Draft of June 15, 2005

Economic Freedom and the War on Terrorism

by

Herbert Grubel, Professor of Economics (Emeritus), Simon Fraser University

Senior Fellow, The Fraser Institute

Note: I thank Fred McMahon, Amela Karabegovic and James Gwartney for helpful comments on an earlier draft of this paper.

The US fight against terrorism has been going on for more than three years and continues to gather momentum. There is no doubt about the merit of its objective. The protection of the security of the citizens of the United States and other countries from terrorist attacks brings significant welfare benefits. However, as is the case with all policies that bring benefits, there are also costs and all such policies need to be examined periodically to see whether the expected benefits are greater than their costs.

In practice, the analysis of benefits and costs of the war on terrorism is very difficult, mainly because the value of the benefits cannot be quantified. And while many of the costs are known in terms of dollars – at least in principle - there are also some important unquantifiable costs, which arise from the loss of economic freedom. This loss leads to the direct reduction in welfare and to the indirect reduction in income caused by its negative effect on incentives and economic efficiency.

The paper first considers existing evidence on the magnitude of terrorism, with special focus on events in the United States. It then presents some facts on the quantifiable costs of the fight on terrorism before turning to the loss of economic freedom and the implications it has.

The Magnitude of Terrorist Activities

“The term “terrorism” means pre-meditated, politically motivated violence perpetrated against noncombatant targets by subnational groups or clandestine agents, usually intended to influence an audience. The term “international terrorism” means terrorism involving citizens or the territory of more than one country.”

This definition of terrorism is used by the US State Department as the basis of its compilation of statistics on global acts of terrorism and organizations responsible for them.1

Without discussing the more than 100 other definitions used by scholars and diplomats2, let me go directly to some data on international terrorism that

1 See Krueger and Maleckova (2003)2 The biggest problem of definition arises from the need to distinguish between “freedom fighters” and “terrorists”. This is an issue facing the definition used by the United Nations.

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readers may find useful in thinking about the issue. These data are not widely known but can be found readily on the State Department website.3

Figure 1 (all figures from the State Department website are placed at the end of this paper) shows the number of total international terrorist attacks from 1982 to 2003, the latest year for which the data are available.4 The most outstanding feature of these statistics is their clear downward trend since the middle 1980s, even though it was interrupted by what seems like a short-term (3-year) increase in 1999-2001.

Figure 2 shows the regional distribution of terrorist acts over the period 1998 – 2003. During these years there were only 6 terrorist events in North America. This number is tiny relative to the number of attacks that took place in other regions, especially in Latin America and Asia, though it should be noted that some of these attacks in other regions involved US government, military and commercial assets.

The data in the two tables show that terrorism is not a particularly serious problem in the United States in relation to the experience of other countries. While even such few attacks warrant policies to prevent them, the question arises why terrorist threats have resulted in such a massive counter-effort in the United States.

The answer to this question if found in Figure 3, which shows the regional distribution of total casualties from terrorist attacks during the years 1998-2003. As can be seen, the number of lives lost in the attacks of September 11, 2001 stand out dramatically at 4,465. This number was exceeded only in Africa in 1998, when it was 5,379.

The figure also shows that there were many casualties in 2003 in Asia, the Middle East and, as a relatively new development, in Western Europe. These latest figures suggest that while America has been spared in recent years, international terrorism is spreading and it may be only a matter of time before terror attacks will reappear in the United States and may be particularly serious if weapons of mass destruction are involved.

3 http://www.state.gov/s/ct/rls/pgtrpt/2003/31759.htm

4 The 2005 Report does not update the figures shown here for the year 2004. Previous annual Reports had always presented the data for the preceding year..

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The Causes of Terrorism

While measures designed to prevent the movement and financing of terrorists will make attacks less likely in the short and intermediate run, the ultimate protection of the United States and the world from terrorism in the long run can be achieved only if its root-causes are understood and eliminated.

Many politicians and intellectuals have voiced their views on these causes. Some have blamed poverty and the lack of education in the countries where terrorists are recruited, trained and sent on missions. This explanation of the causes of terrorism is advanced most vigorously by the political left in all Western countries, which loves to blame free markets and capitalism for all of the world’s evils.

