Spengler on Egypt: “It’s the price of wheat, stupid”

… so what do developments in Egypt have to do with the price of tea in Asia wheat on the worldwide market?

“Spengler” is the pen name for an erstwhile investment banker at Bank of America who is also a senior editor at First Things. Actually, his article, “Food and failed Arab states“, is a lot more nuanced than my title, and a must-read despite its length.

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

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

Not the destitute, to be sure, but the aspiring and frustrated young, confronted the riot police and army on the streets of Egyptian cities last week. The uprising in Egypt and Tunisia were not food riots; only in Jordan have demonstrators made food the main issue. Rather, the jump in food prices was the wheat-stalk that broke the camel’s back. The regime’s weakness, in turn, reflects the dysfunctional character of the country. 35% of all Egyptians, and 45% of Egyptian women can’t read.

The main cause, as he explains, is actually the growing prosperity of the big Asian countries: as their denizens become better off, they add more meat to their diet, and it takes about 7 pounds of grain to produce 1 pound of beef.

In this case, Asian demand has priced food staples out of the Arab budget. […] Asians are rich enough, moreover, to pay a much higher price for food whenever prices spike due to temporary supply disruptions, as at the moment.

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

Earlier this year, after drought prompted Russia to ban wheat exports, Egypt’s agriculture minister pledged to raise food production over the next ten years to 75% of consumption, against only 56% in 2009. Local yields are only 18 bushels per acre, compared to 30 to 60 for non-irrigated wheat in the United States, and up 100 bushels for irrigated land.

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

People have drowned in rivers with an average depth of two feet. It turns out that China, not the United States or Israel, presents an existential threat to the Arab world, and through no fault of its own: rising incomes have gentrified the Asian diet, and – more importantly – insulated Asian budgets from food price fluctuations. Economists call this “price elasticity.” Americans, for example, will buy the same amount of milk even if the price doubles, 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 demand falls. 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 case the poorer Arabs.

[…] Wheat supply dropped by only 2.4% between 2009 and 2010 – and the wheat price doubled. That’s because affluent Asians don’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 the price 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 has been fairly reliable. The problem lies in demand.

Obviously, if food constitutes 50% or more of your family budget (as appears to be the case for many poor Egyptians), doubling of food prices means privation if not outright hunger. “Spengler” is rather pessimistic, but does have one concrete policy recommendation that sounds like the most sensible thing I have read so far:

Under the title The Failed Muslim States to Come (Asia Times Online December 16, 2008), I argued that the global financial crisis then at its peak would destabilize the most populous Muslim countries[…] I was wrong. It wasn’t the financial crisis that undermined dysfunctional Arab states, but Asian prosperity. The Arab poor have been priced out of world markets. There is no solution to Egypt’s problems within the horizon of popular expectations. Whether the regime survives or a new one replaces it, the outcome will be a disaster of, well, biblical proportions.

The best thing the United States could do at the moment would be to offer massive emergency food aid to Egypt out of its own stocks, with the understanding that President Mubarak would offer effusive public thanks for American generosity. This is a stopgap, to be sure, but it would pre-empt the likely alternative. Otherwise, the Muslim Brotherhood will preach Islamist socialism to a hungry audience. That also explains why Mubarak just might survive. Even Islamists have to eat. The Iranian Islamists who took power in 1979 had oil wells; Egypt just has hungry mouths.

Read the whole thing

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3 thoughts on “Spengler on Egypt: “It’s the price of wheat, stupid”

  1. I keep forgetting that’s the leverage we have over the OPEC and other belligerent oil-producing states.

    Altho’ now that I think about it, Canada is a top producer of both wheat AND oil…

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