“If the rise in food costs persists, there will be an explosion of popular anger against the government.” – 19 Nov 2010, Hamdi Abdelazim, economist, Sadat Academy for Administrative Sciences, Cairo
Should one be surprised about the uprisings in Egypt? Hardly. Perhaps one may be surprised that it was this week, instead of three months ago or later this year. But surprised that it happened, not at all. As noted above, a prominent Egyptian economist accurately predicted the uprising two months ago.
To explain why Egypt, and why now, one need only do a little homework.
The Social Contract Holding Together the Egyptian Economy Has Been Eviscerated
To understand how Egypt came to stand on the edge of the economic abyss, one needs to step back a bit and briefly review what has recently happened in the Egyptian economy.
Privatization of state-owned enterprises in Egypt, pushed inexorably over the last two decades by the IMF and US finance under the watchful eyes of the US Agency for International Development (USAID), has decimated what used to be a vast state-run economic sector. That sector, among other things, actually provided employment, stability, wages, benefits and opportunities to millions upon millions of Egyptians workers in energy, ports, rail, housing construction, water, banking, textiles, cement, agriculture, beverages, etc. The large state enterprises in Egypt originated in Nasser’s time – under the sobriquet “Arab Socialism” – with significant support from the Soviet Union (e.g. the construction of the Aswan Dam). These state-owned businesses have long been in the cross-hairs of international capital, as they represented a valuable asset for takeover, in addition to being an impediment to foreign domination of the Egyptian economy. Under Nasser’s Egypt, according to the World Bank,
“the public sector accounted for some 90 percent of total (monetized) investment throughout the 1960s and until 1973.”
After Sadat took power in 1970, he dismantled many of the accomplishments of Nasserite society using the 1974 ‘Open Door’ or Infitah, and subsequent agreements with the IMF. Yet still many state-run enterprises persisted under Sadat and Mubarak. According to USAID, until Mubarak and his much-resented son, Gamal, dismembered the state enterprises in 1991 for the the IMF and World Bank in the Economic Reform and Structural Adjustment Program (ERSAP),
“the public sector remained a dominant force in the economy constituting around 37% of GDP, was responsible for about 55% of the industrial production, controlled over 80% of import/export and about 90% of the banking and insurance sectors”.
This, one should note, is in the eyes of the IMF an ipso facto ‘evil’ and needed to be eliminated. This would allow private capital to drain the public wealth of the country accumulated over the many earlier decades, and also bring the working class, previously well-treated by the state, to its knees.
The trigger to denationalization was pulled in 1991 by Mubarak and the IMF with Public Law 203 which aimed to eliminate all vestiges of state enterprises and national sovereignty in the economic sphere. According to the NYT, Amr El-Shobaki, a political scientist at the Ahram Center for Political and Strategic Studies concluded,
“privatization was a way for the friends of the rich and powerful to grow more rich and powerful. Even the government acknowledges that the economic changes have had little impact on average lives.”
The result is a typical globalization model of deconstructing the social fabric, built over decades:
- The choicest plums of high-profit state enterprises were auctioned off at embarrassingly low bids with military officials enriching themselves. Of 315 enterprises, only 150 unprofitable concerns now remain.
- “Efficiencies” in what was the former state workforce were instituted – layoffs, wage cuts, etc., further skewing the economy toward inequality. Three-quarters of state enterprise jobs from 1978 are now gone forever. The GINI coefficient (indicator of inequality) worsened from 30 in 1995 to 35 in 2005.
- Revenue from profitable state enterprises evaporated, putting great stress on the budget
- Remaining state enterprises that are not profitable and can’t be sold now drain the national budget
- A resulting wave of protests, much from privatization, “erupting from the largest social movement Egypt has witnessed in more than half a century. Over 1.7 million workers engaged in morethan 1,900 strikes and other forms of protest from 2004 to 2008” according to Dr Joel Beinin of Stanford University, and the protests continues to today.
The North African Food Crisis Which Was Engineered Abroad
Egypt (and Tunisia, most of North Africa and much of the Middle East) is in a severe food crisis. One must keep in mind the impact of food prices upon a nation like Egypt where twenty percent of the population lives on less than $1 per day, fifty percent on less than $2 per day.
