Source: US Department of State (2004, Annex G)

Transcription

1 3. in a Direct 4. in a III. The economics of terrorism Terror is a widespread and long-term phenomenon (Figure 5.2), which only rarely is related to economics in public discussion.* Despite this neglect, terror has (among others) economic origins and economic consequences. * Frey, Bruno S. (2004), Dealing with Terrorism Stick or Carrot?, Cheltenham and Northampton. * Special issue Middle East in The Journal of Economic Perspectives,, Summer 2004, Volume 18, Number 3. *Wintrobe, R. (2003), Can Suicide Bombers be Rational?, University Western Ontario, mimeo. *Special issue Ökonomie der Sicherheit, DIW Vierteljahrtshefte 3/2009. *Freytag,A. J.J. Krüger, D. Meierrieks, F. Schneider (2011), The origins of terrorism: Cross-country estimates of socio-economic determinants of terrorism, European Journal of Political Economy, pp. S.5-S.16. S

2 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Figure 5.2: World-wide terror attacks ( ) Source: US Department of State (2004, Annex G) 15

3 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Issues are: Terror and international trade drivers of terrorism (micro and macro) Financing terror Combating terror Cost of security vs. cost of terrorism a) How economists see it: terrorist as a utility maximizer terrorist behaves rationally to meet certain objectives, e.g. destabilising the society, media attention, economic losses for the country, power. Even suicide bombing is perceived as a rational act. The key is opportunity costs. 16

4 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Opportunity costs are relevant for terrorist, their relatives, and their leaders. High opportunity costs imply low terrorist activities having their origin in countries or regions. Opportunity costs theoretically depend on several factors: real income per capita (+), (even) income distribution (+), growth rate of real per capita income (+), education level (+), male surplus (-), economic and political freedom (+), kind and number of independent media (+), religious competition (+). Figures 5.3 through 5.5 show the individual rationality. 17

5 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Economic Success Figure 5.3: Optimal choice between ruler s blessing and economic success U A Mental Rewards Source: Freytag, A. (2005) Weltwirtschaftliche Integration und Frieden, In: A. Freytag (ed.) Weltwirtschaftlicher Strukturwandel, nationale Wirtschaftspolitik und politische Rationalität Festschrift für Juergen B. Donges zum 65. Geburtstag,, Köln: Kölner Universitätsverlag, pp

6 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Economic Success Figure 5.4: changing relative price U 2 C A B Mental Rewards 19

7 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Economic Success Figure 5.5: The suicide bomber U 2 U E D Mental Rewads 20

8 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Socioeconomic determinants of terrorism: Freytag, A., J. Krüger, D. Meierrieks and F. Schneider (2011) The Origins of Terrorism - Cross-Country Estimates on Socio-Economic Determinants of Terrorism; European Journal of Political Economy, 2011, S5-S16. Necessary to distinguish: terrorist group/network leaders active terrorists supporters/sourroundingsourrounding Socioeconoic determinants reflect opportunity costs of these actors: Wealth accumulation, consumption, employment opportunities Political freedom, freedom of press, religious freedom Political polarization, ethical fractionalization, social unrest 21

9 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Varible to be explained Terrorist attacs coming from one country, Main explanatory variables: (logged) real GDP per capita and its square (logged) real and its square (logged) level of consumption level of trade openness (measured by the logged ratio of exports and imports to the real GDP) (logged) level of investment (indicated by the investment component of the real GDP) we control for the rate of economic growth which reflects a country's short-run run economic performance Control variables:, Regime stability Government size Population size Civil war, International war, military spending Religion 22

10 3. in a Direct 4. in a 5. Normative Public 6. Conclusions 23

11 3. in a Direct 4. in a 5. Normative Public 6. Conclusions 24

12 3. in a Direct 4. in a 5. Normative Public 6. Conclusions It is easier to look at terrorist targets. They are rich countries or regions in poor countries where Westerners are regularly (as tourist or as security officials). Costs of terrorism (and of fear of terrorism): Tourism, fdi, foreign trade, stock prices, urban economy less attractive, real estate prices, national income. The costs related to terrorist activities cannot be neglected. Are high 25

