ON POLITICAL STRESS IN EMERGING MARKETS

A TAPESTRY OF SUBSIDIES

Thomas Friedman starkly highlights a key problem for fast-growing emerging markets in this latest missive from Egypt:

"The current global energy-food crisis is, understandably, a pocketbook issue in America. But when you come to Egypt, you see how, in a society where so many more people live close to the edge, food and fuel prices could become enormously destabilizing. If these prices keep soaring, food and fuel could reshape politics around the developing world as much as nationalism or Communism did in their days..."
A few years ago, Egypt’s president, Hosni Mubarak, belatedly but clearly embarked on an economic reform path that has produced 7 percent annual growth in the last three years — and now all that growth is being devoured by food and fuel price increases, like a plague of locusts eating through the Nile Delta..."
For Egypt’s poor, who make up 40 percent of the population, food makes up 60 percent of their household budget. When wheat prices double, because more U.S. farmers plant corn for biofuels, it is devastating for Egyptians, who depend on imported American wheat for their pita bread. Bread riots are now a daily occurrence here."

Keep in mind the subsidies mentioned above in passing for corn farming in the US for biofuels.

The basic problem is the deal the Egyptian government made with the really poor majority, across the country years ago:

"What’s happening is that the basic bargain between the Egyptian regime and its people — which said, “We will guarantee you cheap food, a job, education and health care, and you will stay out of politics” — is fraying. Even with the growth of the last three years, government subsidies and wages can’t keep up with today’s food and fuel price rises. The only part of the bargain that’s left is: “and you will stay out of politics.”

The key  issue here of course are the government subsidies for basic staples, from food to fuel.  Egypt again is a case in point:

"From Shubra we drive into the desert toward Alexandria. The highway is full of cars. How can all these Egyptians afford to be driving, I wonder? Answer: The government will spend almost $11 billion this year to subsidize gasoline and cooking fuel; gas here is only about $1.30 a gallon."

The reason these subsidies are important to note is not it's prevalence in Egypt, but in almost every developing country from Venezuela to Iran to Indonesia.  Not to mention reverse subsidies like the taxes on gas all across the developed economies in Europe.

If gas and energy prices remain high for a few years, the political repercussions in a whole host of countries in almost every major continent could be really unpredictable in the short-term. 

We especially need to be paying attention as subsidies in one place almost always have political and economic impact on subsidies in another. 

Traditionally, politicians have not needed to pay attention to these cross-border repercussions in a globalized world.  Now the global tapestry of subsidies matters more than ever.  And there's almost no upside for politicians in either the developed or developing world to really be bothered about the political and economic costs in another.

Political stress due to subsidies in both developed or developing economies is nothing new.  That they can lead to political changes in both worlds is also not new or unexpected.  What's new here is that the political stress in some of these emerging markets could result in not just political change, but potentially violent political change.

As global investors celebrate the relative fast long-term growth of many emerging markets, and even as that growth is good for so many people in those countries, it is still tiered growth, from China to India to Russia to Brazil.  It depends on all the tiers moving up the economic ladder more or less concurrently and consistently.

As Friedman notes in his piece from Cairo:

"The good news: More Egyptians today can afford to live like Americans. The bad news: Even more Egyptians can’t even afford to live like Egyptians anymore. This is not good — not for them, not for us."

The laws of unintended consequences are at work again.  Especially when Americans are striving to live like Americans.

Comments

[Trent]

$1.30 a gallon in Egypt? It hasn't been that price since I was a kid!