Bitter Lemons Middle East Roundtable May 29, 2008 The political effects of rising prices

bitterlemons-international.org
Middle East Roundtable


Edition 21 Volume 6 - May 29, 2008

The political effects of rising prices

• Catch 22 - an interview with Leila Farsakh
The only avenue the PA has is international aid, and we are already among the most subsidized countries in the world.

• Egypt: social unrest and deteriorating politics - Amr Hamzawy
The regime's lack of an overall strategy to address the country's enduring troubles extends far beyond the economic sphere.

• The fallout from rising prices in Jordan - Yusuf Mansur
Fearing embarrassment, no new study is being commissioned of the poverty line in Jordan.

Catch 22
an interview with Leila Farsakh

BI: What kind of effect will rising food prices have on Palestinian society?

Farsakh: Rising food prices will have major effects on the Palestinian economy. The first way we're noticing it is with inflation. Inflation in Gaza has increased by 4.6 percent and in the West Bank by around two percent. People are already complaining about oil prices, which is one factor that affects food prices, and we know today that 36 percent of Palestinians are food insecure. That increase in prices is just going to increase demand for food aid.

So if you combine the fact that you have poverty at around 65 percent, which means that 65 percent of the population are living under two dollars a day, and all predictions are that food prices are going to double, that means two things: the international community will have to increase its aid and this aid will go mostly on food security. If the predictions are right, food insecurity will double and that's a significant amount.

The second is how to alleviate this food insecurity: is it going to be with cash, which then can raise inflation, or food, which will create unemployment. So we are in a catch 22 situation that can only aggravate the political and economic catastrophe we are living.

BI: Palestine has a significant agricultural sector. Is there not a way in which the international community can strengthen that sector to alleviate the effects of rising food prices, even take advantage of them?

Farsakh: There is a misconception that Palestine is mainly an agricultural society. Palestine was an agricultural society when the occupation started 40 years ago. Today, less than 15 percent of Palestinians work in the sector. During the second intifada and with the Israeli closures we've seen a return of labor to agriculture. But there is low productivity and low efficiency because of the financial and political constraints on production. For instance, we don't have a significant rise in percentage of land use.

There has been a doubling of vegetable production over the last ten years, which is not insignificant. But at the same time there has been a drop in cash crops, most importantly for flour. That is largely because of constraints in exports, that you can't export anything. What is happening with vegetable production and crops is that they have become localized, since you can't get Gaza produce to Hebron or Hebron produce to Ramallah.

What we conclude from that is we have an agricultural sector that has become a reservoir for labor. It is productive, but not efficient enough, partly because of a lack of investment but mainly because of lack of export markets and accessibility even to local markets. Rising food prices should improve the chances of production, but if there is no access they won't help.

BI: Potentially, then, 60 percent of Palestinians are likely to end up food insecure. What can the government do?

Farsakh: The government has limited resources, cannot increase taxes on the population and depends on customs revenue from Israel. The only avenue it has is international aid. And we already have a lot of international aid, we are among the most subsidized countries in the world, about a quarter of GDP, so the PA cannot do much.

What it can do is try to solve the political crisis and the crisis of negotiations, but it seems to me at this particular junction that Annapolis is not going anywhere and the Israelis don't seem very interested in reaching a solution. If the PA wants to do something it should consider dissolving itself and let the international community and Israel take responsibility for what is going on. This of course would be a major political and economic move. I don't think the situation will improve as a result, in fact it will worsen before it improves. But I think we have reached a stalemate on the economic, political and diplomatic level and maybe it will do more good in the long run to dissolve the PA than to continue in this way.

BI: Do you think the rising food prices alone could force such a situation?

Farsakh: We have to see what are the manifestations of rising food prices. In Egypt rising food prices will lead to demonstrations. In the West Bank I do not see that rising food prices will lead to strikes or demonstrations against the PA because everybody is aware of the limitations of the PA. We had that crisis last year when the Hamas government was suffering from the international boycott and still is in Gaza. The real question is will the food crisis create a situation as bad and alarming as the international boycott. I do not see that happening in the short run, though it may happen in the long run.- Published 29/5/2008 © bitterlemons-international.org

Leila Farsakh is a US-based political economist currently teaching at Birzeit University.

Egypt: social unrest and deteriorating politics
Amr Hamzawy

In diverse Arab countries such as Morocco, Egypt and Jordan, a burgeoning social crisis caused by out-of-control global inflationary pressures, a crippled welfare system and persisting high levels of poverty and unemployment is further complicated by a broader political deterioration. Taken together, the simultaneous trajectories of social unrest and deteriorating politics call into question the prospects of stability in those countries.

