Rising Food Prices and the Revolutions in the Middle East
February 21, 2011
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First, I want to say that I agree with the generally-accepted idea that rising food prices are a huge problem for places like the Middle East, because the cost of food represents a large percentage of the average person's income in those countries. And I believe that food prices may have been the straw that broke the camel's back, in the sense that they acted as a catalyst for the uprisings that are now taking place. This certainly was not the only catalyst, but still a significant one.
Bloggers on various sites have been suggesting that QE2 is responsible for these rising food prices, and we can blame it all on Bernanke. I'm not a strong supporter of QE2 by any means, but the idea of blaming everything on Bernanke just seemed a little too easy and politically convenient... so I decided to do a little research to find the true reasons for the rises in food prices.
Information on food prices can be found on the FAO website. From the graphs on their homepage you can see that the rises in food prices began back in early 2007. They reached a peak in 2008, before dropping along with all other commodities during the economic crisis, and then increasing again in 2009-2010. But it is not a new problem, and it did not begin in 2010.
The 2008 spike in food prices has been studied in detail, and the FAO examined the causes for it in their 2008 report. The FAO passingly mentions US dollar weakness in their 2010 report, but they certainly do not identify it as a major contributor to the crisis. The causes that they identified in 2010 were pretty much identical to what they saw in 2008: increased demand from emerging markets, higher fertilizer prices, and unfavorable conditions for agriculture (floods, draughts, cyclones, etc).
Let's look at currencies. Many people don't realize that in 2010 the Egyptian Pound sharply decreased in value against the US dollar. If food prices look high right now in US dollars, just imagine how much worse it would be if you held Egyptian currency. So it seems that food inflation in Egypt has more to do with the Egyptian economy than it does with US policies. Emerging-market countries often have high inflation rates... that's not Bernanke's fault.
Another factor that compounded Egypt's problems was their loss of oil revenues. As the author explains in this article, the unrest in Egypt began at essentially the exact moment when their net oil exports dropped to zero. Suffice to say, I don't believe in coincidences.
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