The empirical evidence does not support this proposition. At the casual level of analysis it is well known that the terrorists who died in the 9-11 attacks were not raised in poverty and most were related to relatively well-off Saudi Arabian families. The most recent of these academic studies5 reached the conclusion that poverty and the lack of education are not statistically significant variables explaining terrorism in different countries once geography has been accounted for.

What this academic research did establish was that a variable reflecting the lack of political rights is by far the most important cause of terrorism.6 Abadie (2004) discovered a very interesting additional fact in his econometric analysis.7 Terrorism is least likely to involve citizens from countries with low and with high levels of political freedom. In the former set of countries repressive police actions make terrorist acts difficult. In the countries with much political freedom political activism readily finds outlets other than terrorism. The reason why countries with middle levels of political freedom suffer the highest incidents of terrorism is that they tend to be in a process of political liberalization without yet having developed the culture fostering the peaceful resolution of political conflicts.

5 For example see Krueger and Maleckova (2003) and Abadie (2004).6In regressions in which terrorism in specific countries is the dependent variable, the independent variable level of political rights is both statistically significant and has the right sign.7 His econometric study used both a linear and squared value of the index measuring the extent of political freedom as independent variables to explain terrorist incidents. The observation in the text follows from the fact that both the linear and squared coefficients were statistically significant.

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The analysis below outlines the nature of empirical measures of economic freedom, which is different from the index of political freedom used in the Abadie study. However, economic freedom and political freedom indices are highly correlated.8 Therefore, the Abadie results in all likelihood could be replicated using economic rather than political freedom as the independent variable.

Table 1 provides the names of foreign terrorist organizations published annually by the US State Department in a report submitted to Congress. The list is for the year 2003. Its study helps to increase our understanding of the nature and causes of terrorism, which confirms the formal econometric analysis and provides additional insights.

Table 1

List of Designated Foreign Terrorist Organizations

Abu Nidal organization (ANO) Abu Sayyaf Group (ASG) Al-Aqsa Martyrs Brigade Ansar al-Islam (AI) Armed Islamic Group (GIA) ‘Asbat al-Ansar Aum Supreme Truth (Aum) Aum Shinrikyo, Aleph Basque Fatherland and Liberty (ETA) Communist Party of Philippines/New People’s Army (CPP/NPA) Al-Gama’a al-Islamiyya (Islamic Group, IG) HAMAS (Islamic Resistance Movement) Harakat ul Mujahidin (HUM) Hizballah (Party of God) Islamic Movement of Uzbekistan (IMU) Jaish-e-Mohammed (JEM) Jemaah Islamiya (JI) Al-Jihad (Egyptian Islamic Jihad, EIJ) Kahane Chai (Kach) Kongra-Gel (KGK, formerly Kurdistan Workers’ Party, PKK, KADEK) Lashkar-e-Tayyiba (LT) Lashkar I Jhangvi (LJ) Liberation Tigers of Tamil Eelam (LTTE) 8 See Dawson (1998) and Griswold (2004).

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Mujahedin-e Khalq Organization (MEK or MKO) National Liberation Army (ELN)—Colombia Palestine Islamic Jihad (PIJ) Palestine Liberation Front (PLF) Popular Front for the Liberation of Palestine (PFLP) Popular Front for the Liberation of Palestine–General Command (PFLP-GC)

Al-Qaida Real IRA (RIRA) Revolutionary Armed Forces of Colombia (FARC) Revolutionary Nuclei (RN) Revolutionary Organization 17 November (17 November) Revolutionary People’s Liberation Party/Front (DHKP/C) 135Salafi st Group for Call and Combat (GSPC) Sendero Luminoso (Shining Path or SL) United Self-Defense Forces/Group of Colombia (AUC)

