Effect of Terrorism on the Global Economy - Essay Example

The effect of terrorism on the global economy Global terrorism affects the lives and property of the people directly affected by such acts but it also acts like ripples in a pool of water, spreading economic woes on nations far away from the actual attack. The terrorist actions of 9/11 on the World Trade Centers in New York, which resulted in more than 3,000 innocent people killed, is a prime example. The effects of this action spread human misery further than those affected directly by the loss of lives. The U.S. economy, which was not in the best of health prior, was held to a temporary stagnation and the resulting ‘ripple effect’ negatively affected almost everyone in the U.S. and all of the countries it trades with. The federal government, in what some might term a ‘knee-jerk’ reaction to the attack, spent unprecedented amounts of money on questionable programs and ventures in an effort to ‘provide security’ to its citizens. “The President has requested a significant increase in security-related programs in the context of the budget for 2003. Additional spending of $48 billion was proposed for national defense (an increase of 14 percent from the previous year). In addition, the President asked Congress for an appropriation of $38 billion for homeland security, compared to $20 billion spent in 2001” (Looney, 2002). The combination of a stunned economy, a flat-line growth in the job market and dwindling government resources made its affects known worldwide. This paper will examine how the events of 9/11 influenced many aspects of the U.S. economy and examples of its global consequences. The U.S. was enjoying a period of vigorous economic expansion during the second Clinton administration, a period that saw the nation’s first budget surpluses in 40 years. This growth was fueled largely because of a general confidence in the nation’s economic health and an increase in worker’s productivity. This time of prosperity was over by the latter part of the year 2000 as the trend in business appeared to reflect a lessening confidence in the direction of the national economy. Corporations, especially those in the technical industries, began systematically downsizing, outsourcing and employing other means of economizing because of steady revenue losses. The economy had shown signs of weakening the entire year of 1999, and by the end of 2000, the manufacturing segment was also steadily shrinking as was evidenced by the lack of equipment orders, profits and number of employees. This trend was experienced many other industries throughout the nation as well. This downward and/or stagnate trend in corporate profits, employment figures and the economy as a whole continued in the days leading up to September 11, 2001 (Moskow, 2001). The country was not experiencing a depression; however, businesses were not investing capital, choosing rather to keep what they had instead of risking it in an uncertain economic environment. Though the Fed dropped the interest rate on seven occasions from January to September, 2001 in an effort to stimulate growth, the economic indicators continued to be less than impressive throughout the year. New sales of automobiles were on a decline. The construction industry, a segment which had been one of the bright spots in these darkening economic times, was experiencing a steady decline as well. The year leading up to Sept. 11 was a period of sagging consumer confidence, slow or no business growth and a faltering stock market which was eroding the overall wealth of the nation (Perry, 2001). The economy was showing some isolated, but far too few, indications that the nation’s economic position was worsening less quickly. But all things considered, the economy remained predictably sluggish in the days just prior to Sept. 11. This economic stagnation was, for the most part, a phenomenon being experienced by industrialized nations worldwide. The nation and the world was hardly in the best of economic health at least a year and one half before it was stunned by the tragic events of that day (Moskow, 2001). Economic forecasters in the U.S. greatly altered their collective projections of the nation’s economic health following the attacks of Sept. 11. “The consensus forecast for U.S. real GDP growth was instantly downgraded by 0.5 percentage points for 2001 and 1.2 percentage points for 2002. The implied projected cumulative loss in national income through the end of 2003 amounted to five percentage points of annual GDP, or half a trillion dollars” (Looney, 2002). The attack was projected to cost the U.S. more than $500 billion in the short-term not counting what it may spend to counteract terrorism militarily as well as other expenditures directed toward securing the borders. However, on the whole, the damaging economic influence of the terrorist act in the short-term was substantially smaller than initially estimated. Much of the better than expected recovery from this catastrophic event is attributed to effective management by the Administration, the Federal Reserve and Congress. These three entities reacted promptly to re-establish the public and Wall Street’s confidence in the economy “by injecting liquidity and provid[ing] resources to deal with the consequences of the attacks. The Federal Reserve by lowering the price of credit and temporarily providing vast amounts of liquidity helped safeguard the integrity of the financial system and saved many firms from bankruptcy” (Looney, 2002). The global economy essentially mirrored the U.S. in the years 2000 and 2001. The sluggish, at best, growth of 2000 was weaker still in 2001 because of the information technology’s sudden downturn in the middle of 2000. In addition, the world’s three main economic regions, the European Union (EU), Japan and the U.S., were all weak as compared to the previous decade. There was, however, a measured but realistic reasoning for optimism among economists for a slow but steady world-wide economic recovery beginning with the fourth quarter of 2001. The attacks of Sept. 11 put a quick end to all optimistic outlooks and, in addition, acted to exacerbate the already slow moving economies on a world scale. While the implementation of liberal fiscal strategies were at least somewhat responsible for an earlier than expected renovation of the U.S. economy, the EU was taking some pro-active measures intended to renovate its own economic activity though it was partially limited