UN Warns Of Impending Global Economic Crisis

by Thalif Deen

The crisis is expected to have a devastating impact on the world's poorer nations, where the battle to reduce poverty has already been crippled by cuts in development aid, onerous debt burdens, a rise in protectionism, and a rash of civil and military conflicts.

"The first and most fundamental point is that the world economy was already in a state of slowdown," says Ian Kinniburgh, the UN's director of development policy analysis. "Then, we had the economic shock generated by the events of September 11. Those events came at a very unfortunate time."

Gross world product (GWP) is expected to grow at only 1.4 percent in 2001, compared with a previous estimate of 2.4 percent, with partial recovery to about two percent in 2002.

International trade is expected to register "virtually no growth" this year, although the figure could increase to around four or five percent next year.

Kinniburgh says the most severely affected developing economies are expected to be in South and East Asia, where gross domestic product (GDP) growth projections for 2001 have dropped from 4.1 percent to 1.7 percent.

These countries, some of which depend on electronic exports and tourism to sustain their onetime vibrant economies, include Singapore, Thailand, Indonesia, Malaysia and South Korea.

In Latin America and the Caribbean, a region that also is dependent on tourism, GDP growth is expected to decline from a projected 3.1 percent to 0.8 percent.

GDP growth for African countries largely dependent on primary commodities is projected to drop from 4.1 percent to three percent in 2001.

The United Nations has updated its annual World Economic and Social Survey to take account of the potential impact of the Sept. 11 attacks.

"The shock is expected to reverberate through the world economy and global financial markets in the coming months," the study says.

The first major impact of the terrorist attacks is the destruction of human and physical capital estimated at $40 billion, about twice the GDP of Luxembourg. According to U.S. estimates, the cost of the devastation could be as high as $100 billion, about as much as Portugal's GDP.

Rudiger Dornbush, an economist at the Massachusetts Institute of Technology, says that global recession is "unavoidable" because "if we go down, everyone does."

"The impact (of the attacks) will be worse than any of the events of the last 40 years, including the oil shock of the 1970s," adds Ken Goldstein, an economist with the U.S. Consumer Board.

"The damage is spilling over to more and more sectors, such as manufacturing, retailing and technology," the report warns.

At last count, more than 325 American companies have lowered their earnings estimates for the third and fourth quarters of 2001.

In addition, consumer and business confidence has dropped, beginning with a sharp decline in equity markets.

"This decline in confidence has a particularly profound effect because of its effects on spending practices," says Kinniburgh.

Macroeconomic policies have shifted in some of the major economies, with more than a dozen central banks cutting interest rates. In the United States, defense spending -- which averaged more than $300 billion annually -- could increase dramatically in the coming years and this may boost economic growth in the short term, he adds.

Asked about the impact of the crisis on the UN's poverty alleviation programs, Kinniburgh says that population growth outpaces economic growth in most developing regions, so their economies were more vulnerable to external shocks in the first place.

"These types of hiccups have a profound effect on growth in developing countries," he says. "Richer countries are better at protecting themselves from this type of shock."

At a press conference immediately after the attacks, UN Secretary-General Kofi Annan said the international community should intensify its efforts to get to the root causes of terrorism.

"People who are desperate and in despair become easy recruits for terrorist organizations," Annan said. "I think that that realization is accepted generally, and I know that the planners in Washington are also conscious of that."

He also strongly endorsed the creation of a new World Solidarity Fund for Poverty Eradication. The fund, originally proposed by the General Assembly last year, is intended to help implement the pledge to halve, by 2015, the number of people living in poverty.

More than 180 world leaders adopted this target during the UN Millennium Summit in New York in September 2000.

Despite this pledge, the poorest of the world's poor -- about 1.3 billion people living on less than a dollar a day -- are expected to keep growing in number. By the next decade, the number of people living in extreme poverty may rise to 1.5 billion out of a global population of more than 6.0 billion people, UN experts predict.

In the absence of concerted efforts to fight poverty, their number will swell to 1.9 billion by 2015, the world body warns.