Food Riots and Failed Arab States

In a world of rising prosperity,in which the majority no longer care what they pay for grain,  the countries that have failed to modernize theireconomies wake up to find that people are suddenly unable to buy bread or evenhope to feed themselves.

As Spengler here makes clear, financialruin is punishing but quite survivable. Starvation is not. The men of Egypt are hitting the bricksbecause their terms of trade are deteriorating.

What makes it much worse is that Egypt hassurely lagged on allowing the agricultural industry to be easily financed andrapidly grown.  Internal demand is notbeen satisfied with substitutes when preferred imports become costly. A largepart of this is likely the Roman disease. This is ironic when the Roman appetite for cheap public grain was fed byEgypt.

Again the lesson of history isthat a rich prosperous nation is only possible with an enlightened publiceducation system that prepares the next generation to develop a universal middleclass culture.  Egypt could just as easily be as rich as China is today.  In time it will be.

Food and failed Arab states

By Spengler

Even Islamists have to eat. It is unclear whether President Hosni Mubarak of Egypt willsurvive, or whether his nationalist regime will be replaced by an Islamist,democratic, or authoritarian state. What is certain is that it will bea failed state. Amid the speculation about the shape of Arab politicsto come, a handful of observers, for example economist Nourel Roubini, havepointed to the obvious: Wheat prices have almost doubled in the pastyear. 

Egypt is the world's largest wheat importer,beholden to foreign providers for nearly half its total food consumption. Halfof Egyptians live on less than $2 a day. Food comprises almost half thecountry's consumer price index, andmuch more than half of spending for the poorer half of the country. This willget worse, not better. 

Not the destitute, to be sure, but the aspiring and frustrated young,confronted the riot police and army on the streets ofEgyptian cities last week. The uprising in Egyptand Tunisia were not foodriots; only in Jordanhave demonstrators made food the main issue. Rather, the jump in food priceswas the wheat-stalk that broke the camel's back. The regime's weakness, inturn, reflects the dysfunctional character of the country. 35% of allEgyptians, and 45% of Egyptian women can't read. 

Nine out of ten Egyptian women suffer genital mutilation. US President BarackObama said Jan. 29, "The right to peaceful assembly and association, theright to free speech, and the ability to determine their own destiny … arehuman rights. And the United States will stand up for themeverywhere." Does Obama think that genital mutilation is a human rightsviolation? To expect Egyptto leap from the intimate violence of traditional society to the full rights ofa modern democracy seems whimsical. 

In fact, the vast majority of Egyptians has practiced civil disobedienceagainst the Mubarak regime for years. The Mubarak government announced a"complete" ban on genital mutilation in 2007, the second time it hasdone so - without success, for the Egyptian population ignored the enlightenedpronouncements of its government. Do Western liberals cheer at this quietrevolt against Mubarak's authority? 

Suzanne Mubarak, Egypt's First Lady, continues to campaign against thepractice, which she has denounced as "physical and psychological violenceagainst children." Last May 1, she appeared at Aswan Cityalongside the provincial governor and other local officials to declare theprovince free of it. And on October 28, Mrs Mubarak inaugurated an Africanconference on stopping genital mutilation. 

The most authoritative Egyptian Muslim scholars continue to recommend genitalmutilation. Writing on the web site IslamOnline, Sheikh Yusuf al-Qaradawi - thepresident of the International Association of Muslim Scholars - explains:

The most moderate opinion and the most likely one to be correct is infavor of practicing circumcision in the moderate Islamic way indicated in someof the Prophet's hadiths - even though such hadiths are not confirmedto be authentic. It is reported that the Prophet (peace and blessings be uponhim) said to a midwife: "Reduce the size of the clitoris but do not exceedthe limit, for that is better for her health and is preferred byhusbands."

That is not a Muslim view (the practice is rare in Turkey, Iraq,Iran and Pakistan), butan Egyptian Muslim view. In the most fundamental matters, Presidentand Mrs Mubarak are incomparably more enlightened than the Egyptian public.Three-quarters of acts of genital mutilation in Egypt are executed byphysicians. 

What does that say about the character of the country's middle class? Only onenews dispatch among the tens of thousands occasioned by the uprising mentionsthe subject; the New York Times, with its inimitable capacity to obscurecontent, wrote on January 27, "To the extent that Mr. Mubarak has beenwilling to tolerate reforms, the cable said, it has been in areas not related topublic security or stability.