This food crisis is not a ‘natural’ crisis arising out of insufficient production (even though wheat production this year has been moderate). Instead, food being simply a subset of internationally traded commodities, behaves as most other commodities in the market. That is, it undergoes speculation, market manipulation and hoarding. Prices of imported food on the streets at the Suleiman Gohar market in Cairo are no longer set by local Egyptian farmers, as twenty years ago, but today by derivatives, futures and hedge fund traders in Chicago, New York and London. That is, skyrocketing grain prices, as were seen for example in 2008 and now again today, are an outgrowth of removal of national protections of agricultural prices and production to international trade. Food prices in Egypt, due to IMF agreements, is now pegged to international prices and markets.
While one might think that great rises in food prices simply reflect shortages in supply, this is frequently not the case. In an interview with John Kleist, a commodities broker in the US, he explained the reverse process which forces prices up:
“While the world is right to be concerned about food shortages, Kleist said global grain levels are not as low as they were in 2008. Many speculative investors are buying up agriculture-related commodities – whether it’s futures contracts or stocks in companies – on the idea of higher demand for food in the future.”
Egypt now imports 40% of its food and 60% of its wheat. It is now the largest wheat importer in the world, and one of the largest corn importers. There has been a 30% rise in food prices in Egypt from June to December of this year, while many food supplies have been growing. Upon the launching of the uprising in January 2011, Egypt has formally eclipsed the highest food prices ever recorded in the country – those of 2008 when riots flared across Egypt, six other African countries, Haiti and a host of other mideast countries.
These facts are not auspicious when 39 million men, women and (mostly) children of Egypt’s 78 million live on less than US $2 per day.
Adrian Day, a global investment manager and noted author adds,
“There are always two major areas to consider any time you look at commodities—the supply/demand factors and the overall economic environment. Other things being equal, a declining dollar means higher commodity prices. More money being put into the system and low interest rates mean higher prices for commodities. Well, guess what? We’ve got a falling dollar, more money being put into the system and low interest rates. So, we have the perfect economic environment on top of the perfect supply/demand situation.”
That is, the perfect storm of commodity speculation. Which brings us to what underpins skyrocketing commodities, particularly Egyptian food prices.
The Fed’s ‘Quantitative Easing’, also known as the ‘Immiseration of the Developing Economies’
We have known, for at least the previous year, that the Federal Reserves’ policy of “Quantitative Easing” (QE), which is pumping trillions of US dollars into the world economy would inflict great damage on commodities in the developing world. Since fall 2009 alone, $600 billion was ‘eased’ out of the Fed into American bank coffers. But where did the dollars end up?
‘QE’ was proffered as an injection of liquidity into the US economy to increase US business activity. Yet it was patently obvious to those outside the US (and a silenced minority within the US) that the main beneficiaries would not be struggling US businesses strapped for credit, but US banks who would use the liquidity, not to invest in the moribund US economy, but to speculate in foreign currencies, driving currencies higher in relation to the US dollar. This would allow the later repatriation of the resulting foreign-currency inflated investments back into US dollars to bolster US bank profits. For example, Brazil, amongst other countries, harshly criticized the Fed policy which would, “create dangerous bubbles in such countries as Brazil”.
Not surprisingly, the Fed and others pooh-poohed this viewpoint. And even less surprising, this outcome is precisely what has occurred. Even the Wall Street Journal now admits this is the prevailing view of US ‘quantitative easing’ throughout the world:
“In the developing world, the Fed is widely seen as the inflation culprit because it has pushed interest rates to zero and pumped trillions of dollars into the global financial system through a policy known as quantitative easing.”
Chotaro Morita, head of Japan fixed-income strategy at Barclays Capital Japan warned:
The short-term situation in Egypt is uncertain, but if the main cause of the surge in commodity prices since last year has been excessive monetary accommodation by developed economies, especially the U.S., then the macroeconomic policies aimed at balance-sheet adjustment in developed economies appear to have backfired by causing social unrest in developing economies and a further rise in resource prices.
So Adrian Day’s earlier recipe for the perfect storm of commodities, “a declining dollar […] More money being put into the system and low interest rates”, has been accomplished by none other than the US Federal Reserve Bank at the behest of American finance capital. The Fed has:
- Lowered the interest rate to near-zero
- Poured 2.1 trillion dollars into the world economy through June 2010 to increase liquidity by buying mortgages, bank debt and treasuries
- Lowered the US dollar exchange rate by continuing to buy US treasuries by simply printing money ($600 billion in QE2)
And if the storm is not quite perfect enough, simply note that:
- Egypt is the largest wheat importer in the world
- US is the largest wheat exporter in the world
Revolts have now taken place in Egypt and Tunisia with massive demonstrations continuing in Jordan, Yemen and Algeria as well.
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