Egyptian protests: How a food crisis is driving a political crisis.

Commentary about business and finance.
Jan. 31 2011 4:57 PM

Protesting on an Empty Stomach

How the Egyptian economy is fueling unrest in Egypt.

Egyptians queue up in a Cairo supermarket. Click image to expand.
Egyptian shoppers line up in a Cairo supermarket

Any number of political and social factors underpins the current unrest in Egypt —and as always, economics figures in. The upheaval has shined a light on two serious problems facing the country: Most jobs pay too little, and most food costs too much.

First, the structural issue: Egypt has posted solid economic growth numbers, particularly in the past half-decade, but that growth has failed to improve the quality of life or income of most of its 80 million citizens. In the 1990s, Cairo embarked on a broad privatization and liberalization project, redoubling its efforts to attract foreign investment again in the mid-2000s. Those efforts succeeded, boosting GDP growth from about 4 percent in 2004 to more than 7 percent in 2008. Egypt has also fared well through the global recession, with gross domestic product increasing 4.7 percent in 2009 and 5.2 percent in 2010, even as other developing economies faltered.

But those gains have not been shared broadly. According to World Bank statistics, Egypt's top quintile of earners has increased its share of income since the 1990s, while the country's bottom quintile has seen its portion of the pie get smaller. Poorer Egyptians feel no richer, despite the recent gains. Youth unemployment remains a particularly pernicious problem. About two-thirds of Egyptians are under the age of 30—and that age cohort makes up a whopping 85 percent to 90 percent of the unemployed. In comparison, youths make up about 40 percent of the unemployed in nearby Jordan. (Jobless youths, particularly jobless young men, tend to pose instability risks in general.) Millions more face underemployment or the prospect of dead-end careers in the civil service. And overall, the country remains poor: About 40 percent of Egyptians live on less than $2 a day, and the nation's total GDP is about the size of Connecticut's.


Then, there is a secondary problem: a huge run-up in food costs in recent months. According to the Food and Agriculture Organization of the United Nations, the worldwide food price index is at an all-time high—surpassing its 2008 peak, when skyrocketing costs caused global rioting and pushed as many as 64 million people into poverty. The price of oils, sugar, and cereals have all recently hit new peaks—and those latter prices are especially troubling for Egypt, as  the world's biggest importer of wheat.

Egyptians are particularly vulnerable to increases in food prices because they spend an unusually high proportion of their income on food, according to a recent Credit Suisse survey. "Food inflation is a specific issue" in the country, the report notes, "having reached over 20 percent—amongst the highest rates globally." Egyptians spent more on food than respondents in any other emerging economy surveyed in the report—about 40 percent of their monthly income, versus about 17 percent for Brazilians and about 20 percent for Chinese and Saudi Arabians, for instance.

The Egyptian government does subsidize bread and other staples for poorer Egyptians, ameliorating the price increase somewhat. But most Egyptians purchase bread beyond what the subsidy allows. And the threat of instability has already pushed food costs higher in the Egyptian capital and elsewhere. Plus, rising food prices have a long history of causing social unrest in the country. In 1977, the state cut subsidies of basic staples, leading to deadly riots. In 2008, when food prices hit their first peak, Egyptians again took to the streets.

None of that comes as a surprise to social scientists. Economists at the University of Adelaide, for instance, recently examined the impact that food prices have on civil conflict in 120 countries in the past 40 years. "Our main finding is that in low-income countries increases in the international food prices lead to a significant deterioration of democratic institutions and a significant increase in the incidence of anti-government demonstrations, riots, and civil conflict," the researchers note. The same finding does not hold true in high-income countries, where citizens can better afford food.

So what is causing the rise in food prices—and might prices abate, easing tensions in Egypt? Unfortunately, the answer is probably no. Commodity speculation by hedge funds and financial entities might be contributing to the global run-up in prices. But much of the recent increase can be explained by the simple laws of supply and demand. First, there are constraints on yields, caused by recent droughts in Russia, floods in Australia and Pakistan, and increased production of crops for ethanol and other biofuels, rather than food. At the same time, demand for food commodities has continued to climb in big and fast-growing countries like India and China. And rising oil prices—a key component of food costs, given the cost of shipping goods—aren't helping, either.

So why haven't Americans noticed an uptick in costs at the supermarket? Mostly because raw food costs are a smaller proportion of overall food costs for American consumers. When you buy a box of Wheaties, you're paying for packaging, advertising, and processing, as well as the wheat, making the price more insulated from inflation. In addition, U.S. food producers tend to trade in the futures markets to smooth costs—meaning ingredient costs get locked in months or even years in advance.

So, the global food crisis has remained mostly invisible in the United States. But it is all too visible in Egypt and other Northern African emerging economies. And the economic forces do not look like they will abate any time soon.

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