IMF calls Bali blasts another 'terror tax' on economy

IMF calls Bali blasts another 'terror tax' on economy

Alan Wheatley, Reuters, Singapore

Deadly attacks like the weekend's bomb blasts in Bali are akin to a "terror tax" on a global economy that is already facing a raft of risks, the International Monetary Fund (IMF) said on Tuesday.

Kenneth Rogoff, chief economist at the Washington-based IMF, said the bombings on the Indonesian island clearly dealt a blow to Asia's economy but it was highly speculative at best to judge how serious it would be.

"It's plausible that the economic effects on growth next year in the region will be limited, but that outcome is of course sensitive to how the security situation evolves, how policy responds and above all what the effects are on business and consumer confidence, domestically and in the rest of the world," Rogoff told a news conference.

But by raising costs for insurance, security and protection, Rogoff said attacks like those in Bali and those on the United States on Sept. 11, 2001, at the very least blunted the benefits of positive trends in productivity and technology.

"One can think of there being a terror tax on the global economy," Rogoff said.

As with the attacks on the United States and the earthquake that devastated the Japanese city of Kobe in 1995, he said the direct economic consequences of the Bali blasts, which killed more than 180 people, could be fairly narrow and short-lived.

Indonesia had a broad economic base and had made notable progress on a number of policy fronts recently. But all would depend on the secondary impact on confidence.

"Economic analysis is ill-equipped to come to grips with the human tragedy of terrorist attacks where consequences for our sense of safety, our sense of well-being, go infinitely beyond anything that can be captured in numbers," Rogoff said.

"Overall, recognising the great uncertainty and also that this comes at a time when the global recovery is tepid, with many risks on the downside, the appropriate policy response is to remain calm," he added.

Rogoff said he was cautiously optimistic about the world economy but placed the emphasis on caution rather than optimism.

The outlook for Latin America had seriously deteriorated in recent months, while Asia faced substantial risks, not least because of the prospect of a subdued recovery in the industrial countries that are the main buyers of the region's exports.

In the United States, Rogoff said investors' extreme reluctance to take risks meant a further decline on Wall Street could not be excluded, even though price-earnings ratios were now in line with the average of the past 15 years.

Domestic demand in the euro zone was growing much less than gross domestic product, underscoring the need for sweeping labour market and other structural reforms to complement the European Central Bank's appropriate bias toward easier monetary policy.

Rogoff said the case for further monetary easing in Japan was compelling, but he acknowledged the risks that inflation could spin out of control and the yen fall too far if the Bank of Japan succeeded in crushing deflation, now in its fourth year.

That being so, Rogoff said the rest of the world, especially the major industrial countries, should be ready to help Japan by undertaking a modest reflation of their economies to support world demand and offset any slide in the yen.

"This level of cooperation would be extraordinary, but, certainly, ending Japan's 10-year series of recessions and prolonged deflation would also be extraordinary," he said.