13 3. in a Direct 4. in a 5. Normative Public 6. Conclusions b) Does a war on terrorism make sense? War on terror: deterrent strategy decreases terrorist s opp.-costs potentially increases mental rewards (just cause, martyr) Example: ISIS and war in northern arabic peninsula international terrorism no field of war, no mental rewards for foreign fighters Terror organizations try to mitigate effects of war: get a role as social organization reduction of opportunity costs Example: destruction of terrorist s living homes and support by Hamas in Palestine social programs of Hamas and FaTah 26

14 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Figure 5.6: Deterrence and marginal costs and benefits of terrorism for the terrorist MC, MB inactive terrorist/ supporter MB 0 MB 1 active terrorist/ supporter MC 1 MC 0 2) war on terror has costs for terrorists 1) war on terror gives benefits for terrorist T 0 T 1 Source: Frey (2004, p. 77); adoptions by S. Voll Terrorism 27

15 3. in a Direct 4. in a 5. Normative Public 6. Conclusions Cost of deterrence budgetary costs, political costs, e.g. reduced political rights, increased vulnerability due to centralisation, free marketing for terrorists, Schumpeterian reaction by terrorists. How does a successful anti-terror terror policy look like from an economist s perspective? Stick and carrot! (security), diffusing media attention in the target countries, political treatment of terrorist (rule of law), economic integration (as opposing economic sanctions), polycentricity, preventing illegal financial transactions. 28

16 3. in a Direct 4. in a 5. Normative Public 6. Conclusions So why do governments react economically partly irrationally by using deterrent strategies only? Terrorism is costly, fear of terrorism is also costly (see next slide), integration of potential terrorist may not be a successful strategy to be re-elected, elected, security as a (weakest link) public good excessive provision of deterrence, action gives the government a competitive edge over the opposition. Deterrence as an anti-terror terror strategy has benefits in increasing opportunity cost partly. However, terrorist groups are flexible. Therefore, deterrence (= war on terrorism) has also high costs. 29

17 3. in a Direct 4. in a IV. Empirical evidence: governments performance So far in Chapter 5, public choice models applications have been shown. This section is dedicated to summarising remarks and some extensions, mainly more evidence about government size and some evidence about the relevance of the theory of political business cycles. a) The welfare effects of lobbying b) The size of government c) Political business cycles This section refers to chapters 20 (a), 21 to 22 (b) and 19 (c) in Mueller (2003). 30

18 3. in a Direct 4. in a a) The welfare effects of lobbying United States: Lobbying expenditures per year in US: 1) daily lobbying (Senate, Congress): 31

19 3. in a Direct 4. in a 2) Campaign contributions: 32

20 3. in a Direct 4. in a European Union Coen, D. (2007) empirical and theoretical studies in EU lobbying. Journal of European Public Policy, Vol. 14(3), pp Is special, because: Federal organization Still strong tendencies of standardization and centralization (Niskanen) Heterogeneous member states European Commission: creates discussion bodies (asymmetric information, consultation) which are primary target of interest groups gate keeper and agenda setter for council discussions and decisions National governments: captured by regional interests 33

21 3. in a Direct 4. in a Lobbying expenditures in Brussels a snapshot: ( data etracted from ec.europe.eu/transparencyregister transparencyregister) 34

22 3. in a Direct 4. in a Olson: some interest groups better organized than others Informational asymmetry and platform choice of politicians: the median outcome will be missed. Waste of ressources: lobbying as investment (human capital!) Welfare losses: - Excess burden due to: wrong regulation; subsidies, tariffs, restriction of competition - Inefficient tax regime with sub-optimal distortions - Insufficient and/or wrong targeted redistribution - Lack of risk insurance At least in US and EU-level: Registration of lobby groups And registration (approx.) of contributions mandatory 35

23 3. in a Direct 4. in a b) The size of government Overall government activities and expenditures have grown remarkably between 1870 and 1980 (see Table 5.1). Today (1996) the average government in OECD countries uses in roughly 45 per cent of GDP for its expenditures. In 1870, the share was 10 per cent. Two relevant questions: How can this growth be explained? How does this increase in government activities affect social welfare? 36

24 3. in a Direct 4. in a Source: The Economist, January 23rd-29th, 29th, 2010, title 37

