Analyzing Terrorist Threats to the Economy: A Computable General Equilibrium Approach

Abstract

This chapter summarized the current capabilities of computable general equilibrium (CGE) models that were designed to analyze and estimate the economic impacts of a terrorist attack. The CGE approach is a formidable one because it performs well in terms of nearly all of the modeling considerations applicable to the task and it superior to its major modeling competitors in most aspects. CGE is especially adept at modeling two major aspects of the economic losses in this context – resilience and general equilibrium effects. It should be noted that the formulation and application of most CGE models to date has been in respect of the economic impacts of disruptions to individual utility lifelines. Additional refinements are necessary to model the ramifications of more complex cases with widespread devastation of property from bombs or natural hazards. In should be emphasized that in these cases, the sum of the indirect damage stemming from simultaneous damage to several individual targets is greater than the actual damage because of redundancy, that is, one must avoid counting lost production in a factory from both its own destruction and its inability to produce. Most terrorist attacks however are likely to be relatively more targeted, in which cases further adjustments are not needed. Future research on CGE modeling of terrorism should focus on important aspects of the issue, as well as limitations of CGE modeling in addressing them. The combination includes improving the ability of CGE models to incorporate financial variables, technological change and cumulative adaptive behavior, short-term adjustments to equilibrium and long-term effects on economic growth.