Terrorism -- A Threat to World Peace?

Marie T. Huhtala, U.S. Ambassador to Malaysia

Remarks to the Rotary International Dinner Forum
Kuala Lumpur, Malaysia
February 22, 2003

Good evening. I'm delighted to be here this evening and have the opportunity to address an
august group, Rotary International, which is so highly regarded for its good works around the
world. I understand that this evening's gathering includes a number of Rotary Clubs from the
Kuala Lumpur area.

I'm honored to share the speaking duties this evening with our moderator Datuk Paddy Bowie, my
esteemed diplomatic colleague, the Ambassador of Germany Jurgen Staaks, and with Razak
Baginda, whose writings and presentations I have followed with great interest during my time in
Malaysia.

The question before us this evening is whether terrorism is a threat to world peace. Obviously, if
we look at how the world has changed in the last 18 months, the answer is a resounding "yes."

There is still a debate in some quarters over exactly what constitutes terrorism, though many of
us "know it when we see it." I'd like to offer a definition of terrorism, drawn from a new U.S.
counter-terrorism strategy announced in Washington last week, that perhaps we can all agree on:
"Terrorism is premeditated, politically motivated violence perpetrated against noncombatant
targets by subnational groups or clandestine agents."

Premeditated. Politically motivated. Noncombatant targets. Done by someone other than nation
states -- those are the key elements to our definition.

It would be difficult to overstate how the events of September 11, 2001 have changed the United
States. What happened that day has caused us to take a hard look at our foreign policy and
national security objectives around the world. Moreover, with the creation of the new Department
of Homeland Security, the United States has undertaken its largest government reorganization
since World War II.

But, Americans know that terrorism did not begin on September 11, 2001. Regrettably, its history
is long and all too familiar. The first major terrorist attack on New York City's financial district, for
instance, did not occur on September 11, or even with the 1993 truck bombing of the World Trade
Center. It occurred on September 16, 1920, when anarchists exploded a horse cart filled with
dynamite near the intersections of Wall and Broad Streets, taking 40 lives and wounding about
300 others.

Starting with the assassination of President William McKinley in 1901, American history in the
20th century was punctuated by terrorism. Some of the most terrible events were the attack by
Puerto Rican nationalists on the Capitol Building in Washington (in 1954), a string of aircraft
hijackings beginning in 1961, and the downing of Pan Am 103 over Lockerbie, Scotland, in
December 1988, when all 259 aboard were killed.

U.S. Embassies and diplomats were frequent targets -- our Embassies in Tanzania, Kenya,
Beirut, Athens, Moscow, and Kuwait were all attacked in the 1980s and 1990s and many
diplomats, there and elsewhere, were either kidnapped, murdered, or both. We also suffered
terrorist attacks on military facilities, such as the bombings of the Khobar Towers residential area
in Saudi Arabia in 1996 and the USS Cole in Yemen in 2000.

And we are painfully aware that we are still vulnerable. You will all have seen that America is
bracing itself for more terrorist attacks right now and, based on credible threat information, we
have gone to Level Orange, which means that the U.S. Government believes there is a high
possibility of imminent terrorist activities in the United States.

Americans also understand that we are not alone in the struggle against terror. Terrorists have
left their mark in some way upon every country in the world. Too many nations around the world
have had the fundamental fabric of their societies torn by endemic terrorism. Colombia and Sri
Lanka are only two examples.

It is important to remember that citizens from some 90 countries died in the attacks of September
11. Moreover, last fall's bombings in Bali brought home to all of us that terrorism is lurking in
Southeast Asia as well. As Secretary of State Colin Powell recently stated: "In the global
campaign against terrorism, no country has the luxury of remaining on the sidelines. There are no
sidelines. Terrorists respect no limits, geographic or moral. The frontlines are everywhere and the
stakes are high."

Although terrorism is a centuries-old scourge, it has adapted itself to our new, globalized world.
Al-Qaida exemplifies how terrorist networks have twisted the benefits and conveniences of our
increasingly open, integrated, and modernized world to serve their destructive agenda.

The Al-Qaida network is a multinational enterprise with operations in more than 60 countries. Its
camps in Afghanistan provided sanctuary for years, and its bank accounts served as a trust fund
for terrorism. Its global activities are coordinated through the use of personal couriers and
communication technologies emblematic of our era -cellular and satellite phones, encrypted e-
mail, Internet chat rooms, videotape, and CD-ROMs. Like a skilled publicist, Usama bin Laden
and al-Qaida have exploited the international media to project his image and message worldwide.

