Sunday, January 30, 2011

Egypt's Revolt: The Economic Dimension

By Barry Rubin

The very savvy columnist Spengler has kindly given me permission to quote in advance his column in the Asia Times. He writes:

"There's an economic dimension to the problem is quite worrying. Structural changes in the world food market will make jumps in the price of grains such as we had during the last few months and in 2007-2008 a regular occurrence. A spike in food prices were certainly a factor in the timing of the revolts.

"The trouble is that this is likely to be a regular occurrence. Any minor disturbance in grain supply now has catastrophic price effects because prosperous Asia no longer cares what it has to pay for wheat and maize. In effect Asia is threatening to price the Arab poor out of the world food market.

"Egypt is the world's largest grain importer in most years (Iran had the number-one spot in 2009 due to drought, with 6 million tons of imports). Egypt imports about half its wheat. Iran still can pay for food; with a few weeks' of instability, Egypt's currency and foreign credit (trade credits from banks in particular) will be in jeopardy and people will be hungry. Whatever regime is around will have to deal not just with the urban mob but with the very poor. We haven't really had food riots like 1977 [in Egypt] yet, but we probably will. We have a country that is structurally incapable of feeding itself and may have difficulty paying for imports soon.

"Insurance against Egyptian default was LIBOR +3.3% a week ago; now it's at LIBOR+ 4.54%. That's not quite crisis levels, but if banks start reducing exposure, things could get bad fast. In 2009 Egyptian imports were $55 billion against only $29 billion of exports; tourism and other services brought the current account into balance. Scratch the tourism, and you have a $26 billion deficit against $35 billion of central bank reserves. It would not take long for a run on the currency to materialize--and if the currency devalues, food and fuel become all the more expensive. Food and fuel subsidies are now 7% of GDP.

"With half the population living on $2 a day or less, that means real distress. I suppose there's a scenario under which al-Baradei gets in and scores some loans from his friends at the World Bank and an ad hoc aid consortium, but there's no reason to count on it. And if the country really starts to hurt badly, the Ikhwan will be out there preaching al-Qutb style Islamic socialism to hungry people."
Right, I'd add that given Egypt's situation, a free election would not produce a moderate democratic government that can meet popular demands. That means either the elected government will go to demagoguery to mobilize mass support--meaning shrieking about Israel, the United States, and the West--or be replaced by an Islamist regime.
We've seen this pattern in the past, including in Egypt itself between 1952 and 1977 or so. There were three wars with Israel during that period, an alliance with a radical anti-Western state (the USSR), and a government dedicated to destroying U.S. and Western interests in the region.
This is a critical point: What could a moderate democratic government do if it gained power given Egypt's difficult situation (few resources, some oil; Suez Canal; huge population; little capital)? It can't cut the military budget because the army would revolt. It can't cut subsidies because the people would revolt.
It is no accident that Egypt has a dictatorship. Obviously, every country is in a different situation 
Here's a detailed article about the issue.

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