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Economic Costs of Terrorism

(January 29, 2002) New York City, stunned from an estimated US$105 billion in damages incurred in the attacks of September 11, may have been ground zero for the latest terrorist attacks unleashed by Muslim radical Osama bin Laden but the economic repercussions are felt all over the world .

For days, terrorist concerns grounded all civilian aviation, shut down the stock market and disrupted transportation throughout the country. A possible forecasted U.S. recession will reverberate throughout the world. World Bank President James Wolfensohn believes the terrorist attacks will cut global economic growth by up to 1 percent in 2002.

Terror Attack on Global Economic Progress
The repercussions trickle down through every layer of the global economy. In the era of globalization, the September 11 terrorist attacks on New York and Washington have had worldwide economic consequences, felt even in those countries that are not likely to become terrorist targets themselves. Ultimately, some of the weakest Third World economies could suffer the worst fallout from the September attacks. The necessary preoccupation with counter-terrorism measures is also diverting attention and resources away from economic development throughout the world. The Group of Seven (G-7) top industrial countries is concerned about panic in the banking sector. On September 13, the U.S. Federal Reserve made US$50 billion available to stabilize European banking systems. Many G-7 central banks have cut interest rates to boost consumer confidence and funnel more money into the ailing global economy.

Macro-Economic Realities
The U.S. Treasury concedes that a recession may well result from the September 11 horrors. A decline in gross domestic product is likely to continue into at least the first quarter of 2002. Before September 11, U.S. gross domestic product was expected to increase by 2 percent in the fourth quarter of 2001.

In the days following the attacks in New York and Washington, U.S. employers cut more than 248,000 jobs. The transportation sector was especially hard hit, with more than 96,000 lay-offs. The attacks have also curbed consumer spending, which normally accounts for about two thirds of U.S. economic activity.

European Impact
Reduced consumer confidence is evident in most member states of the European Union. Even Britain, which enjoyed the strongest economic position prior to the terrorist attacks, was forced to revise downward its modest expectations of GDP growth for this year.

Concerns about further terrorist designs on air travel have sent Europe's airline industry into a tailspin. The Belgian carrier Sabena filed for bankruptcy. Government bailouts were necessary for airlines in France and Switzerland. Major carriers in Britain, Italy, the Netherlands and Scandinavia cut flight capacity, scrapping certain routes and layed off tens of thousands of employees. Some European airlines are adding "crisis" or "war" surcharges -- to help defray the soaring insurance costs -- to ticket prices.

Stock markets throughout Europe have wobbled, not only because of investor uncertainty. The very integrity of G-7 stock markets has been under assault, as financial investigators in Germany, Italy and Switzerland explore evidence that al-Qaida, the Afghanistan-based Middle Eastern terrorist network behind the September 11 attacks, engaged in insider trading. Aware that the attacks would devastate the airline and insurance industries in Europe, al-Qaida members reportedly profited from "put options," negotiable bids speculating that the price of certain airline and insurance stocks would decline within a short time frame.

East Asian Impact
Japan, already in a recession, is likely to face deeper economic challenges. The decline in U.S. consumer spending will hurt, among other things, the Japanese auto industry. Japan, Asia's sole G-7 member, has seen its economic difficulties multiply since the September terrorist attacks. Since the United States buys about 40 percent of Japanese exports, reduced U.S. consumption means declines in Japanese exports, production, employment and capital investment. Tourism has also dropped off since September 11. In Okinawa alone, 78,000 tourist trips were canceled between mid-September and mid-October.

Japan Airlines and All Nippon Airways have been forced to cut flights since September 11. Similar cuts have been made by Malaysian Air and Korean Air, which is considering hundreds of layoffs. Carriers in Thailand and China have added surcharges to air ticket prices.

Cambodia, which nets about US$120 million a year from tourism, reported that 30 percent of foreign tourists canceled bookings in the second half of September. Cambodia is also worried about textile exports, 75 percent of which are sold to the U.S. market.

