It is less than two weeks into the aftermath of the September 11, terrorist attacks on the USA and already the economic fall-out offers several useful lessons about certain aspects of the functioning of the new global economy. Perhaps the most important of these is the crucial roles that psychology and confidence play in shaping economic outcomes.

Psychology and confidence

In a market economy, economic outcomes depend upon astronomical numbers of individual investing, producing, distributing, and consuming decisions. A market economy is, by definition, an uncertain economy. To cope with this uncertainty, economic actors prefer situations where individual behaviour is consistent and stable. These are only likely to occur when confidence rules supreme.

In the aftermath of September 11, therefore, one of the first set of economic actions taken by the various Authorities worldwide, were measures to restore confidence in the future. In this regard the decision to re-open the US financial markets, heavily concentrated in Wall Street, which is in close proximity to the World Trade Center, was a bold move. On the first day of that re-opening (September 18), the stock market had its biggest point decline in history. It lost seven per cent of its value on that day, as US $540 billion worth of stock value was 'lost.' This outcome added to the turmoil in the currency markets.

Despite this adversity, the act of 're-opening the market,' particularly in such a short time after the events, was of immense symbolic value, as far as public confidence is concerned. The short-term losses from this decision would be more than compensated in the long-term, by the gains to be derived from establishing confidence in the fact that the US markets were up and running.

I am certain that, in the absence of this action, business outlook and consumer confidence in the USA would have been devastated. And, if that occurred, the USA would have slipped into deep recession, carrying the rest of the world with it.

Relevance to Guyana

This first lesson has great significance for us here in Guyana. We run a market-based economy. Yet we pay little, if any, attention to understanding the psychology and confidence of various economic actors. The best indicator of this flaw is that, apart from individual efforts (e.g. Ram and Mc Crae) the Authorities conduct no regular surveys of business outlook or consumer confidence at the national level. How can we chart the future, when we do not even try to statistically estimate how the various "actors" view it?

Insurance

The second lesson is the crucial role that an efficient insurance sector plays in providing protection against risk and uncertainty. It has been estimated that insurance companies may have to pay up to $US30 billion to cover losses arising from September 11. These claims will be smoothly and quickly settled. Here in the Caribbean, after disaster strikes, settling insurance claims is a tortuous legal battle between insurer and the insured, which invariably ends with grave dissatisfaction on all sides.

Services and modern society

The third lesson in the aftermath is the growing recognition of how truly important the services sector has become in modern society. The cessation of travel in the USA and its spillover into other nations has been estimated by the International Airline Transport Authority (IATA) to cost US$10 billion for its members for those few days alone. Indeed in the USA, it has been revealed that the airline industry accounts for as much as 10 per cent of total US industry. Moreover, if the industry goes under it has been estimated that this would raise unemployment levels in the USA by a whopping 2%.

Crisis and state intervention

The fourth lesson is that despite the "private sector" being the engine of growth, when disaster threatens, governments in developed economies do not hesitate to intervene in the economy. There is a pragmatic, and not an ideological response to economic contingencies. Thus in a matter of days the Federal Authorities were letting it be known that they would assist the US airline industry. They have been well aware that air travel in the US had been declining prior to September 11, but also recognise that events on that day, if left to the private economy, could lead to the collapse of the US airline industry. While "foreign' airlines could, in theory, fill this void, the US government would never countenance this. At present they are committed to some form of economic bail out, which has been estimated as likely to cost US$24 billion over the next two years.

It is expected that government outlays on this scale, when added to the cost of rescue and reconstruction, plus the preparation for military action overseas and beefed-up security in the USA, particularly at airports, will lead to considerable re-arrangement of federal and state budgets. The concern for us in the Caribbean is that such re-arrangements could lead to drastic cuts in potentially "dispensable items" like overseas aid.