Over the past two years, Egypt has come to be a case in point for the dangers inherent in that kind of development. On April 6, 2008 a number of civil society organizations including independent unions, syndicates and networks of young activists--some of whom belong to political parties--organized a national strike day to express their frustration with deteriorating social and economic conditions. Although government security forces contained the strike in most Egyptian cities, they could not stop workers in state-owned industrial complexes in Mahalla, a city in northern Egypt, from orchestrating massive demonstrations. There were numerous reports of violent confrontations and clashes between thousands of protesters and security forces that went on for two days.

Workers' strikes have become frequent in Egypt. Hundreds of strikes and protests have been carried out over the past two years, but none escalated to the levels witnessed in early April. The primary demand of workers has been to link their wages to commodity price levels. Inflation has been a problem for many years in Egypt, settling at around eight percent in late 2007, according to the International Monetary Fund. Earlier in March, unanticipated shortages of subsidized bread caused considerable popular agitation, prompting President Husni Mubarak to instruct army bakeries to boost their production.

The social unrest of the last two years is quite different from what Egypt witnessed briefly between 2004 and 2005. Back then, street level outbursts were the result of reform-driven activism led by several opposition movements, most notably the Muslim Brotherhood and Kifaya. By and large, the present unrest is a reaction to the acute decline in socio-economic conditions, and its instigators do not appear to have a well thought-out agenda.

The regime has consistently tried to contain the situation through a combination of repressive and conciliatory measures. Government officials have issued warnings to industrial workers that participation in strikes or any other protest activities would cost them their jobs. More often than not, security forces have been deployed to preempt or smother strikes. At times, however, the regime has yielded to certain demands such as increases in wages, expanding the beneficiary pool of state welfare programs and sustaining some subsidies. Most recently, President Mubarak announced a 30 percent increase in public sector wages. Yet the persistence of protest activities demonstrates the seriousness of popular discontent and the failure of both oppressive methods and minor peace-making concessions to mollify the public.

The Egyptian regime's lack of an overall strategy to address the country's enduring troubles extends far beyond the economic sphere. The regime seems to have abandoned the often implemented option of using political reforms to defuse socio-economic tensions. The strong showing of the Muslim Brotherhood in the parliamentary elections of 2005, when its candidates won 20 percent of the seats of the People's Assembly (the lower chamber of the Egyptian parliament), tested the regime's grip on power and led it to crack down on the political activism of the years before. In 2006, the regime postponed local elections, extended the state of emergency and repressed opposition activists. And it suppressed efforts by the country's judiciary to accrue some measure of independence. The Muslim Brotherhood also became a target: in 2006 and 2007, the regime launched a wave of arrests targeting the movement's high-ranking leaders and financiers.

The resultant weakness of the organized political opposition is further augmenting social unrest. The capacity of opposition groups to operate effectively has been terribly deflated. The consequence of this condition has been a massive increase in spontaneous, unstructured outbreaks of civil disobedience. Leading these discordant waves of activism are labor leaders, human rights activists, bloggers and young journalists. They have roots that stretch across the ideological spectrum and are remarkably responsive to the public's sentiments. In spite of attempts by some political parties to develop links to these activists, they have remained largely autonomous. Nevertheless, this dispersion of energy from the center of the political system to its peripheries has also obstructed the emergence of a coherent movement with a clear set of demands.

Egypt is trapped in an unenviable position, characterized by growing social unrest and political deterioration. Choices made by the Egyptian regime will most likely determine whether the current social convulsions will be followed by more instability or, if matters are handled prudently, sustainable recovery. In all likelihood, the option of moderating the perilous effects of economic strain by orchestrating a new wave of political reforms is one that the regime will hesitate to embrace at this stage. The concern that such openings might make worse the odds of the approaching presidential succession (Mubarak turned 80 on May 4 and his fifth terms ends in 2011) seems to surpass any other considerations.

The current resurgence of protest activism constitutes the one promising development in Egyptian political life. But progress on the street needs to be complemented by real progress in the performance of organized opposition forces in the political process. Notwithstanding the fact that this progress is largely predicated on the regime's willingness to welcome the opposition's input, it is also dependent on the quality of the opposition. Only through active, disciplined, credible and committed participation in the political process can organized political forces in Egypt effectively advance the reform agenda and push for sensible and comprehensive policies that address the socio-economic exigencies at hand.- Published 29/5/2008 © bitterlemons-international.org

Amr Hamzawy is a senior associate at the Carnegie Endowment for International Peace, Washington, DC.

