Column One: Caution: Storm approaching
By CAROLINE B. GLICK, The Jerusalem Post
July 15, 2011
No doubt millions of Arabs are upset about freedom deficit in Arab
lands. But the fact is that economics has played a decisive role.
It was seven months ago that Mohammed Bouazizi, a vegetable peddler in
Tunisia, set himself and the Arab world on fire. The 26- year-old
staged his suicidal protest on the steps of the local city hall after
a municipal inspector took away his unlicensed vegetable cart, thus
denying him the ability to feed his family of eight.
Most depictions of the Arab revolutions that followed his act have
cast them as struggles for freedom and good government. These
depictions miss the main cause of these political upheavals. No doubt
millions of Arabs are upset about the freedom deficit in Arab lands.
But the fact is that economics has played a decisive role in all of
them.
In Bouazizi’s case, his self-immolation was provoked by financial
desperation. And if current trends continue, the revolutionary ferment
we have seen so far is only the tip of the iceberg.
Moreover, the political whirlwind will not be contained in the Middle East.
Most of the news coming out about Egypt today emanates from Cairo’s
Tahrir Square. There the protesters continue to demand ousted
president Hosni Mubarak’s head on a platter alongside the skulls of
his sons, business associates, advisors and everyone else who
prospered under his rule. While the supposedly liberal democratic
protesters’ swift descent into bloodlust is no doubt worth noting, the
main reason these protesters continue to gain so much international
attention is because they are easy to find. A reporter looking for a
story’s failsafe option is to mosey on over to the square and put a
microphone into the crowd.
But while easily accessible, the action at Tahrir Square is not
Egypt’s most important story. The most important, strategically
consequential story is that Egypt is rapidly going broke. By the end
of the year, the military dictatorship will likely not only default on
Egypt’s loans. Field Marshal Tantawi and his deputies will almost
certainly be unable to feed the Egyptian people.
Some raw statistics are in order here.
Among Egypt’s population of 80 million, some 32 million are
illiterate. They engage in subsistence farming that is too inefficient
to support them. Egypt needs to import half of its food.
As David Goldman, (aka Spengler), reported in Asia Times Online, in
May the International Monetary Fund warned of the impending economic
collapse of non-oil exporting Arab countries saying, “In the current
baseline scenario the external financing needs of the region’s oil
importers is projected to exceed $160 billion during 2011-13.” Goldman
noted, “That’s almost three years’ worth of Egypt’s total annual
imports as of 2010.”
Since Mubarak was overthrown in February, Egypt’s foreign currency
reserves have plummeted from $36b. to $25b.-28b. Last month, Tantawi
rejected an IMF loan offer of $3b., claiming he would not accept any
conditions on the loans. Instead he accepted $4b. in loans from Saudi
Arabia and another $2.34b. from the Gulf states.
And still, Egypt’s foreign currency reserves are being washed away. As
Goldman explained, the problem is capital flight. Due in no small part
to the protesters in Tahrir Square calling for the arrest of all those
who did business with the former regime, Egypt’s wealthy and foreign
investors are taking their money out of the country.
At the Arab Banking Summit in Rome last month, Jordan’s Finance
Minister Mohammed Abu Hammour warned, “There is capital flight and
$500 million a week is leaving the Arab world.”
According to Goldman, “Although Hammour did not mention countries in
his talk... most of the capital flight is coming from Egypt, and at an
annual rate roughly equal to Egypt’s remaining reserves.”
What this means is that in a few short months, Egypt will be unable to
pay for its imports. And consequently, it will be unable to feed its
people.
EGYPT IS far from alone. Take Syria. There, too, capital is fleeing
the country as the government rushes to quell the mass anti-regime
protests.
Just as Egyptian and Tunisian protesters hoped that a new regime would
bring them more freedom, so the mass protests sweeping Syria are in
part due to politics. But like in Egypt and Tunisia, Syria’s economic
woes are dictating much of what is happening on the ground and will
continue to do so for the foreseeable future.
Last month, Syrian President Bashar Assad gave a speech warning of
“weakness or collapse of the Syrian economy.” As a report last month
by Reuters explained, the immediate impact of Assad’s speech was
capital flight and the devaluation of the Syrian pound by 8 percent.
For the past decade, Assad has been trying to liberalize the Syrian
economy. He enacted some free market reforms, opened a stock exchange
and attempted to draw foreign investment to the country. While largely
unsuccessful in alleviating Syria’s massive poverty, these reforms did
enable the country a modest growth rate of around 2.5% per year.
In response to the mass protests threatening his regime, Assad has
effectively ended his experiment with the free market. He fired his
government minister in charge of the economic reforms and put all the
projects on hold. Instead, according to a report this week in Syria
Today, the government has steeply increased public sector wages and
offered 100,000 temporary workers full-time contracts. The Syrian
government also announced a 25% cut in the price of diesel fuel, at a
cost to the government of $527m. per year.
