Does high food prices cause political instability?

 Lagi, Bertrand and Bar-Yam show that the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. So, yes rising food prices (above a certain threshold) might induce riots and political instability.

They identify a specific food price threshold (the FAO’s Food Price Index of 210; the index as of June 2011 was at 234) above which protests become likely. It suggests “that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations.”

Below is a chart showing time dependence of FAO Food Price Index from January 2004 to May 2011. Red dashed vertical lines correspond to beginning dates of “food riots" and protests associated with the major recent unrest in North Africa and the Middle East. The overall death toll is reported in parentheses.

The researchers argue that food prices will permanently rise above the 210 threshold within a yea or two. They argue that the major causes of rise in food prices are investor speculation and ethanol production. Hence, they argue “reducing the amount of corn converted to ethanol, and restricting commodity future markets to bona fide risk hedging would reduce global food prices.”

The FAO food price index just below 220 in July 2012 would increase the changes of having more instability, they predict.

The chart above shows time dependence of FAO Price Index at current prices (upper black curve) and constant prices (corrected for inflation, lower blue curve) from January 2004 to May 2011. Red dashed vertical lines correspond to beginning dates of food riots and events associated with the major recent unrest in North Africa and the Middle East. Black and blue horizontal lines represent the price threshold above which riots are ignited in current and constant prices respectively. Index backgrounds are fitted with a third-order polynomial; intersection with the threshold (July 2012 at current prices, August 2013 at prices corrected for world inflation) represents the point of instability.

Retail prices of wheat and rice in South Asia

The charts below show retail prices of wheat and rice in one major city of each South Asian country (except for Maldives for which there is no data available).

Retail price of rice increased in all countries during mid-2008. It cooled off a little bit but is still high and rising. Overall, retail price of rice is highest in Pakistan. It is followed by Sri Lanka, India, Nepal, Bhutan, and Bangladesh. Retail price of wheat in Bhutan is rising rapidly even though it still has lower price than in Bangladesh. Price of rice is picking up since the beginning of this year.

As of July 2011, retail price of a kilo of rice was USD 0.59, USD 0.52, USD 0.51, USD 0.49, USD 0.47 and USD 0.44 in Pakistan, Sri Lanka, India, Nepal, Bhutan and Bangladesh respectively. In July 2008, they figures were USD 0.74, USD 0.58, USD 0.47, USD 0.54, USD 0.35, and USD 0.50 in Pakistan, Sri Lanka, India, Nepal, Bhutan and Bangladesh respectively.

Retail price of wheat spiked in mid-2008 and then cooled off a bit before rising again. As of July 2011, Sri Lanka has the highest retail price of wheat, followed by Afghanistan, Nepal, Bhutan, Pakistan, Bangladesh and India. Sri Lanka and Nepal are seeing a rapid rise in retail price of wheat.

As of July 2011, retail price of a kilo of wheat was USD 0.78, USD 0.52, USD 0.51, USD 0.43, USD 0.38, USD 0.38, USD 0.34 and USD 0.34 in Sri Lanka, Afghanistan, Nepal, Bhutan, Pakistan, Bangladesh and India. In July 2008 the figures were USD 0.69, USD 0.68, USD 0.43, USD 0.35, USD 0.41, USD 0.55, and USD 0.30 in Sri Lanka, Afghanistan, Nepal, Bhutan, Pakistan, Bangladesh and India respectively.

Nepal’s sovereign rating

Nepal does not have a sovereign rating. Standard & Poor’s, Moody’s, and Fitch, the three international rating agencies, have not rated Nepal. Altogether 58 developing countries are still not rated by them. Canuto, Mohapatra and Ratha of the World Bank followed the same methodology used by S&P to estimate the rating of the unrated developing countries.

As of April 2011, Nepal got CCC+, Maldives B+ to BB+, Bhutan and Bangladesh BB- to BB. Nepal falls under the "high default risk" category; Maldives “highly speculative”; and Bhutan “speculative”. The rating is based on a regression outcome with the independent variables GNI per capita, GDP growth rate, debt to exports ratio, reserves to imports to short term debt, growth volatility, inflation and rule of law.

Transatlantic economies whipsawed by globalization

Jeff Sachs writes:

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A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the euro zone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.

I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.

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Sachs outlines three fiscal policies for the US and the EU.

• Expand investments in human and infrastructure capital.
• Cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen.
• Balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.

Labor issues cost closure of another garment factory in Nepal

The beleaguered Nepalese garment industry has lost one of the top performs—Surya Nepal, which produces popular international brand John Players and exports to India, the US, Canada, France and other European countries—due to protracted labor problems.

The blame should squarely go to the trade unions that have been letting its members use militant behavior to press their demands (remember locking management staff and giving physical threats?), which has so far revolved around increasing wages (multiple times in a year) and social security (which is a newly introduced concept). When will the trade unions (read its bosses) get satisfied with wages? What is the final deal?  What happened to this deal between labor unions and FNCCI? Do the trade union leaders really represent their members (or trade union members honor agreements singed by their organization heads)?

