Jihad, Inc. Part I

The introduction to an article entitled The new economy of terror, dated Jan. 26, 2005, by Loretta Napoleoni, says a mouthful (emphasis in original):

Terrorism is business as well as politics. Loretta Napoleoni explains how its funders and sponsors support its operations by covert, sophisticated use of changes in the global financial system.

Reread that paragraph again, because it is important.

This blog has a focus on the violent spread of Islam. A major aspect of that is Islamic terrorism, so I write this post, the first in a series, in the context of jihad and Islamic conquest. However, it is not just violent elements of the Islamic world that have found out how profitable jihad can be. Terrorism is business -- big business -- and it is very lucrative.

Three and a half years since 9/11, the world is still beholden to the belief that it is politics or ideology that fuels armed struggles worldwide. But an analysis of five decades of modern terrorism reveals two unexpected and disconcerting truths: that the engine of the armed struggle is money, and that the deregulation of finance has allowed terror networks deeply to penetrate legitimate institutions of the international financial system.

Politics and ideology do fuel armed struggles; they always have. But, people have always fought over more down-to-earth things as well: money. Furthermore, money very often fuels politics and ideologies, so an armed struggle can arise by any mix of these three basic ingredients. Money, though, is arguably the key.

The author gives a brief historical introduction to the need for financial ingenuity in funding terrorism, before addressing the Iran-Contra Scandal as an example, of which she says:

One such operation was an illegal scheme, in which US weapons acquired by the CIA were sold to the Islamic Republic of Iran, using Israeli and Saudi businessmen as brokers, who charged handsome fees. Iranian payments were channelled through numbered Swiss accounts controlled by the Contra leadership.

She then states:

Terrorism is an expensive business. In the mid-1970s, the Italian Marxist terror group Brigate Rosse (Red Brigades), had a yearly turnover of $8-$10 million, equivalent to that of a medium-size north Italian commercial enterprise. Unlike the cash-generous United States, the Soviet Union chose to supply its favoured groups with free training, arms and ammunition. Western European groups like the Red Brigades and the Baader-Meinhof gang had to raise their own cash. This required managerial finesse more than military expertise.

The author then presents the problem of the desire of terrorists to be free from their state sponsors, and introduces the concept of a "shell state" as a means to this freedom. The first example of a shell state given is Yasser Arafat's activity with the PLO; then, she continues:

Over the last thirty years, similar "shell-states" have blossomed in zones of war and political instability. Colombia, Peru, Chechnya, Afghanistan, Nepal and now Iraq have become breeding-grounds for these entities. After terror groups establish military control over an area, they destroy the existing socio-economic infrastructure (or what is left of it) and seek to replace it with the armed groups’ own socio-economic infrastructure, one designed exclusively to feed the armed struggle.

Notice how the author states "and now Iraq" -- this was nearly two years after the US-led invasion of Iraq as part of an ongoing War on Terror.

Later, she returns to develop the example of the PLO. As is frequently the case with criminal financial enterprises, as more wealth gets accumulated, that wealth often gradually gets invested in business operations that are more legitimate. Although the illegal activities continue, the interactions of those activities in the legal economy take on a life of their own. This is illustrated in the example of the PLO:

In 1976, following the legendary bank robbery of the British Bank of the Middle East , Arafat chartered a flight to Switzerland to invest the PLO’s share of the loot; the Christian phalange and the Corsican mafia, the other partners in the robbery, used their shares to buy arms. CIA estimates are that the PLO’s total wealth in the 1990s was $8-$14 billion. This suggests that the PLO in this period had a higher annual gross domestic product (GDP) than Arab countries like Yemen ($6.5 billion), Bahrain ($6 billion) and even Jordan ($10.6 billion).

As Palestinian wealth grew, so did its interdependence with the economy of its neighbour and enemy, Israel. In 1987, the Israeli finance minister Adi Amorai released a PLO courier who had been stopped at the Allenby Bridge, the transit point between Jordan and Israel. The man was carrying a suitcase with $1 million in cash. Amorai knew that the money would be exchanged in shekels and spent inside Israel, money that was badly needed by the Israeli economy.

