Slowdown in the global economy
(The following is a post-script to the Global Competitiveness Report (GCR)
2001 released last month. The authors of the GCR (Professor Michael E.
Porter of the Harvard Business School and Professor Jeffrey D. Sachs, director
of the Centre for International Development at Harvard University, along
with John McArthur also from Harvard, and Peter Cornelius and Klaus Schwab
of the World Economic Forum, in a separate report deals with the impact
on the world economy after the September 11 attacks in the US).
In the short term, the terrorist attacks have probably worked as a catalyst,
pushing the world economy into a recession more quickly and more severely
than would have been the case otherwise. Two factors are largely to blame.
First, the terrorist attacks and the security precautions taken in their
wake have made travel, trade, and communication more costly. Possible disruptions
in transport networks threaten the functioning and efficiency of global
production chains. Second, and more significant, business and consumer
confidence took a significant blow. Before September 11, the resilience
of US consumer spending was one of the few positive signs in an overall
slowing world economy. Now there is more consumer uncertainty, leaving
companies to wait and see what will happen next. Although it is highly
probable that these two factors will dissipate over the next year, they
could well place a drag on a global economic recovery.
In the longer term, the terrorist attacks will have a lasting negative
impact if the policy responses trigger a reversal of the global economic
integration that has characterised the past twenty years. The possibility
of large-scale global conflict, terrorism, political backlash and market
uncertainty have the potential to raise the costs of cross-border business
to levels not seen in decades, and thereby to limit the gains in economic
well-being that global economic integration can yield. We therefore hope
and believe that the responses to September 11 will be resolute and powerful,
but that care will be taken to prevent them from derailing the benefits
of global business.
Flash survey - More resilient
To assess the magnitude of the effects of September 11 over the coming
six months, between September 26 and October 1 we conducted a "flash survey"
of 90 senior executives whose companies are members of the World Economic
Forum. We asked them a few questions about how their business operations
had been affected by the terrorist attacks in the United States, soliciting
their views on both their companies' operations and their general view
of the world economy. Although the limited sample size prevents rigorous
statistical analysis, the main results — and their consistency across regions
and sectors — provide useful insights into the current thinking in global
Overall, the survey indicates that the terrorist attack has had a slightly
but not overwhelmingly negative effect on business and consumer confidence.
It suggests that the global economy is more resilient than many observers
would suggest. Interestingly, the survey also revealed consistent business
sentiments around the globe. The interconnectedness of the international
economy appears to be yielding broadly similar responses to the current
cyclical economic downturn and the events of September 11. In this sense,
the terrorist attacks of September 11 hit not only the United States but
also nations around the globe.
Changes to corporate investment
Of the executives surveyed, 64 percent foresaw no change in corporate investment
plans due to the events of September 11. Meanwhile, 19 percent foresaw
their company's investment decreasing by only 10 percent or less and only
15 percent anticipated cutting back more than 10 percent on investment.
Only 2 percent foresaw an actual increase in investment. Notably, there
was no geographic trend among the companies anticipating large drops in
investment. Indeed, those expecting the biggest decreases were companies
with global operations spanning several continents. In sectional terms,
more than half of the manufacturing companies anticipated no change in
their investment nor did a full 75 percent of the financial firms. It is
of note that these results were collected even before US interest rates
dropped to their lowest point in four decades on October 2. Apparently,
despite the headline grabbing stories of massive cutbacks in a few industries,
many if not most firms have suitable investment plans, relatively robust
to the aftereffects of September 11.
On a 1 to 7 scale question where 1 = large increase in demand, 4 = no effect,
and 7 = large decrease in demand, 20 percent of respondents anticipated
no change in demand for their products, while 18 percent looked forward
to an increase in demand. Meanwhile, 62 percent anticipated a decrease,
but more than two thirds of them anticipated the drop in demand to be only
minor. The overall average response was 4.5, with little variation in mean
scores across business sectors. Variation was also fairly limited geographically,
with average scores ranging from 4.0 for companies operating in Latin America
to 4.6 for companies operating in East Asia.
Perhaps the most obvious repercussion from the terrorist hijackings involves
increased risks, and therefore costs, of doing business. These costs include,
for example, increased insurance premium, increased shipping times and
expenses, reduced business travel, and general trade disruptions. In a
question that asked executives to rate on a 1-to-7 scale the effects and
aftermath of terrorist attacks on business costs (1 = small effect, 7 =
large effect), the mean response was 4.0. Companies operating in Asia,
Sub-Saharan Africa and the Middle East and North Africa were slightly more
pessimistic than their counterparts operating in other regions, rating
means responses of 4.3, 4.4, and 4.3, respectively. Interestingly, the
average score for executives identifying their companies as being in the
information technology (IT) sector was 4.7. In a sector already buffeted
by declining demand, pessimism about the effect of the attacks was greater.