How do we respond to such a nefarious opponent? First, by defining who and what we are
fighting. The enemy is not one person. It is not a single political regime. Certainly, it is not a
religion. Rather, we fight those who, regardless of their specific secular or religious objectives,
strive to subvert the rule of law and effect change through violence and fear. We fight those who
share the misguided belief that killing, kidnapping, extorting, robbing, and wreaking havoc to
terrorize people are legitimate forms of political action.

Second, we respond with a variety of methods. Of course, there is military action, which, for
example, was necessary in Afghanistan to rip out by the roots the al-Qaida infrastructure that had
been allowed to develop there and the repressive government that had shielded the terrorists.
The United States believes, however, that most terrorist threats will be countered through patient,
painstaking diplomatic, law enforcement and intelligence efforts and through the coordination of
all these efforts with friendly and allied nations around the world.

Malaysia is a shining example of this. We have always had close law enforcement and
intelligence ties with Malaysia but these have increased since September 11 to our mutual
benefit. The fruits have been tangible.

To cite but one example, you will recall that last fall your government allowed U.S. agents to
interview a Malaysian being held under the Internal Security Act, in connection with the
prosecution of al-Qaida member Zacarias Moussaoui in the United States. We deeply
appreciated that opportunity.
The United States and Malaysia have also worked well on the diplomatic front in the fight against
terrorism. Our two countries signed a Memorandum of Understanding on counter-terrorism when
Prime Minister Mahathir was in Washington last spring. Subsequently, drawing from that text, the
U.S. and ASEAN signed a declaration on counter-terrorism at the ASEAN Regional Forum (ARF)
in August. The United States looks forward to co-hosting with Malaysia next month in Sabah the
ARF Intersessional Meeting on Counter-Terrorism and Transnational Crime.

Finally, the United States plans to play a constructive role in the regional Counter-Terrorism
Center which Malaysia has agreed to host. We are also encouraged by the highly constructive
role that Malaysia has taken in cooperating with Indonesia in identifying and apprehending the
Bali bombers. These examples illustrate that, while the U.S. and Malaysia do not always agree on
all issues, we have found extensive common ground on counter-terrorism and will continue to
seek ways to expand on this shared interest.

On the world stage, working with like-minded nations like Malaysia, we will deny further
sponsorship, support, and sanctuary to terrorists by ensuring that other states accept their
responsibilities to take action against these international threats within their sovereign territory.

UNSCR 1373 and the twelve UN counterterrorism conventions and protocols establish high
standards that we and our international partners expect others to meet in deed as well as word.
Together, UNSCR 1373, the international counter-terrorism conventions and protocols, and the
inherent right under international law of individual and collective self-defense confirm the
legitimacy of the international community's campaign to eradicate terrorism. We will use UNSCR
1373 and the international counterterrorism conventions and protocols to galvanize international
cooperation and to rally support for holding accountable those states that do not meet their
international responsibilities.

The United States currently lists seven state sponsors of terrorism: Iran, Iraq, Syria, Libya, Cuba,
North Korea, and Sudan. We are firmly committed to removing countries from the list once they
have taken the necessary steps under our law and policy. A checkered past does not foreclose
future membership in the coalition against terrorism or in the world community, as some countries
have demonstrated.

There is much talk these days of the "root causes" of terrorism. While the United States
recognizes that there are many countries and people living with poverty, deprivation, social
disenfranchisement, and unresolved political and regional disputes, those conditions do not justify
the use of terror. Indeed, terrorism only exacerbates those problems.

However, many terrorist organizations that have little in common with the poor and destitute
masses exploit these conditions to their advantage. The September 11 terrorists, for instance,
came predominantly from the ranks of the educated and middle-class and served in an
organization led by a millionaire murderer.

Our efforts to address underlying conditions that provide fertile ground for terrorists to plant their
seeds have material as well as intangible dimensions. Ongoing U.S. efforts to resolve regional
disputes, to foster economic, social, and political development, and to promote market-based
economies, good governance, and the rule of law, while not necessarily focused on combating
terrorism, contribute to the campaign by addressing underlying conditions that terrorists often
seek to manipulate for their own advantage. Additionally, ameliorating these conditions requires
the United States, with its friends and allies, to win the "war of ideas," to support democratic
values, and to promote economic freedom.

