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Photo: Reuters
Photo: Reuters

The economic causes and consequences of terrorism

Is there an economic explanation to terrorism or acts such as suicide bombings apart from the generally offered theological and political ones?

In his first public reaction to the terrorist attack on an army camp in Uri, Narendra Modi called upon the people of Pakistan to introspect why India was exporting software to the world, while their country’s leaders were exporting terrorism. The prime minister was trying to impress upon the Pakistani people that supporting terrorism has been inimical to their economic interests.

A 2013 paper by a young Pakistani economist, Sultan Mehmood, has estimated that the direct cost of post-9/11 terrorism in Pakistan was to the tune of $7 billion. The paper also estimated that had it not been for terrorism, Pakistan’s per capita real gross domestic product (GDP) would have grown by 177% instead of 119% between 1977 and 2008, which translates to a loss of 33% in real national income.

While the question of whether or not Pakistan has lost from encouraging terrorist groups on its own soil is a no-brainer, many economic questions vis-à-vis terrorism are not so simple.

Is there an economic explanation to terrorism or acts such as suicide bombings apart from the generally offered theological and political ones? Why would a person choose to become a terrorist or suicide attacker, when he could have selected any other profession? Are such decisions rooted in rank irrationality or craziness or is there some economic basis to them? Economists and other social scientists have tried to engage with these questions over the past few decades.

It is generally believed that terrorists are from economically backward and educationally poor backgrounds. A growing body of economic research disputes this hypothesis. A National Bureau of Economic Research (NBER) working paper by two economists, Efraim Benmelech of The Kellogg School of Management and Esteban F. Klor of The Hebrew University of Jerusalem, has shown that many foreign fighters for the Islamic State are coming from countries which do not have high levels of poverty and inequality.

A lack of assimilation in Western societies could be driving the radicalization, the paper found. These findings were discussed in a Mint article.

A 2002 NBER working paper by Alan B. Krueger of Princeton University and Jitka Maleckova at the Charles University in Prague also reported similar findings. The paper cited already published research that looked into the backgrounds of terrorists in various parts of the world and found that there were many who came from well-off economic and educated backgrounds.

The authors then used data on 129 deceased Hezbollah militants to compare their socioeconomic status to the average Lebanese population and found that having a living standard or having secondary or higher education raised the chances of participation in the Hezbollah. For example, poverty rates were 28% among Hezbollah militants and 33% for the total population.

The findings were similar for an Israeli militant group called Israeli Jewish Underground, which used to conduct terrorist attacks on Palestinians in the 1970s and early 1980s. Those responsible for these attacks were typically highly educated and well-off. The authors add a qualification to their findings though. While individual economic deprivation might not be a cause for terrorism, even the elite in a poor country might turn to terrorism while seeking to improve the condition of their society, the paper argued.

If it is not poverty or lack of education, is it religious fundamentalism which breeds terrorism?

In the introduction to his book Radical, Religious and Violent: The New Economics of Terrorism (see here), Eli Berman, an economist at the University of California argues that religious fundamentalism and related explanations such as promises of rewards in the afterlife cannot explain terrorism.

Berman cites interviews conducted by Israeli psychologist Ariel Merari, who interviewed captured militants and friends and families of Palestinian suicide attackers. The findings are revealing. Neither were the suicide attackers suffering from ailments such as depression or suicidal tendencies, nor did the terrorists interviewed by him cite religion as the main motivating factor for their acts.

Berman suggests that altruism and an exaggerated sense of importance plays an important role in driving terrorists including suicide attackers. The attackers often believe that their acts would force repressive forces to reverse their policies and hence improve the quality of life of the population whose cause the terrorist group claims to be fighting.

He also argues that whether or not suicide attacks are chosen as a tactic also depends on how “difficult" the target being attacked is. If conventional methods are unlikely to yield results, then it is likely that suicide attacks would be preferred. For example, it would have been impossible to ram an aeroplane into the World Trade Centre without resorting to a suicide attack.

