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Terror and Economics: Through a Glass Darkly

Author: Benn Steil, Senior Fellow and Director of International Economics
February 1, 2002
Revue des Deux Mondes

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The September 11 terrorist attacks on the United States have been widely linked with economics, both as cause and effect. Most notably, concern has been widespread that the attacks would themselves trigger a deep recession in the US, which would quickly spill over globally. More significantly, however, economics has also been mooted as a cause of the attacks: an extreme reaction to poverty or inequality. Whether or not justified by the facts of September 11, it would certainly appear that the popular perception of an indelible intertwining of economics and politics is as great as it has ever been.

The actual economic impact of September 11 has been clouded by the politics of stimulus spin, with every congressman's long wished-for tax break or cranberry farming subsidy now being proffered as an instant economic anti-toxin for terrorism. Although the US may already have been in recession prior to September 11, it is clear that the downturn has been exacerbated by the events. Yet if there is to be enduring long-term economic damage from the terrorist attacks, it is unlikely to derive directly either from the carnage and displacement in lower Manhattan or the US military response in Afghanistan. Rather, it will derive from the domestic political response itself, both in America and elsewhere in the developed world.

America's wealth-generating capacity ultimately derives from its political and legal institutions which are designed to ensure that individuals and corporate entities can freely transfer goods and provide services, both within and across borders, without risk of ad hoc government interference or expropriation. That risk has clearly risen since September 11.

The most obvious illustration is the threat of both the US and Canadian governments to override Bayer's patent on its anthrax medication, Cipro. Whether justified by the degree of risk to public health from bioterrorism is debatable, but the business lesson is clear: it is no longer merely the likes of Brazil and South Africa that intellectual property holders must be concerned with. If rich country governments can be panicked into pre-emptive patent expropriation by bioterrorism, they may, however unintentionally, discourage precisely the research needed to develop the means of countering it.

The closure of borders and airspace was also an ominous sign in an economy predicated on openness. Whereas the palpable damage to the US auto industry from the partial border closing with Canada, or to the airline industry from the closure of American airspace, may in this case have been temporary, a recurrence of major terrorist activity may come to threaten the solvency of a wide range of integrated industries that depend fundamentally on rapid and reliable transport. Furthermore, with greater government control over banking and securities transactions, it is not inconceivable that a parallel threat could develop in cyberspace, with legitimate time-sensitive financial transactions being made subject to highly costly disruption and legal uncertainty.

In essence, the so-called political risk that has long deterred companies and investors from committing capital to developing countries may come to be a much more salient feature of the economic environment of the developed world, with damaging implications for long-run growth prospects and living standards.

Reconciling the new security requirements of the post-September 11 United States with the rights and freedoms fundamental to an open society is therefore a daunting political task. Even if the implications of terrorism were "only" economic, the ramifications of failing to dismantle international terrorist networks could be tremendous.

It is on this issue of confronting terrorism, however, that European feelings of solidarity with America are tempered by a significant measure of skepticism over its methods. Those opposed to America's military response invariably argue that the US can only effectively combat terrorism by addressing its so-called "root causes." Terrorism, after all, is only an extreme response to some powerful underlying grievance, or set of grievances. Attacking perpetrators and supporters of terrorism without uprooting the sentiments that give rise to it is a temporary fix at best, blind revenge at worst, or so the argument goes.

This proposition appears so eminently compelling on its surface that even staunch supporters of military action frequently feel obliged to pay lip service to it. However, the facts behind America's repeated encounters with al Qaeda terrorism over the past decade make clear that none of the putative injustices visited upon Muslims by America has played even the smallest supporting role as a "root cause." Whether these injustices be murky crimes of omission (notably America's supposed indifference to world poverty and inequality, as mooted by the Vatican Synod and anti-globalization groups) or specific political offenses (notably America's support for Israel, widely alleged by Arab governments) even their complete extirpation would have not the slightest palliative effect.

First, let us consider economics as a "root cause." The September 11th al Qaeda operatives were well educated, well travelled and well heeled - hardly products of deprivation. bin Laden himself is a man of great inherited wealth, who has never expressed even the most remote common cause with global "social justice" advocates. Far more tellingly, consider the source of the bin Laden family's wealth. The family was accorded a monopoly over much of the construction sector in Saudi Arabia - the sort of state-fashioned monopoly that dominates the economic landscape across most major sectors throughout the impoverished Arab Middle East. The tripling of economic growth which would accompany unilateral trade and competition liberalization in these countries would dwarf the contribution to poverty alleviation that even a tenfold increase in US foreign aid would make. In the absence of such liberalization, the hard reality is that the wealth gap between the US and the Arab world is doomed to grow in the coming years, irrespective of US policy. Even if there were an invisible hand tying economics with terrorism, then, that hand is not controlled by the United States.

Second, let us consider the plight of the Palestinians as a "root cause." Even if the US had the means to impose peace between the Palestinians and the Israelis, such a peace would be an affront to the deepest teleological convictions of al Qaeda sympathizers. bin Laden's long-stated cause is the overthrow of the Saudi regime and the eviction of Christian and Jewish infidels from Muslim soil. As for his primary associate, Ayman al-Zawahiri, simply replace "Saudi" with "Egyptian." Fearing the bin Ladens and al-Zawahiris, the Saudi and Egyptian governments have for years stoked the embers of anti-Americanism and anti-Semitism in the press, the mosques, and the schools in a deadly effort to fan flames of domestic discontent towards the alleged malignant design of foreigners. The Palestinian cause is, tragically, little more than a politically convenient fig leaf behind which Arab leaders hide - a fig leaf they would only be obliged to replace were it to be snatched from them by a pax Americana.

In short, it is not merely naive to believe that America has the magical power to transform the Middle East into a community of prosperous multi-ethnic cantons. It is dangerous to believe it, because it misapprehends the source of economic deprivation in the Middle East as well as the motivations of those who masterminded the atrocities of September 11. The United States cannot afford to play Don Quixote in a heroically hopeless mission to strike at the windmill of terrorism's "root causes." Causes - noble and depraved, practical and fanciful - come and go; they morph and flow with the volatile tides of tribalism and fundamentalism. Confronting the means of terror is therefore indispensable to the protection of the individual liberties which are America's most treasured European inheritance, and which are the source of her prosperity and her enduring appeal to generations of immigrants.


Benn Steil is the Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations in New York. He is also the editor of the journal International Finance (Blackwell Publishers). His most recent book is a co-edited volume entitled Technological Innovation and Economic Performance (Princeton University Press).

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