The late novelist James Clavell had a tiresome habit of driving the plots of his potboilers into cul-de-sacs, whence he would extricate them with a natural disaster.
Egypt had its Clavell moment on February 8 when the Food and Agricultural Organization warned that drought in China might require the world’s largest wheat producer to import vast amounts of the grain, forcing the market price to levels never seen before.
While protesters continued to fill Cairo’s Tahrir Square, and Washington swung between urgent calls for President Hosni Mubarak’s departure and admonitions not to rush things, and Egypt’s elite wondered whether to take their money and run, the weather in China preempted all these petty calculations.
Not until June will we know the extent of the damage to China’s winter wheat crop, virtually all its production. Extremely low rainfall this winter parched more than 5 million hectares of 14 million hectares planted, and the next few weeks’ weather will determine if the world faces a real shortage of the staff of life.
Hoarding on the part of North African countries, starting with Algeria, has already pushed up the wheat price in the Mediterranean to a 20% premium over the price shown on the Chicago futures market. The immediate risk is that preemptive purchases of wheat will price the grain out of the reach of poor Egyptians, not to mention Pakistanis and Bengalis.
And if reserve-rich China, usually self-sufficient, goes into the world market to buy millions of tons of wheat, the price of wheat can rise to an arbitrarily high level.
There is a root cause to the Egyptian uprising, as I wrote last week (Food and failed Arab states,February 2), and it is not Israel, but China: prosperity in Asia creates inelastic demand for grain, such that a minor supply disruption such as the 2010 droughts in Argentina and Russia causes huge price increases. American economist Larry Kudlow observes as well that ethanol subsidies artificially inflate grain demand as well, contributing to the present price spike.
About 40 million Egyptians live on less than US$2 a day – far poorer than the Gazans who are now selling the food they received through Western largesse to Egypt. Amid all the blather about democracy and human rights, some pundits have taken notice.
Thomas Friedman wrote in the February 5 New York Times:
Of course, China per se is not fueling the revolt here – but China and the whole Asian-led developing world’s rising consumption of meat, corn, sugar, wheat and oil certainly is. The rise in food and gasoline prices that slammed into this region in the last six months clearly sharpened discontent with the illegitimate regimes – particularly among the young, poor and unemployed.
Since then, the impressionable Friedman has made his way to Tahrir Square, where he now writes odes to the spirit of freedom sweeping Egypt. On February 7, he wrote that “the truth is now gushing out of here like a torrent from a broken fountain.”
The trouble is that people want to eat almost every day. Pundits and political scientists talk of a choice of political models as if they were at a Ford dealership rather than the scene of a national catastrophe. New York Times columnist Roger Cohen titled his February 7 offering, “Tehran 1979 or Berlin 1989?”
Israeli Prime Minister Benjamin Netanyahu warns that Iran wants “a new Gaza in Egypt.” Swiss Tariq Ramadan wrote in the Huffington Post on February 8 that “Democratic Turkey is the Template for Egypt’s Muslim Brotherhood.” (Ramadan is the grandson of Brotherhood founder Husan al-Banna, whom he praises without mention of al-Banna’s allegiance to the Nazis during the 1930s and 1940s).
Automobile models and political models, though, have one thing in common: you can’t have them unless you can pay for them. Iran in 1979 pumped 6 million barrels of oil a day, and petrodollars can pay for a lot of stupidity. Germany was in 1989 and remains one of the world’s most productive economies. Turkey is the only Muslim country that produces large numbers of first-rate university graduates – I had the privilege to work with many of them in the financial industry – thanks to founding father Kemal Ataturk’s emulation of the German university system starting in the 1930s.
Egypt has no oil, insignificant industry, small amounts of natural gas, and 40 million people who are about to become very, very hungry. Without figuring out how to feed the destitute bottom half of the Egyptian population, all the talk of “models” is window-shopping.
That is also why an Iranian outcome is less likely than Iran’s exultant leaders seem to think. A radical Islamist state is like J P Morgan’s yacht. If you have to ask how much it costs, you can’t afford it. Iran wants “another Gaza in Egypt,” Netanyahu warned on February 2. That might be true. But there’s a difference between a Gaza floating in foreign aid, and the bankrupt failed state that Egypt is about to become. The difference will be measured in starvation.
The United States alone has pledged $580 in annual aid per Gazan, slightly less than the annual per capita income of the bottom half of Egypt’s people. The Palestine Authority (PA) transfers $1.2 billion a year to Gaza, mostly in salaries for the 77,000 PA employees still on the payroll. The United Nations throws in about $250 million. Iran subsidizes the Hamas government with at least $100 million a year, although the PA claims that the flow is much greater.
The numbers are slippery, but according to a study for the Washington Institute for Near East Policy published in the January 13 Jerusalem Post, the Hamas government in Gaza takes in several thousand dollars for each of the strip’s 450,000 residents.