25 3. in a Direct 4. in a Year in millions of dollars Total federal expenditures as % of GDP Federal, state and local expenditures as % of GDP Govern- ment transfers in billion dollars as % of natio- nal income in billion dollars (con- sump- tion) [1] [2] Table 5.1a: Government expenditures in relation to national income and GDP in the US, Total government consumption plus transfers [1]+[2] [1]+[2] as % of GDP

26 3. in a Direct 4. in a Year in millions of dollars Total federal expenditures as % of GDP Govern- ment transfers in billion dollars as % of natio- nal income Federal, state and local expenditures in billion as % dollars of (con- GDP sump- tion) [1] [2] Total government consumption plus transfers [1]+[2] [1]+[2] as % of GDP

27 3. in a Direct 4. in a Year in millions of dollars Total federal expenditures as % of G D P Federal, state and local expenditures as % of GDP as % of natio- nal in- come in billion dol- lars in billion dollars (con- sump- tion) [1] Govern -ment trans- fers in billion dollars [2] Total government consumption plus transfers [1] + [2] [1]+[2] as % of GDP Source: Mueller (2003, p. 502). 40

28 3. in a Direct 4. in a About 1870 General government for all years Pre- Post- World War I Pre- Post- World War II Table 5.1b: Growth of general government expenditure, (percent of GDP) Australia Austria Canada France Germany Italy Ireland

29 3. in a Direct 4. in a About 1870 General government for all years World War I Pre- Post- World War II Japan New Zealand Norway Sweden Pre- Post- Switzer- land United Kingdom United States Average

30 3. in a Direct 4. in a About 1870 World War I Central government for , 1937, general government thereafter Pre- Post- World War II Belgium Pre- Post- Nether- lands Spain Average Total average Source: Mueller (2003, p. 503). 43

31 3. in a Direct 4. in a State activities in terms of GDP cannot only be seen when looking at expenditure, but also when looking at tax reductions: In fact, governments in country A and B are equally active. They both tax the citizens with 50 per cent. Only country B reduces tax for parents to a total of 10 per cent of GDP. Country A Country B Official Full Official Full Gov. Consumption Transfers to pensioners Transfers to children Spending Taxation

32 3. in a Direct 4. in a Explanations for the size and growth of government Pure economic theory: the government as provider of public gods and eliminator of externalities (section in Mueller) Wagners law (technology; scientific progress in widest meaning) Historically: Welfare theory started with 1950s justification for government intervention in classical/neoclassical economics is weak ( unproductive state ) Increases in productivity: tax burden which can be borne by the citizens raised strongly from 1850 onwards 45

33 3. in a Direct 4. in a bb) The government as redistributor of income and wealth (section ) Increasing redistribution Application of the median voter theorem. cc) Interest groups (section ) Subsidies and transfers have enormously grown since 1870 (Table 4.5). Reasons: switch from regulation to transfers and subsidies (microeconomic foundations: superiority of cash in comparison to real transfers; trade policy) 46

34 3. in a Direct 4. in a Table 5.2: Government expenditure on subsidies and transfers, (% of GDP) About Canada France Germany Japan Norway Spain United Kingdom United States Average

35 3. in a Direct 4. in a About Australia Austria Belgium Ireland Italy New Zealand Sweden Nether- lands Switzer- land Average Total average Source: Mueller, p

36 3. in a Direct 4. in a dd) Bureaucracy and the size of government (section ) The Niskanen model is static and thus cannot explain the growth of a budget. But: bureaucratic entrepreneur : budget grows faster than GDP Pure statistics: bureaucracy with low possible productivity increases (service character of public administration) but competition on labour market for higher human capital wages increase stronger than productivity budget increases over proportionally 49

37 3. in a Direct 4. in a ee) Fiscal illusion (section ) Voters overestimate utility from actual spending, discount future tax burden too much public sector and public debt increases Empirically less relevant in its strict form but: no full ricardian equivalence of private savings Individuals think, they can bear future tax burdens easier (time preference) or can avoid tax payments (just dying away.) ff) Tax elasticity (section ) A Leviathan type of government increases taxes above optimal levels. Only if the increase becomes unsustainable taxes have to be reduced. ( it s the economy, stupid! Reagan, Thatcher, Kohl, Schröder) 50