BUSINESS PAGE is dedicated to providing objective information and issues of intrest to the business community and the public at large. The articles in Business page are prepared and contribuated by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae. Chartered Accountants, Professional Services Firm.

Introduction

The events in New York and Washington over the past week could not have come at a worse 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 bouyant 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 options 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 involves 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$40B 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 began 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.