Terrorism , Trade and Public Policy

Are bigger markets safer? How should government policy respond to terrorist threats? Trade draws potential terrorists and economic predators into productive activity, but trade also draws terrorist attacks. Larger trade reduces the risk of terrorist attack when the wage elasticity is high, associated with low ratios of predators to prey and high wages; but it may increase the risk of terrorist attack when the wage elasticity is low, associated with high ratios of predators to prey. Anti-terrorist trade policy should always promote trade in simultaneous play. Government first mover advantage and inelastic wage may imply trade restriction. Tolerance of smuggling may improve security. Better enforcement should ordinarily be provided for bigger, inherently safer and higher wage markets. JEL Classification: F13, O17, K42 ∗An earlier version of this paper was presented to the CEPR Conference on Conflicts, Globalization and Development, Paris, November 2008. I thank Stergios Skaperdas and other participants for helpful comments. Are bigger markets safer from terrorism? How should governments respond? Informal economic thinking yields conflicting answers. Protectionists think that less trade lowers vulnerability. Liberals think that bigger markets increase legitimate employment and thus dry up the wellsprings of terrorism. The liberal vs. protectionist debate has important policy implications. Should trade be concentrated and fostered in bigger, more well-protected markets or dispersed in smaller markets? Sensible public policy should be derived from a model of the costs and benefits of trade and enforcement policy, accounting for the reactions of traders and terrorists. This paper sets out the key elements in a model of rational terrorism, trade and public policy. It features interaction between trade, terrorism and policy through a common labor market supplying trade workers, enforcement patrols, economic predators and terrorists. Think of market towns with labor and capital markets partially segmented from the wider economy. Government and a terrorist executive ‘Al Qaeda’ (AQ) set defense and attack strategies. The model is most applicable to thinking about public policy and terrorism in a market and across markets within a country. Since economic predation plays a key role, the model may be less applicable to rich secure countries. Thinking about transnational terrorism suggests linkages between countries that are shut down here — terms of trade effects, migration, and competing national governments, some of which may be complicit with the terrorist movement. The current model may nevertheless be a platform on which to build these added structures. Is bigger safer? Destruction of bigger markets is probably more valuable to a terrorist executive — bang for the buck. In contrast, trade expansion raises wages, making it more costly for AQ to hire terrorist agents — cost push. Higher wages also draw off economic predators, increasing the shipment success rate of traders against predators of both types — safety in numbers. When safety in numbers and cost push dominate bang for the buck, bigger is safer. This occurs when the elasticity of the wage with respect to trade volume exceeds one and the value to AQ per unit of trade destroyed falls with volume. The wage elasticity condition is met in high wage low predation markets, Irrational policy examples include the current US law mandating that 100% (!) of all containers shipped to the US must be inspected by 2010. Some expensive steps have already been taken, in the US and many other locations. Yet delay in ports adds to shipment costs more significantly than most current tariffs. but it may be violated for low wage markets. ‘Underemployment’ equilibrium — low wage elasticity with respect to trade — is associated in the model with insecure property rights and a large sectoral share of informal employment. It contrasts with surplus labor models that impose low wage elasticity economywide. Public policy includes both tax or subsidy to trade (via lower access charges) and enforcement by patrols or inspections. Anti-terrorist trade policy should promote trade if the government plays simultaneously with AQ. Trade promotion is efficient whether bigger is ultimately safer or not because the strategies of government and AQ cannot exploit knowledge about their opponents’ response. With a government first mover advantage, tradereducing policy may be beneficial if bigger is less safe; i.e., only if the wage is inelastic and/or AQ’s value per unit destroyed is increasing in volume. Considering interaction between government and AQ across many markets, simultaneous play seems more plausible. Liberal optimism is probably justified in most circumstances. Enforcement frustrates predation of both types by ‘patrols’ or ‘inspections’. The comparative statics of efficient trade and enforcement policy imply that the rich get richer: less trade and enforcement and thus less security the smaller and more low wage the market is. An important externality arises when a grey (smugglers) market exists alongside a legal market. Smuggling draws off potential predators of both types, so anti-terrorism motives increase tolerance. If smuggling strengthens AQ, intolerance is indicated. Across market towns linked through the labor market, so long as better enforcement raises the wage, better enforcement anywhere makes all markets safer, a positive externality. When wages are low it is possible that better enforcement reduces the wage (the greater number of cops is offset by the number of economic predators switching to legitimate employment), inflicting a negative externality on other markets. Cooperative enforcement ordinarily treats markets unequally. At a constant wage, bigger markets get more protection. But incorporating the wage response to enforcement effort, in high wage economies the effect is to reduce protection to bigger markets. In low wage economies the wage response can amplify the tendency to protect bigger markets more intensively. Thus efficient enforcement in poor economies may be more unequal than in rich economies.