Since the Islamic State declared a Khilafah on 29 June 2014, it carried out, worldwide, 6 attacks or series of attacks in 2014, which killed 2 and wounded 12 people, 23 in 2015, which killed 1020 and wounded more than 2171, 36 in 2016, which killed more than 1455 and wounded more than 3505 and so far 3 in 2017, which killed more than 109 and wounded more than 169 people, assuming all attacks are known and referenced as such (Wikipedia “List of terrorist incidents linked to ISIL“). As a whole, we thus faced 68 attacks, during which more than 2586 people lost their lives and more than 5857 were injured.
Prospects for the near future look no less grim as reminded by Europol as far as Europe is concerned in its report Changes in Modus Operandi of IS revisited (2 Dec 2016 – main points here). Indeed, a weakening if the Islamic State in Syria and Iraq is most likely to imply a heightening of terror attacks elsewhere (Europol, Ibid.), as we warned here repeatedly considering the global character of the so-called Khilafah of the Islamic State (see Helene Lavoix “At War against the Islamic State – A Global Theatre of War“, 23 Nov 2015 and following articles, The Red (Team) Analysis Society). Furthermore, Europol also points out that the weakening of the Islamic State may see a strengthening of its competitors such as Al Qaeda, which are also likely to carry out terror attacks (Changes in Modus Operandi…, Ibid.). This forward looking assessment would be reinforced by one of the latest declaration of Al-Qaeda’s leader al-Zawahiri stressing “the call to our nation and the mujahedeen to raise the jihad against the current idol, and its allies as their priority as long as they can make it” (Sheikh Ayman Al-Zawahiri, “Brief messages to a victorious nation; Part 5: Letter to our nation. For Allah we will not kneel”, 5 Jan 2017 – message and translation shared by Expect Consulting, specialist on jihadist groups, notably in Africa, in the Red (Team) Analysis partner network).
Intuitively, we would expect such numerous attacks, notably by a single (if distributed over territory) player trying to achieve a single aim, a Khilafah, to have a deep and wide impact not only on states and societies as a whole, but also on one of their actors, businesses.
This impact would stem from the specific character of terror, which aims at causing not only bodily harm while targeting civilians or non-combatants, as suggested by the 2004 description of terrorism of the High-Level Panel on Threats, Challenges and Change of the Secretary-General of the United Nations (U.N., A more Secure World, par. 164, p.52), but also to disrupt the system perceived as enemy (see, for example, for the plethora of official definitions, “Definition of Terrorism by Country in OECD Countries“).
Yet, terrorist attacks only made it to the top five risks of the “Global Risks Perception Survey” of the Global Risk Report 2017 (World Economic Forum) in Autumn 2016*, and only for large-scale attacks (see also report pdf, p.68). Similarly, the terrorist threat is mentioned neither in the May 2017 survey “Geostrategic risks on the rise“ (Drew Erdmann; Ezra Greenberg; and Ryan Harper, McKinsey & Company, 2016) nor in the latest “McKinsey global survey” (December 2016) regarding potential risks to businesses, even though we may surmise it is implicitly part of “geopolitical risks”.
Does that mean that businesses do not care about terrorist attacks, beyond, of course, humanitarian concern? Should the corporate sector, whatever the size of the businesses involved, pay more attention to these geopolitical threats or, on the contrary, neglect them as not likely enough or not impactful enough to deserve consideration? Should only some sectors feel concerned, such as obviously tourism? But in that case, which are these sectors and what could be the depth and scope of impacts? These are the questions that this article and the following ones intend to address.
We shall start with seeking to identify the impacts of terrorist attacks, because being able to estimate the full range of potential impacts for uncertainties is a fundamental necessary condition if we are to do a useful thus actionable strategic foresight and warning. Starting with older studies on the economic impact of 9/11, we shall use them to single out potential types of impacts, while beginning to bring in elements of comparison with the current string of attacks. Indeed, 9/11, considering the very characteristics of the attack and the shock it created, may not easily compare with the current Islamic State’s attacks, which are globally distributed but with some countries being more hit than others (when furthermore each country has its own specificities and conditions in terms of stability), which occur over a relatively long time-span and display wide-ranging types of modus operandi, from the murder by stabbing of policemen to killing people in festive gathering by ploughing the crowd with lorries through mass shootings or more classical bombings.
