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Abu Dhabi, UAEWednesday 12 December 2018

Economics 101: Terrorism rarely destroys tourism for good

Researchers says infrequent attacks, such as those faced by Egypt, do not impact visitor numbers long term

River cruise boats are parked on the Nile River in Cairo, Egypt. The Sheraton hotel can be seen in the background. Amr Abdallah Dalsh/Reuters
River cruise boats are parked on the Nile River in Cairo, Egypt. The Sheraton hotel can be seen in the background. Amr Abdallah Dalsh/Reuters

A couple of weeks ago, The National reported that Egypt’s tourism receipts had increased by 54 per cent during the first seven months of 2017, compared to the corresponding period in 2016.

The most populous Arab country has suffered greatly economically since the beginning of a political roller coaster in 2011, with much of the damage being reflected in shrinking tourism. Have acts of terrorism, such as the 2015 crash of a Russian plane in the Sinai Peninsula, played a role in hamstringing the Egyptian economy?

Many scholars have investigated the impact of terrorism on international tourism, with two recent contributions coming from the Hong Kong-based researchers Anyu Liu and Stephen Pratt in the 2017 volume of the academic journal Tourism Management; and Australian-based researchers Shrabani Saha and Ghialy Yap in the 2014 volume of the Journal of Travel Research.

Before discussing their findings, it is worth clarifying the theoretical link between terrorism and tourism. Part is obvious: when a terrorist attack occurs, prospective tourists may exhibit greater reluctance as they fear becoming victims of future terrorist attacks. Beyond this, there is the damage to important infrastructure and its downstream effects, as well as the adverse consequences for foreign direct investment, which often furnishes the tourism destination with critical capital.

Ostensibly, countries such as Egypt appear to have suffered according to these mechanisms; in particular, Russia - a historically important economic partner and source of tourisms - still bans flights directly from its territory to Egypt, as a direct consequence of the loss of its civilian jet in 2015. But can terrorism account for the broader declines in tourism revenues experienced by Egypt throughout the last six years?

The above pairs of researchers have found that in general, tourism is not adversely affected by terrorism, especially when that terrorism comes in the form of infrequent attacks, such as those faced by Egypt. While terrorist attacks tend to cause an immediate, noticeable decline in tourism demand, revenues are typically quite resilient, recovering in a matter of months. Secular declines in tourism activity are much more likely to be the result of protracted periods of political instability, due to its crippling effect on all components of the economy.

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Why does terrorism tend to have a modest effect, despite the frequently hysterical media coverage?

The simple answer is “rationality”. A key goal for most terrorists is making the general public feel unsafe, through headline-grabbing acts of violence. They want you to feel that something which you regard as completely routine - such as going to the grocery store, or withdrawing money from an ATM - is a risky act.

The problem for terrorists is that, in many cases, this is an illusion. A cold hard look at the probabilities associated with being the victim of a terrorist attack suggests that it is tough to justify a need to change your daily habits in response to acts of terrorism.

For example, in a recent article by CATO Institute’s Alex Nowrasteh summarising findings on the issue, it turned out that the annual chance of dying in a terrorist attack in the UK in the period 2001-2017 was 1-in-9,000,000, compared to 1-in-600,000 during the period 1975-2000. Both figures are very small, and most would be surprised to hear that salient terrorist attacks that have happened in the UK during the last 17 years, including the 2005 London Underground bombs, have not contributed to a statistically more hazardous life for UK residents.

In the context of tourism, once prospective tourists get over the initial shock of seeing wanton acts of destruction on their television sets and Twitter feeds, they quickly realise that the actual likelihood of being a victim is minuscule. They may also be emboldened by authorities truthfully reporting that expressing fear is precisely the terrorists’ goal, and that a valiant response revolves around exhibiting defiance, and an insistence on living one’s life as normal.

Beyond this, the price mechanism helps; exchange rates, hotel rates, and flight prices all exhibit elevated levels of flexibility, meaning that a terrorist attack - and the subsequent reluctance to engage in economic activity - will be swiftly reflected in touristic bargains. For many, the temptation to take advantage of a good deal is too strong to resist, which helps initiate a recovery in tourism demand, as people start to realise that their fears were a psychological overreaction.

These findings fall into a broader economics phenomenon: experience in real stakes market transactions helps people overcome their cognitive biases, such as the tendency to exaggerate the risk of being the victim of a terrorist attack. Seasoned travellers are most likely the least prone to the dissuasive effects of politically-motivated violence, just as experienced stock traders are less likely to fall prey to financial bubbles than are fresh investors.

Returning to the case of Egypt, the country experienced many decades of political stability under Hosni Mubarak, a key contributor to the country’s once-vibrant tourism sector. Combating terrorism should always be a priority; but from an economics perspective, ensuring and projecting political stability is of great value, too.

Omar Al-Ubaydli is the program director for International and Geo-Political studies at Derasat, Bahrain. We welcome economics questions from our readers via email (omar@omar.ec) or tweet (@omareconomics).