Panel Discussion on The Global Economic Fallout of September 11, 2001
October 22, 2001, New Delhi

Introduction made by Dr. Otto Graf Lambsdorff, Chairman,
Friedrich-Naumann-Foundation

Economically, our world has become poorer after September 11th:

• at least in a narrower sense of lower productivity,
  
• of having less to consume and more to invest in security, in our fight against terrorism.
  

Whether our world will be poorer in a more complex sense, depends on you and me, on all of us.

For up to now, what has made our world even richer in this broader sense, that is the unequalled solidarity with the victims of terror, with the United States, in overcoming global terrorism as our common duty, in our mutual interesting common wealth.

Yet more important is, to keep this spirit alive all over the hard times in front of us: Politically in strengthening the global coalition against terror, economically in minimizing the global fallout of September 11.

Dealing successfully with the global economic fallout is a much harder task than bearing the direct economic consequences of the tragedy in New York and Washington.

Ladies and Gentlemen,

I am convinced that we will succeed. There is no doubt ; Terror and the widespread feeling of insecurity have aggravated the risks for the global economy. But yet there is no reason for economic horror-scenarios.

The preconditions for success in minimizing the economic fallout perhaps are best recognized, when you first take the old rocking chair-model (Johr and Haberler) for the economic analysis of system stability after shocks or any kind of stress on the system :

1. You need to have a clear picture of the quality and quantity of the shock and stress on the system.
2. You need to know how the rocking chair - i.e. the system - is constructed, including it's defects.
3. You need to know the environment of system : In our case of all the global economy this means the political environment.

Let's look upon first:
The specific quality of the strain on the global economy after September 11th results from the combination -

• of the dramatic shock of the terror attacks of September 11th.
  
• and the permanence of undermining confidence by keeping fear alive : breeding a constant feeling of insecurity, especially by bioterrorism in envelopes, which could reach everybody everywhere.
  

This is the original quality of terrorist shocks, as the English liberal writer of Polish birth, Joseph Conrad, describes terror in "The Secret Agent" by the First Secretary of the Russian Embassy in 19th century London :
"Hit the symbol of freedom and progress by it's famous token, the observatory of Greenwich, demonstrate the vulnerability of democracies, shake the confidence in the rule of law, breed fear."

Or, as the British 'Economist' on October 6th spelled, what a terrorist shock's quality of the September 11th size really is :
"Yet the purpose of terrorism is to terrorize... The ultimate terrorist weapon is, after all, fear : panic can be more paralyzing as any nerve gas and more infectious than any virus. Such "token" attacks are therefore a real threat."

Governments and each of us can do a lot of things to strenthen public confidence : democracy can cope with terror. But a price is to be paid: investment in human capital and security costs less consumption in the short or even longer run.

For this investment can transform the non-calculable risk of fear and panic into calculable economic costs of reforming our public health systems. e.g., as part of the strategy to cope with bioterrorism: concentrate scarce public resources on priority care, stop waste of resources, flowing into social bureaucracy and secondary or tertiary care.

This is just a small extract of an investment in people, which is much harder in Europe than in India or Bangladesh.

But it leads us to the second point of the rocking chair example: the construction and state of our system.

Lasting wealth and a moderate climate for nearly all the people in Europe, especially in Germany, have nourished illusions :

Illusions of living on an island of plenty without greater risks, and security inside, being just a question of the optimal structure of your private portfolio -if not a costless service of the welfare state.

And exterior security is paid for under moan, although being mostly the job of the United States, who are paid for taking responsibility : by money and by anti-Americanism.

After the end of the Cold War, there has also been a tendency to take less interest in the rest of the world, both in Europe and in the United States. But economic globalisation cannot work alongside political and social isolation.

These illusions are shaken now in Europe. And from the dawn of disillusion to the enlightenment of dealing rationally with risks, remains a hard way to go for many people and politicians too.

But there is no alternative to being aware of the challenges we have to master and to improve our mental preparedness to overcome the economic fallout of terrorist attacks:

With wit and will, and without fear. Beyond these psychological challenges, there are plain facts on the state of the global economy.

These facts and the choice of adequate policies now, forbid any legends, which hide defects of the global economic order and home-made economic problems behind the general excuse: "It is always Osama bin Laden."

Some examples:
According to the last report of the UN-Organization for Food and Agriculture, more than 800 million people are living in desperate hunger.

The reasons often are civil wars, as in Afghanistan, Sudan or the Democratic Republic Congo etc.

But besides years of drought, the reason of hunger and of little chances to "invest in people" of developing countries is policy-made.

This is a scandal not only in Communist North Korea. It is the scandal of protection by industrial countries, especially against agricultural products of developing countries, textiles and clothing etc.

Therefore free trade now is more important than ever. And it would be a shame when it had to take terrorism, to learn that free trade is in the interest of the poor first, but also a pre-condition for global peace and in the interest of the wealth of all nations too.

We therefore should renew our commitment to the WTO and the focus of negotiations should be better market access for the countries of the South. It makes economic sense, but it would also underline our commitment to the idea of one world.

Another spotlight on the state of the global economy before September 11 falls on the biggest economy, the United States.

In a lot of respects, the United States are best prepared to deal with the economic consequences of terrorism and by this to minimize it's global economic fallout.

Nearly 20 years of dominant supply-sided economy in the United States, with deregulation and tax cuts, not only created about net 35 million new jobs, but also years of budget surpluses. This makes the choice of optimal policies much richer:
The United States at least has room for fiscal manoeuvre, which no big European economy has because of already high deficits.

