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World: Economic Impact Of 11 September Attacks Continues To Spread

National and international economic institutions moved quickly to minimize immediate worldwide financial disruptions after the 11 September terrorist attacks on the United States. An economic study to be published soon by the Organization for Economic Cooperation and Development says, however, that over time the economic impact of terrorism will continue to grow.

Prague, 11 June 2002 (RFE/RL) -- The world's insurance companies weathered extraordinarily well the tremendous costs of the terrorist attacks nine months ago in New York and Washington. But a new economic study says that some of them could not survive another assault of such magnitude.

Increased security at national borders -- at crossing points, seaports, and airports -- is a natural and necessary consequence of the attacks and of the belief that more attacks are likely. The report says, however, that the security regimen's increased costs, long lines, and disruptions themselves threaten to damage world trade.

The Paris-based Organization for Economic Cooperation and Development, OECD, is a research institution for 30 of the world's most developed economies. It plans to publish the study titled Economic Consequences of Terrorism in its forthcoming "Economic Outlook Number 71."

One of the study's authors, OECD senior economist Vincent Koen, discussed the study with our correspondent in a telephone interview from Paris. He said a surprising result of the study was how remarkably well U.S. government, financial, and monetary authorities responded to the 11 September disaster. The United States and much of the world were already in a recession, but the economy recovered within six months.

"The recession has not been aggravated durably and very significantly by 11 September, contrary to widespread fears in the days right after the tragedy," Koen said.

Koen said an important lesson is that central banks and other authorities must have tools in place to react promptly and forcefully when unexpected and unpredictable disaster strikes. Another lesson, he said, is that in the short term, liquidity support -- in the form of loans and guarantees -- is more important than grants in aid and direct subsidies.

"Liquidity support was very important in this crisis. The key [was] that the Federal Reserve [the U.S. central bank] immediately stood up and said, 'We will provide liquidity to whoever needs it in virtually unlimited amounts' in order to avoid cascading failures and collapses," Koen said.

If the U.S. authorities erred, Koen said, it may have been in providing huge subsidies to the U.S. airline industry. "We think it's important to take a bit more time to study whether, indeed, state aid in the form of grants or subsidies is warranted or not," Koen said.

One flaw of providing hasty subsidies to one industry is that other industries, with less dramatic cases to present, may be unfairly left without help. The airline industries worldwide certainly were damaged severely by the terror attacks. But, Koen pointed out, so was the tourism industry. He said the tourism industry was too diffuse, too fragmented in numerous small enterprises, to make the kind of appeal for aid that airlines so successfully made.

The OECD study looks at three areas of high impact from the terrorist attacks. These focused on the possible loss of what before 11 September was being called a "peace dividend." Koen said the study was unable to quantify this area. But, he said, it seems evident that funds diverted to new security measures and military requirements will affect productivity over the long term.

One severe economic effect, he said, is on world trade. Border-crossing security measures are unavoidable, he said, and care must be taken to limit their impact on trade. "But a policy lesson is that in tightening security, measures should be designed in such a way that they enhance the efficiency of trading rather than adding another form of nontariff barrier," Koen said.

Koen said that the United States and other countries are investing in arrangements that can increase security while actually contributing to efficient trade flows. "There are devices such as smart seals that can be put on containers in ports of origin and that can improve security dramatically, and also reduce fraud, which is a very positive side benefit from such devices, at limited costs," Koen said.

Smart seals are electronic devices that record when a truckload-size container is sealed, if it is tampered with on the way, whether it undergoes major temperature change or other suspicious circumstances, and other data. Koen said the United States also is making arrangements with 10 major world ports from which it receives most of its container shipments. Well-trained U.S. customs officials are to be stationed at such ports to inspect shipments prior to their departure for U.S. destinations.

Koen said the insurance industry showed astonishing resilience. It survived history's greatest single insurance event without major failures. One reason, he said, is that much of the estimated $30 billion to $58 billion loss was spread among re-insurance companies, many of them European firms. A re-insurance company is one that accepts part of the risk of major loss from a primary insurer, usually all or part of the loss over some specified maximum amount. For example, an insurance company may issue a $1 billion policy, provide only the first $500 million in coverage itself, and shift the remaining $500 million risk to re-insurance firms.

The OECD study says, however, that part of the long-term impact is that insurance companies now are raising rates and refusing terror-related coverage. Koen said that another immense disaster undoubtedly would cause a number of insurance companies to fail.

The study says it will be necessary for government agencies to step in and provide insurance or other guarantees against disastrous events too immense for private insurers to underwrite.