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| International |
| Efforts to fight terrorism could slow economic growth |
| 2002-06-06 |
| Increased military spending and stricter border controls in an effort to combat terrorism could slow economic growth in developed nations, an OECD report released Thursday shows. Okay. Let's examine the implications both ways... Economic growth resumed as business and consumer confidence recovered from the shock of the Sept. 11 attacks, the Organization for Economic Cooperation and Development, or OECD, said in a 24-page study entitled ''Economic Consequences of Terrorism.'' However, higher military spending by governments and increased security spending by private companies could reduce productivity and growth in the world's biggest economies. This is more Raghu's area of expertise than mine, but I'll give it a whack and he can correct if he pleases. Economic growth took a hit because of market uncertainty caused by the terrorists' acts. Markets take similar hits in the wake of fire, flood, earthquakes, and hurricanes, among other reasons. Historically, higher military spending increases employment both in defense and support industries during wartime. Real productivity goes down because of the diversion of goods and services from the market, but increased and stable employment actually produces a wartime prosperity. It's when the war is over that the consequences set in: demobilization of forces throws a large number of men back into a labor pool while at the same time government orders for implements of destruction are dropping off and the requirement for warm bodies drops with it. This causes a predictable rise in unemployment and may produce the illusion of a constricting economy. Witness post-1918 and post-1945 contractions and, less pronounced, post-1989. The step following that is a real expansion of the economy: the men who were in uniform start additional businesses, employ each other, and take all the innovations that went into the war effort and apply them to the civilian economy. In 1948 it was the construction advances that allowed the creation of billets for large numbers of men within a very short time that produced tract housing, for instance. The telecommunications industry was transformed — to include giving us Uncle Milty and Howdy Doody — and computers made an appearance; you can see an antique wartime computer in the National Cryptologic Museum, at Fort Meade, Maryland; it was used in code breaking and it takes up a whole wall. In the 1990s it was all those guys who were employed producing C3I systems for the government who applied them to civilian pursuits so the likes of me can blog about it. The Paris-based research arm for 30 of the world's most developed economies added that it could also raise wages and divert research and development activities toward military projects. ''Measures to reduce the risk and the economic consequences of further attacks should be both security-effective and growth-friendly,'' the report said. I said that... I think. The report also warned that the heightened border security, which has been relaxed since the immediate aftermath of Sept. 11, could slow down the delivery of goods. Many companies have adopted just-in-time supply management systems, which count on short delivery periods. According to OECD estimates, if tighter border controls raised the costs of international trade by 1 percent to 3 percent, trade flows involving developed economies could fall by 2 percent to 3 percent. That could be adjusted for simply by lowering fuel taxes. A 2 to 3 percent cut in fuel costs would offset the additional shipping costs and make it more economically worthwhile to move those goods. Make the cut 3 to 4 percent or better just for funsies and see what happens. OECD also said tighter border controls could increase the costs of international trade and insurance premiums. In addition, the absence of cover for terrorist attacks could curb investment, the study said. That's a legitimate problem. War and other catastrophes are bound to hit insurors, since that's what insurors are insuring against. They also do risk analyses, which amounts to trying to figure the odds on a particular horrible event happening, and adjust their rates accordingly. The idea is for the pool of insured and the investment of the pool money to overcome the payout and produce a profit... The organization said insurance industry losses from the Sept. 11 attacks ranged from $30 billion to $58 billion, representing the largest insurance payout in history. By comparison, the industry suffered losses of $20 billion when Hurricane Andrew hit Florida in 1992. In the face of another attack of a similar magnitude, the OECD warned that several insurance companies would fail. Entirely possible. But I'd venture to say that other areas of the economy will expand correspondingly, starting with the security industry. |
| Posted by:Fred Pruitt |