Can Developing Nations Avoid Catastrophe?

Advocates for free markets and free enterprise will assert that if political preconditions can be established to nurture these freedoms, prosperity and liberty will increase, and population growth rates will voluntarily decrease in favor of education and career aspirations. The so-called developed nations nearly all have embraced the fundamental principals of free markets and free enterprise and now confront new challenges – how to provide for aging populations, what environmental goals to prioritize, what investments to make in emerging technologies, and how to manage their floating currencies, freewheeling commodities markets, and burgeoning debt. It is important for members of the developed world to understand what a luxury it is to have such challenges.

Using Egypt as an example, this post will present data on their population trends and agricultural production, comparing that to how much of their household income is spent on food, global food prices, and their balance of trade. These hard numbers will underscore how daunting the task may be for many developing nations to emerge economically.

While everywhere in the world the rate of population increase is slowing, in nations like Egypt the projected slowdown in population growth lags well behind the rest of the world. Projections that place the global population maximum occurring sometime between 2030 and 2050, at a total of somewhere between 8.0 and 10.0 billion people, generally view large developing nations such as Egypt, Pakistan, India, Indonesia and Nigeria as the wild cards. How quickly they develop economically is considered the key to how soon their populations level off. Here is the current projections for Egypt from the U.S. Census Bureau International Data Base:

As the above chart indicates, Egypt’s population is projected to double between 1995 and 2025, a period of only 30 years. Currently there are 82 million people living in Egypt, and according to the best data we’ve got, their population increases at a rate of 2.0 million people per year. So how much food does Egypt produce and consume? According to IndexMundi, whose mission is “to turn raw data from all over the world into useful information for a global audience,” using data provided by the U.S. Dept. of Agriculture, in 2005 Egypt produced 5,860,000 metric tons of corn and consumed 10,300,000 metric tons of corn. Similarly, in 2005 Egypt produced 4,130,000 MT of rice and consumed 3,300,000 MT of rice, and they produced 8,184,000 MT of wheat and consumed 14,800,000 MT of wheat. (ref. IndexMundi/Egypt/Agriculture).

If you review the complete list of major agricultural commodities the Egyptians rely on for nourishment, you will see that corn, rice and wheat are by far the most significant. In 2005 Egypt imported 10,226,000 metric tons of critical grains, and in 2011 there are an additional 10 million more people living in Egypt. Have they expanded their agricultural production? How? Where? Egypt in 2005 was only producing 64% of its critical grains domestically, and it is unlikely that percentage has improved. So how does Egypt pay for this food?

According to Economy Watch’s “Egypt Trade, Exports and Imports” data compilation, “Egypt’s trade is characterized by huge trade deficits. The economy is highly dependent on oil exports. Since the 1990s, the government has pioneered several economic reforms through foreign donor aid. However, measurable benefits of these economic reforms are yet to be seen.” They go on to state that in 2009 Egypt’s exports were $29 billion and their imports were $56 billion, and that “Egypt has had a negative balance of trade since the 1980s.” Put another way, Egypt had a trade deficit in 2009 of $27 billion, which equates to $329 per capita. If that doesn’t sound like a lot, remember Egypt’s per capita income in 2009 was only about $5,700, and Egypt has been borrowing money every year for over 30 years. A rough calculation based on those variables would suggest that Egypt’s accumulated trade deficit over the past generation now totals more than twice the total annual income of the average Egyptian. Will investments make up the difference forever? And is foreign investment, hence foreign ownership, a desirable outcome for the Egyptian people?

What about food prices? Clearly if Egyptians import nearly 40% of their food, a change in global food prices is going to impact them severely, especially since they have low per capita incomes. The next chart, using data from the International Monetary Fund, shows what percentage of household income is spent on food in each nation in the world:

As the above chart indicates, in 2007, the average Egyptian was spending over 50% of their entire earnings just to buy food. This is unthinkable in nations like the United States, where only about 10% of the average income is used to pay for food. If the price of food doubles in the United States, the average household buys 10% less of something else. If the price of food doubles in Egypt, the average household spends 100% of their money on food. From the USDA, compiled by IndexMundi, here are price trends for corn, rice, and wheat for the last six months:

Summarizing these tables, in the last six months the global price for corn has increased from $166 to $253 per MT, rice has increased in price from $471 to $533 per MT, and wheat has increased in price from $197 to $308 per MT. Put another way, if all Egyptians ate were corn, rice and wheat, instead of spending 50% of the average household income on food, they would spend 100% of the average household income on food.

A deeper analysis of the Egyptian economy will undoubtedly uncover examples of resilience that ensure the apocalyptic scenarios that crude extrapolations may conjure are unlikely. Human adaptability even in repressive environments cannot be underestimated. But as more and more nations develop highly competitive advanced economies, nations left behind like Egypt risk ending up in a position where there is nothing they can export that other nations can’t also export at equal or more competitive prices. These nations risk being unable to secure additional investment because everything of value has already been collateralized or purchased outright. A nation like Egypt, who currently imports twice as much as it exports and has had massive trade deficits for 30+ years, and only grows 60% of the food it needs, is pretty close to that wall.

Once such a nation can no longer import more than it exports, it is forced to find the resources internally to support its population’s basic needs. At that point, one can imagine the horrors of Biafra, Cambodia, or Uganda, visiting these larger states. To avoid such catastrophe, is the only hope for these nations to become permanent wards of the world, failed welfare states that survive only on the perpetual brink of mass starvation? The most challenging question facing the developed world is how to humanely steer developing nations into self-sufficiency, when aid itself can defer or corrupt the process. To state the obvious, there are no simple answers.

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