Nowhere is this "war of ideas" more important than in the Muslim world, where the United States
will continue to support moderate and modern governments that focus on meeting the needs of
their own citizens. We will continue assuring Muslims that American values are not at odds with
Islam. Indeed, the United States has fought to defend many imperiled Muslims in the past -- in
Afghanistan, Kuwait, Bosnia, and Kosovo, to name a few. The United States will work with such
moderate and modern governments to reverse the spread of extremist ideology and to counter
those who seek to impose totalitarian ideologies on our Muslim allies and friends.

Finding a solution to the Israeli-Palestinian conflict is an essential component to winning the war
of ideas. No other issue has so colored the perception of the United States in the Muslim world.
The Israeli-Palestinian conflict is critical because of the toll of human suffering there, because of
America's close relationship with the state of Israel and key Arab states, and because of that
region's importance to other global priorities of the United States. There can be no peace for
either side without freedom for both sides.

America stands committed to an independent and democratic Palestine, living alongside Israel in
peace and security. Like all other people, Palestinians deserve a government that serves their
interests and listens to their voices. The United States will continue to encourage all parties to
step up to their responsibilities as we seek a just and comprehensive settlement to the conflict.
The United States can play a crucial role but, ultimately, lasting peace can only come when
Israelis and Palestinians resolve the issues and end the conflict between them.

Perhaps the primary lesson from the events of September 11 is that threats to international
stability and world peace cannot be allowed to fester and spread. Instead, they must be dealt with
early so that the world community does not suffer the consequences of inaction. This is what
guides U.S. policy on Iraq, an issue that I know is on all of our minds this evening.

This is not a new problem. There has been no rush to judgment. In the last 12 years, there have
been 16 UN resolutions calling on Iraq to give up its weapons of mass destruction. Last fall's UN
Security Council Resolution 1441, painstakingly negotiated for almost two months by Security
Council members and then unanimously adopted, was only the latest resolution in this regard.

As Secretary Powell pointed out in his comments to the UN Security Council on February 14,
Resolution 1441 was not about inspections. Iraq has not complied with 1441 just because it has
once again allowed in inspectors. Resolution 1441 was about Iraqi disarmament -- full, voluntary
disarmament of Iraq's horrific arsenal of weapons of mass destruction. And this Iraq continues to
refuse to do.

The lead UN inspector, Dr. Hans Blix, has reported improvements in Iraqi cooperation on several
issues of process, but there has been no improvement on issues of substance. In the face of
substantive non-cooperation by the Iraqi government, inspectors will never be able to use random
inspections to find all of the weapons of mass destruction, or WMD, that we know Iraq has
(because earlier inspectors found plenty of WMD before they were thrown out in 1998).

Remember, we are talking about 100 inspectors in a country the size of California. The burden is
not on the inspectors to find WMD but on Iraq to come clean on what it has done with the
massive amounts of anthrax, botulism, VX and other horrific agents it already has admitted to
having.
For the United Nations to have any credibility, it cannot continue to allow Iraq to blithely ignore
UN resolutions. In particular, the UN cannot allow Iraq to escape the "serious consequences"
which 1441 clearly stated would be the result of Iraqi non-compliance.

The United States is quite willing to work towards another UN resolution, building on 1441, but
the purpose of such a second resolution must be to make unequivocally clear to Iraq once again
that the world community insists on full compliance and that the world community will resort to
military force to force Iraqi compliance if Iraq continues to mock the United Nations.
We hope that member states of the Non-Aligned Movement will strongly make this point to Iraq
during the ongoing NAM Summit here in Kuala Lumpur.

Nothing less than the credibility and future of the United Nations is at stake here. If a rogue state,
with a loathsome human rights record and armed with the worst WMD, can defy the United
Nations with no fear of serious consequences, then the United Nations risks becoming like the old
League of Nations: a toothless debating society unable to respond to the crises of the day.

Let me conclude by returning to the theme of this forum: "Is Terrorism a Threat to World Peace?"
I think we have all see that it is. How do we make it less of a threat? The United States, in concert
with friends and allies, seeks to defeat terrorism by acting simultaneously on four fronts.

