Understanding a New World of Uncertainty and Risk

Not knowing what comes next is spooking business and the markets

The new millennium really began on Sept. 11, 2001. True, the economies of the U.S. and the rest of the globe were showing worrying signs of distress in the weeks and months before terrorists crashed three passenger planes into the World Trade Center and the Pentagon. But by striking down a key pillar of America's leadership--its unbridled faith in its own security--the catastrophe has plunged the world into an uncertain new era. A decade ago, when the cold war was history and nations rushed to embrace free markets, the world seemed united by shared opportunity. It now seems united by a dread of risk.

As the aftershocks of Sept. 11 ripple across America and on through Mexico City, Frankfurt, and Hong Kong, it's too early to fathom the contours of this new age. Economists, who make their best guesses based on the evidence at hand, are lopping anywhere from a half-point to two percentage points off their 2002 growth forecasts for the U.S., Europe, and East Asia. But talk with business leaders, investors, and consumers around the world, and you get the unmistakable sense that the impact will be far more extensive. If Wall Street rallies, and the U.S. economy picks up in a quarter or two, the question remains whether the gains will be sustainable. "All economic and profit forecasts are null and void," says economist Henry Kaufman.

What really spooks business is the sheer uncertainty. When it comes to conventional risk, the markets know how to hedge against possible loan defaults, say, or currency swings and changes in government. But they don't know how to navigate in an utter fog. Among the imponderables: Will President George W. Bush's war on terrorism be limited to Osama bin Laden and the Taliban government inside Afghanistan, or will it be an open-ended conflict that engulfs much of the Islamic world? Where will the extremists strike next? As police round up suspects across the globe, it's clear the targets include not only America's heartland, but citadels of capitalism from Paris to Tokyo. Even in Indonesia, police suspect Afghanistan-trained terrorists in the Sept. 23 bombing of a shopping mall.

What's more, disaster struck at the worst possible time in the business cycle. The U.S., Europe, and Japan were sliding into a rare synchronized slump. America's confidence in the promise of equities, the magic of technology, and the brilliance of celebrity CEOs was shaken by the Nasdaq meltdown that erased $5.4 trillion in wealth between March, 2000 and April, 2001. Now, the markets must mull the implications of the $1.4 trillion in market value that vanished in five days of panicked selling after Wall Street reopened on Sept. 17, the biggest one-week sell-off since 1933.

PERSISTENT HAZARDS. Signs of risk now pervade the globe. Tokyo's Nikkei index has plunged to depths unthinkable just six months ago. Hotels, retailers, and airlines everywhere have been pummeled. Germany's Lufthansa says up to half of booked passengers on some flights aren't showing up. In East Asia, a region that is reaching crisis fatigue since the 1997 financial collapse, makers of everything from toys to electronics are seeing their hopes crushed for a U.S.-led rebound. In Mexico, which sends nearly 90% of its exports to the U.S., 500,000 workers have lost their jobs this year because of the slowdown--with more layoffs and order cancellations on the way. "We are at the mercy of what happens in the U.S.," says economist Mauricio González of Mexico City think tank Grupo de Economistas y Asociados. As the luster of emerging markets dulls, so, too, has the 1990s optimism in perpetually strong world growth.

Indeed, many of the most promising features of globalization are being called into question. For emerging markets, the wide-open capital markets promoted in the 1990s now look like persistent hazards as--yet again--investors rush to yank funds out of Brazil, Korea, and other lands thousands of miles removed from lower Manhattan's ground zero. The explosion in international travel, thanks in part to freer borders, also has made it hard, if not impossible, to track the movements of criminals and terrorists. And it turns out that the liberal inflows of skilled labor and students that the U.S. has welcomed also included the perpetrators of the World Trade Center attack.

The impact extends far beyond commerce. Now that terrorist networks have become the global enemy America has lacked since the end of the cold war, a geopolitical realignment may be under way. The Bush Administration has a new ally in Vladmir V. Putin's Russia, with which it had sparred over missile defense. In return for use of Pakistan's air space and intelligence, the U.S. is set to throw billions of dollars in aid at a military regime it had largely shunned a few weeks ago. China, which U.S. hawks have been building up as America's No. 1 strategic threat, looks less menacing.

The global unity now being shown in the war on terrorism, in fact, could well be one of the few positives to come from this crisis. Perhaps once this war is won, there will be a greater appreciation that the fates of the West and the developing world are intermingled--economically as well as politically. Is a promising New World Order in the making? Or is the old one merely coming undone? As long as such questions hang in the air, it will be hard to invest or plan for the long term.

By Pete Engardio

With Peter Coy in New York, Geri Smith in Mexico City, Michael Shari in Singapore, and bureau reports

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