Napoleoni comments on how this trend has increased with increasing globalization and deregulation; then, she addresses Osama bin Laden's financial empire:

The business empire of Osama bin Laden, whose profits bankrolled terror attacks against western interests across the Muslim world before 9/11, is a striking example of this phenomenon. His portfolio was truly transnational and highly diversified.

While residing in Sudan, bin Laden acquired 70% of Gum Arabic Ltd, a company holding a monopoly of gum arabic (80% of the world supply of this product is used to fix the print in newspapers, to prevent the solution in soft drinks from separating, and to create a protective shell around pills and sweets). By far the largest importer of gum arabic is the US, which enjoys a special price agreement with the supplier. In 1998, the Clinton administration’s decision to impose economic sanctions on Sudan was opposed by lobbies representing US importers of the product. Eventually they convinced the administration to exclude it from the list of sanctioned products. Their argument was very simple: the sanctions would hurt American importers. Why? Because the Sudanese were going to sell the product to the French, the second largest importer, who in turn would offer it to the Americans at a premium.

In this example, the story was told of how US President Bill Clinton sought to punish a state sponsor of terror, but was talked out of doing so, as the punishment would have little impact on the country that the Clinton Administration wanted to affect, Sudan, but would have significant effect on the corresponding parts of the US economy. In this example, it was successfully argued that it was in America's best interests to continue to do business with the terrorists.

As the author contends, both sides know who they are doing business with:

Terror leaders themselves are well aware of this interpenetration between the terror economy and the official economy. In the 1990s, Osama bin Laden issued a fatwa urging his followers to refrain from attacking Saudi Arabia. The reason was that revenues from legal oil industry businesses, run by Saudis who backed al-Qaida, were needed to consolidate the Islamist revolution. These revenues found their way into the new economy of terror via legal donations or dividends. This fatwa was lifted in spring 2003 when al-Qaida waged its first spectacular attack inside Saudi Arabia.

Western corporations are also often aware that they are doing business with groups that are closely linked with the illegal/terror economy. One way that Islamist armed groups have funded themselves is via smuggling of electronic products in Asia. Daniel Pearl, the Wall Street Journal reporter kidnapped and killed by Jaish-I-Mohammed (Army of Mohammed) in Pakistan reported that the Sony corporation used a contraband network in the continent as a part of its regional strategy.

Notice, however, that this was clearly a matter of convenience for the terrorists in the example discussed above. Saudi Arabia's business dealings with bin Laden bought only a temporary reprieve from terror. The question that comes to my mind is this: Did bin Laden decide it was time to get back to his ideological reasons for opposing the Saudi regime, or had business gone bad?

More legitimate business concerns provide terrorists, like any other criminal organization, with a means of laundering their money:

The dependence of consumers on terror money is evident in Latin America's "triborder" region connecting Argentina, Brazil, and Paraguay. Here, Arabs linked to the Lebanon-based groups Hamas and Hizbollah run a buoyant money-laundering business, using drug funds to purchase and smuggle duty-free products from Central America.

This affects not just Latin American economies:

There is also a close connection between the illegal/terror economy and the United States money supply. Arms, drugs, and people-smuggling are all cleared in US currency. Since the primary means of exchange in the US economy is the dollar, in particular $100 bills, the annual infusion of new US dollars is a rough indication of the rate of growth of this economy.

Using that as an indicator, it is possible to estimate the size of this terrorist and other illegal economy:

Research from the St Louis-based Federal Reserve reveals that the stock of new dollars issued in the US and permanently transferred abroad has been steadily rising since the 1960s. In 2000, as much as two-thirds of the US M1 money supply (money in circulation) has been removed from the US monetary system in this way. The amount involved, which does not include stocks of dollars held by central banks in the form of reserve currency, is equivalent to $500 billion. If this assessment is accurate, then the rate of monetary growth of the illegal/terror economy is higher than that of the US economy. Indeed, the stock of dollars held abroad is a considerable source of revenue for the US treasury through seignorage.

So, it seems, the mujahideen have many reasons to wage holy war: five hundred billion of them or so.

Subsequent posts in this series will explore the economics of terrorism, as we lead up to addressing the real reasons why -- and how -- three towers of the World Trade Center were destroyed on that Tuesday morning.