• We will defeat terrorist organizations of global reach by attacking their sanctuaries,

leadership, command, control and communications, material support, and finances;
• We will deny further sponsorship, support, and sanctuary to terrorists by working closely
with our willing and able allies, helping willing but weak states, persuading reluctant
states and using all the elements of national power to compel the unwilling ones;
• We will diminish the underlying conditions that terrorists seek to exploit by enlisting the
international community to focus its efforts and resources on the areas most at risk; and
• We will defend the United States, its citizens and interests at home and abroad by
proactively protecting our homeland and ensuring we identify and neutralize the threat as
early as possible.

Victory in the war on terrorism will be achieved when our children can live free from fear and
when the threat of terrorist attacks no longer hangs over our daily lives.

As we all unite against terrorism, let us remember that although political violence may be endemic
to the human condition, we cannot tolerate terrorists who seek to combine the powers of modern
technology and WMD to threaten the very notion of civilized society.

The war against terrorism, therefore, is not some sort of "clash of civilizations." Rather, it is a
clash between civilization itself and those who would destroy it. Thank you very much.

WOMEN EMPOWERMENT

Women's Empowerment Project

ASSCOD has been working to empower poor women in the

Kancheepuram and Thiruvannamalai districts of rural Tamil Nadu since
2003. The ASSCOD 'Women's Empowerment' project concentrates on
selling the concept of the Self-Help Group (SHG) to women of lower
caste families. The women are then encouraged to take the initiative
and form their own self-help groups with the guidance of ASSCOD. A
typical SHG has between 15 and 20 women members.

Since the start of the project, ASSCOD has mobilized over 3000 women
to form over 200 SHGs in 26 villages of Kancheepuram and
Thiruvannamalai districts in Tamil Nadu, India. To find out more about
life in these rural villages, please click HERE.
ASSCOD then conducts further programmes aimed at capacity building
and empowering these SHGs. These training programmes encourage
the women to:

Save money regularly and adopt a policy of thrift.

Issue their own internal loans.
Undertake Income Generating Activities (IGAs) and Small Scale
Business Activities.
Attend Training Workshops run by ASSCOD.
Get involved with local government initiatives.
Learn about their rights.

The women are then encouraged to operate on their own initiative, with
the minimum intervention from ASSCOD. To enable this, ASSCOD has
facilitated the formation of federations and APEX bodies run by the
women themselves. These committees act as a governing body for all
the SHGs and allow them to share their experiences and and make
decisions that benefit all the groups.

The project has been a considerable success and ASSCOD continues

to expand the proje

The women’s movement in Andhra Pradesh originated from the anti arrack (anti liquor)
movement started by the state’s rural women in the 1990s. The state government built on
its momentum to start a women’s literacy movement. In 2000, with World Bank support,
it expanded this program as a thrift based program where women could make small
savings, revolve their own resources, and meet their families’ critical consumption and
food needs. The program, earlier called Velugu and now called the Indira Kranti Patham,
has since evolved into a movement for the all-round empowerment of poor women -
social, legal, political, and economic.

The World Bank’s Andhra Pradesh Rural Poverty Reduction Project supports the
program. It promotes women's social, economic, legal and political empowerment to
reduce poverty among the poor and the poorest of the poor.

The World Bank project has helped take the women's Self Help Group movement to all
22 districts of Andhra Pradesh. It has also become the model for livelihood programs in
other states too, including Tamil Nadu and Bihar.
Social, Legal, Political and Economic Empowerment

The women Self Help Groups (SHGs) hold regular weekly meetings, save and repay
regularly, and use trained bookkeepers for proper bookkeeping. All SHG members abide
by the principles of saying no to child marriages, child labor, domestic violence and
wasteful expenditures.

The weekly meetings provide a platform for sharing and discussing broad social, legal,
political and economic issues that affect their lives. Issues range from entitlements to
land, access to NREGA and PDS, whether teachers and health workers are actually doing
the work allotted to them, and women's own rights in the case of domestic violence.

The women discuss family planning, the number of children they should have, and the
spacing between births, indicating a significant change in their ability to exercise
reproductive choice within the household.

They have also not hesitated to take up difficult issues like domestic violence, the
trafficking of women and children, and the jogini system of exploitation.

KEY OUTCOMES

While this is a continuous and evolving process, these poor women’s groups have made a
number of gains in a variety of spheres:

Child Marriage, Trafficking of Women and Children

Women’s groups have been able to prevent over 5000 child marriages. A study by the
Center for Economic and Social Studies in Hyderabad finds that the incidence of child
marriage has declined among project participants. Groups have also started campaigns
against the trafficking of women and girl children with the support of police, the revenue
administration and NGOs.

