Business Today

How other economies fought terror

Devastating Al Qaida attacks rattled the economies of the US, UK and Spain but swift government policies prevented their economies from tanking. Can India learn from them? Puja Mehra finds out.

Puja Mehra        Print Edition: December 28, 2008

As soon as ten heavily armed men began their carnage in Mumbai, journalists and citizens alike instantly dubbed the unfolding tragedy, ‘India’s 9/11.’ Many also bemoaned the fact that a fragile economy, already strangulated by a global slowdown, was now simply going into a further tailspin. Instead of thronging malls and shops around this time of year, Indian consumers stayed at home and remained glued to their televisions. The Mumbai terror strikes seemed to have considerably damaged India’s economy and its long-term prospects.

Swift govt policies prevented US economy from tanking
Swift govt policies prevented US economy from tanking
Not really. Mumbai’s attacks and the US’ 9/11 could not be more different. First, the scale of the Mumbai attacks was far smaller. The US tragedy, which used airplanes as missiles, brought down two of the largest buildings in the world, severely damaged the Pentagon and killed 3,025 people. Those attacks wiped out 200,000 jobs, busted 18,000 small businesses and razed $16 billion worth of buildings, besides forcing a week-long shut down of Wall Street. In Mumbai’s case, close to 200 people lost their lives.

The damage to the Taj is estimated at around $100 million and the Oberoi is only a few weeks from opening up for business again. Contrary to popular belief, there is now a consensus that beyond temporarily impairing capital markets— such as the shut down of the New York Stock Exchange (NYSE) and London Metal Exchange (post the 7/7 attacks)—and causing suspensions of flights and the cancellations of hotel bookings, terror strikes cause little immediate impact outside of physical destruction.

Consumer confidence and stock prices both take hits—but all of these aspects of the economy tend to recover robustly within a quarter or so. In the longer term, however, the only economic impact seen is the shift of resources away from the production of other goods and services towards law enforcement and defense.

The trajectory of the US economy post 9/11 is ample proof of this theory. For the American economy, 9/11 was merely equivalent to a cleverly concealed sucker-punch, only causing immediate disruptions and localised bankruptcies in New York City. The insurance and airline industries were the worst hit, and property and casualty claims mounted to $40 billion. Air services were cutback 20 per cent, 100,000 airline jobs were cut and US Airways—whose planes were hijacked and used in the attacks—was driven to filing for bankruptcy. But apart from these problems, little else was affected at a significant scale.

Moreover, within mere hours after the attack, the US Federal Reserve launched a rescue package by infusing $100 billion into the economy every day for three days (In contrast, it took Indian commandos longer to get to the siege at the Taj, than it did for the Fed to act.

Source: Centre for Economics and Business Research; Analyst firm, FootFall
Source: Centre for Economics and Business Research; Analyst firm, FootFall
Ten days later, the government was yet to come up with an economic reconstruction plan). The Bank of Japan and other central banks across Canada and Europe were mobilised into supporting the dollar and easing the flow of money across money markets. Federal loans, grants and industry-specific bailouts followed.

A week later, when Wall Street reopened and trading resumed on the NYSE, the Fed dropped interest rates by 0.5 per cent to spur growth. With three more cuts, it brought the rates down to 1.75 per cent by December 2001. The RBI, on the other hand, announced a stimulus 10 days later, except it targeted only the current economic slowdown and completely side-stepped the victims of the attacks and Mumbai.

 The US response

The $10-trillion economy was slowing down even before 9/11. But robust policies—such as an instant $100 billion, Fed-orchestrated cash injection—ensured a quick economic recovery.

Greater devastation:

  • 30% of lower Manhattan’s office space lost
  • 200,000 jobs destroyed
  • $16 billion of assets ruined
  • 5 per cent of the annual US GDP lost by December 2003

Heavier losses:

  • Insurance industry lost $30 billion
  • Claims of $40 billion
  • Air services cutback by 20  per cent
  • 100,000 layoffs
  • US Airways filed for bankruptcy
  • Hotels vacancy surged 58,000 jobs cut
  • Gross City Product for New York City shrunk $27.3 billion
  • Tax losses equalled $3 billion

Quicker response:

  • Federal Reserve assured liquidity
  • Infused $300 billion
  • Cut interest rates by 0.5% point
  • Three more cuts brought them to 1.75% by December 2001
  • Dollar support, rate cuts from Bank of Japan, European Central Bank
  • The US Treasury created Patriot Bonds to fund the war on terror
  • Airlines got a $15 billion-aid package
  • Impacted small firms got loans and grants
  • NYC got $21.7 billion of federal aid
  • Unemployment benefits were extended
  • Federal oversight of airport security

