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

Welcome Address by Mr R S Lodha, President-elect, FICCI

Dr. Otto Lambsdorff, Chairman, Friedrich Naumann Foundation;

Your Excellencies;

Senior Diplomats;

My colleagues from the industry;

Distinguished participants;

Ladies and gentlemen;

Today, I have the privilege to introduce you to a person of great eminence with a distinguished career, Dr Otto Lambsdorff, the former Federal Minister of Economics, Federal Republic of Germany and the current Chairman of Friedrich Naumann Foundation. We eagerly look forward to you, Sir, for enlightening us on the Global Economic Fall-out of September 11, which is a cause of serious concern for all of us.

The impact of the terrorist attack on September 11th on the global economy continue, to unfold as uncertainties spread with new threats of biological warfare looming large on the horizon. As pointed out by the US Treasury Secretary, Paul H.O'Neill,
" We have a new kind of uncertainty to deal with. It probably was always present, but we never reflected it in our markets because it was such a remote possibility".

The remote possibility is now metamorphosed into reality and it will now continue to stalk the global economy for some time to come. That is the biggest fallout of the September 11 events and its implications are far reaching.

It is clear that the new uncertainties will now add to the cost of doing business with higher spending on security and insurance and also create more bottlenecks in movement of people and goods across the globe. Freight rates to India have already been jacked up by 10-15% over the last one-month. More intensive border inspections and tighter immigration policies will certainly have a negative impact on the pace of integration of the global economy.

Moreover, the investors across the globe, and especially in the developed economies, will now demand higher returns to offset the larger risks. Political uncertainties in major segments of the emerging markets will also curb the enthusiasm of investors. As pointed out by the Chief Economist at Morgan Stanley Dean Witter & Co., " The world was becoming a seamless frictionless place and now there is sand in the gears of cross border connectivity. That is a huge tectonic change in the global landscape".

So far, the best evidence of the impact of the terrorist attack on the international economy is the dip in the stock markets across the globe. The various multilateral institutions have also scaled down the growth projections. According to the World Bank, the High-Income countries will have to bear the brunt of the fallout.

Forecasts indicate that GDP growth in the High-Income countries will now go down much more steeply to 0.9% in 2001 as against the 3.4% growth achieved in 2000. The earlier World Bank projection of a 2.2% GDP growth for High-Income countries in 2002 has also now been revised down to the 1-1.5% range.

The World Bank estimates of the impact of the September 11 attack on GDP growth in the developing countries are not too alarming. But some other aspects are a bit unnerving. The GDP growth rate in 2001 in developing countries has now been revised down from 2.9% to just 2.8%. The impact is however estimated to worsen next year. The GDP growth rate in developing countries during 2002 has now been revised down from 4.3% to 3.5-3.8%.

However, these are only aggregate projections and the actual impact on individual developing countries may be much higher depending upon their geo-political position and the level of integration with the world markets. For instance, it has been estimated that the impact of the September 11 attack on Latin American countries will be twice that of those in Asia.

According to forecasts for 2001, the commodity prices were to fall by 7.4% on an average. The September 11th events will now ensure that they fall much more steeply. Many agriculture futures have declined by 5% since the attacks. These declines are expected to set the stage for lower commodity prices in the next year. Current forecasts are that agricultural prices will decline by 3% and that of metals by 5% in 2002. This will mean that economies depending on commodity exports will have to suffer a potentially large terms of trade shock over and above the impact of the slower GDP growth. Developing countries with large tourist inflows are now being hit especially hard. Trade sources indicate that as much as 65% of the holidays booked for the Caribbean have been already cancelled. The Middle East will also suffer from a sharp decrease in tourism revenues in the coming winter.

Similarly the investors flee to more safety would mean that the flow of capital to the developing countries would further weaken. Even the available flows would be increasingly concentrated in countries that are considered to be immune to the crisis. Experts believe that both the equity and lending activities to the high-risk countries would be further squeezed and that they would require more financial assistance from official bilateral and multilateral sources.

So, it is very evident that some of the poorest countries will be hit simultaneously in at least four ways : A decline in exports, fall in commodity prices and slower tourism and investment inflows and the World Bank also brings out some other chilling facts. According to their estimates an additional 20,000-40,000 children under five years old could die from the economic consequences of the September 11th attack as poverty worsens among the most vulnerable people in the developing countries.

Among the developing countries the worst hit will be those in Africa. About half the additional child deaths worldwide are likely to be in Africa. The 300 million poor in Sub-Saharan Africa are most vulnerable because the poor households there have minimal savings and there are little or no safety nets.

Lower growth rates in Africa would also mean an additional 2-3 million people be forced to live in poverty. Falling commodity prices would also ensure that a further 2 million people may be condemned to live with incomes below $1 a day. Rural laborers and other involved in the agriculture sector will have to bear the brunt of the fall in growth rates and commodity prices.

The impact of the downtrends in the global economy is also quite evident in the Indian economy. The fall in the stock markets has been further aggravated and the indices are now around one-third the levels in the previous year. The tourism and aviation sectors have been already hit badly and insurance costs are going up for trade and industry. The deterioration in the external sector is also highlighted by the fall in foreign exchange reserves by around $600 million by the end of September 2001. This is the first time that the foreign exchange reserves have fallen in the last year. It is however, still too early to ascertain the full fallout of the September 11th attack on exports of goods and services. The software industry is unlikely to be affected too badly but merchandize exports to the United States and Europe may suffer further.

These unforeseen stark realities are the outcome of the events that have been forced on us by a few disgruntled elements. It is now for the political leaders from across the globe to ensure that the forces of destruction are overcome at the earliest and the global economy is immunized from any repetition of such catastrophic uncertainties in the days ahead. Only a wider campaign against all form of terrorism in every part of the globe will ensure that such events are never repeated and that the world becomes a safer place for all our people.