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The economist's view
Published in Al-Ahram Weekly on 23 - 10 - 2008

In the aftermath of the world food crisis, followed by the world financial crisis, Seheir Kansouh-Habib of Beyond speaks to two of Egypt's most prominent economists on the extent to which the country is at the mercy of -- or protected from -- global shocks.
The following are excerpts from an interview with Gouda Abdel Khalek.
To what extent do you think that the unprecedented world food price crisis that started to manifest itself in 2007 is the result of global economic integration?
It is to some extent, but it is also the result of national policies in many countries under the pressure of international organisations.
With regards to the global aspect, we can identify several factors. First is the might of multinational corporations in the agro-business that are now controlling the process of breeding new varieties of seeds for various products in addition to controlling the production of other agricultural inputs, particularly fertilisers and pesticides. This trend has accentuated under the World Trade Organisation (WTO) discipline as a result of the implementation of the General Agreement on Trade in Services (GATS), because one of the vital elements of GATS is to prolong the period of the protection of intellectual property rights. As a result, the access cost to agricultural producers worldwide to basic agricultural inputs (seeds, fertilisers and pesticides) has risen significantly.
The second factor has to do with the pressure levelled by developed countries upon developing countries to liberalise their trade regimes with regards to agriculture while at the same time insisting on subsidising their own agricultural sector. This particularly applies to the European Union that subsidises agriculture to the tune of $1 billion a day. As a result, many agricultural products have entered the markets of developing countries at the expense of local products. Main examples are wheat and corn, and to a lesser degree dairy products and meat. Financial globalisation has resulted in a proliferation of the use of derivatives in almost all markets, including agricultural products.
In this context, agricultural products such as wheat, corn and sugar have become assets to be compared with other assets such as oil, gold and currencies, and speculators are moving back and forth among such assets using derivatives. When energy prices shot up, agricultural products were increasingly converted to produce biofuel and hence agriculture-based derivatives became very attractive for speculators. Ultimately that contributed to the spike in world food prices during 2007 and the early part of 2008.
At the national level, there has been the trend to neglect agriculture in the context of neoliberal policies promoted by the Bretton Woods institutions, in addition to urban bias. This factor applies differentially to different regions, but it may apply most to countries in the Middle East and Africa.
How can Egypt make more sense of globalisation rather than blaming it?
We have to make a clear distinction between two aspects of globalisation. The first is technology and the second is ideology. Technology manifests itself in the areas of communication, information, transportation and innovation in technology. This is positive and should not be resisted. With regards to ideology, it means elevating a specific model to the level of a universal model.
Economic policies under the so-called "Washington Consensus" (liberalisation of trade and capital flows, privatisation, government retrenching, labour mobility, etc) have shifted resources in the direction least appropriate to the needs and conditions of developing countries. On the other hand, a pattern of consumption of food products based on prolonging the production chain (beef hamburgers, for example) has been promoted as a universal model.
We can compare, for illustration, the beef hamburger with falafel (the main staple food in the Middle East, which is a hamburger made of horse beans, or chickpeas). We can get seven times the intake from a unit of agriculture resources through consuming falafel than consuming beef hamburgers. The loss of energy is due to the loss in the processing chain occurring through feeding livestock with grain.
Based on the distinction between technology and ideology, countries such as Egypt can increase the benefits of globalisation by engaging in technological development to the maximum extent possible. When it comes to the ideology part of globalisation, in that sense, Egypt will have to be selective and not surrender to the neoliberal economic ideologies promoted by the Bretton Woods institutions. Instead, it will have to devise an alternative model to frame its own socio-economic policies in the light of its own realities.
The world is currently suffering from economic recession and political turmoil. In Egypt, there are also structural deficiencies in governance. As these factors are mutually reinforcing, it is difficult to know where to start in addressing present challenges. What is your view?
The world economic crisis that has been triggered by the turmoil in financial markets is in fact a systemic crisis, not just a question of a lack of liquidity. By systemic crisis I mean that the system resulting from the Bretton Woods agreement of 1944 is no longer relevant for today's conditions. Naturally that calls for international efforts to restructure the international system and Egypt can only take this as given.
What Egypt should perhaps do is to join forces with other countries in order to ensure that the new system will safeguard the interests of developing countries. But at the same time, Egypt will have to rethink its systems of government and managing the economy. With regards to the system of government, there has to be a serious move towards democratisation. With regards to management of the economy, it has to stress value-creation in profit making instead of rent seeking.