But how does one explain the fact that majority of lethal terrorist organizations have religious roots today? In another paper, co-authored by Berman and Stanford University political scientist David D. Laitin, the concept of club goods in economics has been used to explain the greater lethality of religious terrorist organizations.

Before delving into this discussion further, it might be useful to understand what economists understand by club goods.

Economic theory differentiates between two types of goods: public goods and private goods. Unlike private goods, public goods are non-rivalrous and non-excludable in nature. Non-rivalrous means that consumption by one person would not reduce the amount which is available for consumption to another person, and non-excludability means that it is not possible to exclude others from using this good.

A lamp post in the middle of a park would depict both these characteristics, whereas an ice-cream cone or car would display neither. A club good is a type of good which is non-rivalrous but excludable either fully or partly. A membership-based library is an example of a club good.

In a society where states or markets are unable to provide basic services, people could form a club among themselves to provide a supply of such club goods. Community-effort based hospitals, religious teaching institutions and even informal security arrangements can be such examples.

Many terrorist outfits such as Hamas or the Taliban offer such services to their recruits or to localities from which potential recruits are drawn, the researchers point out.

The providers of club goods, however, are confronted with a conundrum: how to effectively exclude those who do not help in the production of club goods (or the problem of “free-riding" in the language of economics)?

In the case of extremist or terrorist outfits, the problem is one of excluding beneficiaries (of social services) who do not subscribe to the extremist ideology, or make sacrifices for the cause that the outfit leaders believe in. To address this issue, such outfits provide club goods conditional on sacrifices of time by its members.

“It (the conception of extremist outfits as providers of club goods) allows us to rationalize the common Taliban practice of years of attendance in religious seminaries which offer little or no training in marketable skills," the researchers write. “While indulging in the study of holy texts might not be surprising as a leisure activity for relatively wealthy individuals, it is a puzzling choice for impoverished Afghan refugees in Pakistan. Yet as a sacrifice of time which allows access to a desirable club, that behaviour may be quite sensible. The puzzling sacrifice among Hamas is of a different nature. Members show a surprising willingness to risk arrest by organizing and conducting low level violent activity. Since arrest often implies protracted jail terms, this activity can also be understood as a sacrifice of time."

The authors define militia activity (terrorism) as coordinated capture of economic or political rents using violence. The activity involves risks of failure, which increase with chances of defection. A successful terrorist organization would be one that can prevent its members from defecting to the enemy.

It is here, Berman and Laitin argue, that religious sects have an advantage in undertaking terrorism over other groups since they already have a pool of members who have shown their loyalty and hence carry a lower risk of defection. They cite historical evidence to show that terrorist groups such as the Taliban, Hamas and Hezbollah had their roots in benign organizations that provided social-religious services through a club goods approach.

Such loyalties would come under strain if the rewards of defection increase significantly. The prospect of usurping a consignment of drugs headed from Pakistan to Iran via Afghanistan would not be tempting enough for a Taliban foot soldier given the risks associated with defection, but a million-dollar CIA reward with an offer of witness protection in the US could induce him to defect.

Is there a takeaway from these studies in terms of devising an effective counterterrorism strategy? The conclusion of a paper by David Gold, an economic historian at New School University is worth quoting here:

“There are some economic roots of terrorism, but these have more to do with the incentives and constraints that individuals and organizations face than with any specific set of easily quantifiable factors that push people toward involvement in terrorist organizations.

“This suggests that policy responses to terrorism need to be multi-faceted and flexible. Security policies, for example, need to be more cost effective, in order to both achieve results and to limit the negative economic consequences of devoting excessive resources to security purposes.

“Similarly, aid policies need to concentrate on achievable objectives, both to obtain positive results and to provide a more representative and optimistic outlook on the future. Policies need to be targeted at filling in the voids left by weak states and shifting incentive structures within societies away from the use of violence. But such policies can never be complete, just as policies to fight crime can never reduce crime to zero.

“There are too many potential sources of violence to expect policy to deal with them all, and incentive-based policies can never force everyone to disregard the ideological or psychological tendencies that lead them to resort to violence."

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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