Child Labor

In a bid to reduce child labor, new residential schools have been set up in six districts to
provide quality education to girl child laborers. Over 40,000 girls are now enrolled in
these schools. According to an impact evaluation, these schools have outperformed other
public schools in terms of regular attendance, academic results and facilities provided to
students, leading to a fall in the drop out rate from 14.8% in 2001 to 4.3% in 2005-2006.

Exploitative Social Practices

Groups have achieved considerable success in eradicating exploitative social practices
such as the “jogini” (temple concubine) system. Says a Community Activist, from
Mahabubnagar District: “I was made a jogini when I was eleven years old by my parents.
Joining the SHG gave me confidence and, despite opposition, I got married to lead a
normal life. There are still thousands of joginis still operating in and around my
community, whom we are trying to rehabilitate. As the children of these jogini mothers
are considered illegitimate by the village, we are going to conduct DNA tests for four
thousand of them to determine who their father is and ask them for support. We want to
ensure that these children are proud of their mothers and lead a normal life”.

Gender Violence

Women’s groups discuss sensitive issues such as gender violence, and make special
efforts to identify victims and help them to start new livelihoods.

Food Security

The project has helped to improve food security of the poor. Over half a million
households in six districts have benefited from access to food grains and other essential
commodities of good quality at relatively lower prices, provided on a credit basis.
Destitute women, especially elderly widows, are being helped by a special program
through which community members contribute a fistful of rice to a common pool which
is then distributed among these women.

Health Insurance for the Poor

Over 21,000 households have been covered with health insurance on a pilot basis. The
community managed risk fund aims to provide quick financial support to meet families’
health expenditure, including during emergencies. 1.2 million women SHG members
have purchased life insurance cover.

Disabled Persons

Over 160,000 disabled persons have been mobilized into some 17,500 SHGs and have
received support to start new livelihoods.

Land Access for Tribals and the Poor

The project has facilitated the resolution of several land issues affecting the poor
including the restoration of illegally occupied land. Para legals have been trained, and
efforts are on to establish a land rights center for tribal areas in association with the Law
College at Hyderabad, and organize lok adalats (public courts).

Improved Farming Practices

In a forward-looking move, women’s groups have also developed a local movement

against the indiscriminate use of pesticides, covering 186,000 acres by 2006-07. By
replacing chemical and other external inputs with local knowledge and natural methods
of pest management, they are reducing the cost of cultivation. Cost savings have ranged
from about US$40 to US$120 per acre leading to a 75% increase in the income of a
farmer. This has also had positive effects on farmers’ health status.

Economic Empowerment

Social empowerment issues have become the basis for the subsequent economic
empowerment of women. The program enables women’s organizations to develop the
skills to negotiate with market institutions and develop other financial services.

Political Empowerment

Grassroots leaders developed through the program have contested local government
elections; 32000 candidates have filed their nominations for a variety of positions, and
9500 women from SHGs and their federations have been elected at various levels.

economics policies to control inflation

Introduction

The control of inflation has become one of the dominant objectives of government economic policy in many
countries. Effective policies to control inflation need to focus on the underlying causes of inflation in the
economy. For example if the main cause is excess demand for goods and services, then government policy
should look to reduce the level of aggregate demand. If cost-push inflation is the root cause, production costs
need to be controlled for the problem to be reduced.
Monetary Policy

Since May 1997, the Bank of England has had operational independence in the setting of official interest rates in
the United Kingdom. They set interest rates with the aim of keeping inflation under control over the next two
years. Monetary policy can control the growth of demand through an increase in interest rates and a contraction
in the real money supply. For example, in the late 1980s, interest rates went up to 15% because of the excessive
growth in the economy and contributed to the recession of the early 1990s. This is shown in the chart above

The effects of higher interest rates

Higher interest rates reduce aggregate demand in three main ways;

• Discouraging borrowing by both households and companies

• Increasing the rate of saving (the opportunity cost of spending has increased)

• The rise in mortgage interest payments will reduce homeowners' real 'effective' disposable income and their
ability to spend. Increased mortgage costs will also reduce market demand in the housing market

• Business investment may also fall, as the cost of borrowing funds will increase. Some planned investment
projects will now become unprofitable and, as a result, aggregate demand will fall.

