Opportunity cost and crime (with particular reference to terrorism)

Opportunity cost and crime (with particular reference to terrorism)

Sam Choon Yin (09/2004)


Criminal acts deliberately inflict harm on others. As such, governments need to be involved to internalise the external cost imposed on third parties possibly with help from international organisations and countries from around the world. Terrorist attacks can be viewed as criminally based. So are murdering, kidnapping and stealing. These are some of the common crimes committed by the working class. The white collars may commit crimes like money laundering, evading of taxes and expropriating of private and public funds. In the international context, the Interpol (based in Lyon, France) provides a useful avenue for governments around the world to work together and contain growths of cross border crimes including terrorism, corruption, money laundering, trafficking of human beings and cyber crime (http://www.interpol.org).

            Micro economists have viewed the decision to commit criminal acts as one which reflects the fact that the decision brings forth higher net benefit than that of its alternatives. This essay examines how economics can be a useful subject to help us understand criminal behaviour better, with particular reference paid to acts of terrorism.

            Economics is a science of choice. Basically, hard choices have to be made because of scarcity. A relative concept, scarcity is said to exist if the amount of resources one has are not sufficient to meet all of his/her wants. As a result, all alternatives have to valued and ranked so that the most desirable one is ultimately chosen. In Economics, individuals are assumed to be rational thinkers. A rational person views all possible alternatives available to him/her and ‘computes’ the cost and benefit for each. The alternative that yields the highest net benefit will be selected. In theory, providing the individuals with freedom to choose (with no intervention from the government) should result in efficient choices. It is also important that the individuals have perfect information. Unfortunately, individuals usually do not have access to all available information. Even if all information is available, cognitive science have warned us about the impossibility of the human brains to decipher them. As such, individuals are bounded rational.

Because choices are made, it must imply that some alternatives have to be sacrificed. In Economics, the term ‘opportunity cost’ is used to illustrate the value of the next best alternative forgone.

A terrorist faces the scarcity problem like anyone else. For example, with limited time available, he/she must decide how time could be efficiently allocated. It could be assumed that a potential criminal faces two options: ‘to commit crime (terrorist attack)’ and ‘not to commit crime’. Each decision could bring forth benefit and cost to the person, and it is up to him/her to assess the alternative’s benefit and cost and choose the option that yields the highest net benefit. Obviously, an economic approach to deter crime is to raise the opportunity cost of engaging in criminal acts (like terrorising the society), and reduce the opportunity cost of engaging in legal activities.

            Because the actual benefits and costs are difficult to ascertain by a typical person (for they involve ‘forecasting’ the benefit and cost), it is the perceived benefit and cost which matters. But there is always an element of risk whereby the perceived benefit and cost are not realised. For example, suicide bombers are often promised financial rewards to their loved ones in exchange for their courageous acts. Supporters of extremists may believe that upon fulfilling their duties, a path will be drawn for them to go to heaven. Such benefits could not be ascertained in an accurate manner. There are often non-zero probabilities that the promises will not be fulfilled. This is unlike the usual fines or punishments imposed on offenders, which, if they are acted in accordance to stated legislations, are generally more certain to those who intend to commit crimes. It is important to recognise this because attempts to influence the perceived benefits and costs could come in the form of influencing the probabilities that these benefits and costs would realise, and not merely through influences on the magnitude of benefits and costs.

            My focus in this essay is on acts of terrorism. While what actually constitutes as ‘terrorism’ has yet to be determined by international institutions like the United Nations (UN) (Boulden and Weiss, 2004), the Little Oxford Dictionary has provided a useful working definition. It refers to terrorism as a practice of using violent and intimidating methods to secure political ends. Clearly, terrorist acts wilfully inflict harm on the society, indicating the society’s disapproval of them. What does economics has to say about terrorism? As was illuminated earlier, economists have suggested raising the opportunity cost for committing terrorist acts as a useful measure to tackle the problem.

            Numerous measures have been suggested to raise the opportunity cost of taking part in terrorist attacks. Multilateral institutions like the UN and Financial Action Task Force (FATF) have committed resources to fight terrorism, raised awareness of the problem, and made it less difficult to catch the offenders. The UN works closely with its member countries to see that terrorist attacks are kept to the very minimum. This was well before the September 11, 2001 terrorist attack on the US (de Jonge Oudraat, 2004, p. 153). The influential power of the UN to see that these were done was illuminated in the aftermath of the attack with the passing of the often-quoted resolution 1373. The resolution required all member states to introduce domestic legislations in preventing future terrorist attacks. The member countries were asked to submit progress reports to the newly set up Counter Terrorism Committee (CTC). As at April 2003, 190 states had submitted the first round reports, while 134 member states had submitted the second round reports and 27 states submitted the third round reports. As Von Hippel (2004) pointed out, ‘never before have so many members responded in such a rapid fashion to a request by the (UN) security council’ (p. 112).

