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What’s the price of paying for hostages? The economics behind funding and fighting terrorism

Hostage-taking has become an important moneymaker for terror groups including the Islamic State. Economics correspondent Paul Solman looks at the larger price of paying ransom and cost-effective ways of fighting terror.

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  • GWEN IFILL:

    One major element in the battle against terror is the threat to hostages and the demand for ransom. The U.S. government says paying for their release only feeds the money machine.

    Economics correspondent Paul Solman has been looking into how terrorism is financed, part of our ongoing reporting Making Sense, which airs every Thursday on the NewsHour.

  • PAUL SOLMAN:

    Suicide bombings, brutal attacks on innocent civilians, hostage-taking with fatal consequences. Terrorism, it seems, is becoming frighteningly frequent. But what are the economics of terror, the cost-benefit analysis of, for example, paying ransom to Islamic State kidnappers?

    Economist Todd Sandler says the results are clear, if controversial: Do not pay.

    TODD SANDLER, University of Texas at Dallas: You have got one person back and, on average, it encourages two to three more people to be taken hostage after that. This is based on 40 years of daily data collected worldwide.

  • PAUL SOLMAN:

    But ISIS may be a new brand of kidnappers, and hostages are not just data points. They're human beings with friends and families who will do almost anything to get them back.

    Juan Zarate led efforts to thwart terror financing while at the U.S. Treasury and has written a book about it, "Treasury's War."

    JUAN ZARATE, Center for Strategic and International Studies: The human reality is that people want their loved ones back and are willing to spend money, regardless of the downstream impact on terrorism, regardless on the effects potentially on other potential hostages down the road.

  • PAUL SOLMAN:

    And of course that's why so many countries have paid for the release of their citizens.

  • TODD SANDLER:

    Germany has been known to pay off. Spain has been known to pay off. Italy has been known to pay off and the French have been known to pay off. And, in fact, what the research I'm trying to do right now is to look at to what extent, when one country pays off, whether they become more of the victims of future hostage-taking than those countries that say we will never negotiate, and they stayed alive.

  • PAUL SOLMAN:

    What's your guess as to what the results are going to be?

  • TODD SANDLER:

    That the countries that pay off get hit with more hostages.

  • PAUL SOLMAN:

    In an interview with BuzzFeed, President Obama was firm the United States will not pay ransom to ISIS because it will cost even more in the end.

  • PRESIDENT BARACK OBAMA:

    What we don't want the do is make other American citizens riper targets for the actions of organizations like this.

  • PAUL SOLMAN:

    But on the same day American hostage Kayla Mueller was confirmed dead, the president could hardly help but empathize with those who do want to pay.

  • PRESIDENT BARACK OBAMA:

    It's as tough as anything that I do, having a conversation with parents who understandably want by any means necessary for their children to be safe.

  • PAUL SOLMAN:

    So, while economics may deem it cost-ineffective for countries to pay ransom, that doesn't mean they will stop paying.

  • TODD SANDLER:

    It's a collective action problem. Each individual looks at it from their own point of view or each corporation, thinking, well, that's not going to change the big picture. But every time someone does give in, it seems to change the big picture.

  • PAUL SOLMAN:

    But there's even more pressure to pay when you're dealing with kidnappers who manipulate the media to project the raw ruthlessness of their methods.

  • JUAN ZARATE:

    The challenge for those who have loved ones in the custody of a terrorist group like the Islamic State is that they have to wonder whether or not not negotiating will lead to the slaughter of their loved ones. And we have seen that the Islamic State has been willing to up the ante with its barbarity and cruelty.

    And so hostages for the Islamic State in many ways have become strategic pawns in a broader conflict and a broader ideological battle, in a broader campaign for propaganda and attention.

  • PAUL SOLMAN:

    Perversely, hostages have become increasingly important moneymakers for the Islamic State of late, especially since allied airstrikes and lower prices have slashed ISIS income from commandeered oil facilities in Syria and Iraq.

  • JUAN ZARATE:

    ISIS is running a local war economy and in some ways is a for-profit terrorist and militant group. Kidnap for ransom has really become an industry in some cases. And so, in many ways, it's less about terrorism and more about commerce and profit.

  • PAUL SOLMAN:

    Despite the rise of ISIS, however, economist Sandler finds that transnational, terrorism across borders, has declined.

  • TODD SANDLER:

    It's about 40 percent less than what it was in the 1980s and early 1990s. However, each incident is more likely to end in bloodshed now.

  • PAUL SOLMAN:

    What has been most cost-effective in restraining cross-border terrorism, according to Sandler's research? Not our substantial investment in global homeland security since 2001.

  • TODD SANDLER:

    We spend much too much money on defensive measures. So the payback that we calculated, I believe it was somewhere between 13 cents and 23 cents, depending on the assumptions.

  • PAUL SOLMAN:

    Per dollar spent.

  • TODD SANDLER:

    So it was a loser, because it didn't stop that many incidents.

  • PAUL SOLMAN:

    By contrast, the economics ideal was the MIND/FIND system operated by Interpol, the international police organization, checking passports against a database of terrorists and stolen travel documents.

  • TODD SANDLER:

    The payback was about $40 for every dollar spent.

  • PAUL SOLMAN:

    But former Treasury official Zarate says that homeland security may well have been cost-effective, too.

  • JUAN ZARATE:

    Because what you're trying to measure is — are things that don't happen, which are hard to calculate. It may not appear all that cost-effective to be spending money on trying to prevent, for example, WMD terrorism, when the probability is not that high, but if it were to occur would be incredibly costly to not just a society, but to an economy.

  • PAUL SOLMAN:

    In the end, the bottom line remains elusive, but that doesn't mean economic analysis isn't worth doing when trying to assess what works and doesn't work in dealing with terrorism.

    This is economics correspondent Paul Solman reporting for the PBS NewsHour.

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