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Some rates had even decreased. Maritime shipping rates grew by 5 to 10% on average in the two weeks after the attack, but that rise was soon reversed. Airfreight rates, however, were about 10% higher in late 2001 than before the attacks. Due to the abrupt slowing of cumulative demand starting in 2000 and the decline in fuel costs after the terrorism, there should have been a steeper falling off in freight costs. The stability of freight rates, despite power fuel prices and underused shipping capacity would suggest that transportation costs may have increased as a result of the 9/11 attacks (Looney).
In 2005, Songster looked at the impact that terrorist acts have around the world on the hospitality industry, which has become a prime target in a number of threatening situations. Hotels, restaurants and bars around the globe have increasingly become scenes of terrorist atrocities not enjoyment and relaxation. The question is what kind of impact are such attacks having on the trade and how can hospitality operators work to reduce their threat? For example, in 2005, there was a terrorist attack in Amman, the capital of Jordan. Sixty people died in the horrible hotel bombing-- the Grand Hyatt, the Radisson SAS and the Days Inn. This was not an isolated incident, however. It followed attacks earlier in the year in Indonesia, Egypt, India, Pakistan and the UK. Such ongoing events have greater long-term impact.
Although the costs of terrorism appear high, everything is relative. The costs from one incident of terrorism are usually not great in comparison to the size of the total economy. In New York City, included in the activities that suffered significant losses after 9/11 were finance; air transportation as the decrease in air traffic impacted employment and income associated with the two major airports, Kennedy and LaGuardia; and businesses related to tourism, including hotels, restaurants and the theater.
For 9/11, despite the fact that the personal costs faced by those directly involved were considerable and lingered for substantial periods of time, and while the magnitude of loss measured in dollars was huge -- $33 to $36 billion in New York City alone -- according to one estimate, the loss of physical and human capital and related output was somewhat small in relation to the size of the economy (Bruck, Tilman and Wickstrom, 2004). Although business activity, and especially air travel, suffered setbacks, and some activities remained weakened even after two-and-one-half years, the total regional and national economies recovered quickly. Within a year, they were again dominated by the trends and cyclical patterns in place prior to 9/11.
The extent of the terrorism will vary the economic impact. For example, the terrorist attacks in Madrid on March 11, 2004 led to different results than 9/11. The Spanish attacks had much less of an impact on the capital markets and on the financial markets overall. The Dow Jones EURO STOXX fell by approximately 3% on March 11 for several days, but recovered nearly by the end of the month. Similarly, after a small decline, the Standard and Poor's 500 returned to the pre-March 11 levels in less than a month.
When terrorism lasts in a similar location for long periods of time, the costs mount more significantly. Nations or regions that rely significantly on tourism have been found to suffer considerable economic losses from the persistence of terrorism. This is true, for example, for the Basque region in Spain, as well as for Austria, Egypt, Greece, India, Israel, Italy, Kenya, and Turkey. Terrorism in such areas seems to lower incoming direct foreign investments. When there is an ongoing threat of terrorism, usual business relationships and spending activities demand more time, additional security measures and greater risk because they frequently require higher compensation as well.
For example, the Bank of Israel estimated that the country's 2002 GDP fell between 3 and 3.8% due to the second Intifada that started before the end of 2000. The initial negative effects on tourist numbers, exports to the Palestinian territories, and building trade were exacerbated as people began to worry that the result of the continuation of terrorism would decrease their income and, as a result, reduce their amount of spending. Responses such as this can then produce greater effects, as lowered demand results in less production, demand for labor, investment, and an overall slowing in economic activity. What occurred in Israel demonstrates the way that terrorist acts can negatively impact future behavior that also influences a greater spectrum of consumption activities. Instead, the relatively fast recovery in economic activity in the U.S. after 9/11 may demonstrate a general perception that this was a single event and not part of a pattern that was likely to be repeated over time.
There were also several other factors at play with 9/11, some that were not even known at the time, that made this event have less of an impact than expected -- even with an unknown recession around the corner. These were defined by Kubarych (2002). First, consumers were in reasonably good financial shape. Since businesses were reluctant to layoff employees who were in short supply only months before, consumer incomes did well. They were supported partly by President Bush's first installment of tax cuts that had just been approved by Congress. Inflation was low, and interest rates had fallen considerably as the Federal Reserve had taken steps to ease monetary policy as the economy slowed. Also, the housing market was very strong: Low interest rates and rising home prices gave owners the ability to refinance their mortgages without difficulty. It was possible for them to save on monthly interest or have cash from some of the capital gains they had from their homes. About 40% of all residential mortgages turned over in the last year and had put close to $100 billion into the pockets of the American consumer.
Second, explained Kubarych (2002), the motor vehicle manufacturers decided after 9/11 that fearful consumers were not apt to purchase a new car. Therefore, these companies acted aggressively to create this demand for self-preservation purposes. They had to eliminate tremendous excess inventories that had been building up in the first eight months of 2001, since they had not prepared for a slump in demand. So these manufacturers slashed prices and, even more importantly, attracted more buyers with the newly introduced zero-percent financing. As a result, consumers had an unprecedented spending spree for automobiles in the months of October and November. Also, consumers went to the malls in droves, so that the total retail sales boomed as well. Personal purchase expenditures rose 6% per annum in the fourth quarter of this year, which led to not less than 4 percentage points of economic growth.
Third, noted Kubarych (2002), the Bush administration greatly expanded the military budget with military action against the targets of Al Qaeda, and the Taliban regime in Afghanistan sheltering bin Laden's terrorist organization. The combination of a tremendous growth in consumption and the defense build-up cut short the recession. It allowed a major inventory correction to move rapidly ahead, and as that ended, it boost a steep increase in real GDP for the first 2002 quarter.
As noted, the impact of 9/11 was not as considerable as would have been expected. Also, one major terrorist attack vs. long-term, ongoing terrorism has less of an overall impact. However, this does not mean that measures should not be taken to prepare for economic impact if, and when, another such attack occurs. Raby (2003), for example, notes that organizations should recognize that the cost of taking steps to counter terrorist acts needs to be seen as an important investment that will lower risk premiums and the tendency to shy away from long-term productivity strategies created by uncertainty and risk. Technology improvements that strengthen security can decrease trade inefficiencies and costs. Especially those industries most vulnerable, such as real estate, insurance and tourism, need to have strategies in place for possible future terrorist events.
According to Kevin Coleman (2004), the insurance and financial services industries "need to adopt new strategies, tactics and technologies to protect against the implications of a terrorist attacks." There is no person who could dispute that the events on September 11th, 2001, changed the world forever. Due to this event, understanding about terrorism increased considerably and industries started to acquire and learn the countermeasures necessary to protect different areas of business, government and society. The economic effects of such terrorist attacks frequently exceed the direct costs associated with them. Although it is impossible to ever put a price on human loss, financial impact can be measured. For instance, if an explosion were to go off in at a single world airport, the entire global trading system would be all but shut down. The economic implications would be catastrophic.
Business is used to managing risks and methods. Strategies and…[continue]
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