Hamish McRae: Counting the hidden costs of terrorism

Terrorism is undermining the fabric of the global economy in a host of subtle ways

On Friday it will be a year on from the terrorist attack on London, and in another two months it will be the fifth anniversary of the attacks on the US. So what has happened to the economies of the two countries since these events? Both have done very well.

Here in the UK, the 12 months have seen decent growth, rather better in fact than during the first half of last year. And that is not just general UK performance, for the London economy has had a great year. Just yesterday figures came out showing that foreign direct investment in London had grown by more than 15 per cent in the year to end March. Office rents in the West End are up by a similar amount; population is growing; house prices rising again.

As for the US, the past five years have seen a strong economic recovery, with the country being the fastest-growing of the G7 economies and indeed having some of the best years in economic terms that the country has ever experienced. As for New York itself, well, after a difficult couple of years it is now growing strongly again.

You can look further. Spain has survived the attack on the Madrid railway commuter trains and remains the star performer among the large continental economies. In a rather different category, the centre of Manchester has been transformed following the IRA bomb devastation of a decade ago.

This is hugely encouraging. Nothing, but nothing, can ever mitigate the human suffering and the loss of life, and we should always remember that. I am not sure we have been good enough at that. But if part of the fight against terrorism is demonstrating that our economies cannot be unsettled by these attacks, then we have a powerful story to tell. Nevertheless, the story requires an explanation and carries a warning. The explanation first.

It is often declared that war is good for economies. That is basically rubbish, for war - any war - destroys wealth as well as killing human being. Superficially, conflict does indeed create growth in the sense that the level of economic activity is cranked up by it: factories work longer hours producing equipment and people who might otherwise be inactive are pulled into employment. But resources that go into military activity, or in this case counter-terrorism, are resources that are not available to go into consumption. So, sure the figures say there is more activity, but we don't feel any richer as a result. So the resources that have been devoted both here and in the US in tackling terrorism may actually show up in the growth figures, but they represent a loss of human welfare, not a gain.

There is another part of the explanation, and that is that the scale of the resources thrown against the terrorists is quite small in the overall size of the economy. To get this into perspective, our entire defence spending is less than 3 per cent of GDP, the equivalent of a good year's growth. Of course only a small proportion of that is spent on counter-terrorism, while much of the effort appears on other departments' budgets. But the basic point is that in hard cash we are not spending a lot of money in to context of the economy as a whole.

Maybe we should spend more, maybe less; maybe we should spend it in different ways. But those are separate issues. From a macro-economic perspective this is not big. Growth is the thing that matters, and that does not seem to have been harmed, or at least not significantly so.

That is the explanation; now the warning. Terrorism - and more particularly the West's response to it - is undermining the fabric of the global economy in a host of subtle (and some not so subtle) ways. While we can see the immediate up-front costs, we cannot see the underlying ones, some of which will undermine the global economy for years to come.

It costs money to organise the security checks at airports, because real resources have to go into that. But the cost is partly just our own time, which is sort of free, and partly it is lost in the overall cost of the airline ticket. It is less enjoyable getting through to the plane (though personally I am astounded just how good security staff seem to be at most UK airports), but that does not show in the statistics

The issue is then: to what extent have terrorism and our efforts to tackle it imposed costs on our society that are more or less invisible? Here I think there should be real concerns.

For example, visitor restrictions to the US have meant that it is not economic for the Halle Orchestra to have a US tour: it would cost too much to get the necessary visas for the entire orchestra. Now that was not the intention of the US authorities when they changed the visa system in response to 9/11, but that is what has happened. Similarly, foreign student numbers in the US have fallen as a result of visa difficulties, so in 10, 20 or whatever years' time, fewer people around the world will have practical experience of the US.

It so happens that this has worked to the UK's advantage. Thus many US financial institutions run their international operations out of London rather than New York. One of the reasons, not of course the only one, is that it is easier to hire non-Americans here: they either don't need UK visas (they are EU citizens), or it is easier to get them.

That would, however, be a narrow perspective. There are other costs to all societies from restrictions on the free movement of people that are designed as counter-terrorist measures but have unintended consequences. Some of these are evident now, but I suspect that there are many more that have yet to appear on the radar.

There are obvious absurdities, such as the way anti-laundering legislation means that you need to find your birth certificate to open a bank account or change your pension plans. That is happening; everyone knows it is nuts; but no one seems to know what to do about it.

The case of the three National Westminster bankers, who may be extradited to the US, is another unintended consequence of anti-terrorist legislation. There will be more and more such examples and, drip by drip, they will damage the global economy.

Does that matter? Well, yes, absolutely. We take for granted the burst of global prosperity that the world is now experiencing. Hundreds of millions of people in China, India and in parts of Africa are moving to a level of prosperity that would have seemed unthinkable a generation ago. So far at least, terrorism has made only a small dent in this progress. But the response of the developed world to it, at many levels, has not been as competent as we have a right to expect. Sadly, too, we have to expect further attacks. So in celebrating the economic resilience so far, we should also be wary of the threats ahead.