How other economies fought terror

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.

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.

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.

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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