Millennium bug 'will slow the world economy down'

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By Peter Thal Larsen

The costs of fixing the millennium computer bug will lead to slower economic growth and higher inflation until well into the next millennium, according to a study released today.

Oxford Economic Forecasting, the leading think-think, has calculated that the costs of preparing computer systems for the millennium computer bug, and the disruptive effects of some computer networks crashing after the turn of the century, will slow world gross domestic product growth by 0.3 per cent a year.

The figure sounds relatively small. But 0.3 per cent of the US economy is worth $30bn. Moreover, the figure has a large effect because it continues over an extended period of time. OEF calculates that, in today's money, the cumulative cost of the millennium problem is 6 per cent of the world's GDP. This year, the world economy is widely expected to grow by around 2.3 per cent.

OEF divides its study into two parts: First, it looks at the costs of fixing systems that suffer from the problem, which arises when computers store the year as a two-figure number.

This makes it impossible for them to tell the difference between the year 1900 and the year 2000, and raises the possibility that entire networks may crash after the millennium.

Fixing the problem, which involves re-writing huge swathes of computer code, is costing companies a fortune. Current estimates suggest that a total of $450bn will be spent on converting computer systems.

According to OEF, this spending is largely wasted, in the sense that it does little to improve the efficiency of the economy.

Although the study acknowledges that some companies will use the cash to upgrade computer systems and install new software, OEF reckons no more than 25-30 per cent of the spending is productive for the companies involved.

As a result, this spending is a drag on world growth, because it diverts cash from projects that would have improved the productivity of the economy to areas where it is largely wasted. Because the economy then has less spare capacity, it will be more prone to overheating and inflation.

OEF also attempts to estimate the disruptive effects of computer systems crashing. Although it is hard to guess what will happen, OEF points out that firms may change their behaviour - by, say, closing down for a week after the New Year - even if the effects turn out to be fairly limited.

The study points out that infrastructure failures such as the breakdown of electricity or telecom networks would be most costly. It also argues that disruption could trigger a stock market crash.