The policy inconsistency of government and stance inconsistency of trade unions (that have been using extralegal means to press their demands) is bleeding the industrial sector. Vested interests of trade union bosses and their bosses of political parties are actually costing not only the industrial sector but also the naïve workers who think they are represented by the leaders are politicians who are past their retirement age. Closing down Surya Nepal will cost 650 direct and 1400 indirect employment. We already lost Colgate Palmolive, Dabur Nepal, Kodak and other MNCs due to labor and political problems. 

Established in 2004 with an investment of Rs 700 million, Surya Nepal was producing popular international brands like John Players and Springwood. The industry was directly employing more than 700 workers, of which majority were women. Likewise, it was providing employment to other 1,400 workers mainly by contracting out its production orders.

Also, read this article that explains how labor militancy is leading to strike-unemployment cycle. This statement is even valid right now: “If you have lost a job, are potentially going to lose, or cannot get one in the market, then blame the outrageous, militant youth wings and the politicians who incite the unions to go on a destructive path.” Read this article that explains the disconnect between outrageous labor demands not matched by labor productivity.

Poverty declined in Bangladesh from 40% to 31.5% in five years

Absolute poverty in Bangladesh dropped to 31.5 per cent in 2010, reflecting an 8.5 percentage point decline in the last five years, according to Bangladesh Household Income and Expenditure Survey (HIES) 2010. This is lower that in Nepal where absolute poverty declined to 13 percent of total population, down from 31.5 percent in 2003/04—an incredible 18 percentage point decline in poverty, or three percentage point decline each year.

According to the HIES 2010 data, poverty in the rural areas shrunk by 8.60 percentage points to 35.2 per cent in 2010 from 43.80 per cent in 2005. The last HIES survey in 2005 showed that 40 per cent of the people of Bangladesh, out of its total population, lived below the poverty line. According to the last survey data, the 43.80 per cent of the total rural population was poor while 28.40 per cent people in the urban areas lived below the poverty line.

One of the main factors is attributed to remittances, which was also the most crucial factor in reducing income poverty in Nepal. The Bangladeshi authorities attribute to this remarkable feat to increased remittances, spread of modern agricultural method, improvements in rural infrastructure and flow of micro-credit to the ultra-poor.

The present report is based on the final data sets of HIES 2010. The sample size was
12,240 households where 7,840 were from rural area and 4,400 from urban area.

South Asia continues to reap the benefits of remittances. The question is: can this be sustainable and can the money be channeled to productive sectors?

IMF’s assessment of Nepal’s economy in 2010/11

An IMF staff team has concluded 2011 Article IV Consultation in Nepal. The report is yet to be out but here is what the IMF sees going on in Nepal right now. Below are the major points copied from the IMF statement.

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• GDP growth is expected to remain below 4 percent in the near term but in the absence of other shocks, inflation should decline somewhat.
• The balance of payments should show a small surplus, though it will remain vulnerable to the weak global environment.
• The delayed adoption of the 2010/11 budget contributed to the weak economic outturn. The timely presentation of the 2011/12 budget to Parliament is therefore welcome.
• The authorities’ plans to limit domestic financing of the fiscal deficit to 2 percent of GDP is appropriately consistent with macroeconomic and debt sustainability. However, achieving the deficit target will not be easy. Despite the impressive gains in revenues in recent years, slower economic growth could result in lower receipts than envisaged. At the same time, current spending is budgeted to rise substantially, and additional unbudgeted spending pressures could arise, including for reintegrating former combatants. Taking into account all of the above, the authorities are advised to prepare contingency plans to ensure the domestic financing target is met. These should focus on collection of VAT arrears, further improvements in tax administration, and reductions in unproductive subsidies, while safeguarding spending on priority poverty reduction and infrastructure.
• At the same time, large losses that arose at the Nepal Oil Corporation (NOC) in 2010/11 are unsustainable. Adoption of an automatic price adjustment mechanism that ensures the NOC avoids future losses is strongly recommended.
• As regards monetary and exchange rate policy, the peg should remain the key policy priority. This requires that monetary policy be conducted in a manner that ensures interest rates in Nepal do not fall below those in India. In the current environment, generalized liquidity injections would be inconsistent with this objective.
• Risks in the financial sector have been building up for some time as financial institutions proliferated in an environment of weak supervision. Excessive exposure of banks and other financial institutions to the real estate sector, where an asset price bubble has now burst, have brought many of these risks to the fore. Well targeted and fully collateralized temporary liquidity support to solvent individual institutions at penalty interest rates is warranted.
• On the other hand, relaxation of prudential and accounting regulations or blanket provision of liquidity assistance would only postpone addressing the deterioration in financial institutions’ balance sheets, with potentially significant untoward consequences for the economy. The authorities are encouraged to put in place a comprehensive and multi-faceted program of financial sector resolution that includes, among other things, better diagnostic assessments, strengthened supervision and enforcement of prudential regulations, and stronger intervention powers for the NRB.

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