The World After September 11th, 2001
Introduction
The events in New York and Washington over the past week could not have
come at a worst time for the world economy. No one denies that United States
domestic policies shape the economic landscape across the globe. As
President Bush confesses to anger and announces the first war of the
millennium, no one dares to remind him of the wars, some more silent than
others, brought forward from the twentieth century - the war against
poverty, the war in the Middle East, the war against drugs and the war for
freedom and human dignity. While the anger is clearly understandable, the
response must be measured, carefully thought out, send a clear message that
terrorism has no place in a civilised debate and that military might carries
grave responsibility.
The events of September 11 took place as the world appears to be on the
brink of a recession. The US industrial production in August fell for the
eleventh consecutive month. The myth of the new economy has been exploded -
though not as devastatingly as the crash into the Twin Towers of the World
Trade Center - and the law of gravity restated with telling effect. No
technology, no economic model, no business concept and no management guru
has yet devised, or even will, a system that will prevent the age old
business cycle.
Recession with a Difference
Singapore and Taiwan, long held up as models, are suffering from a
recession with a difference. Recessions are often associated with high
inflation - this one does not. Recessions are often associated with a fall
in consumer demand - this one does not. Recessions are usually associated
with countries and economic blocs - this one is more widespread and the
signs are that Asia, Europe, North America and Central America are already
hurting badly, all at the same time. Even China, a truly special case, has
seen growth falling dramatically although still positive.
The downturn in the world economy is due largely to a fall in investment,
exposing considerable overcapacity in the industrialised countries.
Fortunately for America, consumer demand has been buoyant but with job
losses in so many sectors, the consumer goods and services market will soon
reflect the difficulties in the wider economy.
The outlook for the economies of the world would have been difficult to
predict in the most normal circumstances. Post September 11, it is even
greater. The New York Stock Exchange has of course been closed since that
day and how investors respond tomorrow will offer some indication of the
economic consequences of the activities. On the European and Asian stock
markets, share prices tumbled and there is fear that US share prices will
reflect similar falls.
Collapse Unlikely
A complete collapse however is unlikely for two principal reasons. A
certain nationalistic sentiment prevails throughout the US. Analysts and
institutional investors, usually the model of logic and rationality are
unlikely to want to trigger an economic collapse, conceding even greater
credit to those responsible for the events. There is word also that the US
Securities and Exchange Commission (SEC) has relaxed its rules to allow
companies to buy back their own shares - mopping up excess supply and
demonstrating confidence. This is on top of the built-in mechanism that
provides for trading to be halted where prices fall below certain set
points.
Wall Street has been largely blamed for the bubble which not even seven
rate cuts by Alan Greenspan could prevent bursting. They fuelled the
national belief that profits were somehow irrelevant to share prices and
that Amazon.com was the new thing in investment. It is therefore a great
irony that it is to Wall Street that America and the world will be anxiously
looking tomorrow morning to hold share prices up.
Investors are also faced with the crucial question of where to take their
money. The developing world is not even on the radar while the exchanges in
Europe and Asia are certainly no safe haven. Not long ago, gold was the
almost automatic choice in times of disaster and for one brief spell, gold
prices actually rose but nowhere close to anything that it would during
earlier catastrophes or that reflects the scale of the current one.
Chief Suspect
The uncertainty is also caused by the response hinted at by President
Bush and those around him. So far no one has been able to establish proof of
a link to chief suspect Osama Bin Laden or to his whereabouts. Anyone
devilishly clever enough to mastermind an operation of this nature and scale
is hardly likely to leave a trace that would satisfy the test of proof in a
court of law. But with increasing numbers of suspects being taken in by the
FBI, someone may soon talk. In any case, America is keeping its option close
to its chest and potential targets are kept guessing and nervous. Will the
response be short, sharp and narrow and have a clearly defined objective?
Action which affects and involve Iraq, Iran and Libya could exacerbate the
already volatile oil prices which will further harm industrial production
and enlarge the pool of those who consider such activities are noble.
Economic Impact
With the dust still not settled and many analysts and experts having no
office to go to, no one has had time to think of the impact on the US and
world economies. Air travel has suffered badly and while planes are
returning to the skies, they will find passengers a bit more hesitant. As
countries rally behind America's call to join in the action, they themselves
may be considered vulnerable to hijacking and other forms of terrorist
attacks. While security for domestic flights in the US is/was naively
modest, it is not much worse than the security arrangements at some
international airports in the developed and developing countries.
The cost of upgrading airline and airport security will be substantial
and will necessarily be passed on to the consumer who will be asked to spend
more time in check-in and security procedures. Add this to the fear of
flying and it is not unlikely that the airline industry will experience fall
in traffic.
A look at the supply chain will indicate a lower demand for new aircraft
with implications for industry employment level and falling visitor members
in tourist destinations as well. With heavy dependence on the hospitality
sector, the economies of the Caribbean will almost certainly suffer. The
international insurance industry will be called upon to pay huge claims of
unprecedented magnitude and there will be much social pressure on them to
behave more decently than normal where they threaten to stretch out claims
to force lower, quicker settlements. Much of the premium paid to local
insurance companies end up with these foreign giants. With the settlement of
the claims arising out the activities in the US estimated at anywhere
between US$20Bn and US$75Bn, the local insurance industry can expect some if
not significant increases in their re-insurance premiums.
Budget Surplus Gone
Congress has given President Bush US$40Bn to fund counter-terrorism and
recovery efforts but even in America this is not petty cash. The
near-recession has probably been worsened by the direct and indirect
consequences of September 11. The huge budget surpluses inherited from
President Bill Clinton are fast evaporating. Bush made tax cut a principal
plank of his elections campaign and a reversal of that policy is politically
unthinkable. Even Governments have to finance budget deficits with
implications for interest and inflation rates. If, as is likely, the nature
of the current downturn and the events of September 11 prolong the period
necessary for recovery, the cost can be very severe indeed.
On the other hand, the construction industry in New York, the war
industry in the United States and the security industry generally will
benefit. Replacing the Twin Towers alone could rack up a bill of hundreds of
millions of dollars while the calls by the hawks in the Bush Administration
for more money for the military will increase in decibel and urgency. This
will necessarily create jobs but will it do so at the cost of the social
sector or to the take home pay of the employee?
Guyana
For Guyana, the strengthening of the Euro which begun some weeks ago is
likely to continue, bringing some respite for the sugar industry. The
immediate impact for the rest of the economy as a direct result of September
11 is likely to be less significant. Key elements of our economy such as the
exchange rate of the US dollar are extremely difficult to predict. Bauxite
may find itself even more endangered while our dependence and vulnerability
to movement in fuel prices will continue to affect our recovery.
Conclusion
Understandably this article addresses only the economic consequences. The
cost in lives lost and that will be lost if America chooses to target the
not insignificant number of countries associated with terrorism will be
considerable indeed. What is likely to happen is that as with the staff of
the Twin Towers, the Pentagon and the staff and passengers of the hijacked
airplanes, civilians are by far the largest number of victims. The
infrastructure of these countries will be destroyed with less human and
financial capital to rebuild. Is it morally just to displace and kill the
starving Afghans because of the misdeeds of the Taliban? The world faces the
same irreconcilable dilemma in 2001 as it did in the previous century.
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