Some cash-starved Asian firms may fail because of growing concern among international investors about taking commercial risks. About US$3.5 billion worth of debt refinancing is already in question in East Asia. The most imperiled country in the region is the Philippines, where the government will probably increase deficit spending to cushion the domestic impact of the global recession.

Impact on Latin America and Caribbean
Latin America, as a whole, had been expected to realize modest economic growth, about 1.3 percent, in 2001. Since the September terrorist attacks, economists now believe that regional GDP may not grow at all.

The post-attack economic climate is drying up the tourism industry in Latin America and the Caribbean. Aeromexico and Mexicana Airlines have already laid off thousands of workers. Hotel reservations in El Salvador were half the normal volume in late September.

Export industries in Mexico and Central America are reeling from reduced consumption in the United States and from the post-attack plunge in many commodity prices. By early October 2001, Guatemalan employers had laid off 250,000 workers, mostly in the textile industry. That number could grow by another 15 percent in the coming months.

Even countries whose economies are less interwoven with the U.S. market are hurting. Speculation born of economic uncertainty devalued Brazil's currency by more than 8 percent. This will translate into increased government debt. Global risk aversion in the wake of the terrorist attacks will deepen the difficulty of attracting foreign investors so badly needed in Argentina, where debt default was already a possibility before September 11.

Impact on Muslim Countries
Muslim countries are experiencing the same post-attack losses in their tourism and travel sectors. By early October 2001, eight foreign carriers had suspended flights into Pakistan, while freight insurance surcharges were driving up the costs of imports to that country. Masood Ali Khan, head of Pakistan's Tourism Development Corporation, predicts a decline in tourism of between 80 and 90 percent for the coming months.

In Egypt, hotel occupancy rates dropped by nearly 50 percent in the second half of September. Tourism is Egypt's top hard-currency earner.

During an October meeting of tourism ministers from the Organization of the Islamic Conference (OIC), representatives from Iran's Supreme Tourism Council pleaded for joint action to overcome terrorism-related obstacles to tourism development.

The post-attack difficulties of the global aviation industry have also hurt the Organization of Petroleum Exporting Countries. By early October, the price of crude oil had declined to US$20.44 a barrel, well below OPEC's target range of US$22 to US$28. Demand for jet fuel is particularly depressed, because of air safety concerns

General Problems for Developing Countries
Increased freight insurance costs since the September attacks may put some basic imports beyond the capabilities of the world's poorest countries. Some panic buying of food staples has already been reported, in an apparent attempt to stock up before transportation costs go higher. World Bank analysts predict that the post-attack economic uncertainty will deepen poverty in Africa in particular. The World Bank believes the Third World will feel the impact of the post-attack recession through 2002.

Development Focus Blurred
Numerous conferences addressing economic development have been postponed or derailed since the September attacks. Concerns about further terrorist attacks delayed gatherings of the World Bank, International Monetary Fund, the U.N. Food and Agriculture Association and a summit of francophone countries. The World Trade Organization decided to relocate its November summit, originally planned for Qatar, worried about the security of the Middle Eastern venue.

Beijing implemented tight security for the late October conference of the 21-nation Asia-Pacific Economic Cooperation (APEC) forum. The participants had planned to focus on new development initiatives, such as the "Human Capacity Building Promotion Program," a campaign to promote the region's information technology industry. But development concerns were given less attention than the threat of terrorism -- and the need to regain economic ground lost since the September attacks.

Insurance Industry
Insurers from many countries have had to cover unparalleled losses from the World Trade Center attack. Lloyd's of London expects its insurance syndicates to cover claims amounting to US$1.9 billion. Swiss Re, a major reinsurer (a business that insures regular insurance companies against an unanticipated spike in claims) expects to cover US$1.24 billion in claims resulting from the U.S. attacks. The overall cost of insurance claims resulting from the September 11 horrors could amount to US$35 billion.

