Eat now, or wait for the cease-fire?

Politically, the world changed irrevocably on 9/11. Yet from an economic viewpoint 9/11 could be called the day when hardly anything changed. Predictions of economic apocalypse proved laughable wrong.

India is averaging 8% GDP growth for the fourth year in a row. The world economy has also experienced a phenomenal boom, enabling even sub-Saharan Africa to grow at 5% for the third year running. Bourses have soared globally.

This leaves us with a puzzle. How can such a major political event have such little economic impact?

Communal polarisation has worsened everywhere. Fear hangs in the air. Security measures and banking curbs (to detect money-laundering) have raised costs and hassles globally. The price of oil has gone from $ 20/barrel to $ 70/barrel, hitting transport. Economist Joseph Stiglitz estimates that the Iraq war will cost the US up to $ 2 billion.

How, then, has the Indian and world economy boomed as never before? The Wall Street Journal gives some unexpected answers.

Contrary to predictions, the number of security guards on business and government payrolls in the USA actually declined after 9/11. The growth of security spending in the US has fallen from 7.1% annually in 1995-00 to 6.8 in 2000-05, and is projected to fall further to 4.3% in 2005-10.

Why? Because crime rates have crashed, and ordinary criminals pose an infinitely greater security threat to businesses than terrorists. Economist Steve Levitt argues that legal abortion has been the main reason for the plummeting crime rate. Easy abortion means that poor, single black women, whose children are most likely to turn to crime, are having far fewer babies.

After 9/11 builders absolutely refused to build high skyscrapers, for fear of attracting terrorist attacks. Today that fear has gone, and Dubai is building tallest skyscraper on earth.

Security checks have raised costs at ports and airports. Airlines have been hit by both security and fuel costs. Yet the world airline business is booming, and Boeing and Airbus have record orders in hand. World exports have soared, sending shipping rates (and ship prices) to record highs.

Two factors have overwhelmed the adverse impact of higher security costs. One is the enormous liquidity pumped into the world economy by the USA. The other is technological change.

After 9/11 the US Fed slashed interest rates to just 1% and kept them low for the next four years. This sparked a housing and consumer spending boom. Meanwhile the US budget deficit rose to record levels (partly because of Iraq), and so did the US current account deficit. This huge monetary and fiscal boost was enough to lift not just the US economy but the world economy. A veritable tsunami of dollars swept through the world, lifting all boats.

This boom sent the price of all commodities, including oil, skyrocketing. But oil at $ 70/barrel proved to be no problem at all, since it was driven by booming economic demand, not supply disruptions. The price of zinc, aluminium and other metals rose even faster than that of oil. Indeed, oil is one of the few commodities that is actually cheaper today than a year ago.

Analysts say there is a “terror premium” on oil futures. But this premium stems from US threats to bomb Iran or unilateral supply cuts by Iran, and this arises from Iran’s nuclear programme, not terrorism. US hawks believe Iran’s programme is linked to terrorism. Phooey, that is anti-Islamic paranoia.

Technological change is also a key factor. Productivity has shot up not just in the US but globally. In addition, the outsourcing of manufacturing to China and services to India has hugely improved outcomes in both the West and Asia. Computerisation and just-in-time techniques have enabled corporates to reduce inventories (whereas pessimists had expected higher inventories to guard against terrorist disruption). Higher costs of terrorism–security, transport, fuel and raw materials– have been offset by higher productivity. Hence the world has enjoyed zooming GDP with little inflation.

Finally, the impact of terrorism on the economy has been grossly exaggerated by the media. Many newspapers congratuled Mumbai on its “resilience” after 7/11. Yet does economic life come to a stop anywhere in the world because of a few hundred killed by bombs?

The British and Spanish economies were not affected by the London and Madrid bombings. Civil strife in Northern Ireland has not prevented Ireland from becoming the fastest growing economy in Europe.

Sri Lanka has been growing at a steady 4.5% annually despite a savage civil war without end. Pakistan has suffered many terrorist attacks (some on foreign investors), faces insurrection in Baluchistan, and has lost 800 soldiers trying to quell Taliban fighters in Waziristan. Yet its GDP is growing at 8.5%/year.

The fact is that people have to earn their living, and will carry on with daily business even in the most difficult conditions. Somlia has degenerated into anarchy and has no government, only warlords, yet it now hosts a flourishing cellphone business.

Thomas Friedman’s book, “From Beirut to Jerusalem”, is an eye-opener on how life goes on despite civil war. Most of the Lebanese elite have stayed on in Beirut despite constant bombs and gun-fire. When the Lebanese civil war started, people stayed at home on hearing of any violence in the country. But as the violence continued, they took notice only if there was violence in their city; later, only if violence hit their street; and finally only if their own home was hit.

The elite of Beirut keep partying gaily, regardless of gun-fire. Friedman tells of one such dinner party where the hostess asks her guests ‘Would you like to eat now, or wait for the cease-fire?”

Mumbai is no nowhere near as bad. Yet consider this. An estimated 3,500 people die annually in Mumbai falling off overcrowded trains. If that does not affect the economy, why should 200 killed in bomb blasts?

 

What do you think?