Some Thoughts on the Global Economy: A Conversation with C. Fred Bergsten

The Honorable C.

The Honorable C. Fred Bergsten has been Director of the Institute for International Economics since its creation in 1981. He also served in the Carter Administration as Assistant Secretary of the Treasury for International Affairs. His latest book is No More Bashing: Building a New Japan-United States Economic Relationship (2001). He spoke with In the National Interest editor Nikolas K. Gvosdev about a number of issues facing the global economy.

Q: What sort of an impact did 9/11 have on the global economy? Did the terrorist attacks cause any serious damage to the international economic system, or has it been a "blip", a momentary shock that has had no real lasting consequences?

A: I think that, so far, it has been a blip. There are, however, two potential costs.

The first concerns trade. If the outcome leads to substantial increases in the barriers erected at borders for security reasons, then, of course, you could have some negative effects on trade. There have already been a series of efforts undertaken by the G-7 and by APEC to put in place cooperative programs to reduce the risks of terrorists or terrorist devices being transported internationally. (1) Such efforts will lead to some increase in border security costs on international transactions, and so that could, over time, have some modest dampening effect on trade. A few countries--Hong Kong, quite notably--have publicly raised this question. While they have pledged their support to minimizing security risks, they are concerned about the impact on trade. So there is some degree of tension between increased security and the free flow of goods. I suspect that as the United States leads the international effort to tighten up on borders, there will be some modest increase in costs, and some modest diminution of trade flows.

The second and more indirect effect is whether steps taken in the aftermath of 9/11 have slowed down economic growth. All countries, starting with the United States, will have to pay a security premium to reduce the risk of further terrorist attacks. This premium encompasses things such as more expensive and time-consuming airport security procedures, the costs of hiring more police, developing and implementing more comprehensive programs for homeland security, and so on. All of this diverts resources from presumably more economically productive uses. This could have a modest yet negative effect upon economic growth. That, in turn, would also reduce international transactions.

It is, however, going to take a while for all of this to show up in the economic data, and even then it will be hard to separate which effects spring from 9/11 and which are caused by other, ongoing developments. I would suspect that these two outcomes arising out of 9/11--increased security at the borders and the diversion of resources into homeland security--could to some modest extent dampen the continued pace of globalization and the internationalization of the world economy.

We can also mention a third, psychological effect of 9/11, which is, to some extent, affecting equity markets and other financial markets. It is, however, hard to quantify.

Q: Could you comment on the impact that a potential American strike on Iraq may have on energy prices? Linked to that, what is your opinion of the statements made by some economists that, in the event that Saddam Hussein is overthrown rapidly and a friendly, pro-American regime comes to power in Baghdad, that it is not in American interests to promote a drastic decline in world oil prices?

A: With regard to the first question, I think that a sharp distinction needs to be drawn between the current period of uncertainty prior to any action in Iraq, and what would actually occur in the energy markets were action to take place. In this period of uncertainty, the market places an extra premium on the price of oil, what can be termed an "uncertainty effect." There are different estimates as to how much the premium actually is, but I would think that at it at least a few dollars more per barrel of oil. So, I suspect you now have an oil price than is higher than would otherwise be the case because of uncertainty as to what might happen in the region. Assuming that action takes place--and that any military action we undertook would be successful and fairly short in its duration--I think it would prove to be quite positive for the world oil market. First, it would eliminate the current climate of uncertainty, and I think it would also lead to a decline in the price of oil, on its merits. This, after all, is the lesson of the Gulf War. When Operation Desert Shield was converted into Desert Storm, when the first air attacks proved to be quite successful, and--crucially--when the United States announced it would release oil from the Strategic Petroleum Reserve to offset any instability or interruption of supply in the world markets, the oil price dropped by a third. In fact, the decline in the oil price as a result of the Gulf War helped to trigger the economic boom in the United States that lasted for nearly a decade. So, assuming that military action would be quick and fairly successful, and assuming that the United States and other OECD countries would be prepared to release oil from their stockpiles to counter any short-term interruptions, the end result of action could prove to be very bullish for the oil markets and that, in turn, would stimulate growth all around the world.