Of course, the overall short-term impact of trends such as decreases in
business travel might have some longer-term benefits. Becoming accustomed
to the potential of video and Internet-based communication technology could
help many companies lower operating costs.
Effects of potential disruptions to supply chains
Anticipated disruptions to supply chains were significant but less severe
than expected cost increases. On the same 1-to-7 scale (1 = small effects,
7 = large effects), the mean response across the sample was 3.0. Respondents
from firms operating in Asia or the Middle East and North Africa were slightly
more pessimistic than their peers, rating mean responses of 3.3 and 3.4
respectively, but there were no other discernible geography-based differences
in responses. In sectoral terms, IT producers were again the most concerned
about supply chain disruptions, with a mean score of 3.9 for that group.
Effects of potential disruptions in world oil markets
Of great interest to all markets is the possibility that world oil market
disruptions will affect businesses' operating environments. The flash survey
responses reflected this uncertainty, with the average score among respondents
(with 1 = small effect and 7 = large effects) being 3.7. Economies operating
in Sub-Saharan Africa had worse exceptions, with an average score of 4.6,
while companies operating in Latin America were slightly more optimistic,
with an average response of 3.4. Across sectors, the average score to this
question was quite constant, except for firms involved in IT, who were
again slightly more pessimistic with an average score of 4.5.
Overall recession perceptions
Of the executives surveyed, none foresaw strong worldwide economic growth
in 2002. Twenty-one percent predicted modest growth, but a full 79 percent
predicted recession in the year ahead. Of significant interest, however,
is that more than half of those predicting a recession believed than such
a downturn was likely even before September 11. In our sample, executives
with operations in the Middle East and North Africa were slightly more
likely to believe that the events of September 11 will cause a recession,
while those operating in Latin America were somewhat more likely to believe
a recession was already in the offing. Among executives with operations
in Asia, Western Europe, and North America, roughly 45 percent believed
a recession was already underway, approximately 35 percent perceived September
11 as a major cause of a coming recession, and the remaining 20 percent
predicted modest global growth in the year ahead. The breakdown of responses
was quite similar across sectors. In most areas of business, a large majority
of respondents foresaw a recession in the year ahead and roughly half of
those people thought a recession was already underway. The one exception
was for firms in the financial industry, where slightly more executives
(by a 3 to 2 margin) saw September 11 as a key element in causing a coming
Together, these results paint an intriguing picture of the world economy.
Both corporate investment and consumer demand will ebb at least slightly
in the near future, but perhaps not by as much as predicted by early fears.
The relative stability of planned investment and only minor anticipated
drop in consumer and corporate demand suggest that executives do not see
the events of September 11 as being cataclysmic for the world economy.
The persistence of this sentiment will no doubt depend on future political
and military developments.
The flash survey results provide interesting insights into global business
perspectives, but they raise an equally important question. Which countries
will be the most affected by the heightened uncertainty? We can identify
four main, sometimes overlapping, groups of countries in terms of exposure.
First are those emerging market economies whose growth in output is
most closely linked to the US business cycle. These economies were already
suffering before September 11 and are likely to bear a heavy burden if
the US economy requires an extended period to regain momentum. This is
particularly relevant to the East Asian export-oriented economies. Singapore's
exports to the United States in July 2001 were a full 30 percent less than
for the same month in the previous year, while Taiwan's decreased by 24
percent. Since Singapore's exports to the United Suites accounted for 21
percent of its gross domestic product in 2000 and Taiwan's accounted for
13 percent, these drops represent major changes for those economies. Also
affected are Korea, Malaysia, the Philippines and Thailand, all of which
saw roughly 20 percent drops in July-on-July exports to the United States.
Many of these economies had already experienced a major slump in demand
for their information and communication technology-based exports as US
firms continued to recover from the technology market bubble that burst
Second are those economies with high levels of sovereign debt, particularly
those with high debt-co-export ratios. Although interest rates have been
lowered across the G-7 since September 11, 10-year US Treasuries have only
decreased approximately 50 basis points, while the risk premia and long-term
bond markets have expanded by nearly 100 basis points (and in some instances
much more) in the weeks following the attacks. Economies such as Argentina,
Bolivia, Brazil, Nicaragua, and Peru that have high debt-to-export ratios
could be seriously strained in their ability to finance new debt or refinance
old debt in the months ahead.