Boasting foreign currency reserves of $18b., the Syrian regime
announced it would be using these reserves to pay for the increased
governmental outlays. But as Reuters reported, the government has been
forced to spend $70m.- $80m. a week to buck up the local currency. So
between protecting the Syrian pound and paying for political loyalty,
the Assad regime is quickly drying up Syria’s treasury.
In the event the regime is overthrown, a successor regime will face
the sure prospect of economic collapse, much as the Egyptian regime
does.
And in the event that Assad remains in power, he will continue to reap
the economic whirlwind of what he has sown in the form of political
instability and violence.
What this means is that we can expect continued political turmoil in
both countries as they are consumed by debt and tens of millions of
people face the prospect of starvation. This political turmoil can be
expected to give rise to dangerous if unknowable military
developments.
Poor Arab nations such as Egypt and Syria are far from the only ones
facing economic disaster.
The $3b. loan the IMF offered Egypt may be among the last loans of
that magnitude the IMF is able to offer because quite simply, European
lenders are themselves staring into the economic abyss.
Greece’s debt crisis is not a local problem. It now appears
increasingly likely that the EU is going to have to accept Greece
defaulting on at least part of its debt. And the ramifications of
Greek default on the European and US banking systems are largely
unknowable. This is the case because as Megan McArdle at The Atlantic
wrote this week, the amount of Greek debt held by European and US
banks is difficult to assess.
WORSE STILL, the banking crisis will only intensify in the wake of a
Greek default. Debt pressure on Italy, Ireland, Spain and Portugal,
which are all also on the brink of defaulting on their debts, will
grow. Italy is Europe’s fourth largest economy. Its debt is about the
size of Germany’s.
If Italy goes into default, the implications for the European and US
banking systems – and for their economies generally – will be
devastating.
The current debt-ceiling negotiations between US President Barack
Obama and the Republican congressional leadership have made it
apparent that Obama is ideologically committed to increasing
government spending and taxes in the face of a weak economy. If Obama
is reelected next year, the dire implications of four more years of
his economic policies for the US and global economies cannot be
overstated.
Due to the economic policies implemented by Prime Minister Binyamin
Netanyahu since his first tenure as prime minister in 1996-99, in the
face of this economic disaster, Israel is likely to find itself in the
unlikely position of standing along China and India as among the only
stable, growing economies in the world. Israel’s banking sector is
largely unexposed to European debt. Israel’s gross external debt is
44% of GDP. This compares well not only to European debt levels of
well over 100% of GDP but to the US debt level, which stands at 98% of
GDP.
Assuming the government does not bend to populist pressure and take
economically hazardous steps like reducing the work week to four days,
Israel’s economy is likely to remain one of the country’s most
valuable strategic assets. Just as economic prosperity allowed Israel
to absorb the cost of the Second Lebanon War with barely a hiccup, so
continued economic growth will play a key role in protecting it from
the economically induced political upheavals likely to ensue
throughout much of the Arab world and Europe.
Aside from remaining economically responsible, as Israel approaches
the coming storms it is important for it to act with utmost caution
politically. It must adopt policies that provide it with the most
maneuver room and the greatest deterrent force.
First and foremost, this means that it is imperative that Israel not
commit itself to any agreements with any Arab regime. In 1977, the
Camp David Agreement with then-Egyptian president Anwar Sadat, in
which Israel surrendered the strategically invaluable Sinai for a
peace treaty, seemed like a reasonable gamble.
In 2011, a similar agreement with Assad or with the Palestinian
Authority, (whose budget is largely financed from international aid),
would be the height of strategic insanity.
Beyond that, with the rising double specter of Egyptian economic
collapse and the rise of the Muslim Brotherhood to power, Israel must
prepare for the prospect of war with Egypt. Recently it was reported
that IDF Chief of General Staff Lt.-Gen. Benny Gantz has opted to
spread over several years Israel’s military preparations for a return
to hostilities with Egypt. Gantz’s decision reportedly is due to his
desire to avoid provoking Egypt with a rapid expansion of the IDF’s
order of battle.
Gantz’s caution is understandable. But it is unacceptable. Given the
escalating threats emanating from Egypt – not the least of which is
the expanding security vacuum in Sinai – Israel must prepare for war
now.
So, too, with the US’s weak economy, Obama’s Muslim
Brotherhood-friendly foreign policy, and Europe’s history of
responding to economic hardship with xenophobia, Israel’s need to
develop the means of militarily defending itself from a cascade of
emerging threats becomes all the more apparent.
The economic storms may pass by Israel. But the political tempests
they unleash will reach us.
To emerge safely from what is coming, Israel needs to hunker down and
prepare for the worst.
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