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World: Millennium 'Bomb' Threatens Global Economy

Washington, 25 February 1998 (RFE/RL) -- A financial expert says the so-called "millennium bomb" -- the failure of certain computer software to distinguish between the 20th and 21st centuries -- will have as great an impact on the global economy, if not more, than the current economic crisis in Asia.

Lou Marcoccio, Research Director of the year 2000 problem at the Gartner Group, a Connecticut research firm widely regarded as the premier expert on the millennium bomb, told RFE/RL that the world should brace for serious economic problems ahead as a result of the software failure.

The problem, also referred to as Y2K for the year 2000, dates back to the 1960's and 1970's when technicians used questionable cost-cutting methods to create special microchips. In order to save space and money, the technicians programmed the chips to recognize years as two digits instead of four. For example, when the computer reads the digits 9 and 8, it determines the year is 1998.

So, unless the computers are reprogrammed, the year 2000 will register as 00 -- or 1900. Experts say this is certain to create a number of logical inconsistencies, causing the computers to either erase the data, malfunction, behave in erratic and unpredictable ways, or shut down altogether.

Since most major institutions such as banks, hospitals, schools, communication and transportation arrays, government agencies, businesses and the military are all connected to computers, a failure of any or all of these systems simultaneously could cause the world economy to grind to a halt.

The severity of the problem is finally gaining worldwide attention. The Business Week magazine published a cover story this week dedicated to the effect the millennium bomb may have on the U.S. economy.

As part of its research, the magazine commissioned a survey to assess the impact of the Y2K problem specifically on the U.S. economy. However, the survey also serves as a blueprint of what other industrialized nations around the world may also experience.

According to the survey, growth rate in the U.S. in 1999 is expected to be 0.3 percentage points lower as companies are forced to divert resources to fix the computer problem.

The survey also estimates the Y2K problem will cut a half of a percentage point off growth in the years 2000 and 2001. That would roughly equal the expected economic fallout of the current turmoil in East Asia.

But the survey indicates that growth will not be the only thing affected. Inflation is expected to rise and productivity fall. This will come about, says the survey, because companies will be busy diverting money, resources and manpower toward fixing the millennium problem instead of creating and marketing new products.

Finding the people to fix the problem will not be easy either. According to a study done by The Information Technology Association of America, the U.S. already has 350,000 job vacancies for computer scientists and programmers.

As a result, the U.S. Federal Reserve (central bank) will have to negotiate a delicate course as the millennium approaches. The Fed is expected to come under intense pressure in 1999 to increase interest rates as labor shortages for technology workers could cause wages to soar. But if the Federal Reserve raises interest rates, it could then force employers to hire fewer workers, possibly delaying a solution to the computer problem.

Last September, a U.S. House subcommittee on government management estimated the cost of fixing the millennium bomb for federal agencies will be $3.8 billion, with an additional $2 billion to fix state agencies.

However, the Gartner Group has issued an estimate of final costs far larger the official $3.8 billion mark. It says the cost could reach as high as $30 billion.

Moreover, another costly dimension to the problem, say experts, is that many companies are not taking into account the possibility of litigation resulting from software failure.

For example, companies that do not fix their code in time are opening themselves to lawsuits from partners and shareholders. Companies which share electronic data could sue each other if the problem results in lost revenue. Governments could face a wide range of lawsuits from citizens and, at the least, angry constituents.

Overall, Software Productivity Research -- a research firm located in the northeastern U.S. state of Massachusetts -- estimates the legal fees resulting from failures due to the millennium bomb could reach as much as $2 billion by the year 2005. Awards for damages could be as high as a trillion, it adds.

But perhaps the greatest unknown factor in determining the precise impact of the millennium bomb on the U.S. and global economy, says Marcoccio, is the readiness of the rest of the world to address the problem.

Marcoccio says Europeans and Asians lag behind the U.S. in trying to fix the problem. In a recent survey, Marcoccio's firm checked on how prepared 6,000 companies around the world are in addressing the millennium bomb, the results were dismal.

The survey rated countries according to five categories: Zero -- for no action on the problem taken; Level 1 -- for recognition of the problem and need for action; Level 2 -- completion of an inventory; Level 3 -- for development of a program for making repairs and starting the process; Level 4 -- for completion of work on "mission critical" systems; Level 5 -- for completion of work on all systems.

The results listed the U.S., Canada, Australia, Great Britain and Ireland at Level 2 to 3. Western Europe, Israel, South Africa, Japan and Brazil were ranked at Level 1 to 2. Central Africa Eastern Europe, Middle East, Russia, China and parts of South America were rated at Zero to Level 1. Thailand, Malaysia, the Philippines, portions of South America, and most of the former Soviet Union -- Zero.

To make matters worse, some experts say that European banks are more preoccupied with preparing for the euro than addressing the computer problem, whereas Asian financial institutions are too busy worrying about the current economic crisis to think about the year 2000.

That is a big mistake, says Edward Yardeni, chief economist at the investment bank Deutsche Morgan Grenfell, Inc. Last year, Yardeni predicted a 35 to 40 percent chance that the year 2000 software bug would cause "at least a mild global recession" in that year.

U.S. President Bill Clinton and Great Britain's Prime Minister Tony Blair are so concerned about the effect of the millennium bomb that the issue will be on the formal agenda of the next G-8 summit in Britain in May.

Other U.S. officials are also speaking out on the issue.

On a visit to Germany last October, U.S. Senator Bob Bennett, (R-Utah) told a group of German businessmen that he was greatly concerned that Europeans were not taking the computer problem seriously enough.

Bennett said many leaders simply believe the problem will go away, or someone else will fix it for them.

Bennett said: "I was talking to one business leader in Bulgaria about [the millennium bomb], and he said it should be no problem. He told me they would just ask Bill Gates [the multi-billionaire owner of the American software firm Microsoft] to come over and fix it for them. I hope our partners in Europe realize how serious this problem facing us is."

Overall, Marcoccio says his organization has estimated that the cost of fixing the Y2K problem worldwide will cost $300 to $600 billion.

Says Marcoccio: "All of us in every country in the world are going to pay this bill ... all of us individually because goods will cost more, utilities, including power, lights and water, will increase in price, taxes will go up across the board because governments have to pay for this as well ... There is no one else to pay for this problem except all of us. And pay, we will."