For example, he has given his wife latitude to campaign for women's rights andagainst practices like female genital mutilation and child labor, which aresanctioned by some conservative Islamic groups." The authors, Mark Landlerand Andrew Lehren, do not mention that 90% or more of Egyptian women have beenso mutilated. What does a country have to do to shock the New York Times? Eatbabies boiled? 

Young Tunisians and Egyptians want jobs. But (via Brian Murphy at the AssociatedPress on January 29) "many people have degrees but they do not have theskill set," Masood Ahmed, director of the Middle East and Asia departmentof the International Monetary Fund, said earlier this week. "The scarceresource is talent," agreed Omar Alghanim, a prominent Gulf businessman.The employment poolavailable in the region "is not at all what's needed in the globaleconomy." For more on this see my January 19 essay, Tunisia's lostgeneration. There are millions of highly-qualified, skilled andenterprising Arabs, but most of them are working in the US or Europe

Egyptis wallowing in backwardness, not because the Mubarak regime has suppressed thecreative energies of the people, but because the people themselves cling to themost oppressive practices of traditional society. And countries can onlylanguish in backwardness so long before some event makes their positionuntenable.

Wheat prices 101 and Egyptian instability

In this case, Asian demand has priced food staples out of the Arab budget. Asprosperous Asians consume more protein, global demand for grain increasessharply (seven pounds of grain produce one pound of beef). Asians are richenough, moreover, to pay a much higher price for food whenever prices spike dueto temporary supply disruptions, as at the moment. 

Egyptians, Jordanians, Tunisians and Yemenis are not. Episodes of privation andeven hunger will become more common. The miserable economic performance of allthe Arab states, chronicled in the United Nations' Arab Development Reports,has left a large number of Arabs so far behind that they cannot buffer theirbudget against food price fluctuations.

Earlier this year, after drought prompted Russiato ban wheat exports, Egypt'sagriculture minister pledged to raise food production over the next ten yearsto 75% of consumption, against only 56% in 2009. Local yields are only 18 bushelsper acre, compared to 30 to 60 for non-irrigated wheat in the United States, and up 100 bushelsfor irrigated land. 

The trouble isn't long-term food price inflation: wheat has long been one ofthe world's bargains. The International Monetary Fund's global consumerprice index quadrupledin between 1980 and 2010, while the price of wheat, even after the price spikeof 2010, only doubled in price. What hurts the poorest countries, though, isn'tthe long-term price trend, though, but the volatility. 

People have drowned in rivers with an average depth of two feet. It turns outthat China, not the United States or Israel, presents an existential threat tothe Arab world, and through no fault of its own: rising incomes have gentrifiedthe Asian diet, and - more importantly - insulated Asian budgets from foodprice fluctuations. Economists call this "price elasticity."Americans, for example, will buy the same amount of milk even if the pricedoubles, although they will stop buying fast food if hamburger prices double.Asians now are wealthy enough to buy all the grain they want. 

If wheat output falls, for example, due to drought in Russia and Argentina, prices rise until demandfalls. The difference today is that Asian demand for grain will not fall,because Asians are richer than they used to be. Someone has to consume less,and it will be the people at the bottom of the economic ladder, in this casethe poorer Arabs. 

That is why the volatility of the wheat price (the rolling standard deviationof percentage changes in the price over twelve months) has trended up fromabout 5% during the 1980s and 1990s to about 15% today. This means that thereis a roughly two-thirds likelihood that the monthly change in the wheat pricewill be less than 15%. 

It also means that every so often the wheat price is likely to go through theceiling, as it did during the past 12 months. To make life intolerable for theArab poor, the price of wheat does not have to remain high indefinitely; itonly has to trade out of their reach once every few years. 

And that is precisely what has happened during the past few years: 

After 30 years of stability, the price of wheat has had two spikes into the $9per bushel range at which very poor people begin to go hungry. The problemisn't production. Wheat production has risen steadily - very steadily in fact -and the volatility of global supply has been muted: 

The line in Chart 3 above marked "production volatility" is thefive-year standard deviation of annual percentage changes in world wheat supply(data from US Department of Agriculture). During the 1960s and 1970s, ithovered around the 3% to 5% range, but fell to the 1% to 3% range. 

