• EconAfterHours

The Economics of Terrorism

Updated: Mar 11, 2020

By Shannon Sequeira

Since the terrorist attacks on the Twin Towers in September 2001, society has tried to understand the nature of terrorism and further its abilities to counteract it. More importantly, terrorism has grown from small scale acts of violence by local non state actors, to a problem that affects the routine functioning of entire economies and industries. While terrorism is not a new phenomenon (Chaliand and Blin, 2007), it has only grown in scale of late. With the size of this growing threat, many countries across the world have passed antiterrorism legislation to counteract the problems it faces. In this article, we look at some of the economic aspects of the terrorist question.

Loretta Napoleoni (Napoleoni 2005, also Napoleoni 2010) argues that the funding question for terrorists as faced today is the result of three phases: governmental intervention, privatization and globalization. This trifurcation of the evolution in terrorism can be most easily identified through the example of Osama bin Laden, and his terrorist organization, al-Qaeda. Before he formed al-Qaeda, bin Laden was part of the mujahideen, a covert organization of extrajudicial guerrilla warriors that aimed to account for the ‘injustice [that] had been committed against the people of Afghanistan’ (Fisk 2005). Under Operation Cyclone, the Central Intelligence Agency funded the mujahideen in order to further its own agenda of preventing the spread of Communism in the Democratic Republic of Afghanistan, then a Soviet ally.

The second phase began with the founding of al-Qaeda in 1988. Bin Laden met with members of the Egyptian Islamic Jihad (Wright 2006). After being expelled from Saudi Arabia for criticizing the rule of the locals, bin Laden made a base at Khartoum, Sudan, wherefrom he was soon expelled again, following a failed assassination attempt on Hosni Mubarak and pressure from the US and Saudi Arabia. He returned to Afghanistan in 1996 and declared a war against the United States of America. The third phase, of globalization started with the 9/11 bombings. This was the first mark of terrorism on the global theater, as markets around the world plummeted, and the USA PATRIOT Act 2001 was passed to equip the US with the ability to counteract terrorism. Al-Qaeda since then has been funded through illegal activities, and by donations from fundamentalist groups around the world.

The problem faced across the world is not merely one of non-state actors committing crimes on a large scale. Terrorists are not of lower income status and many have high levels of formal education. Suicide bombers, for instance, are often educated in Western countries, but are driven by fundamentalist ideology (Krueger and Maleckova 2003 and Berman 2011). Furthermore, Berman (Berman 2011) argues that the ‘Hamas model’ makes ‘religious radicals such effective terrorists’: armed militant clerics spring up in failed states and regions perturbed by violence, and take governance into their own hands by ‘develop[ing] social institutions and help[ing] address the local population’s day-to-day survival needs.’ This creates both a community that fundamentalist militants can depend on, and also carries social capital in their favor as they serve the community around them.

Thus, the terrorist question is a complicated and multifaceted problem that society faces in the world at large. While it cannot be disregarded that terrorists pose a significant problem, and that international cooperation is needed to untangle their complex funding networks, terrorists are able to successfully inject themselves into perturbed and dying communities, making regulatory action and unilateral efforts against terrorism difficult.


Berman, Eli. Radical, Religious, and Violent: The New Economics of Terrorism. Cambridge: MIT Press, 2011.

Chaliand, Gérard, and Arnaud Blin. The History of Terrorism: From Antiquity to al Qaeda. Berkeley: University of California Press, 2007.

Fisk, Robert. The Great War for Civilisation: The Conquest of the Middle East. New York: Harper Perennial, 2005.

Krueger, Alan B, and Jitka Maleckova. ““Education, Poverty and Terrorism: Is There a Casual Connection?” Journal of Economic Perspectives, 2003: 17:119-44.

Napoleoni, Loretta. Terror Incorporated: Tracing the Dollars Behind the Terror Networks. New York: Seven Stories Press, 2005.

—. Terrorism and the Economy: How the War on Terror is Bankrupting the World. New York: Seven Stories Press, 2010.

Wright, Lawrence. The Looming Tower: Al-Qaeda And The Road To 9/11. New York: Knopf, 2006.

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