• Higher interest rates could also be used to limit monetary inflation. A rise in real interest rates should reduce
the demand for lending and therefore reduce the growth of broad money.

Fiscal Policy

• Higher direct taxes (causing a fall in disposable income)

• Lower Government spending
• A reduction in the amount the government sector borrows each year (PSNCR)

These fiscal policies increase the rate of leakages from the circular flow and reduce injections into the circular
flow of income and will reduce demand pull inflation at the cost of slower growth and unemployment.
An appreciation of the exchange rate

An appreciation in the pound sterling makes British exports more expensive and should reduce the volume of
exports and aggregate demand. It also provides UK firms an incentive to keep costs down to remain competitive
in the world market. A stronger pound reduces import prices. And this makes firms' raw materials and
components cheaper; therefore helping them control costs.

A rise in the value of the exchange rate might be achieved by an increase in interest rates or through the
purchase of sterling via Central Bank intervention in the foreign exchange markets.

Direct wage controls - incomes policies

Incomes policies (or direct wage controls) set limits on the rate of growth of wages and have the potential to
reduce cost inflation. The Government has not used such a policy since the late 1970s, but it does still try to
influence wage growth by restricting pay rises in the public sector and by setting cash limits for the pay of
public sector employees.

In the private sector the government may try moral suasion to persuade firms and employees to exercise
moderation in wage negotiations. This is rarely sufficient on its own. Wage inflation normally falls when the
economy is heading into recession and unemployment starts to rise. This causes greater job insecurity and some
workers may trade off lower pay claims for some degree of employment protection.

Long-term policies to control inflation

Labour market reforms

The weakening of trade union power, the growth of part-time and temporary working along with the expansion
of flexible working hours are all moves that have increased flexibility in the labour market. If this does allow
firms to control their labour costs it may reduce cost push inflationary pressure.

Certainly in recent years the UK economy has not seen the acceleration in wage inflation normally associated
with several years of sustained economic growth and falling inflation. One reason is that rising job insecurity
inside a flexible labour market has tilted the balance of power away from employees towards employers.

Supply-side reforms
If a greater output can be produced at a lower cost per unit, then the economy can achieve sustained economic
growth without inflation. An increase in aggregate supply is often a key long term objective of Government
economic policy. In the diagram below we see the benefits of an outward shift in the long run aggregate supply
curve. The equilibrium level of real national income increases and the average price level remains relatively
constant.

Supply side reforms seek to increase the productive capacity of the economy in the long run and raise the trend
rate of growth of labour and capital productivity. A number of supply-side policies have been introduced into
the British economy in recent years.

Productivity gains help to control unit labour costs (an important cause of cost-push inflation) and put less
pressure on producers to raise their prices.

The key to controlling inflation in the long run is for the authorities to keep control of aggregate demand
(through fiscal and monetary policy) and at the same time seek to achieve improvements to the supply side of
the economy. The credibility of inflation control policies can often be enhanced by the introduction of inflation
targets.

Problems with forecasting inflation

Inflation can never be forecast with perfect accuracy. The overall inflation measure is the result of millions of
pricing decisions made by businesses large and small. The calculation of the retail price index although
extremely thorough, is always subject to error and omission. Furthermore, the nature of the inflation process
makes it very difficult to forecast, even when inflationary conditions in the economy appear to be benign.

External economic shocks can make forecasts inaccurate. For example, a sharp jump in world oil prices (an
inflationary shock) or deep falls in global share prices (a deflationary shock), both have big feedback effects
through the economic system. The exchange rate might also fluctuate leading to volatility in the prices of
imported goods and services.

The last few years has seen inflation in Britain falling to levels well below expectations! Can this period of low,
stable inflation persist? Or will we see once more a return to the high and variable inflation experienced during
the 1970s and 1980s?
What's a recession? How will US slowdown hit India

T he fear of a recession looms over the United States. And as the cliche goes, whenever the US sneezes, the world catches a cold. This
is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.

Weakening of the American economy is bad news, not just for India, but for the rest of the world too.

So what is a recession?

A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year.
A recession is also preceded by several quarters of slowing down.

What causes it?

An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10
years and tends to go into a recession for about six months to 2 years.