It shows an approximately two-thirds likelihood that world wheat supply willchange by less than 3% each year. Wheat supply dropped by only 2.4% between2009 and 2010 - and the wheat price doubled. That's because affluent Asiansdon't care what they pay for grain. Prices depend on what the last (or"marginal") purchaser is willing to pay for an item (what was theprice of the last ticket on the last train out of Paris when the Germans marched on June 14,1940?). Don't blame global warming, unstable weather patterns: wheat supply hasbeen fairly reliable. The problem lies in demand. 

Officially, Egypt'sunemployment rate is slightly above 9%, the same as America's, but independent studiessay that a quarter of men and three-fifths of women are jobless. According to aBBC report, 700,000 university graduates chase 200,000 available jobs.

A number of economists anticipated the crisis. Reinhard Cluse of Union bank of Switzerlandtold the Financial Times lastAugust:

"Significant hikes in the global price of wheat would present thegovernment with a difficult dilemma. 

Do they want to pass on price rises to end consumers, which would reduceEgyptians' purchasing power and might lead to social discontent? 

Or do they keep their regulation of prices tight and end up paying highersubsidies for food? In which case the problem would not go away but end up inthe government budget.

Egypt's public debt is already high, at roughly 74% of gross domestic produce(GDP), according to UBS. Earlier this year the IMF projected that Egypt'sfood subsidies would cost the equivalent of 1.1% of GDP in 2009-10, whilesubsidies for energy were expected to add up to 5.1%.

Tensions over food have led to violence in bread queues before and it wouldn'ttake much of a price rise for the squeeze on many consumers to becomeunbearably tight."

One parameter to watch closely is the Egyptian pound. Insurance againstEgyptian default was the LondonInterbank Offered Rate (Libor) +3.3% a week ago; on Friday, it stood at Libor +4.54%. That's not a crisis level, but if banks start reducing exposure, thingscould get bad fast. In 2009 Egyptian imports were $55 billion against only $29billion of exports; tourism (about $15 billion in net income) and remittancesfrom Egyptian workers (about $8 billion) and other services brought thecurrent accountintobalance. Scratch the tourism, and you have a big deficit. 

Egypthas $35 billion of central bank reserves, adequate under normal conditions, butthin insulation against capital flight. Foreigners hold $25 billion of Egypt'sshort-term Treasury bills, for example. It would not take long for a run on thecurrency to materialize - and if the currency devalues, food and fuel becomeall the more expensive.

A vicious cycle may ensue. 

Under the title The Failed MuslimStates to Come (Asia Times Online December16, 2008), I argued that the global financial crisis then at its peak woulddestabilize the most populous Muslim countries:

Financial crises, like epidemics, kill the unhealthy first. Thepresent crisis is painful for most of the world but deadly for many Muslimcountries, and especially so for the most populous ones. Policy makers have notbegun to assess the damage. The diplomatic strategy of the industrialnations now resembles a James Clavell potboiler, in which an earthquakeinterrupts a hopelessly immured plot. Moderate Islam was the El Dorado of the diplomatic consensus. 

It might have been the case that Pakistancould be tethered to Western interests, or that Irancould be engaged peacefully, or that Turkey would incubate a moderateform of Islam. I considered all of this delusional, but the truth is that weshall never know. The financial crisis will sort them out first.

I was wrong. It wasn't the financial crisis that undermineddysfunctional Arab states, but Asian prosperity. The Arab poor have been pricedout of world markets.There is no solution to Egypt'sproblems within the horizon of popular expectations. Whether the regimesurvives or a new one replaces it, the outcome will be a disaster of, well,biblical proportions.

The best thing the United Statescould do at the moment would be to offer massive emergency food aid to Egyptout of its own stocks, with the understanding that President Mubarak wouldoffer effusive public thanks for American generosity. This is a stopgap, to besure, but it would pre-empt the likely alternative. Otherwise, the MuslimBrotherhood will preach Islamist socialism to a hungry audience. That alsoexplains why Mubarak just might survive. Even Islamists have to eat. TheIranian Islamists who took power in 1979 had oil wells; Egypt just hashungry mouths. Enlightened despotism based on the army, the one stableinstitution Egyptpossesses, might not be the worst solution. 

Spengler is channeled by David P Goldman. Comment on this article inSpengler's Expat Bar forum.

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