Being such a statelet is great work, if you can get it. The misplaced fixation of the major powers on Israeli-Palestinian peace gives Hamas (the Palestine offshoot of the Muslim Brotherhood) an enormous claim on foreign aid. The Brothers back in Egypt won’t be so lucky. There are 178 Egyptians for every Gazan, and not much aid to go around.
Columnist Roger Cohen’s February 7 article concludes, “Obama, if he embraces 1989 over 1979, as he must, should twist the arms of Gulf allies. He should ensure Egyptian democracy delivers by preparing an oil-money-funded Marshall Plan for a democratic Arab world.” There won’t be enough money for emergency food aid, let alone a “Marshall Plan.” Cohen should invest in a pocket calculator.
What happens next? Egypt’s stock market has collapsed, and its pound has fallen to the lowest level since 2005, with some brokerage-house analysts warning of a 20% decline during the next several weeks. Foreign investors have deserted the market for Egyptian treasury securities, so the central bank will print money to give to the banks to buy government debt.
After half a century of military rule since the 1952 Free Officers’ coup, Egypt’s wealth is concentrated in the hands of the old regime and its family and friends. If this regime is overthrown, and the corrupt nexus of army and business faces expropriation, the entire liquid wealth of Egypt will make a run for the border, along with its current proprietors.
This is a formula for a classic currency breakdown and galloping inflation, which invariably means panic purchases of commodities and hoarding: a collapse of the Egyptian pound, uncontrolled capital flight, inability to finance a current account deficit in the $15 billion range, and chaos in the Egyptian economy. Egypt might appeal to the international community for help, but the largesse offered to 450,000 Gazans will not extend to the 40 million Egyptians living on less than $2 a day.
Egypt’s rulers had a good run as an American client. They have not yet absorbed the enormity of Washington’s abandonment of a reasonably faithful and consistent ally. Accustomed as they are to hypocrisy in all public discourse, the rulers did not quite grasp President Barack Obama’s obsession with the salvation of the world of his father and stepfather, the world which his anthropologist mother labored her whole short life to defend against globalization.
America’s president really is prepared to gamble core American interests on the sketchy proposition that Egypt can turn into a Muslim democracy. Washington alternates between sentimental blather and diplomatic backsliding. Shlomo Avneri, a senior Israeli diplomat in the government of Yitzhak Rabin, wrote in the Financial Times on February 8:
Many in Israel have been shocked and dismayed by the inconsistency, bordering on amateurism, of the US response to events in Egypt. First the president, then Hillary Clinton, secretary of state, then again the president’s special envoy to Hosni Mubarak, have oscillated between distancing themselves from one of America’s staunchest allies and calling for him to step down, further calls for him to do it as soon as possible and then, taking a U-turn, endorsing an “orderly transition” headed by Omar Suleiman, his intelligence chief.
Oh, for the good old days of American power, when the likes of Jimmy Carter still had the will and means to cut America’s friends off at the knee! Obama’s ability to inflict damage is limited by the contempt which the world displays for American policy.
If Obama succeeds in forcing the Muslim Brotherhood into a new Egyptian regime, Mubarak’s cronies really would be better off in London exile. That implies a tsunami of capital flight and the disappearance of Egypt’s managerial class who, feckless as they might be, nonetheless keep the economy working day by day. As I noted last week, Egypt’s $12 billion a year in tourist revenue has gone to zero and would take years to restore under the best of circumstances.
At this point, Egyptians will begin to starve. The government’s immediate response is to spend more. Egypt’s new Finance Minister Samir Radwan promised on February 5 that government subsidies would offset the rise in the world market price of food. The government budget would help to “achieve social justice,” Radwan told reporters.
The trouble, as the rating agency Standard and Poor’s explained, is that the government deficit will climb into the teens, from the 8.1% deficit registered last year.
How long Egypt can finance its external deficit, or its internal deficit, without recourse to the printing press, depends less on internal events than on the weather in China.
The Times’ Friedman writes rapturously that Egyptians “want to shape their own destiny.” Unless Egyptian intelligence has secretly mastered weather modification, Egyptians have very little say about their own destiny.
The New York Times on February 8 quotes Mohamed ElBaradei, the figurehead opposition leader, complaining that the Arab world is “a collection of failed states who add nothing to humanity or science” because “people were taught not to think or to act, and were consistently given an inferior education. That will change with democracy.”
It’s too late. A country that still practices female genital mutilation cannot undertake a grand leap into modernity (by way of comparison, China began to abolish foot-binding in 1911 and eradicated it entirely shortly after 1949).
In this case, Oswald Spengler’s motto applies: Optimism is cowardice. Memo to the temporary residents of Tahrir Square: pray for rain in China.