Cost of the war on terror

A key magnitude which is quoted frequently by the Government is the cost to Pakistan of the war on terror. According to the estimates by the Ministry of Finance the cumulative cost from 2001-02 to 2016-17 is $123 billion. This, it is rightly argued, is substantially more than the total security and economic assistance received from the USA during this period of $33 billion.
However, the estimated cost is substantially lower than the actual cost that has been incurred. This is the consequence of a somewhat defective methodology used by the MoF for deriving the total cost. The methodology used focuses on 10 types of costs. The largest component in 2016-17 is apparently the fall in tax collection, followed by the negative impact on foreign investment.
Unfortunately, this methodology does not include the two largest costs of the war on terror. The first is the substantially higher costs that the country has had to bear due to the required increases in security expenditure related to the military, paramilitary and police forces. The second is the fall in investment, not just by foreign investors but also by domestic investors, in the face of heightened perceptions of risk and uncertainty.
In fact, there has been a lot of interest in US academia on quantifying the cost of 9/11 to the US economy. A standard methodology has since been developed which focuses on costs of terrorist attacks and of efforts to counter them.
The direct costs include the loss of lives and injuries to people. These, of course, cannot be quantified. Other direct costs include the cost of compensation to victims' families, damage to infrastructure and private property and costs of resettlement of internally displaced persons, like those from Waziristan.
A large component of the direct costs is the rise in the expenditure on the security apparatus. This depends on the extent to which the rate of growth in such expenditure since 2001-02 exceeds the historical growth rate prior to Pakistan's support to the US in the war in Afghanistan. Further, there is need also to recognize the costs of private security arrangements in the face of higher risks to establishments and individuals.
Indirect costs consist, first, of the fall in the private investment, both local and foreign, in the economy due to the relatively insecure environment resulting from the acts of terror. Here again, the cost can be quantified by comparison of the rate of private investment after the peak in 2005-06.
Other indirect costs include the decline in tourism; need to maintain higher inventories to manage possible disruptions and higher costs of insurance premiums. Lower investment also implies the loss of 'multiplier' effects on the economy and a fall in the long-term growth potential.
The total security cost in the public domain is estimated from the published budget documents at Rs 1,417 billion in 2016-17. This includes, first, the expenditure on defence services, public order and safety and pensions of armed forces personnel by the federal government. Second, the expenditure on law and order by the provincial governments is also part of the overall security cost.
The aggregated security expenditure is equivalent to 4.6 percent of the GDP in 2016-17, with an annual growth rate in real terms since 2000-01 of over 4 percent. Prior to this year, the annual rate of increase was only 1 percent and the overall security cost in 2000-01 was 3.4 percent of the GDP. This enables estimation of the cumulative additional security cost due to the war on terror in US$ terms at $ 54 billion. The estimated magnitude of other direct costs is $11 billion. This implies that the total direct cost is $65 billion.
Private investment as a whole, including domestic and foreign direct investment, reached a peak in 2005-06. The overall rate attained was 13.5 percent of the GDP. Since then private investment has shown a declining trend to 9.9 percent of the GDP in 2016-17. Of course, the fall is due to a multiplicity of factors including increased risk perceptions, more power load shedding, higher costs of and less access to credit and escalation in the price of imported machinery. It is estimated that half the decline in the rate of private investment is due to heightened risk and uncertainty created by the acts of terror.
The estimated cumulative loss of investment, on the basis of this approach, due to the war on terror is $65 billion. If the resulting absence of the multiplier effect on the economy due to lower investment is included this cost rises to $ 109 billion. Inclusive of other indirect costs of $ 6 billion, the total indirect cost of the war on terror rises to $115 billion.
The overall cost, both direct and indirect of the war on terror, is estimated at $180 billion. This is higher by $57 billion or 46 percent in comparison to the Government estimate of $123 billion. There is need for the MoF to adopt the appropriate methodology for estimation of these costs.
The approach adopted here also enables a comparison of the additional security costs to Pakistan with the quantum of security assistance provided by the US, especially through reimbursements from the Coalition Support Fund. The former has been estimated above at $54 billion, while the latter magnitude is reported at $ 22 billion. Therefore, less than half of the additional security costs due to the war on terror to Pakistan have been covered by assistance from the US.
The government estimates imply that the annual costs of war on terror are declining. They are estimated to have fallen by 20 percent in 2016-17 to the level of $5 billion. This is probably based on the success achieved in reducing the number of acts of terror following Zarb-e-Azb and the ongoing Raddul Fasad.
However, private investment has not yet recovered. Also, security costs continue to rise. In fact, they have shown rapid growth of 16 percent in 2016-17. As such, it is unlikely that the costs of the war on terror have started declining. According to the methodology adopted above the cost in 2016-17 is $14 billion, which is almost three times the estimate of the MoF.
Clearly, peace in the region and continued effective efforts to combat terrorism are in the interest of Pakistan. The recent US posture towards Pakistan is unacceptable in light of the high and rising costs that the country continues to pay in the war on terror.
(The writer is Professor Emeritus and former Federal Minister)