Social justice will also have to be emphasised much more than at present. This raises the issue of the economic system to be followed, as Egypt's experience over the past 30 years has indicated that the model of the market economy based on neoliberal lines has failed. The current global economic crisis provides clear evidence of the need for a new paradigm.
The Egyptian government is committed to meeting the Millennium Development Goals (MDGs), the first of which is halving poverty by year 2015. How can it avoid missing such targets amid the current world economic crisis?
Against the backdrop of the current world economic crisis, achieving the MDGs may become a remote possibility. The current economic crisis means that the world economy has moved into recession and hence economic growth worldwide will be slower. Slower economic growth will not provide the prerequisites for reducing poverty.
In addition, under pressure of the crisis, and given the balance of power both at international and national levels, measures taken in response to the crisis may involve greater inequality. An example is the Bush bailout plan of $700 billion where that amount will have to come out of taxes and the tax burden will proportionally fall on lower income groups.
Simply put, measures to address the crisis will be in favour of capital and at the expense of labour.
There appears urgency for a new global agreement on liberalising trade at the Doha Round being negotiated by the WTO. What does Egypt have to gain from this?
The urge to conclude a new agreement under the current Doha Round is entirely prompted by the developed countries. On the other hand, developing countries, including Egypt, have strongly objected to being asked to remove barriers for service and investment flows into their economies in exchange for greater access for their non- agricultural products to developed countries. In fact, Egypt will have no interest in the conclusion of the Doha Round according to the designs of the developed countries.
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The following are excerpts from an interview with Karima Korayem
To what extent have food price increases in Egypt been a consequence of hikes in world food prices and how did the subsequent global financial crisis affect them?
Food prices in Egypt have been affected by world food price increases, but not only by them; there were other factors, mainly local factors, in play. Internationally, before the financial crisis, there was a significant increase in food prices. There were three main reasons for these increases.
First, the increase in total worldwide demand because of increases in population and rapid economic growth in developing countries, on the one hand, and sluggish productivity growth of agricultural commodities worldwide, on the other hand.
Second, the impact of the fall in the US dollar exchange rate on the local prices of commodities bought in the future commodity markets. Most commodities, including crude oil and grain are priced in US dollars but are purchased in local currencies. In the future commodity market, the price of the commodity is determined by the prevailing exchange rate (the contract time between the buyer and the seller). Thus the price of the commodity in local currency will be determined according to that exchange rate.
For example, assuming that the price of one kilogram of wheat was $1. With the exchange rate of $1=LE5, wheat price will be LE5 in the Egyptian market. When the dollar exchange rate falls to LE4 a dollar at the time of implementing the future contract, wheat will still be sold at LE5 a kilogram in the local market, despite that according to the current exchange rate it is supposed to be sold at LE4 per kilogram. This applies to prices in local markets in all countries worldwide when their currencies appreciate vis-à-vis the US dollar.
The third reason was the increase in using cereals as biofuel, which has increased total demand without being matched by an increase in supply.
Things have changed after the financial crisis, which has lead to a fall in demand in the international market, resulting in turn in the fall of prices, including food prices. Food prices in Egypt should have been affected by this downward change in international prices since our main food import consists of cereals: wheat (representing a high percentage of our total consumption) and maize. As other food items, such as vegetables and fruits, are mainly cultivated in Egypt their prices should not have been affected by the international situation. Nevertheless, the price of food, which is the main item in the budget of the poor, increased the most.
Within the food price component used in calculating inflation rate in 2007 it was noted that the price of home grown vegetables increased by 38 per cent, representing the highest price increase in food components, while the price of wheat- based bread and other cereals, partly imported, saw an increase of 18 per cent only. Imported food represents about one quarter of our total food consumption on average. This means that the increase in world food prices is not the main factor underlying the increase in food prices in Egypt.
The escalation of food prices in Egypt is attributed mainly to local factors:
1. The monopoly law applied is weak and inefficient in curbing realised profits to an acceptable level, considering the low income of the majority of the Egyptian population. This has led to a rise in domestic prices, including food.
2. Increase in the fuel price resulted in an increase in the transportation cost of food and non-food production.
3. No incentives are given to increase the agricultural land allocated to food production.
4. No serious research is conducted aimed at increasing food production in Egypt vertically, by improving cultivated seeds, and horizontally, by tapping the potential of newly developed land to produce cereals and other food products. The lack of funds available to research institutes and the lack of incentives for good agricultural scholars are important factors leading to this result.
