SECTION: BUSINESS; Pg. F4

LENGTH: 842 words

HEADLINE: LESTER C. THUROW / OPINION Lester C. Thurow is professor of management and economics at the MIT Sloan School of Management.;
RETHINKING SANCTIONS, BAILOUTS

BYLINE: BY LESTER C. THUROW

BODY:
Terrorism is forcing us to rethink our views of what roles government should or should not play in our economies. What bailouts should be given in the wake of Sept. 11?

What economic sanctions should be imposed on countries that support terrorism?

    In thinking about the first question, it is important to remember that 99.8 percent of what we are seeing economically would have been occurring if the attacks had not happened. Swiss Air and Polaroid would have gone broke anyway. GDP growth rates in the third quarter would have been negative anyway. But 50 percent of what happens will be blamed on terrorism. It is much easier to blame the terrorists than for governments to take responsibility for the economic downturn or for private companies to admit management mistakes.

If the events of Sept. 11, 2001, had happened in September 1999, they would have had no economic impact. Then, we were in the middle of an economic boom and a bull market. The Federal Reserve Board would have responded by not raising interest rates for a couple of months. The economic impact arises from the fact that the terrorism occurred in the middle of a sharp global economic downturn. With a GDP approaching $11,000 billion, even big terrorism is a very small economic shock to the American economy.

Where the permanent effects hit is in industries such as insurance. Here there is going to have to be a major government role. Private insurance can handle risks where probabilities can be calculated and where the total financial exposure is limited. It cannot handle risks where probabilities cannot be calculated (terrorism) or where potential losses are unlimited. If we want airlines to fly and tall buildings to be built, some system of government reinsurance against terrorism is going to have to be designed.

One can also make a case for compensation in situations where government orders stop some industry from conducting its normal business. Airlines were not allowed to fly inside the United States for a few days after Sept. 11. In such a situation there is a case for compensation of the net revenue lost in those few days.

But there is no case for compensation on the grounds that fewer people were flying after flights resumed. On that rationale many people had their incomes reduced. And if compensation were to be paid, it should go to the workers laid off and not to the companies. It is the workers, not the companies, who have suffered a permanent economic loss.

But what about the reverse, government actions designed to stop economies from working - sanctions on those countries that harbor terrorism? There are cases where sanctions make sense. There are cases where they have helped change regimes, for instance South Africa. But there ought to be a simple sunset rule. If sanctions have not succeeded in achieving their announced goals within three years, they ought to be abandoned. If they haven't worked in the first three years, they are not going to work, however much longer they are kept in place.

Economic sanctions have been imposed on Castro's Cuba for 40 years, on Iran for 20 years, and on Iraq for 10 years. They haven't caused Castro's downfall, they haven't changed the behavior of Iran, and they haven't caused Saddam Hussein's demise. And we all know they aren't going to achieve these objectives. If we want these events to occur, means other than economic sanctions will have to be found.

Long-lasting sanctions do, however, harm the economic welfare of people who live in these countries. Iraqi babies do go hungry. In this case, the Arab public is right to look at the harm that America's sanctions bring to ordinary Iraqis and to blame America. We are imposing a policy that we know won't work.

We are, therefore, deliberately hurting the population of Iraq for no reason.

It is true that Saddam Hussein could also get the sanctions lifted by inviting the weapons inspectors back to Iraq, but that just means that we are both hurting average Iraqis. Both Saddam and the United States could lift the sanctions; neither is willing to do so. We are both bad guys, from this perspective.

The impact of sanctions is strongest when they are first imposed. Over time, people find ways around them. If you need a spare part for a piece of US equipment in Iran, you call someone who orders the part from the dealer in Dubai. Some night that spare part mysteriously finds its way across the Strait of Hormuz. The price is higher than it would have been if sanctions were not in place, but the country gets the parts it needs to keep its equipment running.

In both offsetting the effects of terrorism at home and undermining terrorism abroad, it is important to understand the limited role played by economics. Terrorists are not driven by economics. Osama bin Laden is not a terrorist because he was born into poverty. He is not a terrorist because he is worried about global poverty. Worrying about reducing global poverty is a good thing to do, but it will not stop global terrorism.

LOAD-DATE: October 31, 2001