January, 2002

The Impact of 11 September and its Repercussions on Emerging Economies

Maha Sirag Al-Din

The 11 September attacks on the United States and their military repercussions in Afghanistan are expected to have a huge impact on both developed and emerging economies. Prospects for the world economy for the coming year have lessened and risks have been exacerbated by the recent terrorist attack. However, the impact on developing economies is likely to be greater in light of the domestic economic and financial challenges facing these economies. Global growth is projected at 2.6 per cent in 2001 compared with 4.7 per cent in 2000. Growth is expected to be 4.3 per cent and one per cent on average in 2001 for newly industrialised Asian economies and developing countries respectively.

The severely affected emerging economies fall into three categories: 1) those with a very high dependence on the US market, such as Mexico and China; 2) those with a heavy dependence on IT and electronics exports, such as Taiwan, Singapore and Malaysia; and 3) those with a steady requirement for large inflows of capital, which are vulnerable to the increased risk aversion of investors when global financial conditions deteriorate.

Emerging-market exports, including oil exports, are expected to decrease as a result of the global economic slowdown and decline in consumer confidence, especially in developed countries. Capital flows are also likely to be adversely affected, either through a fall in foreign direct investment or portfolio investments