We shall notably point out that the use of confidence indices may not be adapted to the current attacks and to those which are likely to happen in the near future. We shall also outline that states’ policies and answers, thus feedbacks, must fully be integrated in any such impact assessment, thus demanding an adapted approach. This initial assessment will give us a general framework that we shall refine and further explore with the next articles.
Immediate, short-term and direct impacts
The OECD in its 2002 study (Patrick Lenain, Marcos Bonturi and Vincent Koen, “The Economic Consequences Of Terrorism“, Economics Department Working Papers No. 334) adopted a time-bound framework, distinguishing between immediate and short-term consequences on the one hand, and medium-term impacts on the other. A similar framework was used by a March 2005 IMF Working Paper (R. Barry Johnston and Oana M. Nedelescu, “The Impact of Terrorism on Financial Markets“), unsurprisingly as it grounded its work in the 2002 OECD study. There, the short-term effects are seen as direct economic impacts and medium-term effects as indirect.
Immediate impacts include the destruction of life and property, responses to the emergency, restoration of the systems and the infrastructure affected, and the provision of temporary living assistance (OECD: 6; IMF: 3-4). They were evaluated for 9/11 in 2002 to USD 27.2 billion (Ibid.). This figure is lower than what was assessed by the more recent New York Times assessment (Shan Carter and Amanda Cox, “One 9/11 Tally: $3.3 Trillion“, September 8, 2011), which, using a survey of multiple damage estimates, gives a figure of USD 55 billion for the immediate toll and physical damage (which does not appear to include restoration of systems).
This shows first that impacts evaluation changes over time and may increase. Thus, for the current series of attacks we shall probably need to wait before a full evaluation is available. Furthermore, the fact that we are facing an ongoing series of attacks multiplies the work needed to obtain an estimate.
The OECD study then identifies that short-term general impacts are loss of confidence, potential instability of financial market and “self-fulfilling depression”. It points out that the shock was truly short-term, and emphasises that the major negative impacts were, in a large part, avoided thanks to proper liquidity management integrating “financial support to any sector or industry … [through] short-term loans or guarantees”, while only some sectors were truly impacted. We see here emerging a crucial point if we are to properly evaluate impacts of terrorist attacks: we must also consider state policy answers to these attacks, as we shall detail further below.
If we take confidence indices as a first element of measure for impacts, and apply them to the current string of attacks, we would expect to see confidence dipping over the period (mid 2014 until today) or right after each attack. However, none of the most commonly used statistics as provided by the OECD (consumer and business confidence indices, see graphs below), shows in an obvious way such a reaction. As far as consumer indices are concerned, Germany, and Turkey appear as displaying the most obvious downward trends, while Belgium, although appearing to have registered the attacks that hit it on 22 March 2016 (see Wikipedia for a summary), shows for the period following the attack a dip which is less strong than what is displayed for the end of 2016.
If we look at the Business Confidence Index for the same countries, the attacks appear to have been even less registered.
Surprisingly, France, which has been one of the worst hit countries by the attacks, shows no major dip in confidence.
When shown on the longer term, for all countries, the periods following terrorist attacks appear to register less loss of confidence than other events, notably the financial crisis.
These curves could thus confirm a lack of corporate interest as well as a disinterest by citizens. We may hypothesise, cautiously at this stage, that a mix of absence of awareness of the threat, including as a result of psyops operations by governments of hit countries, added to the low probability to be hit by an attack contributed to this result. It could also be that the very short-term impact on confidence pointed out by the OECD study is sufficient, furthermore considering the small size of each Islamic State terrorist attack compared with 9/11, to imply that the current string of attacks has no effect on confidence.
However, we should also consider that such indices as confidence may not be suited to measure the real impact of the types of terrorist attacks we are currently facing.
Indeed, assuming that the statistics communicated by each country are trustworthy, it is, first, particularly difficult to attribute a single cause to an indicator meant to indicate confidence in general. For example, Turkey knows so many upheavals, that imputing a loss of confidence solely to terrorist attacks would be most probably wrong, even though the multiplication of these attacks participates in the evolution of the Turkish situation. A single statistical measure cannot follow such complex dynamics.
Furthermore, on top of the very short-term effect of attacks on confidence pointed out above, as far as 9/11 was concerned, the attack was much larger than each of the attacks we now face, and can be seen as the first in a long series continuing nowadays, hence the shock and thus the fact it registered on confidence index. As far as the current attacks are concerned, the specific character of the distribution of the attacks, may stop any confidence index to register them. We may however wonder why there is not, to the least, a slow degradation of the confidence overtime.
