stabilizes the markets and it quickly rebounds to past levels…

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In the article Terrorism Has Limited Impact on Markets by Buttonwood writes: For some people even to discuss the impact on business or the economy let alone financial markets of a tragedy, such as; Paris attacks is poor taste… but, one of the aims of terrorists is to cause economic, financial damage… such as seen in the attacks on– Wall Street (9/11)Tunisia, Turkey, Beirut, Paris…

But despite these attacks and other dire predictions, financial markets have been remarkably sanguine in face of these tragedies… e.g.; the events of 9/11– an atrocity on a vastly greater scale than anything that preceded it– reduced GDP growth in U.S. that year by a mere 1/2 percentage point; the stock market (which was closed for a few days) recovered all its losses within a month. In July 2005, when suicide bombers attacked the London transport network, UK market recovered within days and British GDP rose 0.8% that quarter…

Hence, terrorist attacks may cause a short-term disruption to business, economy, e.g.; people may decide not to visit the ‘shopping mall’ for a few days. But this generally means they postpone their consumption rather than abandon it; economic activity is simply shifted from one period to the next… According to Citigroup’s economists; in the case of France, the risks to the 2016 France’s 1.4% real GDP forecast are likely skewed to the downside, but it will be relatively minor and short-lived…

On the negative side, household confidence will likely be affected– at least temporarily– and a number of shopping days will be lost. On the positive side from a GDP standpoint, it expects extra spending on– policing, private security and military intervention in coming months and quarters…

In some extreme cases, terrorism can be compared to a pandemic where its campaigns becomes– endemic rather than sporadic, e.g.; in Northern Ireland troubles lasted for 30 years; the result was a decline in private sector employment (requiring massive public spending per head to offset it) and a sharp fall in tourism. If ISIS lives up to its threats of repeated attacks, that might play into the impression that the EU is undermined by social and ethnic divisions; and that would discourage both foreign investment, tourism… and it would seriously impact many businesses and overall economy…

However, the modest reaction of today’s financial markets suggest that investors are reasonably confident that these bad effects will not occur– and that Paris 2015 attacks are just another in a list of brutal tragedies, such as; Madrid 2004, London 2005, Turkey 2015, Beirut 2015… Horrible, but thankfully still rare...

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However, the terrorist treat is significant; tens of thousands of terrorists populate most of the world’s countries: They appear to have the ability to operate independently of– Al Qaeda, ISIS… They have leadership in hundreds or perhaps thousands of ‘cells’ with their own objectives, resources, capabilities, and special modes of operation… They are adept at marshalling personnel and resources from a variety of countries to achieve attacks. And, most importantly, they are staying a step ahead of law enforcement and intelligence agencies…

Hence, a coordinated, purposeful, definitive approach to creating a more secure work-place environment must be achieved, if businesses are to stay a step ahead of the terrorists… Business must embrace the reality and provide funding to achieve meaningful security to protect their– physical operations, employees, customers… hence, it’s not only necessary but smart investment. Although ‘preventive’ actions may not be plausible, but  a strategy for ‘coping’ with terrorism is prudent and sensible…