5. Even when serious research is done in this direction, no attempt is made by the government to implement it. For example, in a research project sponsored by the UN and proposed by the Ministry of Irrigation to investigate the potential output and employment creation in Toshka in the coming 10 years, it has been found, among other things, that Toshka has potential in cultivating wheat and other cereals as well as different export crops. However, the study is kept in the dark in the Ministry of Irrigation, its results not revealed. Instead, it has been announced by the government that local demand for cereal, especially wheat, is to be met by areas outside Egypt, such as Uganda and Sudan!
As is now well known, the world financial crisis that followed the world food crisis has resulted in lowering the price of food commodities in international markets. If the argument given by the Egyptian government that the increase in world food prices is the main factor responsible for the increase of food prices in Egypt, this means that food prices in Egypt should also follow a downward trend. In this context, it has been announced that there is a fall in the price of food commodities. The questions now are: How much will the price reduction of food items in Egypt be? Will the price reduction cross the Egyptian market as a whole or only in government-owned establishments, and how long this will last?
The wealthy eat more than the poor -- this is an established fact. So how do you explain that food price increases affect the poor most?
The rich spend more in absolute terms; this is obvious. However, their spending on food represents a small percentage of their income. On the other hand, the poor, who spend less in absolute terms and also consume less food, spend a much higher percentage of their income on food. This means that any increase in food prices will hurt them the most. What matters here is not the absolute value spent on food, but the percentage of individual income spent on it.
Do you see population growth as consuming the world's resources and responsible for its misfortunes?
Population growth in itself can be an asset or a liability for any nation. If the country leaves people illiterate, uneducated, unemployed, they become a liability. If, on the other hand, the country invests in them by educating them, training them, employing them in productive activities, then they become its strongest asset.
To illustrate, China's population of 1.3 billion people did not deter its growth of output or exports. To the contrary, it was the propelling factor, while in Egypt, the comparatively much lower number of people (80 million only) is the country's greatest liability and the rate of population is blamed for almost every problem it is facing.
Growth, essential for social development, could not be achieved by socialism, while justice could not be achieved through the market economy that is also currently challenged by the current world financial crisis. Please explain.
It is now contended that socialism with governments playing the main role in the economy was not conducive to sustainable growth, though it did cause some upward social mobility for some segments of the population. The example of the Soviet Union and the developing countries who adopted different forms of socialism in the 1960s and 1970s -- and that includes Egypt -- is proof of the point.
On the other hand, the market economy, left unbridled, could not achieve a just growth. The current world financial crisis provides evidence of the existence of major caveats in the market economy. In my view, this does not indicate the failure of the market economy per se, but there is a need for more intervention by the state in certain areas for overall control of the socio-economic system, while the private sector is to remain the main player in the economy.
I probed the causes that led to the recent world financial crisis and came to realise that essential links between the financial sector and real economy sectors are missing in the banks' assessment policies of loan seekers. The absence of such links is, in my view, an important factor underlying the current world financial crisis. To explain, real estate loans are extended by banks to individuals taking into consideration the economic situation of such individuals at the time the loans are requested (their capability of repaying the loans at the agreed rate of instalments and on time, etc). No consideration is given by these banks regarding expected development in real economy sectors, which is the main determinant of job availability to borrowers who can only pay back their debts if they keep their jobs, which in turn, depends on the state of the real economy. When the economy follows a depression curve, this means that many borrower jobs will be lost. Hence those borrowers will not be able to pay back the loans. If the banks had considered the general conditions of the economy, with its downward trend, they would not have given big loans to such a large number of individuals in the first place. It is therefore viewed as essential that banks reassess their criteria of approving loans to include assessing the current and expected state of the real economy. I think that this is an important factor underlying the financial crisis in the United States.
In Egypt, my feeling is that the threat will not come from real estate loans but from the excessive volume of consumer loans (for buying cars and consumption goods), banks are providing to individuals without considering the current and expected situation of the real economy. Thus, what is urgently needed in Egypt is to reduce consumer loans and to rethink and reassess the criteria for loan assessment to include the current and expected capacity of the real economy side by side with the status of the individual loan seekers.
Gouda Abdel Khalek is Professor of Economics, Cairo University; Karima Korayem is Professor of Economics, Al-Azhar University


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