Let us thus compare the confidence measures to a survey investigating relations to the European Union carried out by RedC and Win Gallop International (25 Nov – 7 Dec 2016), which also asked the question: “In general do you think that things in your country are heading in the right direction or the wrong direction?” To this, 78% of Belgium people, 82% of French people and 62% of German people answered that they thought their country heads in the wrong direction.
This does not sit very well with the confidence expected from the confidence index, unless we should also consider some fatalism at work, including a measure of desperation and feeling of powerlessness. Thus, in our case, the terrorist attacks would participate in an overall negative outlook, which is not expressed through purchasing plans for consumers and “assessment of production, orders and stocks” for businesses (the confidence indices), but could be expressed during elections, as we showed in the case of the Brexit for the U.K. (Helene Lavoix, “Lessons from and for the Brexit – Geopolitics, Uncertainties, and Business (2)“, 7 Nov 2016, The Red (Team) Analysis Society). This implies that the impact of terrorist attacks should be seen from a dynamic point of view, through complex and cascading effects, and not through a single aggregate index. For the corporate sector in general, it is these nth order cascading impacts that should be taken into account as highly likely to largely upset the whole framework within which they operate.
The OECD report then points out that a direct negative impact hit airlines and aircraft manufacturers, the insurance sector, tourism-related industries, the upscale retail sector and U.S. postal service, whilst businesses in security and information technology were positively impacted. The negative impacts are constituted by business interruption and business reduction, evaluated by The New York Times for 9/11 to USD 123 billion, notably for airlines, to which should be added other costs such as interests to finance all activities related to the impacts of the attacks (estimated for 9/11 at $185 billion), and social costs (between $300 billion and $400 billion, including immediate damage) (NYT, Ibid, “What’s not shown in this tally?“).
This outlines the importance of the target and of modus operandi of the attack(s) to identify those that will see their operations impacted. We may also point out that little foresight is used by those reacting to terrorist attacks and contributing to business reduction (for example avoidance of some places or activities). Indeed, the highly likely possibility that future attacks may take various forms – as terrorists also follow a learning curve – obviously is not considered in the reaction. This is all the more important in the Islamic State attacks’ case, as we have here a series of diverse attacks and not a single large one. We shall look more in detail to these specific impacts for the current Islamic State – or more generally jihadist attacks – in the next articles.
Medium term and indirect impacts
According to the OECD report, on the medium term, first, insurance premiums were raised while coverage was lowered.
Second, as transportation systems were disrupted and border controls were tightened, the “just-in-time supply chain management system” was threatened (Ibid. pp.23-27). As pointed out by the OECD, a trade-off between security on the one hand, costs on international trade on the other thus appears. Interestingly, the authors stress that terrorism through this cost estimated to 1 to 3 percent ad valorem re-introduces tariffs that globalisation and liberalism strove to abolish (Ibid. p. 25). Seen from the point of view of 2017 and not anymore 2002, after the Arab Spring, which is also a child of globalisation, among other causes (for a review, Ella Moore, “Was the Arab Spring a Regional Response to Globalisation?” July 2012, e-IR students), with the U.S. of President Trump and the post-Brexit U.K. now actively looking for new models of socio-economico-political developments beyond pure liberalism, it might be worth reflecting if thinking in terms of a trade-off between security and international trade is still possible or relevant. As a result, supply-chain management might change or need to be reassessed.
Finally, the OECD underlined that public and “private sector spending [was] likely to be on the rise … to improve the security of premises, employees and information”, with still debated economic consequences, as far as military spending is concerned. The New York Times (Ibid, What’s not shown in this tally?) estimates this cost for 9/11 at “$200 billion in increased state, local and private security spending”, which may also constitute a profit for security companies.
At business level, this last impact will depend first upon the sector of activity. Second it will depend upon the answers designed and implemented by the state hit by terrorist attacks, to which we shall now turn.
Integrating state answers and related impacts
We progressively saw emerging that, in the case of terrorist attacks, it was impossible to neglect answers given at state level as they were having a large impact. This is confirmed in the case of 9/11 by the estimates given by the New York Times (Ibid.): the overall cost of the 9/11 attacks to the United States ̋for all actors did not only include, as we saw, USD 55 billion for toll and physical damage and USD 123 billion for economic impact (business interruption and business reduction, notably airlines), but also USD 589 billion for homeland security, USD 1649 billion for war, and USD 867 billion for future war and veterans’ care, for an overall cost of USD 3,3 trillion. Hence, the cost of answers is far higher than the rest.