Other Terrorist Groups

Al-Badhr Mujahedin (al-Badhr) Al-Ittihad al-Islami (AIAI) Alex Boncayao Brigade (ABB) Army for the Liberation of Rwanda (ALIR) Anti-Imperialist Territorial Nuclei (NTA) Cambodian Freedom Fighters (CFF) Communist Party of Nepal (Maoist)/United People’s Front Continuity Irish Republican Army (CIRA) Eastern Turkistan Islamic Movement (ETIM) First of October Antifascist Resistance Group (GRAPO) Great East Islamic Raiders–Front (IBDA-C) Harakat ul-Jihad-I-Islami (HUJI) Harakat ul-Jihad-I-Islami/Bangladesh (HUJI-B) Hizb-I Islami Gulbuddin (HIG) Hizbul-Mujahedin (HM) Irish National Liberation Army (INLA) Irish Republican Army (IRA) Islamic Army of Aden (IAA) Islamic International Peacekeeping Brigade (IIPB) Jamiat ul-Mujahedin (JUM) Japanese Red Army (JRA)

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Kumpulan Mujahidin Malaysia (KMM) Libyan Islamic Fighting Group (LIFG) Lord’s Resistance Army (LRA) Loyalist Volunteer Force (LVF) Maoist Communist Center of India (MCCI) Moroccan Islamic Combatant Group (GICM) New Red Brigades/Communist Combatant Party (BR/PCC) People Against Gangsterism and Drugs (PAGAD) Peoples War Red Hand Defenders (RHD) Revolutionary Proletarian Initiative Nuclei (NIPR) Riyadus-Salikhin Reconnaissance and Sabotage Battalion of Chechen Martyrs (RSRSBCM) Sipah-I-Sahaba/Pakistan (SSP) Special Purpose Islamic Regiment (SPIR) The Tunisian Combatant Group (TCG) Tupac Amaru Revolutionary Movement (MRTA) Turkish Hizballah Ulster Defense Association/Ulster Freedom Fighters (USA/UFF) Ulster Defense Force (UVP)

Source: Patterns of Global Terrorism, 2003, copied from http://www.state.gov/s/ct/rls/pgtrpt/2003/31759.htm

Assuming that the names of these organizations reflect the purpose for their existence, we can divide them into three groups according to the main objectives:

Groups that claim to defend Islam (41) Groups that desire to gain independence from national central

governments for religious or ethnic minorities (27) Groups that pursue revolution in the name of ideology (7).

In the first group we find organizations like Al-Qaida and Hizbollah (which translates into “The Army of God”). These self-proclaimed Islamic organizations have national branches in many countries and it may be assumed that they are linked trough clandestine global networks. In these countries political freedom is low and its leaders often find it politically beneficial to provide financial and other support to these groups.

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The second, much smaller group of terrorists consists of national separatist organizations, of which the Tamil Tigers and the Ulster Defense Force are among the best known in the West. Many of these terrorist groups owe their existence to the drawing of national borders, often by colonial powers, during the last 150 years, which disregarded the ambitions of ethnic, religious and cultural minorities to establish their own governments.

While some of these nationalist groups have become less militant through time, such as the Ulster Defense Forces, many are certain to continue to be active. Their numbers may be expected to increase as some countries, like Indonesia become more open, developed and democratic. Some gain strength from attachment to militant Islamic causes in countries that are ruled by majorities with other religious backgrounds.

The list of organizations shows that while most are in countries with low or middle levels of democracy, there are also some that are active in modern Western democracies, like Ireland and Spain.

The third group of terrorist organizations consists of political radicals including the Japanese Red Army, the Red Hand Defenders and the Maoist Communist Centre of India. Their number is small and declining. Their activities have made headlines during the 1960s and 1970s, but in recent decades they have tended more to be a potential than actual threats to stability, especially since the Soviet Union has ceased to provide them with financial and other support.

My classification scheme is simple and there are likely to be some problems with organizations that are driven by more than one motive. The listing of a terrorist organization by the State Department does not account for its size and influence and the mere numbers in my compilation therefore also need to be treated with an appropriate caution. The list produced by the State Department may be incomplete or biased.9

However, taken at face value, these data reveal that by far the biggest threat to US security stems from groups claiming to defend and advance Islam. One reason is that some of the extremist organizations are well financed to carry out their activities. Some have the informal financial and political support of governments. They also have loyal followers in developed 9 Abadie (2004) notes that according to the MIPT Terrorism Knowledge Base in 2003 there were 1,536 acts of domestic terrorism and only 240 acts of international terrorism.