Bigger rescue :

  • $843 billion spent on recovery and counter-terrorism by 2006 (over $300 billion of which went into Iraq)

Deeper impact:

  • The federal budget turned from a $100 billion surplus to a $300 billion deficit
  • GDP was shrinking before 9/11, but recovered in 4th quarter with 2.7% growth

Source: Robert Looney, Centre for Contemporary Conflict, US; Center for Strategic and Budgetary Assessments, US


US Airlines received a $15 billion-aid package and small businesses which were adversely impacted by the attacks were given loans and grants. Plus, the city of New York was given $21.7 billion of federal aid. With such well-targeted timely action, the $10-trillion US economy, that had been inching towards a recession all throughout 2001, bounced back within just a quarter, growing at a 2.7 per cent annual rate. All talk of a 9/11-inspired global recession was resoundingly refuted.

Learning a thing or two from the US response to 9/11, Spain and UK also reacted with alacrity to their own incidents of Al-Qaidamasterminded mass terror. The Madrid bombings of March 2004, in which there was a bigger death toll than the London attacks, had no discernible impact on the Spanish economy. Spain’s central-bank Governor, reporting on his country’s stronger-than-expected 3.1 per cent growth for that year, made no mention of any terrorist effect. The Bank of England’s monetary policy committee, meeting to mull over rate cuts targeting economic growth at the time of the bombings, declared business as usual and left the base rate unchanged to avoid panic.

London is bombed...

Date: July 7, 2005
Place: Central London
Bombed: Underground trains and a
double-decker bus
Killed: 52, Injured: 700

...but with little economic impact

  • 3.5% slump in London's FTSE 100 within 90 minutes but 1.4% rebound the next day
  • Bank of England keeps rates unchanged to avoid panic
  • London Metal Exchange shuts for a day
  • 20% more shoppers in Central London the very next weekend
  • British Airways and Ryan Air see business rise
  • No drop off in hotels and pubs
  • Less than 0.5 per cent of GDP lost
In contrast, India’s response to the Mumbai attacks has been nothing short of underwhelming. This when the country, the companies and even the city of Mumbai was looking for attention, action and aid. “The government will take all necessary measures to look after the well-being of the affected families, including medical treatment of injured,” commented Prime Minister Manmohan Singh, but that was it.

India is in a fragile situation. The nation’s psyche has been deeply scarred, leaving its population vulnerable, scared and enraged. Many are clamoring for the country to go to war with Pakistan, ignoring the fact that this could lead to a catastrophic loss of life and property, and dramatically increase the burden on the taxpayer. Remember Iraq? Plus, the government has demonstrated a worrying inability to act decisively in a time of need. If it has any hope of emulating the successes demonstrated by countries like the US, Spain and the UK in rescuing their economies from terror attacks, it needs to stop dithering on the sidelines and jump into the fray.

US Airlines received a $15 billion-aid package and small businesses which were adversely impacted by the attacks were given loans and grants. Plus, the city of New York was given $21.7 billion of federal aid. With such well-targeted timely action, the $10-trillion US economy, that had been inching towards a recession all throughout 2001, bounced back within just a quarter, growing at a 2.7 per cent annual rate. All talk of a 9/11-inspired global recession was resoundingly refuted.

Learning a thing or two from the US response to 9/11, Spain and UK also reacted with alacrity to their own incidents of Al-Qaidamasterminded mass terror. The Madrid bombings of March 2004, in which there was a bigger death toll than the London attacks, had no discernible impact on the Spanish economy. Spain’s central-bank Governor, reporting on his country’s stronger-than-expected 3.1 per cent growth for that year, made no mention of any terrorist effect. The Bank of England’s monetary policy committee, meeting to mull over rate cuts targeting economic growth at the time of the bombings, declared business as usual and left the base rate unchanged to avoid panic.

In contrast, India’s response to the Mumbai attacks has been nothing short of underwhelming. This when the country, the companies and even the city of Mumbai was looking for attention, action and aid. “The government will take all necessary measures to look after the well-being of the affected families, including medical treatment of injured,” commented Prime Minister Manmohan Singh, but that was it.

India is in a fragile situation. The nation’s psyche has been deeply scarred, leaving its population vulnerable, scared and enraged. Many are clamoring for the country to go to war with Pakistan, ignoring the fact that this could lead to a catastrophic loss of life and property, and dramatically increase the burden on the taxpayer. Remember Iraq? Plus, the government has demonstrated a worrying inability to act decisively in a time of need. If it has any hope of emulating the successes demonstrated by countries like the US, Spain and the UK in rescuing their economies from terror attacks, it needs to stop dithering on the sidelines and jump into the fray.

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