Von Hippel (2004) has noted that since the 911 incident, 70 countries had openly supported the war against terrorism, with 160 countries working to freeze flow of funds to terrorist groups, and 90 countries cooperating in law enforcement and intelligence sharing (p. 102). These measures were supplemented with more thorough checks at borders like the ports and airports to strengthen domestic security. Essentially, the measures were aimed toward increasing the opportunity cost to terrorists in carrying out their attacks.

Economic sanctions have also been used to fight against terrorism (de Jonge Oudraat, 2004). Sanctions in the 1990s involved Libya for the terrorist attacks against Pan Am Flight 103 in December 1988 (killing 259 people on board and 11 on ground) and des Transports Aeriens (UTA) (killing 171 people). The Libyan government was accused of training terrorists and providing them with military support. In January 1992, the UN threatened the government with sanctions which included arm embargo and reduction of diplomatic missions involving the state. All flights to and from Libya were also prohibited. These sanctions were imposed in exchange for greater cooperation from the government to work with the criminal investigators, and to hand over suspects involved in the terrorist attacks.

Mandatory sanctions were also imposed on the Sudanese government in April 1996 through resolution 1054 because the government had failed to extradite three suspects in the assassination of the Egyptian President.

It appears, as de Jonge Oudraat (2004) had argued, that the economic sanctions were quite successful in deterring state-led growth of terror groups. For example, possibly fearing the severe consequences of the sanctions, the Libyan government had surrendered the UTA suspects and handed over the suspects for the Pan Am case to the international court. Likewise, the Sudanese government, despite denying its connection with the assassination, had ordered a number of Egyptians, Palestinians and Arab Afghans including Osama bin Laden to leave the country in May 1996. In September 2001, the Sudanese government worked closely with the UN to fight terrorism leading to the removal of economic sanctions against the country.

Economic sanctions against the Taliban however were less successful. Imposed in October 1999 via the resolution 1267, the UN Security Council ordered mandatory aviation and financial sanctions against the Taliban and denied any international support for the group.  In December 2000, the council imposed arm embargo and closure of all Taliban offices around the world.

A possible reason why these efforts were less successful was that the Taliban had a relatively larger number of members. The Taliban comprises more than 4,000 trained fighters as compared to about 500 members of the Abu Nidal organisation, 200 to 400 members of the Irish Republican Army and 50 to 75 members of the Red Bridges. Containing this larger group may take longer time, and require more effort than other cases. The group had also relied on funds tapped from various countries, and from various sources, both legal and illegal, which consequently raises the difficulty in detecting, tracing and eradicating the flows of funds (more about this later). As such, the Taliban had relied less on the state(s) to support its movements.

Perhaps, a more effective measure to tackle non-state led terrorist groups is to cease flow of funds to the terrorists. In this respect, international bodies like the FATF, which was formed in 1989, must be relied upon to curb future attacks. An inter-governmental body, the FATF has the purpose to develop and promote policies, both at national and international levels, to combat money laundering and terrorist financing (http://www1.oecd.org/fatf). On money laundering, the FATF developed the Forty Recommendations in 1990 to ‘provide a complete set of counter-measures against money laundering covering the criminal justice system and law enforcement, the financial system and its equivalent, and international cooperation’. The recommendations were revised in 1996 and again in 2003. Every member country (including Singapore) is assessed to examine to what extent the recommendations have been adopted or otherwise.

Tapping on its expertise, the FATF developed the international standards to combat terrorist financing in October 2001. The document, known as the Eight Special Recommendations, provides eight guidelines on how funds to the terrorists could be deterred. It is supplemented by the body’s attempts to first, seek for closer cooperation from member countries and other organisations like the Asia/Pacific Group of Money Laundering and second, encourage keeping of records of all financial transactions and sharing of the data. The FATF also developed self-assessment questionnaires for the countries to track how closely the guidelines have been followed. Basically, the measure drives home the message that attempts to divert or send funds to terrorist groups will become more difficult as worldwide efforts have been put in place to enhance the probability of catching those involved.