As a result, insurance prices are rising, while demand for insurance increases in anticipation of additional acts of terror by Osama bin Laden's network. The price hikes are passed along to other companies, to governments and ultimately to the individual taxpayer and consumer.

Food and other basic consumer items could become more expensive as freight insurance costs increase. In anticipation of higher freight prices down the line, Egypt made unusually large purchases of U.S. wheat following the attacks. Pakistan is already struggling with price increases for certain imports, because of rising freight insurance costs.

Air travelers are encountering new surcharges to cover higher insurance costs. On October 1, Thai Airways International began adding a US$1.25 surcharge to most of its flights. The Chinese government authorized domestic air carriers to levy surcharges of up to US$2.50 per passenger on international routes. Alitalia imposed a "crisis surcharge" of US$5.50 for each leg of an air journey.

The Airline Industry
More expensive airline insurance costs, heightened security expenditures and public fears about the safety of air travel translate into huge losses for airlines throughout the world. The airline industry is a major factor in the health of an industrialized economy. In the United States, for example, that industry contributes 10 percent to the gross domestic product, directly and indirectly.

Following the September 11 attacks in the United States, the global civil aviation industry plunged into its worse crisis in more than 50 years, costing the sector 400,000 jobs around the world. The International Labor Organization reported in January 2002 that the attacks affected every segment in the industry - carriers, airports, aircraft manufacturers, services, parking lots and rented vehicles.

In the aftermath of September 11, the Italian airline, Alitalia, considered cutting 2,500 jobs, while the Belgian carrier Sabena filed for bankruptcy. The Swiss government bailed out Swissair after the carrier grounded its planes for lack of cash in late September. KLM Royal Dutch Airlines plans to reduce capacity by 15 percent and ask its workers to take a "substantial" pay cut. Scandinavia's SAS, suffering a 20 percent drop in business-class traffic since September 11, will reduce flight capacity by 12 percent in 2002 and cut about 1,100 jobs.

Malaysian Airlines System has cut 12 international flights. Korean Air has suspended flights on five international routes and reduced four others temporarily, while another Korean airline, Asiana, may slash 1,200 jobs. Japan Airlines and All Nippon Airways are also scrapping some international flights.

Terrorism Causes Tremors in the Tourism Industry
Declining air travel means losses for the numerous businesses involved in tourism: hotels, restaurants, entertainment spots, travel agencies, street vendors, etc. Once again, the impact is global. The World Tourism Organization convened in Osaka in late 2001 to discuss ways of reinvigorating the tourism industry in light of the intensified terrorist threat. The organization's 120 member nations were badly shaken by the September 11 terrorist attacks in the United States.

Egypt knows too well the havoc that terrorism can wreak. In November 1997 a terrorist group that is allied with Osama bin Laden attacked and killed 58 Asian and European tourists in the Valley of Kings in Luxor. Four Egyptians also died in the attack.

The Egyptian tourist industry lost millions of dollars when tour companies canceled bookings. The effect of the attack rippled through the Egyptian economy. Hotels and restaurants laid off staff. Tour guides lost their jobs. Taxi drivers had fewer fares. Souvenirs and other tourist wares went unsold. Egypt, once a dynamo in Middle Eastern tourism, reported that hotel occupancy rates had plummeted by nearly 50 percent since September 11.

The WTO believes the research of the envisioned panel would show tourist locales in the Middle East and South Asia how to regain public trust. Even without research, WTO members know they must convince travelers that adequate safety measures are in place at tourist sites and resorts.

Yemen is one of the poorest countries on the Arabian Peninsula. It desperately needs the income from tourism. However, the kidnapping of over 150 foreigners in the past five years makes Yemen a risky country to visit. Several hotel bombings and the attack in October 2000 on a U.S. naval ship, the USS Cole, further tarnished Yemen's image.

Malaysia had a generally good reputation with tourists until Abu Sayyaf guerrillas from the Philippines seized tourists from a diving resort in April 2000. Among those seized were Australians, South Africans, Europeans and Malaysians. A huge ransom gained their freedom. It also encouraged Abu Sayyaf to seize more foreign hostages.