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countries that give financial support to their causes. Important is also the religious fervor that drives many believers and that is stoked by some leaders with a strong self-interest in the pursuit of what they claim are Islamic causes.

In contrast, the threat to US interests from organizations involved in regional conflicts is relatively low since typically they have few resources to carry out attacks outside their home countries. Their activities in the United States are constrained also by the fact that such acts tend to interfere with the fund-raising activities of their supporters in the United States.

The third group of terrorist organizations, which is driven by ideology, tends to contain few and shrinking numbers. Unfortunately, however, history suggests that they are unlikely ever to disappear entirely. Future economic crises, unpopular military adventures and the evolution of countries with self-interest in promoting ideological terrorism can easily revive the threat.

The Cost of Terrorism

The Report of Joint Economic Committee of the US Congress in 200210 lists the following costs imposed by acts of terrorism:

1. The reduction of the human and physical capital stock.2. Reduced sales of certain industries like tourism.3. Increased uncertainty in the conduct of business and personal affairs.4. The diversion of resources to the fight of terrorism.

Not to trivialize the first cost, in fact the loss of life and the reduction in the US capital stock caused by past terror attacks in the United States and on military, commercial and diplomatic assets abroad is negligibly small relative to the size of the US economy, population and activities abroad. The real problem stems from the possibility that future losses might be much larger if and when terrorists use biological, chemical and atomic weapons of mass destruction.

The second cost involves certain industries like tourism and airlines, as both pleasure and business travels were curtailed in the wake of major terrorist attacks, especially the one on September 11, 2001. This cost is important to the industries that face losses in sales, have idle capital and suffer 10 Mentioned by Abadie and Gardeazabal (2004).

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unemployment of unknown duration. However, these losses are not significant quantitatively for the large and diversified US economy as a whole. Moreover, Americans who reduce their travel expenditures tend to spend their money elsewhere and thus leave total demand for goods and services very much unchanged.

The third category involving uncertainty about the future is mostly psychological and diminishes welfare directly. However, both private individuals and governments adopt policies to reduce the risk of future terrorist attacks. Such efforts result in costs, which in the State Department classification scheme are referred to in point four of the list as “resource diversion”.

Such resource diversion takes place when first, private agents are induced to purchase insurance, stocks of food, water, medicine, protective gear and build shelters to increase survival chances in the case of atomic or chemical attacks. Such private protective activities have not been large or costly and may be expected to stop altogether as the memories of 9-11 disappear.

The US government, on the other hand, has spent large resources and is promising to spend even more in the future to reduce the threat of future terrorist attacks. The Office of Homeland Security coordinates and administers most of these actions undertaken by separate spy and law enforcement agencies like the CIA, FBI, state and local police forces and by the US Armed Forces in domestic and foreign operations. All of the expenses essentially represent the cost of what the US government has called The War on Terrorism.

The Cost of the War on Terrorism

The US war on terrorism is fought on two main fronts. First, the power, influence and resources of the militant groups that claim to promote Islam have to be reduced in the countries harboring them. This fight will almost certainly be difficult, lengthy and often politically divisive. The most important of the means of doing so are as follows:

1. Military interventions as have taken place in Afghanistan and Iraq.2. Support for regimes that fight militancy in their own countries, as in

Pakistan.

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3. Political pressures on governments to deal with terrorist organizations and financing in their own jurisdiction, like Saudi Arabia and Indonesia.

4. The infiltration of terrorist organizations to provide intelligence information on their plans and strategies.

The second front of the fight on terrorism involves barriers to the immigration of terrorists, the importation of weapons into the United States and the flow of financial resources and exports to terrorist organizations in the United States and abroad. The most important of these policies are:

1. Dealing with potential terrorists at border control points:a. Using biometric identification methods.b. The production and examination of airline passenger lists.c. Barring entry to suspected terrorists through use of central

registry of suspects.d. Tracking of individuals admitted to the United States as

temporary visitors.2. Close examination of goods imported into the United States through

a. X-ray, odor-detection and physical inspectionb. Pre-inspection of routine shipments.

