Moody’s Quantifying Terror Effects With Economic Impact Index

October 13, 2015 by Enda Curran and James Mayger

How do you measure the impact of terrorism on economic growth?

Moody’s Investors Service has constructed a terrorism index to quantify the hit to gross domestic product, government spending, investment and borrowing costs.

See related article, “Manmade Threats Are Increasing in Significance: Lloyd’s City Risk Index

Attacks are rising rapidly around the world and more than doubled to 11,823 in 2013 from 2011, according to Moody’s. In per capita terms the number of incidents tripled to 2.4 per million people in that year.

More than 60 percent of the incidents in 2013 were concentrated in four countries in Asia and the Middle East: Iraq had 24 percent of attacks, Pakistan 19 percent, Afghanistan 12 percent and India 5.8 percent.

The data covers 156 countries from 1994 to 2013.

Apart from the human toll, the economic impact can be long lasting.

Here are some of Moody’s findings: If there had been no terrorist attacks between 2008 and 2013, Iraq’s GDP would have been 8.2 percent higher by the end of the period and Pakistan’s would have been 5.1 percent higher.

Terrorist incidents can come in many different guises and Moody’s index is a weighted average of the number of incidents, the number of fatalities, the number of injuries and a measure of property damage. The index also factors in a country’s size and the concentration of terrorism in just a few nations—meaning an attack in a conflict-ridden area will have a lower impact than one in a country that rarely experiences terrorism.

The ratings firm found that the kind of attacks experienced in the 10 most terrorism-afflicted countries in 2013 weakened GDP growth by between 0.51 and 0.80 percentage points. Growth weakened by up to an additional 0.59 percentage point after one year and up to 0.07 percentage point after three years.

Government borrowing costs also shoot up after such attacks, jumping between 41 basis points and 65 basis points within one year and up to 81 basis points a year later. Investment growth, a key ingredient for economic expansion, can be cut by between 1.3 percentage points and 2.1 percentage points in the year of terrorist attacks.

Moody’s compiled the data from the Global Terrorism Database, or GTD. In its report the ratings firm used the GTD definition for terrorist incidents: “the threatened or actual use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal through fear, coercion, or intimidation.”