The Economic Effects of Terrorism

How terrorism affects economies through lost lives, fear, tourism, investment and security spending, and what research shows about its long-run costs.

Terrorism aims to spread fear, and fear has economic consequences. Economists study how attacks affect spending, investment, tourism and growth.

Channels of damage

Terrorism can harm economies in several ways:

Direct losses: lives, injuries and destroyed property.
Tourism: visitors avoid places seen as dangerous, hurting hotels, restaurants and local jobs.
Investment: businesses and foreign investors may hold back where risks seem high.
Security spending: governments and businesses spend more on protection, which uses resources that could go elsewhere.
Trade and travel costs: extra security checks at borders and airports slow the movement of people and goods.

The Basque Country

A famous study by Alberto Abadie and Javier Gardeazabal, published in 2003, examined the Basque Country in Spain, where the separatist group ETA carried out attacks for decades. They built a “synthetic” Basque Country from a combination of other Spanish regions that had matched its economic path before terrorism began. They estimated that after terrorism started, Basque GDP per person fell about 10 percent below this comparison. This method, called synthetic control, has since become widely used for studying policies and events.

After 9/11

The attacks on the United States on 11 September 2001 caused enormous direct losses and a sharp temporary fall in air travel and tourism. The larger economic costs came from the security measures and wars that followed. Yet studies suggest the broader U.S. economy recovered relatively quickly from the direct shock.

Tourism after an attack

When a popular beach resort suffers a terrorist attack, bookings can fall sharply for months. Hotels cut staff, restaurants lose customers, and local workers lose income. Research on countries dependent on tourism has found that such effects can be significant, though tourists tend to return over time if attacks are not repeated.

Resilience

Large, diversified economies usually absorb isolated attacks with limited long-run damage. Sustained campaigns of violence, as in the Basque Country, and attacks on smaller economies that rely heavily on tourism tend to cause more lasting harm.

Thinking the economic costs are only the damage from attacks

The direct damage from an attack is often small compared with the wider costs: fear-driven changes in behaviour, lost tourism and investment, and permanent increases in security spending. These indirect effects are what make terrorism economically costly.

Key takeaways

Terrorism harms economies through lost lives, tourism, investment and security spending.
Abadie and Gardeazabal estimated Basque GDP per person fell about 10 percent due to terrorism.
Their synthetic control method is now widely used in economics.
Large, diversified economies are more resilient than small, tourism-dependent ones.