When the twin towers of the World Trade Center and part of the Pentagon were demolished by terrorists in September, the immense damage was not confined to the number of human lives lost; the global economy also took a severe pounding. The economic tremors are still expanding and although the final cost cannot be calculated until the dust settles - whenever and if it does - there is little doubt that no country in the world will entirely escape the fall-out.

In this issue our correspondents examine what has already happened in terms of economic cost and analyse the impact on Africa. We know for example, that one week after the terror attack, a staggering $11,000bn was wiped off the value of shares world-wide. The global insurance industry has already lost $15bn, aviation has suffered a loss of at least $10bn, one million people have been laid off in the United State’s leisure industry and consumer confidence in America has plummeted to one of its lowest ever levels.

In an inter-related world, the aftershocks of this massive blow to the US economy are being felt far and wide. The demand for commodities, on which Africa depends, is falling rapidly. The price of oil has crashed. The markets for Africa’s manufactured exports are contracting. Foreign investment has come to an abrupt halt. Tourism is already reeling from cancellations. Insurance costs are rising by the day. The World Bank estimates that an extra 10 million people will be plunged into poverty as a direct result of the terror attack. At the same time, the level of aid and the number of aid related programmes are being scaled down.

But some economists say predictions of such doom and gloom are exaggerated - especially for Africa. The continent’s isolation from the power engines of the global economy could come to its aid. Some believe that as import costs rise, local industry will receive a much needed stimulus. There is also the belief that the G8, spurred by an inspired speech by Britain’s Prime Minister Tony Blair, will make a determined assault on global poverty, the breeding ground of terrorism. ?The state of Africa is scar on our conscience?, Blair said, indicating his belief that aid and investment flows to Africa should increase rather than decrease.

As we go to press, America and Britain have begun what they describe as a long and relentless campaign against terrorism by bombing Afghanistan. Over the next few weeks we shall know how the pieces fall and whether the global economy revives or heads down a dark hole.

Anver Versi

World pays the price

By Moin Sidiqqi

Within one week of the terrorist onslaught on the United States, about $11,000bn was wiped off from the value of world share prices. According to Forbes Magazine, the 50 wealthiest Americans have incurred losses of $44bn in net worth since the horrific events. This is equivalent to Nigeria’s gross domestic product (GDP).

The New York financial services industry (representing 2.7% of US GDP) has suffered collateral damage and human capital losses. Like previous military and political crises - notably the Yom Kippur war (1973), the Iranian revolution (1979), the Gulf conflict (August 1990) and the Gorbachev coup (September 1991) - the market’s reactions were largely predictable: several major markets dived to their lowest levels for four years.

The demand for US Treasuries and European government bonds, as well as commodity stocks, soared.

As nervous investors sought sanctuary in financial safe havens, the worst-hit sectors were airlines, the leisure and hotel industries, and financial services (banking and insurance).

Only typical defensive stocks (utilities, tobacco, food & beverage, health-care and pharmaceuticals) offered some resilience in the face of the market’s near meltdown.

The insurance industry is facing huge losses, estimated at $15bn by Munich Re’, the world’s largest reinsurer. According to the International Air Transport Association (IATA), the airline industry may suffer losses of $10bn, the worst in history, because of the plunge in demand for air travel.

Psychological blows

Rallies in oil and gold proved short-lived. Oil prices initially rose to $31.05 a barrel in London on September 12th, but soon dropped sharply, reflecting concerns about a weak global fuel demand and expectations of ample supplies during the Northern Hemisphere winter. Gold had jumped from $271 a troy ounce (oz) to around $293/oz, but was still well below the peak of $850/oz following the former Soviet Union’s invasion of Afghanistan in January 1980, or $500/oz during Iraq’s seizure of Kuwait in August 1990. There was no evidence of panic buying of gold. The London-based Gold Fields Mineral Services commented: ?Gold, as an investment, has simply not been on people’s radar screens in recent years.?

