The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Monday, 9 May 2011

Water and Food are Strategic Resources

When people talk about strategic resources, they typically mean a few bits of materiel reserved for use in the event of the outbreak of war: uranium, titanium, and oil lead the pack. Oil is the sine qua non of modern strategic resources. Without it, no military can operate. It has been so since the Second World War. But before the WWII there was a saying: "an army marches on its stomach". Did we forget that adage, or was it simply taken for granted that so long as we could fuel the lines of supply there would be enough food? The latter sounds right to me. Food is taken for granted, whereas before, it was central to military affairs. How now? Is food important as a strategic resource? Does its scarcity have the ability to destabilise populations? Are national policies put in place to control the distribution of and access to food? Yes, yes, and yes.

Recent events in the Middle East have pointed to a deep and abiding need for democratic reform. They are signs that grassroots populist movements can rise and demand regime change. But what methods are used to keep down these uprisings? Well, there seems to be a clear pattern:

2008 MAR: Yemen - "In March 2008, in the middle of a world food price crisis, the cost of wheat more than doubled in the space of four months, leading to weeks of protests and riots across the country. In the past two weeks, the price of wheat in Yemen has risen by 45 percent, and the cost of rice by 22 percent, according to the World Food Programme. The value of the Yemeni rial is also in decline, while the U.S. dollar is increasingly difficult to come by in the capital."
2008 JUN 16: World Bank gives Yemen $100M to lower food prices (the Houthi Rebellion has gone on since 2004, but aid came only after food riots in March)
2011 JAN 16: Kuwaiti Emir Sheikh Sabah al-Ahmad al-Sabah orders food distributed for free for 14 months. As of yet, no Kuwaiti uprising has materialised.
2011 JAN 20: Jordanian Prime Minister Samir Zaid al-Rifai announces increased subsidies on heating oil and food.

And so on.

Even after political change has been won, there is a further problem to be faced: political freedom does not emancipate the poor from poverty. In Egypt now, the decision to end subsidies may triple the cost of staple bread. Subsidies are touted by governments as a way to redistribute the wealth and give the poor more buying power when it comes to the daily necessities. I can understand. I have said it before, the basis of any decision to work for a low wage is predicated on whether I can feed my babies or not. The inability to do so would instil me with vitriolic rage or abject hopelessness. The haunt of hunger is the home of hyperbole. Given the opportunity to live on a meagre wage, so long as my kids were fed, I might choose to eat bitterness and shovel my 16 tons. Subsidies might keep the peace, and ensure adequate food gets distributed to the poor. Still, something is missing from this picture.

Subsidies are funny creatures. We think that they are geared at helping people live from day to day, helping people feed their families. But who actually benefits from them? Now that we've seen the natural progression of thinking for a regular ordinary bloke trying to feed his kids - from despondency to the capacity to bear poverty - what can we truly say subsidies have done? They've driven down the cost of labour, that's what. Subsidies are passed directly to corporations by increasing the public's capacity to bear poverty. The alternative, as we've seen, is rioting. But is it the fault of the government for being unable to provide adequate subsidies, or is it a problem of labour being underpriced?

Subsidies may be defined as helping the poor buy food, but let's call them what they really are: a stopgap measure to address the structural failure of an economy to distribute wealth fairly. Price controls on foodstuffs (and other consumables) are the same thing. Why should the nation tread the razor's edge between deficit spending and riots? In a constant balancing act between two extremes, the key is not to play one side off against the other, but to move the razor. I would much rather balance between a wall-mounted LCD display and not having a wall-mounted LCD display rather than balance poverty against hunger.

And yet, here we are. Subsidies were necessitated by wages that never increased while the price of everything else did. Therein lies the secret to the source of a great deal of hyper-wealth: the disparity between growth in wages and growth in prices. If wages had increased with the price of food - an essential input to labour - then I wit there would be far fewer hyper-wealthy individuals out there, and governments would have less of a deficit. As it stands, we've eaten ourselves into a hole... and done so by spening the money we should have had lying around to dig ourselves out.

So, food fuels labour, labour fuels industry, industry fuels growth, and growth fuels the economy, right? Well, except that growth of the economy will equal greater consumption of those basic consumables, which makes them more scarce, which should make them higher-priced. But if the join between food and labour is based on a subsidised price, then that price signal will not be correctly interpreted by the market. The cost of food stays low, labour stays low, industry stays low, but growth continues (and makes the wealthy extra wealthy!). Which means the price of stuff should be higher... but there's this fantastical wall of subsidy that makes the price of food imaginary. So consumption increases because of growth, and growth doesn't cause a price increase in food, so production of food has to be artificially stimulated to keep up with growth. If price increase doesn't happen, production increase isn't naturally incentivised! The government has to do it itself. Enter agricultural subsidies.

What's already a drain on the treasury has become an even greater drain, precisely because the treasury was being drained to begin with. In this way, an ongoing cost begets and ongoing cost. The government gets trapped propping up its labour and agricultural sector, and where does the money go? Industrial profits. Agricultural subsidies increase supply of food, food subsidies maintain the low price of food, which maintains the low price of labour, which allows for a bigger profit margin for industry because while the cost of goods is going up, the cost of labour stays the same. Subsidies are a band-aid solution to a structural problem. If you leave a bandage on for too long, your wound can fester, but ripping it off is a temporary pain. Sadly, there isn't a single government in the world that wants to be the one that stops subsidies. In an autocratic system, you've already seen what happens... and when the proverbial faeces hit the proverbial impeller, the leaders there reverted to doing what's always worked before when there were problems with the plebians: they gave them bread. This last time, it didn't work (except in Kuwait). In a democracy, the government that removes subsidies doesn't get re-elected. There we are, stuck in a pickle where food prices can't increase to temper demand, where the government can't pull out of the incessant need to subsidise food, and can't stop artificially stimulating the supply of food. Until now.

Now, we hit a wall. Now we tap out our aquifers. The Middle East is the natural place to begin the adjustment to the reality of market forces because the aquifers won't replenish themselves. With subsidies reaching the extent of their ability to keep up with actual food prices, food production is getting to the point where artificial stimulation (including the massive irrigation projects of the gulf and Maghreb) by money can't push yields any higher, and growth runs into the wall of economic reality: eventually, the market undergoes a correction.

The Arab Spring is a great and noble thing, but we need to learn our lessons from it as well. This is certainly more than a market correction - it was a humanitarian correction - and it continues as I write. But Egypt and Tunisia are the first to emerge free of political oppression only to find economic repression there waiting for them. The first to find out that all those subsidies and economic smoke and mirrors cost ungodly amounts of money. The correction happens now, and higher wages are going to be the order of the day, or history will repeat itself. The wall that economic growth is hitting is not imaginary; it is quite real. Only when the real cost of food is known will it become a matter of importance. As the Middle East has shown, food is a strategic resource. We can't afford not to pay for it.

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