The Cost of Terrorism in Pakistan

This study claims “terrorism has cost Pakistan around 33.02% of its real national income” between the years 1973 and 2008, or about 1% per year.

The St. Louis Fed puts the real gross national income of the U.S. at about $13 trillion total, hand-waving an average over the past few years. The best estimate I’ve seen for the increased cost of homeland security in the U.S. in the ten years since 9/11 is $100 billion per year. So that puts the cost of terrorism in the US at about 0.8%—surprisingly close to the Pakistani number.

The interesting thing is that the expenditures are completely different. In Pakistan, the cost is primarily “a fall in domestic investment and lost workers’ remittances from abroad.” In the US, it’s security measures, including the invasion of Iraq.

I remember reading somewhere that about a third of all food spoils. In poor countries, that spoilage primarily happens during production and transport. In rich countries, that spoilage primarily happens after the consumer buys the food. Same rate of loss, completely different causes. This reminds me of that.

Tags: cost-benefit analysis, economics of security, homeland security, Pakistan, terrorism

Posted on June 6, 2013 at 5:58 AM • 23 Comments

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cakmpls • June 6, 2013 7:42 AM

“‘terrorism has cost Pakistan around 33.02% of its real national income’ between the years 1973 and 2008, or about 1% per year.”

How does that work? If they lose about 1% of each year’s income, wouldn’t the cumulative loss continue to be about 1%? If I make $100 dollars a day and lose 1% of it, after 33 days my loss is $33 on $3300, or 1%, not 33%.

LinkTheValiant • June 6, 2013 8:01 AM

@cakmpls

If I make $100 dollars a day and lose 1% of it, after 33 days my loss is $33 on $3300, or 1%, not 33%

Correct. But after 33 days, your total loss adds up to 33% of one day’s pay. It’s a skewed way of presenting the statistic, but in a certain sense it is correct.

(After all, to the average person, 33% of something sounds amazing, while 1% is barely worth bothering with, even if the two figures happen to have the same actual value.)

Someone • June 6, 2013 8:24 AM

So over the course of approximately 35 years, Pakistan lost, in aggregate, about a third of ONE year of its real national income? I’m not so sure of the significance of 33.02% since one could extrapolate a loss of RNI of any % over a long enough period of time from any taxing decision that doesn’t produce more societal benefit than it removes.

paul • June 6, 2013 8:54 AM

If you read the article closely, it’s much worse than that. The claim is that terrorism has knocked 1% a year off Pakistan’s growth rate. So the losses compound. The first year your national income is 1% lest than it would have been without terrorism, the second year it’s 2% and a bit less, the third year 3% and a bit, and so forth. So by 30 years, national income is a third less than it would have been.

The situation in the US is less clear, but if we’d been able to spend all those billions of the past decade-plus on making the country a better place instead of just trying to stop it from becoming a worse place it’s a pretty good bet national income and growth would also be significantly higher.

bcs • June 6, 2013 9:14 AM

@paul

Or just imagine how much better a shape the national finances would be in if we’d used the same tax rates but the $100B/yr just hadn’t been spent at all.

I’m not sure which would be better long term, paying down the national debt or not taxing in the first place.

Captain Obvious • June 6, 2013 9:24 AM

It would seem terrorism affects those on the other side of the world much worse than the locals.

paul • June 6, 2013 9:44 AM

@bcs:

the “we” I was using was broader than the government — if the money weren’t being spent by the government, it would be available (in theory at least) to be spent by other entities. Either way, pretty much anything other than war and “security” would contribute more to longterm growth.

Paying down the national debt, meanwhile, is a fairly complicated economic proposition. What it means is taking money that would otherwise be spent on goods and services and handing it to the owners of some particular pieces of paper, who may or may not spend/invest it in the US.

phred14 • June 6, 2013 10:41 AM

If we were to reclassify drug-related gang activity as “terrorism” I wonder how the cost to the Mexican economy would compare. My guess is that it would dwarf either US or Pakistan’s terrorism costs.