3. Regulations to prevent the collection and transfers to terrorist organizations of financial assets.

a. Controls over fund raising activities by certain organizations.b. Controls over the transfer of funds by financial institutions and

the transportation of cash across the US border.4. Regulations to control exports of high-tech goods, services and

computer programs that are essential for the production of weapons of mass destruction

a. Prohibitions on such exports imposed on individual firms.b. Checking of export shipments at the border for prohibited

items.

The monetary cost of all of these measures has not been published and it is doubtful that it is known even at the highest level of government. However, even though they may be many billions annually, given the size of the US economy and government revenues, the expenditures are likely to be quite a small fraction of the totals. Many of the monetary costs, like the cost of the military in Afghanistan and Iraq are marginal, drawing on past fixed

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spending on infrastructure made for exactly such uses but that are not relevant in estimating the cost of the current spending. The soldiers’ salaries have to be paid whether or not they are engaged in these wars abroad. Bonuses for serving abroad and assuring the success of recruiting soldiers for the volunteer army also are relatively small.

Some numbers provide important perspectives on the magnitude of these costs. Thus, the fiscal cost of the Second World War reached about 20 percent of national income at its peak while the cost of the wars in Iraq is less than one percent of national income.11 Even if the estimates of these current military actions are biased downward to some degree, the truly marginal costs are unlikely in fact to be large relative to the US economy and federal budget.

The number of American fatalities to date (June 17, 2005) has been 193 in Afghanistan and 1,717 in Iraq12. These fatalities obviously represent a tragedy for their families. But seen in the context of other wars, they are very small indeed. For example, the American troops conquering the island of Iwo Jima during the Second World War had fatalities in just one day that are a multiple of the losses in the wars in Afghanistan and Iraq.

US soldiers on active duty in 2005 number 500,000 so that these recent casualties are equal to one third of one percent of the total uniformed personnel, or one tenth of one percent annually over three years. This rate of fatalities is close to that experienced by the armed forces as a result of training and vehicle accidents during peacetime.13

11 According to the latest figures on the Congressional Budget Office website www.cbo.gov/showdoc.cfm?index=5587&sequence= the cost of the war in Iraq up to the end of 2004 has been 93.7 billion. One percent of US Gross Domestic Product in 2004 was $117 billion. The cost of the war and of reconstruction aid in Afghanistan at the end of 2004 had reached $31.8 billion. Both figures cover the period starting with the beginning of military action.12 The casualty figures are from the website www.defenselink.mil/news/casualty.pdf, which are updated daily. On June 17, 2005 the number of total deaths in Iraq was 1,717, of which 1,321 were killed in action and 396 were due to non-hostile events. There have been 6,442 individuals who were wounded in action and that did not return to duty within 72 hours. in Afghanistan, only 80 soldiers have been killed in action while 113 were killed through non-hostile events. The wounded in Afghanistan who did not return to duty within 72 hours has been 314.13 The importance of casualties in the armed forces not due to actual fighting may be gleaned from the figures cited in the preceding footnote. During the operation in Afghanistan to this date the number of killed in action has been 41 percent of the total. Machines used in war, including automobiles, are complicated and dangerous to operate.

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Perhaps most dramatic and relevant to the present analysis is the fact that these fatalities still are less than half of the number of American who died when the twin towers were destroyed on September 11, 2001. They could well be an even smaller fraction of fatalities that might have occurred through terrorist attacks using weapons of mass destruction if the War on Terrorism had not prevented them.

The regulations concerning the importation of goods, immigration, the collection and transfers of financial assets, the export of sensitive goods and services impose substantial costs of administration, compliance and surveillance on the government and private agents. While these costs are significant for certain industries like banking and some manufacturing and service exporters and they are especially burdensome if the industry works on small margins, the overall costs to the US economy are a trivial amount relative to the overall size of the economy.

However, the increased regulation and surveillance of some industries carries a cost that is not widely appreciated. The cost takes the form of reduced economic freedom and the accompanying reduction in economic growth.

Economic Freedom

The Fraser Institute, in conjunction with independent institutes in nearly 70 nations, publishes annually a study entitled Economic Freedom of the World, which compiles objective measures of economic freedom in 123 individual countries. The primary measures reflect:

1. The size of government expenditures, taxes and enterprises; 2. The legal structure and security of property rights; 3. Access to sound money; 4. Freedom to trade internationally; 5. Regulation of credit, labor and business.

