Title
Lebanese security forces and firemen stand next to a destroyed car at the scene of a car bomb explosion that killed former minister Mohammad Chatah in central Beirut, on December 27, 2013. © AFP
Title
Last updated: February 11, 2014

Car Bomb Economics

Banner Icon

A bustling avenue begins its day like any other, with greetings and car horns. On the corner is a local convenience store, serving as a regular pit stop for residents of the neighborhood to shop and socialize. Down the street, parks an unfamiliar vehicle on the side in an abrupt manner, the driver’s eyes nervously darting from side to side. Moments later, an ear-piercing sonic blast shatters all windows within a mile radius, and the store’s floor is suddenly covered in glass shards.

There is no greater cost than the loss of human life. The mere task of even assigning a finite numerical measure to such an event is still under debate. Economic theory has come up with the value of statistical life, which is measured by assessing what value an entity would assign to a marginal change in the probability of its demise. A common example is how much one would pay to upgrade an insurance policy, or perhaps buy a better helmet. The core reasoning is to numerically gauge the price of avoiding death. Unfortunately, what is rapidly becoming a reality for residents of certain nations in the Middle East is that this price rising by the day.

"A bag of groceries for that evening’s dinner is now being trampled on the sidewalk"

From the crowded markets of Baghdad to the rush hour traffic of Beirut, terrorists have become increasingly indiscriminate in their targets. Scores are killed and the local community has gradually looked to apathy as a defense mechanism during these violent times – under such conditions, it may be the only route to living a normal life. Collectively, the event of a terrorist attack imposes costs on the psychological and emotional wellbeing of a citizen. This, unfortunately, is not where the damage subsides.

The shopkeeper has abandoned his cash register, scrambling to assist in any way he possibly can. Sirens bellow through the screams and orders are being yelled at civilians by immediate response teams. Mobile phones are ringing and tears are flowing. A bag of groceries for that evening’s dinner is now being trampled on the sidewalk.

Acknowledging the immediate effects is pivotal, but digging a few tranches deeper will reveal another level of impact in the form of an economic ripple effect whose incidence cannot be underestimated. Synonymous to any market shift, a terrorist attack will induce saturation, stymie business confidence and even alter consumer preferences. More and more, these influences are anchoring small business owners down.

Speculative economics serves to explain the ominous domino effect that grips the economy. Consumer confidence is the first pillar to disintegrate. A dampened sense of security will trump the majority of non-essential spending on an individual level, leading to reduced sales in the on-trade and service sectors in the near term. The off-trade and retail sectors will not be spared either. This drop in demand causes an unexpected build up in inventories and stockpiles, leading to an abrupt saturation in affected consumer markets. These may vary from clothing stores to electronics shops, but ultimately, a loss is incurred.Even behavioral economics plays a role. Spending patterns begin to alter as well, as safety concerns gradually climb up the priority ladder. In a region where car bombs have become an unfortunate norm, cafés and foodservice outlets that are exposed to any sort of street parking will increasingly be avoided. Public markets that depend on foot traffic for sales, but cannot possibly provide a sufficiently adequate security blanket, have been a common target in Iraq and follow a similar pattern of impact.

"He closes up shop early that day, and considers cutting his losses altogether"

A few days later, the shopkeeper is done sweeping the floor, has filed all the necessary insurance claims and unlocks the store’s door for the regular morning rush. Outside, however, there are no car horns or greetings. The only audible sounds are the posters of the attack’s deceased, flailing in the wind. He closes up shop early that day, and considers cutting his losses altogether.

On December 27, 2013, a car bombed ripped through a street in the downtown business district of Beirut, shattering the notion that this area was immune to any violence of this sort.

The target was a prominent technocrat and former minister, Mohammad Chatah, who was killed along with five innocent bystanders. Prior to this attack, similar violence of this nature was isolated to certain areas of the country that were then under stringent security measures. The downtown explosion not only shattered the windows of the boutique shops and government buildings within its blast radius, but also destroyed the paradigm dictating that this instability could be contained.

ALSO READ: Beirut, yet again...

Regardless of the root of the cause, a loss-inducing slump in consumer confidence from this sort of attack can be exorbitant. According to a report released in January 2014 by the Economic Research and Analysis Department of Byblos Bank Lebanon, output losses from economic disruptions such as the aforementioned have been valued at $9.7 billion between 2011 and 2013. This accounts for an average of 7.64% of the annual gross domestic product for those years. This case is not endemic to the Lebanese context – in spite of regaining momentum in its oil sector, several entities have downgraded Iraq’s economic outlook in the medium term due to the recent spike in instability.

The consequences are tangible. Beirut shopping districts such as Hamra and the Downtown district have witnessed a heightened sense of paranoia. Business owners in similar commercial areas, such as in the northern Kaslik neighborhood, have begun approaching vehicle owners they do not recognize and asking them to leave their contact information on the windshield for identification purposes. Not only is this hardly conducive to a friendly shopping environment, but the basic foundation of a market is rattled. The interaction between supply and demand, incentive and greed, has taken a backseat to basic instincts and sheer human survival.

The effect on tourism need not be mentioned - its decline is predictable when security falters. The Lebanese Ministry of Tourism announced earlier in 2014 that traffic at the Rafic Hariri International Airport in Beirut is down a staggering 40% since 2010. Given the current state of affairs, this is unlikely to improve in the near future.

Ultimately, these attacks do not limit their influence to a physical level – there is an intellectual effect. What used to be considered relatively modular communal behavior is reshuffled into a state of mistrust, a crumbling set of market foundations and a deteriorating standard of living. The cost of terror is one that is paid by society as a whole, and while those who encounter bloodshed pay most dearly, secondary costs will continue to be an economic wet blanket on the community.

ALSO READ: 10 reasons to visit Erbil

Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
blog comments powered by Disqus