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OECD Sees Lingering Economic Effects of Sept. 11
Daily Policy Digest

Terrorism Issues

Friday, June 07, 2002
Fears about the immediate economic impact of Sept. 11 proved to be overblown, according to the Organization for Economic Cooperation and Development -- but the longer-term effects on the world economy may be worse than expected.

In a recent report, the organization likened the lingering impact to "sand in the wheels" of the economy.

The increase in insurance-risk premiums, reduction in insurance coverage, higher transportation costs, disruptions to international trade and the diversion of capital to defense and security spending amounts to a heavier and more prolonged burden on global growth that previously realized.

  • The insurance industry has increased risk premiums by 30 percent or higher.
  • Meanwhile, insurance coverage has been curtailed in some cases -- thus hindering corporate expansion.
  • Plans to enhance border protection and security measures will likely increase shipping costs for companies.
  • New security procedures could hinder real-time supply-chain management that many firms have developed in recent years -- thereby encouraging them to carry more inventories.
The boost in recent months in defense spending by governments, particularly the U.S., and private spending on security measures could soon amount to a drag on the economy. The initial spending boosts economic growth, but the longer-term consequence is negative, because funds are diverted from more profitable uses.

The report estimated that doubling private security spending reduced potential output by 0.6 percentage points after five years, and lowers productivity by 0.8 percentage points in that time.

Source: Christopher Rhodes, "Long-Term Economic Effects of Sept. 11 May Be More Costly," Wall Street Journal, June 7, 2002.

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