The September 11 attacks made people afraid to fly anywhere. The airline suicide hijackings reminded Asian security authorities of the bomb placed aboard a Philippines airliner in 1994 that killed a Japanese man and nearly caused a crash. Authorities later learned that the mastermind behind the bombing had plans to blow up 11 aircraft over the Pacific simultaneously.

The mastermind of that aborted attack was Ramzi Ahmed Youssef. He is currently serving a life prison sentence for his part in the 1993 bombing of the World Trade Center. Pakistani authorities caught Youssef in a safe house belonging to Osama bin Laden. Bin Laden's brother-in-law, Mohammad Jamal Khalifa, ran a charity in the Philippines from 1986 to 1994. During that time he supplied funding and new recruits for Abu Sayyaf to carry out Youssef's plans.

The French Club Méditerranée is just one of many tourist companies that watched bookings and earnings plummet after September 11. Winter bookings dropped by 50 percent in the three weeks following the terrorist attacks. Bookings still remain below levels recorded prior to the attacks.

A month after the attack, Club Méditerranée announced that the weakened tourist market was forcing it to close 19 of its 100 resort villages. Eleven resorts will be temporarily shuttered, but eight will close permanently. Destinations that cater to European or American tourists have seen the biggest decline.

Among those resorts closed for up to a year are two in the Middle East and Cherating Beach in Malaysia. Europeans who flock to warmer climates in the winter are choosing winter holidays close to home that avoid air flights. Club Méditerranée estimates that it was losing earnings between US$45 million and US$50 million in 2001 because of the terrorist attack.

Some countries have already taken steps to remedy tourism losses. Malaysia hopes to attract Arab tourists, who face fewer flights to Europe because a number of flights were permanently canceled when passenger totals dropped. The Malaysian government revised projected growth forecasts of 7 percent downward to 1 to 2 percent after the September 11 attacks. If the tourist sector worsens because of more terrorist attacks, it could swing the economy into negative growth.

Thailand is hoping to ease fears of flying. The government has assigned the Royal Thai Air Force the job of preventing hijackings. The air force will also draft plans for other agencies to counter the hijacking of commercial aircraft. Deputy Prime Minister Chavalit Yougchaiyudh said guidelines are being drafted on how government agencies would coordinate in case of a terrorist attack.

Bangkok's Civil Aviation Institute has suspended all new admissions to its flight school. Of the 90 pilots the institute trains each year, only two or three are foreigners. However, caution is necessary. Two Sudanese men training at an Indian flight school disappeared shortly before the September 11 attacks. Security officials are still searching for the men. It is not the sort of incident likely to calm the tourist industry's nerves.

The governor of Okinawa, Japan, asked the central government to bail out the local tourism industry. About 78,000 trips to Okinawa were cancelled from September 11 to October 10.

By early October, 30 percent of foreign tourists had canceled their trips to Cambodia since September 11. Each of Cambodia's major hotels lost 170 guest bookings. Tourism contributes about US$120 million a year to the Cambodian economy.

Concerns about terrorism prompted Dubai to postpone a key event in its campaign to become a major tourism hub. Planned for mid-October, the annual awards ceremony for the information technology industry was postponed until 2002. The gala would have featured internationally known entertainers. In Guatemala, hotel reservations plunged by 25 percent following September 11. In El Salvador, hotels reported a 50 percent decline in bookings.

Cuba's tourism business - the country's most important economic sector - declined greatly following the September 11 attacks. Cuban tourism industry sources reported that the winter 2002 tourism was off to a weak start. Occupancy is down 25 percent in Havana, 40 percent at Varadero and 10 percent to 20 percent in the rest of the country, compared with the same time last year.

Security concerns are keeping tourists away from the museums of Florence, Venice and Rome. About 12,000 jobs in Italy's travel industry could be at risk. That industry contributes about 6 percent to the gross domestic product.
Harry Hayes

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