Petréa Mitchell • June 6, 2013 10:43 AM

Here’s the actual claim from the abstract:

It is documented that cumulatively terrorism has cost Pakistan around 33.02% of its real national income i.e. terrorism costs Pakistan around 1% of real GDP per capita growth every year.

It’s costing 1% growth per year, not 1% of today’s income.

ThreeThreeZeroTwo • June 6, 2013 10:53 AM

Surprisingly no one mentioned it before: “around 33.02%” – Point Zero Two. An estimated number with such a precision?

Vinzent • June 6, 2013 12:47 PM

It is probably a precise estimate.

Jack • June 6, 2013 1:15 PM

You do not build businesses in areas that are out of control.

Pakistani terrorism often does not reach the mainstream news. It is constant under the current and the numbers are shocking.

If you think about putting a business in such a place, you do research. And Pakistan has one of the worst returns for such a search possible.

The Congo Republic and North Korea, Zimbabwe… maybe better places to build businesses.

Ted Heise • June 6, 2013 1:25 PM

that puts the cost of terrorism in the US at about 0.8%

If I’ve learned anything from reading this excellent blog, I think you mean the cost of how we’ve chosen to respond to terrorism in the US.

Clive Robinson • June 6, 2013 1:49 PM

Hmm let me think…

1.0082^35=1.330866

So maybe they mean a little under 0.82% for 35 years…

@ Captain Obvious,

Your point like most things in life is relative to the observer and their point of view. So in this case could apply equally to a Pakistan or US proffessional or semi-proffessional salary earner.

Math • June 6, 2013 3:20 PM

@Clive: What you’ve calculated there has no particular relation to the article.

First, you’re calculating an increase, not a decrease–that changes the yardstick. If you expected to get 10 but you actually get 5, then you’re 50% below target; if you expected to get 5 and you actually got 10, you’re not 50% above target, you’re 100% above target. The thing you’re taking a percentage OF has changed. To get a compound 33% loss over 35 iterations requires an incremental loss of ~1.14%

Second, a “1% reduction in growth” probably does not mean that you end up with 99% of what you would have had. Suppose I expected to grow by 100% (double in size), but I actually grow by 99%. That could plausibly be described as “grew 1% less than expected”, but my final size is 99.5% of what I expected, not 99.0%. So you’d need to know how much they actually grew (or were expected to grow), not just the difference between actual and expected growth.

Clive Robinson • June 6, 2013 4:04 PM

@ Bruce,

The spoilage of food giving rise to waste is quite a complex subject and there have been a number of reports. At the begining of the year the UK the Institute of Mechanical Engineers tried to find the causes over the entire process for their report that became quite newsworthy at the time.

Supprisingly two of the biggest factors in the west were “legislation issues” relating to Best Befor Dates and supposed “Consumer Prefrence”. The latter causing two main effects. The first being small/odd shaped/odd coloured but otherwise quite acceptable food getting sent direct from selection to land fill (via compost sometimes). The second causing a significant “overspend” of around 500GBP/household due to special offers and other marketing tricks.

Since the “double dip” most UK supermarkets have brought out “value” ranges where “Consumer Prefrence” has been dropped and the rejects now go into the “value” range as opposed to landfill. Although special offers on named/premium brands/lines continues.

Whilst some people are now using their eyes and noses and “common sense” to judge if food is safe to eat or not we are three or four generations out of practice due to the advent of “TV Meals” in the early 1960’s.

As I’ve mentioned befor this generational gap is causing problems such as poisoning from using “green potatoes”, and undercooked foods such as “kidney beans” and Casava as well as various fruit pits (Cyanide is common) and eating leaves of plants like rhubarb.