All of these measures in turn are based on sub-indices. For example, the size of government consumption as a percent of national income and the top marginal tax rate on personal income are two of the sub-indices in the primary measure reflecting size of government expenditures, taxes and enterprises.

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In the Fraser Institute publication the national data are converted to a 10-point scale and added up to produce an overall index of economic freedom for each country.14

The world ranking of individual countries in any given year and through time has been receiving increasing attention from scholars and politicians in many countries. A growing number of scholarly publications have used successfully the country indices as a variable in econometric equations in which a wide range of important economic performance measures served as the dependent variables.15

One of the first and most important such studies produced Figures 4 and 5. These figures correspond to the results from formal econometric equations and are designed to make the findings accessible to a wide lay readership. They show that there is a powerful functional relationship between economic freedom and per capita income levels and growth in the 123 countries in the study.16 These empirical findings are backed by theoretical considerations on how economic freedom provides incentives to work, save, invest and take risks, which in turn result in higher economic growth and levels.

The War on Terrorism reduces economic freedom, through its effects on all of the sub-indices of economic freedom noted in the preceding list. Some of these effects are:

1. Government consumption as a percent of national income is raised through higher spending on the military, intelligence gathering and domestic law enforcement and border control agencies.

2. Judicial independence is decreased and military interference in the civilian rule of law is increased by the greater use of secret intelligence gathering and the imprisonment of terrorist suspects by the military and civilian agencies.

3. Trade barriers are raised by the increased paper work, cost of border inspection and related measures designed to prevent the inflow of

14 The calculation of this index involves the usual problems inherent in the production of all indices. The approaches used to deal with these problems and cautions about the interpretation of the results are fully spelled out in the study. 15 See Gwartney and Lawson (2004), Appendix 2 for a partial list of such published studies.16 The Fraser Institute publication also shows similar graphs for the relationship between economic freedom and life expectancy; adult literacy; infant mortality; human development; corruption and others.

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material used by terrorists. These regulatory costs are equivalent to tariffs, which are known to reduce the level of trade and specialization.

4. International capital market controls are increased to stem the flow of financial resources to terrorist organizations.

5. Business regulations are increased in efforts to prevent the sale of products and services useful to terrorists.

The impact of these measures taken in the pursuit of the War on Terrorism has not been quantified, but they will eventually affect the value of the determinants of economic freedom in the United States. There is no doubt that they will reduce the country’s level of economic freedom and ranking in the world and that it will reduce economic growth correspondingly.

When this slowdown in economic growth takes place, the risk is that it will be attributed to variations in the many other determinants of growth found in the standard economics literature on the subject. Some of these determinants are the costs of resource diversion noted above and the War on Terrorism and they will be blamed correspondingly. However, if the preceding analysis of these costs is correct, they will be very small and statistically insignificant. Analysts will end up attributing the observed reduction in growth to a grab bag of unexplained causes when in fact reductions in the economic freedom index are responsible and can be traced directly to measures taken in the name of the War on Terrorism.

Of course, the magnitude of the indirect cost of the War on Terrorism may be small, just like the resource cost. Moreover, we can expect that the open democratic system of the United States will assure that the infringements of economic freedom made in the name of the War on Terrorism will be under continuous and intense scrutiny, leading to the expectation that they will be eliminated once the War has been won.

Nevertheless, the analysis of the effect of the War on Terrorism on economic freedom points to a potentially important cost that is missed by the traditional analysis that focuses on the resource costs of the War. It is therefore important that this line of analysis is included in any future analysis of the costs and benefits of that War.

The Promotion of Economic Freedom

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The discussion above about the causes of terrorism revealed the importance of political freedom. Economic and political freedoms are highly correlated and nations that produce militant groups that claim to promote Islam rank low by both measures.

