January, 2002

The Economic Dimension of the Events of 11 September

Noha Al-Gebali

The 11 September attacks were not only a shock to the United States, the sole superpower in the current world order, but also a threat to its economy. The US economy is seen by many as the only Western capitalist economy capable of standing up to shocks and facing challenges. This belief was enhanced by the economic boom that the United States enjoyed for nearly a decade in the 1990s. These attacks had a great economic impact, not only on the US economy, but on the worldwide economy, as the United States accounted for 40 per cent of incremental world gross domestic product (GDP) growth in the late 1990s.

Some sectors have been more heavily affected than others, mainly aviation, tourism and insurance. Airlines are suffering from a sharp downturn in passenger numbers as well as a significant increase in insurance premiums. This means that increasing numbers of workers in these companies are threatened with job loss. This also applies to tourism, which is highly vulnerable to such shocks. In the insurance sector, a few insurers now say they are prepared to offer the necessary insurance without increasing premiums or government intervention. However, even with the relief package that most governments adopted after the crisis, premiums will still rise. This in turn represents a burden on government budgets.

The economic impact of the crisis will be felt in almost every part of the world due to globalisation. In other words, we are heading into a worldwide recession. The poorest nations will be hit hardest since wealthy countries are always in a better position to handle economic adversity.

The attacks made international trade and travel more difficult, disrupted supply chains, made businesses and consumers more reluctant to spend and increased the cost of security. But had these attacks not happened, would there be such a recession? Most economists believe there would. They argue that the major cause of this recession is not terrorism, but rather the economic and financial balance between the major economic powers, the United States, Europe and Japan. In the United States, for example, imbalances include a low saving rate, a high level of private debt and a current account deficit.

However, there are reasons to believe that the recession will be mild and will not last long. First, firms have already begun to cut down unwanted inventory and excess capacity. Second, unlike during previous recessions, oil prices have fallen, which means that central banks can reduce interest rates to enhance demand without fearing inflation. Third, most governments have adopted loose monetary and fiscal policies. However, developing countries will not be able to adopt such policies due to fiscal deficit. Moreover, in order to increase the effectiveness of such policies, international trade should be increased through the reduction of trade barriers.