Global recovery fights new costs of terrorism

Global recovery fights new costs of terrorism

Vincent Lingga, Senior Editor, The Jakarta Post, Hong Kong

The United States was pushed decisively into recession when
the Sept. 11 terrorist attacks on that country undermined
consumer confidence, disrupted trade and destroyed assets, most
economists at the East Asian Economic Summit in Hong Kong agree.

East Asian economies, particularly Japan, which has been in
trouble over the past decade due to a long delayed reform of its
financial system, is feeling the fallout of dwindling demand as
consumer confidence wanes.

Further down the line, South Korea, Taiwan, Hong Kong,
Singapore which are usually the star performers in the East Asian
economy, are suffering the crunch too as they depend largely on
the two biggest locomotives. Only China seems to continue
enjoying robust growth.

That is how most economists meeting in Hong Kong at the East
Asian Economic Summit, organized by the Geneva-based World
Economic Forum, see the economic landscape after Sept. 11.

Before the tragedy, U.S. consumers spent more than they
earned, hence their confidence was sustained by regular gains on
the stock market.

But with share prices falling fast and unemployment rising,
there is a strong indication that self-confidence at the heart of
the U.S. growth is being punctured.

Could the doomsday scenario happen?

It depends on the fragile flower of confidence. If consumers
carry on spending and holding on to their shares (50 percent of
Americans own shares), the U.S could muddle through with minimal
damage.

But if they stop spending in order to replenish their savings
or sell shares on a big scale, then demand will collapse and
companies will lay off workers, who in turn will cut their
spendings, leading to a downward spiral recession.

Under this circumstance, the other engine of the private
sector -- business confidence -- will decline as well, as
companies refrain from investing when the consumer demand needed
to justify it is in free fall.

Nobody will know what will happen. The outcome will depend on
the decisions of millions of people interacting with each other
and reacting to what they read in newspapers and see on
television.

Fiscal pump priming has worked so far, but if the U.S. economy
goes into a tailspin, that will not be enough, especially since
the American government has now to allocate a much bigger budget
for security.

"The post Cold War era has ended," noted analyst Jusuf
Wanandi, chairman of the Jakarta-based Centre for Strategic and
International Studies, at one of the plenary sessions of the
summit.

That means that the U.S. has lost its peace dividend coming
after the end of the Cold War in the late 1980s which helped
transform budget deficits into surpluses and freeing more
resources to flow into private-sector investment and generate
more than a decade of steady gains in productivity.

As the U.S. now has to devote more of its resources to defense
outlay for restoring national security, fewer resources are now
available for fueling economic expansion.

Investors are now painstakingly trying to fathom how long the
U.S. will take to win the war against terrorism and how much it
will cost.

But since the war has just begun, the risk for significantly
faster growth in defense spending over a longer period of time is
very real.

Despite the buildup in defense spending -- 13 percent
expansion for 2002 alone -- it will raise the share of the
economy devoted to military only to an estimated 4.4 percent from
3.9 percent now, U.S. analysts said.

"That is why the root causes of terrorism cannot simply be
ignored; the scourge of terrorism has to be dealt with because
you need the sense of security to get the economy back on track,"
added Jusuf.

A noted economist from Britain, John Kay, observed that the
strongest message of Sept. 11 is that globalization and the
market economy can no longer ignore the complex set of economic,
social and cultural context.

"There must now be a greater sensitivity to the gap between
the rich and poor nations and a self-contemplation of the
excesses of greedy capitalism," Kay told the meeting.

Many economists who initially saw the shocks as a temporary
phenomenon, are now suggesting that a recovery would be much more
difficult, especially after the recent release of more weaker
economic indicators.

"The bounce back could be a very long time and a bumpy one,"
observed Vernon J. Ellis, international chairman of Britain's
Accenture management cosultancy company.

Terrorism is also causing a more persistent kind of damage as
it forces what analysts describe as lasting changes in the way
Americans do business and lead their lives.

But some analysts suggest that this recession, like others,
will be followed by a vigorous recovery as consumers and
businesses hold back on discretionary spending during the
cyclical downturns, creating pent-up demand which at some point
will rebound like a tide when the flood gates open.

Merril Lynch economists are predicting that the recession will
be followed by a recovery sometime next year. They point out that
the Federal Reserve has already eased interest rates seven times
this year. These lower rates could save consumers up to US$70
billion in interest payments next year.

But analysts of the "less optimistic" camp, including those of
Morgan Stanley investment bank, argue that in the long term,
terrorism is imposing new costs that are unlikely to go away.

For every business, insurance and security costs will be
higher. For many industries, the benefits of just-in-time
production will be sacrificed as companies will hold more
inventory to guard against disruptions in the global supply
chain.

Together, those costs could represent a new form of supply
shock that will hurt growth and could boost inflation. This would
be a toxic combination for global financial markets.