Meanwhile, the US dollar, generally viewed as a global ?safe-haven’ in times of instability, has suffered psychological blows following the destruction of the World Trade Center and the damage to the Pentagon, twin symbols of America’s financial and military might.

The generally volatile market conditions are exerting downward pressures on the greenback with the main beneficiaries being the yen and the Swiss franc. But the euro has failed to regain its parity versus the dollar. The Swiss franc, underpinned by a large current account surplus (12% of GDP) and the country’s political neutrality, has become increasingly popular among foreign exchange traders.

In the aftermath of the attack, global central banks led by the US Federal Reserves Board reacted quickly by injecting $300bn emergency funds into the banking sector in order to ensure the smooth functioning of payments and settlements systems. The Group of Seven Finance Ministers issued a joint statement saying they were ?committed to ensuring that this tragedy will not be compounded by disruption to the global economy?.

The last straw?

The world was already teetering on recession before the terrorist outrage. In the second quarter, real GDP growth in the industrialised (OECD) countries contracted for the first time since 1990, led by downturns in Japan and America. The ongoing weaknesses were evident in plunging consumption, investment, industrial output and employment.

The US might find it extremely difficult to avoid a full-blown recession. Oxford Economic Forecasting, the UK research group notes: ?The September 11 attacks could be the straw that breaks the camel’s back, tipping the US and perhaps the rest of the world into outright recession.?

Consumer spending (contributing two-thirds of US GDP) is expected to contract in the fourth quarter. MBG Information Services, the Washington-based consultancy, says: ?Shoppers will be less eager to race into crowded malls; people will be less likely to jump on an airplane.?

People have become more risk averse and are increasing savings by cutting back on non-essential spending. The Conference Board’s index of consumer confidence was reported at a five-year low in September, undermined by plummeting share prices and rising unemployment.

Since the consumer is the main driver of America’s economy, manufacturing and services industries will suffer heavily if domestic demand weakens for a sustained period.

Hans-Werner the head of the German think-tank IFO, believes that the global economy could fall into recession if US military retaliation against Afghanistan, or Iraq cause wider disruptions to international trade and investments.

The International Monetary Fund does not foresee a looming recession like in 1991, but expects the global economy to record a meagre (2.6%) growth, down from the robust 4.8% in 2000.

A severe downturn in richer countries will hit many developing countries’ exports mainly comprising primary commodities and low value-added manufactures. It can also lead to declining official development assistance (aid and grants) to the least developed countries thereby affecting vital socio-economic projects, including much needed infrastructural improvements in Africa and South Asia.

A recent World Bank report shows that developing countries could, in fact, suffer most from the terrorist attacks on US soil. The Bank estimates that while declining trade and new investments might cut 1% from growth in the OECD countries, developing countries could lose as much as 1.3%.

According to the World Bank, this could lead to the deaths of 25,000-50,000 children, and 10 million people falling into poverty. Policy makers are working overtime to restore confidence in markets worldwide. Alan Greenspan, the Chairman of the Fed, said: ?The foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past?.

Paul O’Neill, the US Treasury Secretary commented: ?Our nation’s financial markets are strong and resilient,? and predicted that the New York Stock Exchange, the world’s largest market, would hit new highs over the next 18 months.

However, in the near-term, activities will remain subdued because of poor corporate profits.

The US short-term rates are projected at 2% in the fourth quarter, the lowest since 1962, as the Fed seeks to revive a flagging economy. The danger is that lower interest rates encourage spending and discourage savings which leads to inflationary pressures.

The consensus forecasts are for US revival in early 2002, underpinned by monetary and fiscal stimuli, provided there are no further extreme shocks during winter. Merrill Lynch, the investment bank, sees annualised growth rebounding to 4.5% by next spring, after a recession lasting just two quarters.

Capitalism is striking back, and stock markets are slowly recovering. If a reasonably stable geo-political environment can be maintained, it will improve the prospects for growth both in the US economy and the rest of the world.

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