The fallout from rising prices in Jordan
Yusuf Mansur

Jordan's enduring dilemma of the dual challenge of endemic high poverty and unemployment rates is joined by a third equally dangerous contingent, inflation, especially as global food prices rise. The political impact and reactions to this third test of the political-economic environment are hard to gauge.

Ordinary Jordanians have become numb to the double-digit poverty and unemployment rates (around 14 percent each). These rates have hovered steady over the last decade without any marked improvement. Hence, there is a settled realization in the Jordanian psyche that little can be done. Past and present promises of improvement and a departure from what has sadly become recognized as the status quo quickly hit the receptacle of unfulfilled dreams and soon became forgotten. The frequent changes of guard, the similarity of promises from one cabinet to the next and their dismal achievements have helped douse the possibility of emergence from the catacomb of policy ineffectiveness. Blame, played like a broken record, is fashionably but quietly heaped upon those that preceded the incumbents.

Inflation, however, is a new phenomenon and a challenge that increases the severity of the other two. The consumer price index rose by almost 11 percent in the first quarter and an inflation rate of 10 percent is expected for 2008. Not only are prices too high in Jordan, which according to some sources is the region's most globalized economy, but the price increase is due to rising food and energy prices, thus severely impacting the poor. Moreover, in a country where income has not grown while income disparities have, inflation erodes the purchasing power of all. Since inflation is mainly in food prices, low income groups, the poor and the unemployed will be further immiserized at a time when the majority of the people have not benefited from the fruits of the economic growth of the past four years. As in the rest of the world, the gap between rich and poor has risen in Jordan.

In addition, unlike poverty and unemployment, inflation rises fast and knows no ceiling. The inflation being imported and thus beyond the control of the central banks of developing and transition economies like Jordan's, highlights the foibles of governments that espoused globalization and rushed into freeing trade without buttressing and protecting the local economy from the risks of globalization.

The nagging question in the streets is quite sophisticated: how could bureaucrats, elected or appointed--in the case of Jordan the latter--believe that they would possess the necessary acumen and resources to muster the rewards and survive the ever-rising globalization risks when they are unable to manage Jordan's small economy. Contrary to the supply-side view, it is this question that has trickled down to the poor and laypeople that had never pondered macroeconomic issues, nor wealth and welfare. The upshot is manifest discontent and rising poverty. Consequently, and fearing embarrassment, no new study is being commissioned of the poverty line in Jordan, which has not been updated since 2002.

The dangerous tripod of inflation, poverty and unemployment has not gone unnoticed by the six-month old Jordanian cabinet, which captured the sympathy of all Jordanians for having arrived at the scene with the three problems already out of Pandora's box. However, such sympathy may soon turn into apathy if inflation continues to bite into the livelihoods of Jordanians; last year the average household consumed 20 percent more than it earned, not a sustainable phenomena.

Poverty pockets, which are highly concentrated in the rural areas, are assured through spontaneous injections and official visits that relief is on the way. Attempts by the new cabinet to curb inflation by encouraging imports of previously protected commodities, removing sales tax and customs on certain imports, establishing parallel markets and better informing the public, have held temporary relief and are costly to maintain at a time when the budget deficit is at an all time high and the budget itself is in excess of 50 percent of GDP.

Jordan, a country where security and stability are prized and prioritized above all else, will surely survive the era of this unholy trinity. The political dimension of such challenges has translated into an obvious dismay that has materialized into whispered, albeit heated gossip and accusations at the street level and in the parliament. It is, therefore, safe to say that the riots seen in Egypt, Yemen and other countries will not be replicated in Jordan. Furthermore, since bread is still affordable, the Ma'an riots of the 1990s are not likely to be repeated.

As in the past, when the challenges become too foreboding, scapegoats will be found and officially sacrificed. Concomitantly, there is hope within official circles that 2009 will be a deflationary year, that globalization, which brought forth inflation, will on its own resolve the problem by deflating prices domestically and that the year of rising prices will be soon forgotten: a curious wish by the neo-liberals for Adam Smith's "invisible hand".- Published 29/5/2008 © bitterlemons-international.org

Yusuf Mansur is the managing partner of the Envision Consulting Group (EnConsult) and former CEO of the Jordan Agency for Enterprise and Investment Development.



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