Third are the economies likely to be disrupted by interruptions to existing
trade patterns, caused by increased insurance and freight costs, lengthened
shipping times, and extended delays at customs. This will particularly
affect economies reliant on ocean shipping and air cargo, again including
the highly trade-dependent export-oriented economies of East Asia - notably
Singapore, Taiwan, Korea, and Malaysia. But it is also likely to affect
Canadian and Mexican firms facing longer delays at United States border
Fourth are those countries dependent on travel and tourism as significant
sources of national income. The World Bank recently estimated that 65 percent
of holidays to the Caribbean have been cancelled for the short-term. It
is difficult to predict how long this reluctance to travel will last and
how long it will take for people to regain confidence in flying, but in
the short term it will definitely have an adverse impact for countries
such as Jamaica, which had tourism receipts equivalent to nearly 18 percent
of its gross domestic product in 1999, the most recent year for which World
Bank data are available. Mauritius is similarly exposed to fluctuations
in tourism, with tourist earnings equal to 13 percent of its GDP. The Dominican
Republic and Costa Rica, two countries heavily dependent on US markets
for their exports, are likewise dependent on tourism, with tourist receipts
estimated at 9.6 and 6.6 percent of those economies, respectively. Tourism
receipts account for more than 5 percent of GDP in several European countries
as well, but visitors are less likely to stay away from those economies
since air travel markets have been less disrupted in Europe than in North
America and also because the train service is an easier alternative means
for travel in Europe.
What can be done?
With short-term real interest rates low, and corporate investment plans
so far only mildly affected by September 11, the economic responses should
include a set of confidence-building measures to stimulate consumer and
corporate demand and help maintain the efficiency of international production
networks. Amidst the formidable uncertainty, means are needed to ensure
that the networks of the international economy continue to operate efficiently
and with minimal disruption.
The main lesson of modern economic history is that we live in a globally
networked economy, where major disruptions in global trade, finance, travel,
and production have significant effects across the world economy.
Even before September 11, this became evident once again. This year's
global economic fallout from the bursting of the US financial bubble was
already proving to be much sharper than originally predicted because the
linkages across markets were stronger than had been commonly understood.
Even economies such as Singapore and Taiwan, which rank very highly on
our lead competitiveness indexes, are being severely affected by this fallout.
This does not imply that these economies are becoming less competitive,
but rather that even the most competitive economies in the world are being
affected by a cyclical downturn.
Policy makers must avoid confusing structural, cyclical, and short-term
issues. When global demand picks up again, these competitive economies
will be well positioned. The key is to ensure the stability of the networks
and linkages that allow economies to interact with the greatest efficiency.
Any central economic response to September 11, therefore, must involve
bolstering the framework of globalisation and recommitting governments
around the world to making the world economy work for all nations, including
the poorest. Without that, confidence in the international economic framework
will remain dented.
Pursue diplomacy, avoid conflict
Most importantly, policy makers need to continue pursuing the diplomacy
needed to avoid large-scale global conflict. Military reprisals are a certainty,
but for many the biggest mistake would be to instigate the kind of response
that sends the world into a wider military conflict. Although less important
than the direct loss of lives, the economic costs would be horrendous.
Second, there needs to be confidence in the basic infrastructure of
international trade and transport. Security at airports, seaports, and
other nodes of commerce and travel should be enhanced.
Third, OPEC should continue making its supply decisions in a manner
that avoids any disruptions in oil supplies or pricing. The OPEC member
governments are among the most vulnerable to the current global crisis,
and should readily commit to such an international pledge.
Fourth, the leading central banks must continue to ensure ample supply
of liquidity, as they have been doing since the attacks in the United States.
Fifth, the world should launch a new trade round at the WTO Ministerial
Meeting in November, to signal the intention of all member countries of
the WTO to persevere in the path of free trade. It is time for the rich
countries to respect the wishes of the poor in getting such a trade round
off the ground. That would require proactive steps by the wealthy economies
of the world to ensure that the developing country exporters have improved
access to rich country markets (especially for apparel and agriculture
exports) and to negotiate mutually acceptable solutions to poor countries'
concerns about access to essential medicines.
Sixth, the United States should comprehensively revamp and expand its
assistance efforts for the world's poorest nations. Lack of economic development
is a root cause of social unrest and violence, so the United States and
other rich countries need to recognise the overwhelming strategic benefits
gleaned from supporting poor nations' economic development.
Perhaps most crucially, the United States needs to provide more leadership
and financing to provide debt relief and financial help for the world's
poorest countries so that they can battle the disease epidemics of AIDS,
malaria, and tuberculosis that are currently killing millions of poor people