These facts suggest that the US War on Terrorism could be fought effectively and efficiently by policies that promote these two freedoms in Islamic countries. One of the first steps in any such policy program is to measure and publicize the actual levels of economic freedom in Islamic countries. In this spirit, Fraser Institute is preparing an Index of Economic Freedom for Arab countries and has assisted in the creation of a free market think tank in Oman, which in turn will use these data to persuade governments in the region to pursue appropriate policies. One promising policy proposal involves the establishment of free market zones modeled after the free trade zones that have operated so successfully in China and some other developing countries. The economic success of such zones can easily cause other regions to demand similar policies with the ultimate effect of much greater economic freedom in all of Oman and ultimate all Arab countries.

Unfortunately, the War on Terrorism fought with the conventional means spelled out above is likely to make more difficult to expand economic freedom in the Islamic world.17 The reason is that the US military actions in Afghanistan and Iraq have helped to mobilize militant forces and provided them with targets for their terrorist attacks inside and outside of the Islamic countries.

In countries like Saudi Arabia and Egypt, the existence of these native terrorist organizations and internal attacks have resulted in increased government efforts to curtail them. Much like the US War on Terrorism has in the United States, these efforts reduce economic freedom in these countries even more and make it more difficult in the future to increase it. In the analytical framework used here, the greater difficulties associated with these efforts in some Islamic countries must be treated as yet another neglected cost of the global War on Terrorism.

Summary and Conclusions

17 I thank James Gwartney for raising this issue with me.

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This paper reviewed some evidence on the magnitude of terrorism, which showed that its level in the United States has been relatively low compared with that in the rest of the world. However, the death toll of the September 11, 2001 attacks and the prospect of future such acts of violence have led the United States to launch the War on Terrorism.

The War is aimed mainly at militant Islamist organizations, which according to data presented here were seen to be much more important perpetrators of terrorism than organizations driven by the desire for regional sovereignty and the propagation of extreme political ideology.

The War involves military actions in Afghanistan and Iraq, measures to prevent the infiltration of terrorists and the importation of weapons into the United States, as well as domestic controls aimed at preventing financial transfers to terrorist organizations and the export of sensitive goods and services.

The costs of these War measures are large in absolute terms but small in relation to the size of the US economy, population and military. On these grounds an intuitive benefit-cost analysis of the War on Terrorism suggests that it yields positive returns, though detailed calculations are needed to clinch the case.

However, the conventional analysis of the cost of the War on Terrorism focusing on dollar expenditures misses an important indirect and potentially high cost in terms of future economic growth through its effect on economic freedom, which has been shown to be strong in many studies.

Economic freedom also has the effect of making countries less likely to be the breeding ground of terrorism. The promotion of such freedom in Islamic countries therefore should become an additional instrument used in the War on Terrorism.

Unfortunately, in some Islamic countries the War has mobilized internal terrorist organizations, which the governments of these countries fight through measures that reduce economic freedom. As a result, efforts to increase economic freedom in these countries are likely to be more costly and time consuming than they would have been otherwise. These costs and delays must be considered to be another neglected cost of the War on Terrorism.

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The magnitude of the reduction in economic freedom in the United States and some Islamic countries is almost certain to appear in the compilation of economic freedom indices in the future. When this happens, it will be possible in principle to estimate the size of the cost of reduced economic freedom and thus the cost in real income lost. This cost should be considered in any future benefit-cost assessments of the War on Terrorism.

References

Abadie, Alberto (2004), “Poverty, Political Freedom and the Roots of Terrorism”, KSG, Faculty Research Working Paper Series RWP04-043, October

Abadie, Alberto, and Javier Gardeazabal (2003), "The Economic Costs of Conflict: ACase-Control Study for the Basque Country." American Economic Review, 93.1, 113-132.

Dawson, John W. (1998). Institutions, Investment, and Growth: New Cross-Country and Panel Data Evidence. Economic Inquiry 36 (October): 603-19.

Griswold, Daniel T. (2004). Trading Tyranny for Freedom:How Open Markets Till the Soil for Democracy. Cato Institute: Washington,DC. Trade Policy Analysis No. 26, January 6

Gwartney, James and Robert Lawson (2004), Economic Freedom of the World: 2004 Annual Report, Vancouver, BC: The Fraser Institute

Krueger, Alan B. And Jitka Maleckova (2003), Journal of Economic Perspectives, 17, 4, 119-144

US State Department website http://www.state.gov/s/ct/rls/pgtrpt/2003/31759.htm

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