Quite another question is, if it is wise to use this room.

It depends, especially on what kind of government expenses.

In principle, higher government expenses, resulting in a budget deficit, can make sense, when they are for investment.

And investment in security in times of terrorist threat are good investments.

Therefore, at the beginning of the American discussion on "Balanced Budget Amendments", Thomas Jefferson in 1789 wrote that war ought to be the only exemption to the strict rule of balanced budgets.

Another question in the debate on fiscal stimuli against the prospect recession, aggravating the fallout of terrorism :

Do we now really have a "Keynes situation", or is it just so easy for nearly all politicians to speak against the Keynesian language of fiscal stimuli for higher "effective demand"?

After a long series of cuts in interest rates, coordinated internationally, the Central Banks have prevented an even deeper slump in confidence.

But there are no further signs, "that the horses are going to drink" because of historically low interest rates.

So, already before September 11th the consumer sentiment-index of the University of Michigan dropped to an eight-year low since end of the year 2000.

In Germany, in spite of all interest cuts, the Ifo-index of business confidence has dropped to a four-year low.

And the new "World Economic Outlook" might be somewhat euphemistic, when forecasting that the world economy "narrowly avoids a recession".

You may doubt the value of such narrow forecasts for decisions in economic policy, future events and psychological reactions, being so open as just now.

But at least it should be clear, which political decisions would add to ongoing recession tendencies and to global economic fallout of terrorism:

• Crying massively for state intervention and breaking the long-term market-consensus can't be the answer to those challenges : not by re-regulation of international capital markets, not by projectionist barriers to trade as in the Thirties, not by the plenty of subsidies, offered to those, which cry loudest.
  
• Raising taxes to prove how solid budget-policy is and to hide how impotent policy is to cut expenditure in "socially sensible" area would prove counter-productive in avoiding recession.
  

But restructuring government expenditure in favor of more investment in security and human capital by cutting government consumption would be a courageous answer to the problem.
People ask for clear-cut decisions in times of high insecurity.

Tax cuts, flanked by low interests, could help in Germany especially.

But again:

Those policies should not be sold politically as to foster consumer demand, when consumers decide for their future in insecure times.

This won't work in spite of all Keynesian wording.

Quite another thing is to cut taxes because policy by this demonstrates trust in people knowing better than policy what to do with their money. This would be the supply-sided argument for tax cuts now.

The only thing, policy in Europe can do just now to strengthen confidence will be tax cuts.

I will answer the question of temporary higher budget deficits after such tax cuts.

Neither Jonathan Swift by his tax-basics of 1728, nor Laffer in 1982 by his Laffer-curve, have promised balanced budgets or budget surpluses by cuts in tariffs or taxes in the short run.

But in the longer run, of two, three or four years already, chances are good that tax cuts help to bring down budget deficits.

Yet my point is not this medium-run dimension of time to turn the tide in favor of new confidence of people.

This is a question of psychological effects now: by clear political decision now, long before economic effects will show.

Politicians, who really have good reason to have a good conscience by their contributions to sound budget policies, should not worry about a higher budget deficit because of tax cuts in the Jefferson case.

Whether you call the defense of freedom and democracy against terrorism "war" or whether you find a much better word - We are in the extraordinary situation that Thomas Jefferson had in mind when he saw the case for the exemption of the strict rule of sustainable balanced budgets.

I have looked at options for the US and Europe. These are the two biggest economic areas. But other areas and countries could and should devise their own strategies to strengthen their own economy and through that the world economy.

Japan, for example, has exhausted its room for fiscal measures to stimulate demand over the last ten years already. It has not helped to bring the economy back to life. Japan might therefore be better advised to tackle overdue regulatory reform to free its economy from numerous shackles. Most importantly, it needs to put its financial sector on a sound, depoliticised footing.

Russia, which has started growing again at a credible rate, could use the opportunity to strengthen the rule of law in the economy.

India has performed above world average in terms of economic growth in the last years. From what I understand, like in Japan there is not much room for fiscal measures. However, there are proposals for regulatory and policy reform that could unleash a lot of economic potential.

This might be a point for our discussion.

My point is not so much that this or that specific measure should be adopted. I would rather like to stress that the present crisis demands a constructive reaction from all of us. It also offers an opportunity for boldness. People will be much more willing to accept bold and courageous decisions by their governments in times of crisis. They realise that this crisis is not just political or military but also economic. Let us not forget that the terrorists targeted the World Trade Centre, a symbol of the global economy and killed innocent human beings from 60 countries. Many Indians and Germans were among the victims. They worked there together among the victims. They worked there together peacefully. That spirit of peaceful economic cooperation should guide us today.

To touch at least the third point of the rocking chair-example for the stability of systems under the strain of global economic fallout after September 11th.

What is to be done in the political environment of the global economic system?

Each government knows what is to be done to hold together and even strengthen the global alliance against global terrorism.

On the other hand :

I know how difficult it is, just to do it.

India plays an important role in the unfolding drama. Its clear support for the global alliance has been of vital importance. I believe there is an opportunity for India to open a new chapter in its relations with Pakistan too. Pakistan is in a difficult at situation right now. In such a context, positive steps from India will weigh much more than during normal times, and can help to keep Pakistan on its present constructive course. That, after all, would be in the interest of all of us. I know that FICCI has been one of the most active organisations in India when it comes to building new bridges with Pakistan. I believe that this is the most important contribution that the business community can make at this point in time.