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
Moreover, the political whirlwind will not be contained in the
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
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
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
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
EGYPT IS far from alone. Take Syria. There, too, capital is
fleeing the country as the government rushes to quell the mass anti-regime
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
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
In the event the regime is overthrown, a successor
regime will face the sure prospect of economic collapse, much as the Egyptian
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
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
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
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.
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
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
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
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.
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
To emerge safely from what is coming, Israel needs to hunker down and
prepare for the worst.
Relevant to your professional network? Please share on Linkedin