Contact Us



Troubled Times for World

From Washington to London to Frankfurt, the world's economic policy makers spoke with one voice last week, and their tone was not reassuring.

On Tuesday, the Federal Reserve cut its benchmark interest rate for the 10th time this year, to its lowest level in four decades, in yet another attempt to restart the American economy. On Thursday, the Bank of England and the European Central Bank cut their own rates more than expected. The only major central bank missing was the Bank of Japan, but its rate was already close to zero.

For the first time in more than 20 years, each of the world's largest economies appears to be in a recession or headed toward one. Unemployment is rising. Factory orders are falling. Both consumers and corporate managers are reluctant to spend money because they are uncertain about the future. Pick a country -- Taiwan or the United States, Argentina or France -- and the description is likely to fit.

This, it seems, will be one of the main legacies of the technology boom of the 1990's. Rather than repealing the business cycle, as its advocates suggested it could, the new economy -- with its various investment bubbles -- has done what only an oil shock had seemed capable of in recent times. "This is the giant tech wreck," said Robert J. Barbera, the chief economist of Hoenig & Company, an investment firm.

That wreck, aggravated by the terrorist attacks of Sept. 11, has ended two decades during which there has always an economy strong enough to give lagging nations a lift by buying their products. In the late 1990's, it was United States bolstering Asia; in 1990-91, it was Japan helping the United States.

This year, by contrast, "the whole house of cards fell at once," Lakshman Achuthan, the managing director of the Economic Cycle Research Institute in New York, said. As a result, he said, "the decline we've had so far will get worse before it gets better."

The fallout is likely to affect global politics over the next year in a way that is second only to the war on terrorism. It will shape much of the debate in the midterm elections in the United States, which will determine which party controls a narrowly divided Congress. The recession will also change the terms of the sometimes violent argument over globalization.

"People took a well-functioning global economy for granted in the last decade," said Daniel Yergin, an author and the chairman of an energy consulting firm.

Now, governments will face conflicting calls to soften the downturn through new regulation and to restart growth by opening the world's borders further. Mr. Yergin noted the decades-long trend toward trade liberalization arguably had its roots in the Great Depression, and the global recession caused by the oil shock of the mid-1970's led to the creation of the industrial nations group known as the G-7.

Even before the latest round of global trade talks opened on Friday in Doha, Qatar, the leaders of the International Monetary Fund and the World Bank argued for the removal of tariffs and quotas. "At this critical juncture for the world economy," the two said in a joint statement, "a strong commitment to continue opening world markets will provide a much-needed boost to confidence and global growth prospects."

The problem is that when the world's pie is not growing, debates over dividing it become fiercer. Poorer countries -- which now manufacture many of the world's goods -- are particularly wary of policies that could harm them in the short term. Manufacturing is usually the most volatile sector in a downturn, and those countries have been hit especially hard by the collapse of technology investment this year.

"The U.S., Europe and to some extent Japan can control their own destinies," Alan S. Blinder, the former vice chairman of the Federal Reserve, said. But smaller nations, like Argentina, cannot. "To some extent, they're innocent victims in all this," he said.

When the world's weaker economies are troubled, larger countries can often lead them out of it, much as the United States helped Asia recover from its late- 1990's crisis by buying so many of its products. In fact, by 1999, nearly every region of the world was growing.

But with no large struggling economies to keep prices down by selling cheap exports, Mr. Achuthan said, central banks began to worry that demand would overwhelm supply, setting off inflation. So the banks raised their rates, choking off growth by making debt payments more onerous and future loans more expensive. Oil prices began rising too, leaving businesses and consumers with less to spend on other goods.

Most important of all, though, people believed that technology -- in the form of global computer networks -- had changed the economic rules by making business endlessly more productive, and hence more profitable. Stock markets gained 20 percent, or more, a year, and companies spent billions on new equipment.

Then the reckoning came. Orders for Finland's cellphones and Singapore's circuit boards plummeted. Corporate profits began to fall, as did share prices, leaving investors with much less money to spend. Companies that had vastly increased their capacity could not profitably sell all their products.

On top of all that, the attacks of Sept. 11 brought the economy of the United States to a temporary standstill and continue to affect people's confidence, and willingness to spend money, even in Europe. New security measures have also slowed business.

This recession is young enough that broad measures of the global economy have not yet fallen as far as they did during some other recent downturns -- even regionalized ones, like the English-speaking recession of 1990-91, which afflicted Australia, England and the United States. But economists say they are on their way.

When the recession will end, and how bad it will eventually be, is difficult to predict because the world has not experienced something like this since at least the oil shock of 1979 and -- given that Japan continued to grow through most of it -- perhaps not since the energy crisis of 1973-75. Most forecasters and government officials believe the downturn will not be nearly as painful as the the one in the mid-1970's. Central banks are acting forcefully to lower interest rates, and many companies have reduced their stockpile of unsold goods.

For now, though, there are few signs of turnaround, especially in the country where the new-economy bubble popped the loudest. And until the United States economy begins growing again, analysts say, the rest of world will struggle as well.

"The recession started here and was exported elsewhere," Mr. Barbera said. "The recovery has to start here too."