by the Economic and Stability Pact of 1991. These tactics, instituted by the world’s premier economic systems, served to guide the global economy back on course for a steady, though slow, recuperation. Though economic forecasters predicted continued growth for the last two quarters of 2002, the circumstances became more precarious by mid-2002. The world’s most influential stock markets were experiencing a period of instability and were trending consistently downward. The cautiousness that corporations exhibited with their assets in 2000 and early 2001 became more intensified which kept the world markets hostage to the most prolonged market slowdown that many people could remember. This extended bear market condition was not the result of Sept. 11, though it was initiated within the U.S. borders. This time the attack was internal and not as obvious. A seemingly never-ending succession of multiple corporate scandals including Enron, Merck, WorldCom, Arthur Anderson, Halliburton and many others brought about a sudden halt to the modest and commendable world market growth following the global economic resuscitation measures. While these corporate misdeeds caused a major slowdown of the U.S. markets as well as in the economy as a whole, its contaminating affects were also suffered in the European and Asian markets. The EU was affected even more than the U.S. itself by these U.S. corporate scandals. The presence of strong consumer spending in the U.S. was the only optimistic indicators in an otherwise sluggish worldwide economy, but this was not sufficient to offset the economic damage caused by the fallout from the corporate scandals. In addition, spending could have been even stronger but was impeded by mounting consumer concerns regarding the slowing growth of the economy. “The economic downturn does indicate a greater role of factors other than those related to the 9/11 events, however, the fact that these attacks have brought a major shift in global patterns is beyond dispute” (Noshab, 2002). The terrorist attacks of Sept. 11 had an instantaneous negative economic influence on the financial and corporate sectors worldwide. Many companies either closed or scaled back which caused an increase of unemployment and a resulting decrease of the tax base. This lack of consumer, corporate and government monetary resources was not good news for countries that depend upon exporting products to the U.S. and the E.U. for economic stability such as the Asian ports located in Thailand and Singapore. Regions of the world that depended on tourism suffered as well as consumers were watching their expenditures and were less likely to travel to foreign countries by air. The slowing down in air transportation and tourism sectors has particularly affected national economies that were mainly dependent on them. The travel industry in the U.S. and other countries were obviously negatively affected by the slowdown in tourism. Asian, European and Caribbean economies were devastated by the lack of tourism and exportation. All regions where tourism supplied a substantial quantity of a nation’s income were adversely affected as well. “Tourism makes up 5 percent of the GDP in some of the European countries, but for countries like Costa Rica and Dominican Republic and Mauritius it accounts for 6.6 percent, 9.6 and 13 percent of the GDP, respectively” (Noshab, 2002). The South American countries of Brazil and Argentina are more examples of those nations that struggled in the aftermath of Sept. 11 because of their high debt-to-export economic ratio. The disruption of trade that negatively affected all countries to some degree severely damaged these economies and all others who rely on global trading for economic sovereignty. Brazil suffered a major loss of tourism as well. As in the U.S., most nations were spending money they could no longer rely on to fight the war against terrorism resulting in a further decline of their economic stability. Not all countries experienced only negative affects from expenditures related to fighting terrorism, however. The nation of Pakistan is a good example. Pakistan’s economy was harmed in much the same ways as other countries following Sept. 11 in the form of exportation issues including the canceling of goods ordered from the country. Pakistan was also affected due to the U.S. invasion of Afghanistan, its neighbor to the west and by unrelated conflicts with India, its neighbor to the East, which threatened to escalate to nuclear proportions. By its being in the middle of two serious military conflicts which closely followed the events of Sept. 11, these issues combined to adversely affect the needed investments by foreign countries which had previously expressed trade interest. The threat of war(s) was directly responsible for the mass departure of foreign citizens which included both high ranking businessmen and investors from many countries. Pakistan, without question, was a big economic loser in the aftermath of the Sept. 11 attacks, but there was a fragment of good news for the country as it became a principal collaborator in the war on terror reaping an enormous economic windfall which included the postponement or cancellation of much of its national debt obligations and a resurgence of its important textile markets. While most countries of the world were economically damaged by Sept. 11, China was the exception, able to escape the events with very little negative effect. Trade reductions certainly did not help the country but it continued to experience economic growth throughout the years following the attacks and does to this day (Noshab, 2002). If terrorism causes nations to practice protectionism, reversing the positive worldwide economic gains during the past 20 years due to globalization efforts these attacks will likely produce a long-lasting damaging impact. “The attack may have effects on firms’ investment decisions, in particular whether to invest domestically or abroad, in part because of potential disruption of cross-border flows of goods and assets. Costs for such transactions may rise owing to closer inspection of transactions and higher insurance premiums” (Looney, 2002). Increased levels of terrorist attacks carry with it the likelihood of all-encompassing international battles on many fronts including political difficulties and escalating economic uncertainties which has the possibility of increasing expenditures of corporations worldwide to unmatched heights. This scenario would reduce the positive gains of globalization and reverse the positive gains from international economic cooperation.  “Economic uncertainty created in the wake of terrorist attacks, being the most disturbing long-term factor, has its own dynamics and would continue shattering business confidence for a long time” (Noshab, 2002). The terrorist attacks of Sept. 11 were on U.S. soil but resulted in severe repercussions regarding not just national but the global economy as well. On that day and for about a year and a half prior, the major economies of the world were teetering on the edge of at least recession conditions and many were close to a full-scale depression. The attacks prevented any perceived or real economic upturns that were predicted given the factors present at that time. The event destroyed lives and property, increased government spending at a time when the country could ill afford the excessive expenditures and squelched corporate and consumer confidence which further slowed the economy and hindered the recovery efforts. The events lasted over a period of a couple of hours but its affects are still being felt all over the world. The heightened insecurity regarding terrorist acts and its effects on the economy worldwide continues to give worry to investors and businesses which only serve to further cripple the economies of most countries. The immediate actions taken by the U.S. following Sept. 11 allowed for a faster economic healing. The terrorist actions served only to further exacerbate the current economic problems experienced in the U.S. and around the world which had begun well before the attacks. The blame for the economic woes cannot be pinned entirely on the events of Sept. 11. However, in the long-term, this event brought a definitive modification of approaches for future economic policy-makers at the national and global level. The globalization efforts which focused the world on economic gains in the 1990’s have been morphed by one event into overriding interests concerning national security interests. We also face a longer-term uncertainty, namely how the emphasis on increased security will impact the economy. This new trend that forsakes economic gain for security concerns is likely to continue at least for the next several years (Noshab, 2002). The extent of the Sept. 11 attacks is financially far-reaching on a global scale as well as on a time-scale. In order to attain and preserve an optimum level of security, world governments as well as corporations and individuals will be forced to pay the costs for an untold number of years to come. Everyone, including corporations and individuals will be burdened with the extra costs to businesses in the form of elevated insurance premiums and other added costs of doing business in the post-9/11 world. “The losses from the terrorist attacks for the insurance industry (including reinsurance) are estimated at between $30 and $58 billion with the main uncertainty concerning liability insurance. By comparison the losses associated with Hurricane Andrew’s 1992 damage in Florida came to around $21 billion” (Looney, 2002). Businesses must pay higher insurance and warehousing costs because they must retain higher levels of inventory to protect against interruptions in imported supplies (Moskow, 2001). “Business may be required to hold larger inventories than previously, owing in part to less reliable air and rail transportation. There is anecdotal evidence from the auto industry that production was interrupted because components were not immediately available from suppliers after the September 11 attacks, owing to delays in shipments crossing the U.S.-Canada border” (Looney, 2002). This is but one example of the peripheral costs of terrorism, costs which trickle down and spread out to all citizens of most countries of the world. Security issues increase the cost of doing business which will probably decrease the rate at which business grows for an indeterminate amount of time, but by how much and how long is unknown (Moskow, 2001). To look into the future of long-term fiscal health of the nation, which directly affects the economy of the world, one should examine the economic indicators and conditions leading up to the attack as a guideline. Before and after Sept. 11, the inflation rate was and has been stable and relatively low. The control of inflation has given the Fed the flexibility it needs to regulate the economic system effectively. Thankfully, the federal government entered the downturn of the economy and the subsequent attacks with a surplus in the budget coffers. Another reason for optimism is that the U.S. economy is structurally resilient. “Financial markets are deregulated, the banking system is sound, and our labor markets are flexible so we can adjust relatively quickly to the kinds of shocks we’ve recently suffered” (Parry, 2001). In addition to a low inflation and strong market indicators, the same types of technology innovations that served to drive the nation’s economic health prior to 9/11 are still firmly in place. “The key point is that the outlook for productivity over the long haul continues to be bright, and this is what matters for our standard of living. Over the longer run, the technology and entrepreneurship we’ve become famous for will be a source of strength to the economy both in the nation and here at home” (Parry, 2001). Hopefully, the economy of the U.S. and the world will adjust to the new hurdles imposed by terrorism. When the collective economies of the world self-correct to absorb the elevated costs of supposed threats to safety, production and economic growth will return to levels experienced prior to 9/11. Works Cited Looney, Robert. “Economic Costs to the United States Stemming from the 9/11 Attacks.” Strategic Insights. Vol. 1, I. 6, (August 2002). Center for Contemporary Conflict. July 24, 2006 Moskow, Michael H. “The Economy After September 11: Fed’s Role and Perspective.” (November 28, 2001). Ft. Wayne, IN: Federal Reserve Bank of Chicago Economic Forum. July 24, 2006 Noshab, Farzana. “Global Economic Implications of 9/11 Attacks.”  Financial Times. (August 11, 2002). Parry, Robert T. “The U.S. Economy after September 11.” (December 7, 2001). Federal Reserve Bank of San Francisco Economic Letter. July 24, 2006 Perry, George L. “Forecasting the Economy and Policy After 9/11.” Brookings Project on Terrorism and American Foreign Policy. (September 27, 2001). The Brookings Institute. July 24, 2006 Read More