But how useful would the above measures be in reality to curb the flow of funds to the terrorist groups? Consider money laundering. Unlike the usual money laundering cases where participants find ways to hide and use the illegally obtained funds by legitimising certain activities (say through the creation of shell companies), the terror groups seek to find ways in channelling legally acquired funds to finance terror acts (funds may be obtained from legal sources like donations from wealthy individuals and religious charities but diverted to support terrorist activities). This makes detecting the funds for the latter case more difficult. Moreover, the attempts may not solve the root problem for it could lead to the identification and arrest of bankers rather than terrorists. Monitoring audit transactions is also difficult especially those that are carried out electronically. It is important to recognise these points. While the penalties and fines are heavier, the probability of catching the offenders and money launderers must also correspondingly increase. Otherwise, the perceived opportunity cost of engaging in terrorist acts will not likely to rise at least in a substantial manner.

Other problems are noted in Fitzgerald (2002). The author points out that cooperation from the banks may not be forthcoming for it is the role of the banks to manage assets, not monitor customers. Financial institutions, like any economic firms, are interested in maximising their profits. Their objective may be threatened if they try to become too nosy and enquire secretive information from the customers. For high worth customers, banking secrecy is deemed important and highly valued such that the customers are likely to ‘rapidly switch banks if this it not offered’ (p. 3).

Mike Levi and Tom Naylor (2002) have further argued that the encryption of communications between offenders through hand phones that were purchased anonymously makes detection of financial flows difficult. Containerisation facilities have also raised the difficulty to detect and trace movements of goods between and within countries particularly if the carrier companies are not government owned.            

To have a feel of the size of wealth acquired by the Al Qaeda group, it may be useful to refer to a recent article by Friedrich Schneider (2002). The author had estimated the wealth of some Islamic terrorist groups using the multiple-causes and multiple-indicators econometric model. He found that the Al Qaeda had a total wealth amounting to US5 billion in 1999-2001.  Annual financial flows to the group were estimated to be between US20-50 million per year of which 30-35 percent were obtained from illegitimate businesses (mainly transporting of drugs), 20-30 percent were obtained from donations from wealthy individuals and religious charities, 10-15 percent were from criminal activities (like kidnapping and blackmailing), and the remaining 30-35 percent from unknown sources.

Fighting terrorism is undoubtedly costly. Expenditures on defence and humanitarian cost due to economic sanctions must be incurred. Worse, imposing threats through sanctions and the use of military forces may fail to create sufficient impact to curb future terrorist attacks. Frey and Luechinger (2002) have suggested an alternative method, which they have called the ‘benevolence system’, to dissuade potential attacks by the terrorists. They argued that the benevolence system is more superior than one which relies on ‘threats’ as the former tends to produce a positive sum game ‘among the interacting parties’ thereby contributing to a ‘peaceful political environment’ (p. 3). This is unlike the ‘deterrence strategy’ (involving heavy sanctions and the use of police and military forces/threats) which tend to produce a ‘negative sum game interaction and lead to further conflict’ (p. 3).

Frey and Luechinger (2002) recommended three measures.

The first measure is to engage the terrorist leaders in dialogues. Avenues should be provided for them to express their ideologies at research centres like the universities. There, they can openly criticise the existing system, offer their solutions and listen to views from politicians, academics and religious scholars. It is believed that through these dialogues and social communications, cooperation and friendship could be fostered leading to lesser attacks and harm imposed on the society.

The approach appears workable if one is to believe that the main reason for terrorist attacks is for the terrorist leaders to push forward their ideologies (like setting up a pan-Islamic superstate to glorify Islam). The difficult part I presume is to get them to talk about the issues. It also takes two hands to clap. Would, for example, the political leaders of the West be willing to engage in such talks with the extremists or radical clerics?

Second, the authors suggest offering incentives such as money, reduced punishment and a secure future life to members of the terrorist groups who are willing to turn over a new leaf. The measure, as the authors argued, has proven to be quite successful in cases involving the Red Bridges in Italy, Red Army Faction in Germany and Direct Action in France. Incentives like those mentioned above serve to raise the perceived opportunity cost of remaining in the terrorist groups, while reduce the opportunity cost of acting benevolently.

