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The “China Syndrome”: An Apology for Economic Injustice

As a red Toyota pickup made its daily delivery, masses of people gathered outside the brand-new blue and white subsidized bread kiosk near my building.  A rusty and dented Fiat also delivered unsubsidized bread to the small grocery store across the street at the same time.  Last Thursday, Egypt’s Central Agency for Public Mobilization and Statistics (CAPMAS) noted that urban inflation had risen to an annual rate of 16.4%.  This increase has been driven by a 22% increase in food prices just this year, but unsubsidized bread in particular has seen its price swell from 25 piastres (four US cents) per loaf to just over 33 . . . until today.  After the Fiat unloaded its cargo, I asked today’s price.  The response was “50 piastres.”  Some people near me who heard that simply crossed the street to enter the line for subsidized bread.

The underlying trend in global commodity prices has certainly been driven by people fleeing dollar-denominated financial assets as well as the rising cost of fuel to transport goods, as duly noted by the business press.  But the media tend to put the most blame on China (and to a lesser extent India) for the rising price of just about everything.  The “China Syndrome” explanation of inflation, more than any other pseudo explanation, conceals the truth about class conflict in the context of global economic stagnation.

Evidence of the weakness of the “China Syndrome” explanation is to be found in the reality that some commodity prices have remained largely stagnant over recent years.  For instance, one would think that the global price of meats would also be spiking given the often parroted influence of Asian demand on rising fuel costs and the rising price of grain as an input for meat production.  This is not the case, however.  In fact, a recently published FAO food price index shows only a 15% increase in global meat prices over the last year while “oils and cereals” rose in price by about 80%.  The obvious contrast between international meat and grain prices is even more startling if we examine data back to 2005.  These trends clearly do not reflect the general market influence of a swelling Asian middle class but rather changes in global consumption patterns caused by a rising sense of economic and political insecurity. 

This general insecurity is increasingly evident in Egypt.  The bread shortages here have come about not because of Chinese demand (in fact China imports only a small portion of grain) or a drought in Australia or an unexpected freeze in Canada, but rather because economic forces and political uncertainties have weighed increasingly on the minds and wallets of Egypt’s middle class.  Those who can no longer afford what they normally buy, or fear for their ability to do so in the future, have made the move to “inferior” goods — basic goods such as rice, corn . . . and especially subsidized bread.  It should come as no surprise then that beef, poultry, pork, and lamb have become domestically and globally cheaper relative to these commodities.

The cause of shortages in Egypt, however, is not only the result of middle-class insecurity.  The situation here is exacerbated by the reality that workers have been unable to raise their wages in response to price increases except when the regime occasionally grants public-sector raises.  Just a few days ago in an effort to maintain his government’s viability, President Mubarak announced a 30% pay increase for public-sector workers (about 5.7 million of them), which would barely help maintain the economic status quo for roughly one fourth of Egypt’s civilian workforce.  At the same time, the regime raised the petrol and diesel prices by 40 to 50 percent, the natural gas price by 58 percent, and the cigarette price by 10 percent.  Mubarak’s prayer is that these price increases will yield the necessary 19.6 billion Egyptian pounds (that is 3.6 billion US dollars) to fund the public-sector pay raise, in case the usual government response to worker demands — overwhelming police presence as was seen during the April 6 general strike and in response to Mahalla workers’ acitons — alone fails to keep the regime in power.

Economic literature has documented the weak bargaining position of Egyptian labor.  In 1998, Gaurav Datt and Jennifer Olmstead published an analysis of agricultural wages and food prices in Egypt using data from 1976 to 1993.  Investigating the responsiveness of rural wages to changes in food prices (under much less extreme political and economic conditions than today), they found that the nominal wage response is delayed for literally years.  In fact, it requires three years for an Egyptian agricultural worker to recover two thirds of his or her real wage after a food price increase.  By year seven, the worker is still worse off (in real terms) than before.  Given the above, it is not difficult to predict the Egyptian economic, social, and political meltdown in the next few years if the government persists in its most peculiar habit of reducing subsidies on final goods and inputs, generating demand-pull inflation by increasing public-sector incomes, and suppressing the wages of other workers who are less able to make demands on the government — all at the same time, in an environment of dramatically rising global prices.

Given the inability of most workers to raise wages to match inflation in the face of rising food insecurity, there are few alternatives for them except to move toward progressively inferior consumer goods, thus raising their prices, and therefore placing more economic pressures upon those already at the bottom of the socioeconomic ladder.  I couldn’t help but consider this as I witnessed Egyptians crossing my street toward the subsidized bread kiosk after being informed of the latest price increase of unsubsidized bread.  The link between protracted and pointless Middle East conflicts, increasing global petrol and food prices, domestic political repression, and workers’  inability to obtain cost-of-living increases is likely very clear to Egyptians who are forced to line up for subsidized bread, no matter how much the media inflate the “China Syndrome.”

John William Salevurakis is Assistant Professor at the Department of Economics, American University in Cairo.

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