Clive Robinson • June 6, 2013 4:58 PM

@ Math,

First, you’re calculating an increase

Yup, classic exam mistake, of answering befor fully thinking (that and having memorised skeleton compound growth/interest tables along with log and other engineering tables in a younger “slide rule” life the near answer popped into my head compounding the mistake).

Yusuke • June 6, 2013 6:52 PM

I remember a similar argument: only about 30% of the people in an organization are doing real work, and the other 70% are more or less goofing, no matter how you choose its members. When you take out the 70% of lazy people, the same split happens again. The same phenomenon is also seen in a group of ants.

name.withheld.for.obvious.reasons • June 7, 2013 2:18 AM

I am afraid the estimate for the U.S. is off, let’s take a list of direct and indirect costs…

12 Years, supplement cost of wars in Iraq and Afghanistan — 1.2 Trillion Dollars

10 Years DHS Operational Costs — 590 Billion Dollars

12 Years expanded security budgets (CIA, NSA) — 600 Billion Dollars

12 Years Armed Services Operations (added non-war operations) — 1.2 Trillion Dollars

12 Years Armed Services Operations (Equipment, Replace Costs — Estimate)
2 Trillion Dollars

12 Years Veteran Injuries (non-recurring) — 600 Billion Dollars

12 Years DOJ (ICE, FBI, etc) — 480 Billion Dollars

DIRECT COSTS: ~6.7 Trillion Dollars

Indirect Costs:
LOSS OF LIFE (8000 U.S., 100,000’s of others) — NO DOLLAR AMOUNT GIVEN

Wounded veteran long term care (estimate) — 1 Trillion Dollars

paul • June 7, 2013 8:25 AM

@name.withheld:

Then there are a bunch of other indirect costs — $5 trillion or so invested in pretty much anything else would have yielded higher returns, and the million-plus people employed in the security apparatus would have produced somewhere in the neighborhood of a trillion dollars worth of useful goods and services in 10 years. And all the people who have produced systems for eavesdropping on phone calls (and storing and analyzing the results) or for looking at people without their clothes on in an airport security line might have been developing stuff that would be useful for the long term.

Imagine for a moment that we had a 10-year start on dealing with climate change…

Steve • June 7, 2013 12:00 PM

They would have just spent it on stupid stuff anyway.

winsnomore • June 8, 2013 11:23 PM

But what they don’t say is that they “collected” about $100B from US in support funds during the past 10 years!.

So, in some total they lost $100B in 20 years and recovered it all in 12 .. They actually are a NET beneficiary of terrorism — after all it’s their state industry.

One should realize .. no one get’s into any business unless there is a “real” profit, in Pakistan’s case it’s their main industry.

For those who don’t know, Pakistan probably spent $2-$3B in developing nukes, Gaddafi gave them $1B and Saudis gave them another $2-$3 .. koreans and Iranians made up probably another $1B or so ..not bad for a poor country!

Wesley Parish • June 10, 2013 2:46 AM

FWIW, the cost of doing something instead of some other thing, is known as “opportunity cost” in economics.

The real cost of something like “terrorism” – which it should be noted, is undefined even as yet: sure, ad hoc definitions exist, but no international definition through treaty – is an opportunity cost. It diverts resources away from other matters, such as flood relief. And not infrequently ends up in a cycle of effect becoming cause causing effect becoming cause and so it goes.

The cost of weaponry, conflict, etc, is largely a sunk cost: cost of weapons, cost of training people to use those weapons, cost of bringing them into use, cost of losing weapons and trainees, etc. As in that asinine tangle of political shenanigans the First World War, the real cost occurs after, when the battered economies didn’t have the resources to control the flu epidemic, and more people died as a result of that epidemic than died on the battlefield.

The US has spent how much on fighting an enemy without a home base and making more enemies while doing so, and how much of its infrastructure, built during the New Deal and in the aftermath of the Second World War, is now sliding down into ruin? Count the costs not in the dollars wasted but in the opportunities lost.

The Cost of Terrorism in Pakistan

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