This article is the first to uncover systematic evidence of the economic cost of harboring terrorism. While trying to inflict real economic costs (in addition to psychological, sociological, and political damage) on targeted societies, terror organizations also cause significant economic harm to the population that they claim to represent. The findings raise the question of whether or not the economic cost is an effective counterterrorism policy. The financial repercussions may induce the civilian population to stop or weaken support for terror organizations.
The literature on conflict and terrorism has paid little attention to the economic costs of terrorism for the perpetrators. This article aims to fill that gap by examining the economic costs of harbouring suicide terror attacks. Using data covering the universe of Palestinian suicide terrorists during the second Palestinian uprising, combined with data from the Palestinian Labor Force Survey, the authors identify and quantify the impact of a successful attack on unemployment and wages. They find robust evidence that terror attacks have important economic costs. The results suggest that a successful attack causes an increase of 5.3 percent in unemployment, increases the likelihood that the district’s average wages fall in the quarter following an attack by more than 20.0 percent, and reduces the number of Palestinians working in Israel by 6.7 percent relative to its mean. Importantly, these effects are persistent and last for at least six months after the attack.