A recession normally takes place when consumers lose confidence in the growth of the economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by
the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock
prices are now at a low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit
worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans (See: Subprime pain: Who lost how much)

The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed
under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil
prices at $100 a barrel, slowed down the growth of the economy.

How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government
has proposed a $150-billion bailout package in tax cuts.

The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government
also takes steps to help the private sector come out of the crisis.

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939.
It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture,
mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment
jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This
was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives
of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second
quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth
dwindled as technology stock prices crashed.

Impact of a US recession on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely
to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins
shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak
dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall
from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was
down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the
world, say experts.

SUB PRIME
T he United States' subprime crisis has turned out to be bigger than previously thought and has the potential to drag the
world's largest economy into a recession.

And although there are varying opinions on whether the US could slip into a recession or not, most economists do feel
that despite the US Federal Reserve's rate cuts and the Bush administration's $161-billion economic aid plan, chances of
a recession are high.

Be that as it may, one thing is for certain: the losses from the subprime that financial majors have incurred will take a long
time to get over.

Given below, in the table, are the estimated losses that some of the world's largest banks have suffered on account of
home loan defaults in the US. The total figure adds up to over $76 billion and does not take into account losses suffered
by many other financial majors that had an exposure to the crisis.

Four Indian banks -- State Bank of India [Get Quote], ICICI Bank [Get Quote], Bank of Baroda [Get Quote], and Bank of India
too have big exposure to credit derivatives, with the spreads on these widening since international lenders turned risk-
averse following the crisis in the US subprime (or high-risk home loan) market.

Credit derivatives are instruments for which the underlying asset is a loan or a bond. Marking to market means valuing a
portfolio based on the prevailing market price.

ICICI Bank has the highest exposure of $1.5 billion. SBI has an
Subprime losses till date estimated exposure of $1 billion, BoI of $300 million, and BoB of
Bank Losses $150 million. About 5-10 per cent of this figure could be the losses
Citigroup $18.0 billion that these banks could incur.
UBS $13.5 billion
Morgan Stanley $9.4 billion Understanding the subprime crisis
Merrill Lynch $8.0 billion
Just what is the subprime crisis? And why is it having such a decisive
HSBC $3.4 billion impact on the Indian stock market?
Bear Stearns $3.2 billion
Deutsche Bank $3.2 billion Let's understand it. Take, for example, an American who seeks a
Bank of America $3.0 billion home loan, but does not have a very good credit rating. That
essentially means that banks may not extend him a home loan.
Barclays $2.6 billion Enter, another American with stellar credit rating and the willingness
Royal Bank of Scotland $2.6 billion to take on some risk. Given his good credit rating, banks are willing to
IKB $2.6 billion give him a loan at a certain rate of interest.
Societe Generale $2.0 billion
Freddie Mac $2.0 billion This individual the divides the loan into small lots and gives them out
as home loans to lots of Americans, who do not have very good
Wachovia $1.1 billion credit rating and cannot get a home loan from any bank. He gives out
Credit Suisse $1.0 billion the home loan at a rate of interest higher than it is paying to the bank
it borrowed money from.

This higher rate is referred to as the subprime rate and this home loan market is referred to as the subprime home loan
market.

By giving out a home loan to lots of individuals, the individual ensures that even if a few of them default, his overall
position is not affected much. But the individual giving out loans in the subprime market does not stop here. He does not
wait for the principal and the interest on the subprime home loans to be repaid, so that he can repay his loan to the bank,
which has given him the loan.

He goes ahead and securitizes these loans. Securitization involves converting these home loans into financial securities,
which promise to pay a certain rate of interest.

These financial securities are then sold to big institutional investors. The interest and the principal that is repaid by the
subprime borrowers through equated monthly installments is passed onto these institutional investors.

The individual giving out the subprime loans, takes the money that he gets from selling the financial securities and passes
it on to the bank, he had taken the loan from, thereby repaying the loan.
A neat plan. But then things went horribly wrong. The subprime home loans were given out as floating rate home loans.
So as interest rates increased, the rates on floating home loans too went up, and so did the monthly installments needed
to service these loans.

These high installments hit the subprime borrowers with the terrible force. Many, given their poor credit rating to begin
with, defaulted. Once, more and more subprime borrowers started defaulting, payments to the institutional investors who
had bought the financial securities stopped, leading to huge losses.