The impacts related to answers are numerous and far-ranging. The OECD report (Ibid: 13-16) pointed out the importance of the management of liquidity in facing the most immediate impacts of terrorist attacks. Further, we had the implementation of border controls impacting the supply chain management, as seen.
We must also consider all the anti-terrorism and counter-terrorism legislations (e.g. for a worldwide list Wikipedia “Anti-terrorism legislation” ) and the compliance measures they entail, which deeply impact business activities, notably in the financial sector. Anti-terrorist financing obligations will then impact all companies and citizens through the regulations banks and financial institutions must follow. Each successful attack is highly likely to prompt legislators to review laws and regulations and possibly to change them, with new consequences added to previous obligations.
Furthermore, and in an even more complex way, if we have, as the New York Times did, to look at supplementary public spending generated by the answer to attacks, and from there deduce an overall cost, which is then born by tax-payers, we cannot limit ourselves to this. For example as far as military spending is concerned, the overall impact will also depend upon the capability of the state – where business operations are based and taxes paid – to ripe dividends from the novel insecurity, not only in showcasing thus selling more arms, which may lower the overall cost of security spending (and even allow for surpluses), but also in acquiring or losing international influence. This may be considered as being the case in terms or arms sales for Russia and its Syrian campaign (e.g. Mansur Mirovalev, “How Russia’s military campaign in Syria is helping Moscow market its weapons“, Los Angeles Times, 25 Nov 2016), while a rising Russian influence in the Middle East is debated (e.g. Joshua Landis, interviewed by John Judis, “America’s Failure — and Russia and Iran’s Success — in Syria’s Cataclysmic Civil War“, 12 January 2017, Syria Comment; Anna Borshchevskaya and Philip Gordon, “Putin’s Middle East Policy: Causes and Consequences“, March 23, 2016, The Washington Institute; Nikolay Kozhanov, “Arms Exports Add to Russia’s Tools of Influence in Middle East“, 20 July 2016, Chatham House; Walter Russel Mead, “Russia Re-Emerges as a Great Power in the Middle East“, 12 Sept 2016, The American Interest).
As another example, the ability of the host polity to let emerge through its policies a new and adapted model of socio-political organisation able to win against the aggressor carrying out the terrorist attacks will also have important consequences on impacts. Indeed, societies that will be able to reorganise themselves, from systems of values and beliefs to political authorities through economic interactions and adequate regulations as seen previously, to win against the enemy carrying out the terrorist attacks, will be stronger, more influent and wealthier and those actors inhabiting them will benefit from these favourable conditions.
To be able to identify precisely and then estimate these multiple impacts, we need to adopt a complex framework, which allows us to address feedbacks and cascading effects. We must be able to include the various impacts identified for previous attacks, yet not become dependent upon frameworks that may have been adapted to these attacks but are unsuited to what we face now and are highly likely to face in the future. Considering the needs, the approach to the evaluation of impacts will most probably be best done through mapping the network of impacts, which will allow us to look at first, second, third and nth order effects and at feedbacks in a multi-disciplinary way, as we practice and recommend (e.g. “Assessing Future Security Threats” series; online course “From Process to Creating your Analytical Model for Strategic Foresight and Warning, Early Warning, Risk Management and Scenario-building“).
Considering the multiple impacts we have started identifying, it seems obvious that businesses indeed should feel concerned by terrorist attacks. Building upon these initial findings and identification of impacts, with forthcoming articles, we shall turn to more specific cases such as the tourist and transportation industries and wonder if and how strategic foresight and warning, anticipation and risk management may practically help actors and notably businesses in addressing current and future terrorist threats.
*conducted between early September and mid-October 2016 (GRR 2017, p.65)
About the author: Dr Helene Lavoix, PhD Lond (International Relations), is the Director of The Red (Team) Analysis Society. She is specialised in strategic foresight and warning for national and international security issues.
Featured image: Before the start of the G20 summit. A minute of silence to honour the memory of the victims of the terrorist attacks in Paris. 15 November 2015 – Russian Presidential Press and Information Office – Kremlin.ru [CC BY 4.0], via Wikimedia Commons.