If poverty is the main reason to participate in the terrorist groups in the first place, the measure may stand a chance to succeed. This is possibly the case for poverty-driven suicide bombers who might have been promised to receive monetary benefits, which would be diverted to their loved ones, upon successful detonation of the bombs. But, poverty is only part of the cause. Some extremists like Osama bin Laden are driven more by their ideologies (Osama is a millionaire but has preferred to live in hidings). It would be difficult to change their mindsets through incentive measures. Moreover, there are some parents who have sent their children to madrasas where extremists’ views are taught because the schools provide free lodging, food, education, books, and clothing. In this respect, the incentive plan would not work very well since poverty is felt on the parents who are neither extremists nor terrorists themselves. Accordingly, eradicating poverty must emerge as the ultimate goal for all responsible communities and institutions to curb possible terrorist attacks in the future.

The method is also criticised because it appears to reward those involved in terrorist attacks. In fact, implementing the measure may lead to more people wanting to join the terrorist groups so that they could receive the incentives when they decide to opt out later.

Third, Frey and Leuchinger (2002) argued that it might be useful to grant the terrorists a legal political process to view their ideas and grievances and to pursue their goals through legal channels (this would correspondingly raise the opportunity cost of pursuing their goals via illegal means). Essentially, not all terrorists possess extremist views. Some were not pleased with the current state on how things are done. Perceived injustices in the international arena like Israel-Palestinian conflict and global income inequality problems may be the driving force for terrorists to enter the terrorist cells. In this respect, their views should be heard through campaigns, talks and rallies to champion or push forward their ideas and solutions, and influence politicians and electorates accordingly in a peaceful and democratic manner.

To conclude, I wish to point out that measures to influence the opportunity cost of engaging in terror acts lie on the assumption that individuals are rational and responsive to incentive and disincentive measures. More specifically, the perceived cost of taking part in terrorist acts must outweigh the perceived benefit if the measures are to be of use in turning the table around. This might be difficult to realise if the perceived benefits of acting criminally become too substantial and opportunities to do so become too abundant.

Levi and Naylor (2002) gave the example of crimes involving counterfeits. With the advancement of technology, the set up costs to produce counterfeits have become substantially lower as compared to the past. They wrote, ‘Though the quality of the end product is highly variable, use of scanners, colour printers and colour copiers has meant that counterfeiting is once more a crime of opportunity and has fairly low criminal set-up costs, affecting the number of possible new entrants into the criminal market as well as reducing dependence on highly capitalised criminal organisations or dishonest businesspeople’ (p. 12). Drug trafficking has also become easier due to technology advancement such that the production capability of drugs in the current state is generally immune to climatic and geographical conditions. Levi (1999) gave the example of synthetic products, which could be produced locally by competent chemists, such that even ‘damp and cool climate of Wales can grow cannabis at any time of year’ (p. 3).

My point here is that it is useful to understand the causes of the crimes. Only then can one recommend the right remedies to contain the problems. 



Boulden, Jane and Thomas Weiss, 2004, Whither Terrorism and the United Nations?, in: Jane Boulden and Thomas G. Weiss (eds.) Terrorism and the UN: Before and After September 11, Indiana University Press, Indiana, US.

De Jonge Oudraat, 2004, The Role of Security Council, in: Jane Boulden and Thomas G. Weiss (eds.) Terrorism and the UN: Before and After September 11, Indiana University Press, Indiana, US.

Fitzgerald, Valpy, 2002, Global Financial Information, Compliance Incentives and Conflict Funding, paper presented to the DIW Workshop on ‘The Economic Consequences of Global Terrorism’, in Berlin 14-15 June 2002.

Frey, Bruno and Simon Luechinger, 2002, How to Fight Terrorism: Alternatives to Deterrence, Working Paper No. 137, Institute for Empirical Research in Economics, University of Zurich (published in ‘Defence and Peace Economics, Vol. 14, Issue 4, 2003, pp. 237-249).

Levi, Michael, 1999, Crime and International Co-operation, paper presented at NCIS/RIIA Conference, March 1999.

Levi, Michael and Tom Naylor, 2000, Organised Crime, The Organisation of Crime, and the Organisation of Business, DTI Crime Foresight Panel Essay 2000.

Schneider, Friedrich, 2002, The Hidden Financial Flows of Islamic Terrorist Organisations: Some Preliminary Results from an Economic Perspective, paper presented to the DIW Workshop on ‘The Economic Consequences of Global Terrorism’, in Berlin 14-15 June 2002.

Von Hippel, Karin, 2004, Improving the International Response to the Transnational Terrorist Threat, in: Jane Boulden and Thomas G. Weiss (eds.) Terrorism and the UN: Before and After September 11, Indiana University Press, Indiana, US.