So how did that effect stock markets in India? Institutional investors who had invested in securitized paper from the
subprime home loan market, saw their investments turning into losses. Most big investors have a certain fixed proportion
of their total investments invested in various parts of the world.

Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion. In
order to invest more money in the US, money had to come in from somewhere. And this money came in from emerging
markets like India, where their investments have been doing well.

These big institutional investors, to make good of their losses on the subprime market, have been selling their investments
in India and other emerging markets. Since the amount of selling in the market far overweighs the amount of buying,
Indian stock prices have been falling.

SATYAM CASE EFFECT ON INDIAN ECONOMY

Kolkata: The scam at Satyam computers will have no effect on Indian economy as it was an
isolated incident, External Affairs Minister Pranab Mukherjee said Saturday.

“The Rs 7800 crore forgery at Satyam Computers is an isolated incident and not a general trend
and so it will have no effect on Indian economy,” Mukherjee said at a function organised by Anmi
here.

“It is true that the Satyam scam had an effect on the share market, but it is an isolated incident
and not a reflection of Indian economy and we do have the economic strength to repair the patch
very soon,” Mukherjee said.

According to Mukherjee the current slowdown in the international market was nowhere near the
end. “We will have to be careful so far as Indian economy is concerned. It is true that India has
been affected by the global slowdown, but as our economy is an internally driven the crisis will
not have that much effect,” Pranab said.

Mukherjee said that inspite of the international crisis India was one of the safest markets for
investment.

“This is due to our internal economic strength and naturally if we can keep our internal market
design disciplined we will become a strong economic nation very soon,” Mukherjee said.

Public sector banks score over private

ones KARAN MANVEER SINGH

public sector banks have long been chastised

as the black sheep of the financial sector. But
while a lot of experts might deride these
institutions for their non-performing assets and lower productivity, at the end of the day, public
sector banks have far happier customers compared to their counterparts in the private sector.
According to Reserve Bank of India’s (RBI's) latest report, Trend and Progress of Banking in
India, public sector banks rule the roost in customer satisfaction.

The report should make those singing hosannas for private sector banks sit up. It shows that the
State Bank of India (SBI) recorded 0.1 “complaints per branch” while the corresponding figure for
icici was 1.39—more than 10 times that of sbi.

Citibank fared far worse: it recorded a whopping 8.59 complaints

• The last resort per branch. These complaints were made to rbi’s grievance cell.

One, however, needs to look at another aspect before delivering

the final verdict: profits per branch. Here, private banks fare better.

For example, on an average, a Citibank branch earns a net profit of Rs 18 crore annually. An
average icici bank branch earns Rs 4.5 crore, while an average sbi branch earns just Rs 50 lakh,
annually. The standard response to such figures is that private sector banks are more efficient
than their public sector counterparts with foreign banks taking efficiency to astronomical levels.

But their rich rake-offs notwithstanding, the profit-complaint ratio of private sector banks is much
lower than their much maligned public sector counterparts (see graphs: Public sectors: bankable,
Downside of efficiency). sbi’s profit-complaint ratio of 4.1 for example is much higher than icici
and Citibank.

Time is money
rbi’s data indicates that private and foreign banks are biting off more than they can chew:
customer acquisition is shooting through the roof but the servicing mechanism is given short
shrift.

Banks, like all other businesses, believe that “time is money”. The private sector interpretation of
this adage seems to be: spending as little time on the customer as possible. In most private
banks, the time spent on the phone with a customer is tracked and executives found to be
spending an inordinate amount are ticked off. The zeal to be efficient means that the private
sector has all but forgotten another business aphorism: time spent with a customer is an
investment which may yield future dividends in the form of customer loyalty and referrals. And
their surveys, other than those conducted by rbi, testify to such omission. For example, according
to a survey by Consumer Voice (http://www.consumer-voice.org), a consumer awareness
magazine, people were more likely to recommend public sector banks to their friends or relatives.
Of the top five banks in this category, three belong to the public sector. The highest-ranking
foreign bank is Standard Chartered at number eight. icici Bank is at number 15 (fifth from the
bottom), with Citibank bringing up the rear.

Dark side
Recent advertising campaigns, especially by private banks, have increasingly started using the
emotional platform to attract customers. With tag lines such as “Hum hain naa” and “Just like
borrowing from a friend”, these banks attempt to bring home the fact that the bond between a
customer and his bank goes beyond the purely commercial.

However, customers don’t necessarily share that warm feeling.