Terrorism Could Cost East Asia 3% in Growth over 5 Years: Study

(SINGAPORE) Failure to combat terrorism will have the greatest impact on the developing economies of Asean, East Asia and China - with ongoing terror threats lopping up to 6 per cent off their combined economic growth after 10 years, according to a new Australian study.

Aside from the short-term economic impact of terrorist attacks, a persistent threat of terrorism has significant medium to long-term impact on the world economy, according to the study by Australia's Department of Foreign Affairs and Trade.

The report, Combating Terrorism in the Transport Sector - Economic Costs and Benefits, suggests that terrorism causes economic 'shocks' resulting in lower output for periods of up to 10 years or more.

The shocks are a combination of permanent productivity decline as resources are diverted to security needs, along with a rise in perceived equity risk causing investors to shift to more secure investments, the study noted.

It concluded that developing nations would suffer more significant declines in economic growth than their developed counterparts because of their heavier dependence on exports and foreign direct investment.

For the combined China, Asean-4 (Indonesia, Malaysia, Philippines and Thailand), and other East Asian economies (Hong Kong, South Korea, Taiwan and Singapore), economic activity would contract by around 3 per cent, or US$95 billion (in 2002 dollars) after five years, according to modelling simulation.

This compares with US economic activity which would be about 2 per cent, or US$220 billion, lower than what would otherwise be the case. For Japan, the drop is estimated at 2.75 per cent, or US$100 billion.

After 10 years, the impact will be more severe, with China's and the Asean-4's gross domestic product predicted to fall by close to 6 per cent. The other East Asian economies would see GDP declines of about 5 per cent.

The report also highlighted actual incidents including the Bali bombing which reduced Indonesia's GDP by up to 0.56 per cent and the Spanish Basque region which has seen a 10 per cent decline in the region's per capita GDP as a result of ongoing terrorism.

The International Monetary Fund (IMF) has estimated that the loss of US output from terrorism related costs could be as high as 0.75 per cent of GDP, or US$75 billion per year.

The Sept 11 terrorist attacks in the US are also estimated to have reduced stock market wealth by US$1.7 trillion while another study over the period 1975-1991 showed that heightened terrorism reduced average annual foreign direct investment flows to Spain by 13.5 per cent and to Greece by 11.9 per cent.

In the Australian study, investment in the Asean-4 falls after a five-year period by over 3 per cent of GDP, or US$25 billion. For China, it is 3 per cent or US$43 billion, and for the other East Asian economies, it is 2.75 per cent or US$34 billion.