The Tangled World we Live in – How Inflation, Weather, and Food Prices lead to Revolutions!

By now, everyone monitoring the developments in the Middle East can’t help but liken them to dominos: once the first dictatorship fell (in Tunisia), the rest were just a matter of time.  Of course societies do not behave like toys – what is common among the revolting populations of the Middle East is that they lived for far too long under authoritative regimes and they have recently experience an increase of their economic disparities.  The dictators have been the same for the past 30 years (in most of these countries), but what is new is the increase in income disparities heightened by a sudden spike on food prices throughout the region.

What does all that have to do with China?  China’s overheating economy is leading to inflation, which along with other weather conditions around the world, is contributing to the rise in global food prices.  That recent development has put new acquit pressures on the cost of living of citizens around the Middle East, which has contributed to the willingness of the people to “risk everything for a better tomorrow.”

As Paul Krugman pointed out recently, the big question about uprisings against corrupt and oppressive regimes in the Middle East isn’t so much why they’re happening as why they’re happening now. He, like many others, believes that there’s little doubt that sky-high food prices have been an important trigger for popular rage.  The rise in food prices can be attributed to both inflation in China and global weather developments.

Inflation in China –

Inflation in China is nothing new.  However, the far and wide implications of inflation in China are something new, and something that disserves a closer look.  China’s inflation rose to 4.9% in January, up from 1.5% a year earlier.  This month, the People’s Bank of China raised the one-year lending rate to 6.06%, the third time since October, in a bid to get inflation pressures under control.  The recent surge in Chinese inflation has clearly been driven mainly by food prices.

The rise in food prices is part of a general commodity boom: the prices of many raw materials have been rising rapidly since early 2009, mainly thanks to rapid industrial growth in emerging markets.  According to Dr. Krugman, growth in emerging nations like China leads to rising meat consumption, and hence rising demand for animal feed.  Furthermore, he argues that agricultural raw materials, especially cotton, compete for land and other resources with food crops.  Inevitably, rapid economic growth in China and other emerging markets has played a role in the food price surge.

Weather Changes –

World food prices hit a record in January, driven by huge increases in the prices of wheat, corn, sugar and oils.  These soaring prices have had a significant impact on the world’s poor, who spend much if not most of their income on basic foodstuffs.  According to Dr. Krugman, while several factors have contributed to soaring food prices, what really stands out is the extent to which severe weather events have disrupted agricultural production.

We are clearly in the midst of a global weather crisis.  Recent extreme weather events have damaged food production around the world.  A telling example is wheat, whose price has almost doubled since the summer.  The immediate cause of the wheat price spike is the sharp decrease in world production.  The bulk of that production decline, according to U.S. Department of Agriculture data, reflects a sharp plunge in the former Soviet Union.  This is because of a record heat wave and drought, which pushed Moscow temperatures above 100 degrees for the first time ever.

Other extreme weather events include dry weather in Brazil and flooding in Australia.  Now drought in China is adding to the overall damage to world production of staple food products like wheat.  According to state-run news media in China, the country’s major agricultural regions are facing their worst drought in 60 years.  China is the world’s largest wheat producer, but consumes almost all of what it grows and keeps roughly 55 million tons in reserve.

Food Prices –

Earlier this month (February, 2011), Chinese Premier Wen Jiabao sought to calm global concerns about the impact of severe droughts on China’s grain output and inflation, saying that the country’s supply of grain is basically in balance with demand and reiterating the government’s confidence that it can keep prices under control.

However, food prices surged 10.3% in January on annual basis, with prices of grain increasing by 15.1%.  Drought in at least five Chinese provinces is adding to the already serious problem of inflation in China, which has been primarily driven by rising food prices for the past several months.  Nonfood-price rises also rose in January, an indicating that inflation pressures are spreading through the economy.

Keith Bradsher reports that any move by China to import large quantities of food in response to the drought could drive international prices even higher than the record levels recently reached.

Mr. Brandsher goes on to argue that the impact of China’s drought on global food prices and supplies could create serious problems for less affluent countries that rely on imported food.  With $2.85 trillion in foreign exchange reserves, China has ample buying power to prevent any serious food shortages and thus further raise world food prices.

Revolutions –

Of course, China per se is not intentionally fueling the revolt around the Middle East — 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 hit the region in the last six months clearly sharpened discontent with the illegitimate regimes, particularly among the young, poor and unemployed.

Thomas Friedman points out to another way how China is a challenge for Middle East nations and their internal affairs.  Cheap Chinese imports are flooding the region, undermining the few manufacturing industries that are employing people.  According to Mr. Friedman, China can make even Egyptian Ramadan toys more cheaply and appealingly than low-wage Egyptians, a clear indication of a competitiveness problem.

Inflation and food prices are not only part of the cause for unrest in the Middle East; they are also a major cause for concern for Chinese authorities.  Don’t forget that it was public concern about inflation in 1989, which contributed to the Tiananmen demonstrations.  If inflation and food prices in China can cause revolutions in the Middle East, can they also cause a revolution in China?  That remains to be seen…