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The Second Shockwave
While the economic contraction is apparently slowing in the advanced industrial countries and may reach bottom in the not-too-distant future, it's only beginning to gain momentum in the developing world, which was spared the earliest effects of the global meltdown. Because the crisis was largely precipitated by a collapse of the housing market in the United States and the resulting disintegration of financial products derived from the "securitization" of questionable mortgages, most developing nations were unaffected by the early stages of the meltdown, for the simple reason that they possessed few such assets.
But now, as the wealthier nations cease investing in the developing world or acquiring its exports, the crisis is hitting them with a vengeance. On top of this, conditions are deteriorating at a time when severe drought is affecting many key food-producing regions and poor farmers lack the wherewithal to buy seeds, fertilizers, and fuel.
The likely result: A looming food crisis in many areas hit hardest by the global economic meltdown.
Until now, concern over the human impact of the global crisis has largely been focused - understandably so - on unemployment and economic hardship in the United States, Europe, and former Soviet Union. Many stories have appeared on the devastating impact of plant closings, bankruptcies, and home foreclosures on families and communities in these parts of the world. Much less coverage has been devoted to the meltdown's impact on people in the developing world. As the crisis spreads to the poorer countries, however, it's likely that people in these areas will experience hardships every bit as severe as those in the wealthier countries - and, in many cases, far worse.
The greatest worry is that most of the gains achieved in eradicating poverty over the last decade or so will be wiped out, forcing tens or hundreds of millions of people from the working class and the lower rungs of the middle class back into the penury from which they escaped. Equally worrisome is the risk of food scarcity in these areas, resulting in widespread malnutrition, hunger, and starvation. All this is sure to produce vast human misery, sickness, and death, but could also result in social and political unrest of various sorts, including riot, rebellion, and ethnic strife.
The president, Congress, or the mainstream media are not, for the most part, discussing these perils. As before, public interest remains focused on the ways in which the crisis is affecting the United States and the other major industrial powers. But the World Bank, the Food and Agriculture Organization, and U.S. intelligence officials, in three recent reports, are paying increased attention to the prospect of a second economic shockwave, this time affecting the developing world.
Sinking Back Into Penury
In late February, the World Bank staff prepared a background paper for the Group of 20 (G-20) finance ministers meeting held near London on March 13 and 14. Entitled "Swimming Against the Tide: How Developing Countries Are Coping with the Global Crisis," it provides a preliminary assessment of the meltdown's impact on low-income countries (LICs). The picture, though still hazy, is one of deepening gloom.
Most LICs were shielded from the initial impact of the sudden blockage in private capital flows because they have such limited access to such markets. "But while slower to emerge," the report notes, "the impact of the crisis on LICs has been no less significant as the effects have spread through other channels." For example, "many LIC governments rely on disproportionately on revenue from commodity exports, the prices of which have declined sharply along with global demand." Likewise, foreign direct investment is falling, particularly in the natural resource sectors. On top of this, remittances from immigrants in the wealthier countries to their families back home have dropped, erasing an important source of income to poor communities.
Add all this up, and it's likely that "the slowdown in growth will likely deepen the deprivation of the existing poor." In many LICs, moreover, "large numbers of people are clustered just above the poverty line and are therefore particularly vulnerable to economic volatility and temporary slowdowns." As the intensity of the crisis grows, more and more of these people will lose their jobs or their other sources of income (such as those all-important remittances) and so be pushed from above the poverty line to beneath it. The resulting outcome: "The economic crisis is projected to increase poverty by around 46 million people in 2009."
The picture provided in the Bank's G-20 report turns even darker when turning to an assessment of the capacity of affected LICs to address the needs of all these newly impoverished people. Because so much of the income of these countries derives from the sale of commodities - the demand for which has significantly diminished (thus lowering prices) - and because foreign loans and investment have largely dried up, the governments involved have precious little money left to provide emergency services for their country's growing legions of poor. The implications are ominous.
"Absent [public] assistance, households may be forced into the additional sales of assets on which their livelihoods depend [e.g., farm implements and livestock], withdrawal of their children from school, reduced reliance on health care, inadequate diets and resulting malnutrition." The long-run consequences of these desperate actions can be severe: "The decline in nutritional and health status among children who suffer from reduced (or lower-quality) food consumption can be irreversible." Already, "estimates suggest that the food crisis has...caused the number of people suffering from malnutrition to rise by 44 million."
These estimates - an increase in those forced into poverty by 46 million and those suffering from malnutrition by 44 million - far exceed anything reported anywhere else. And they must be viewed as preliminary figures, subject to recalibration based on the duration and severity of the global meltdown. If the Bank's prognostications on the likely impacts of the crisis on the LICs prove accurate, these figures could rise much higher.
Looming Food Insecurity
The spring growing season has now begun in many areas of the world, and worried agricultural experts are already calculating the prospects for food availability later this year. Their worries are well-founded: Last spring and summer, rising oil prices and localized food shortages led to food riots in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Ivory Coast, and Senegal, among other countries. (The price of food is closely tied to the price of oil, as modern agriculture relies heavily on petroleum products for cultivation, harvesting, delivery to markets, pesticides, and artificial fertilizers). Food prices have since fallen somewhat with the decline in petroleum costs, but supplies are also at risk of contraction due to severe drought in many parts of the world - hence the concern over food availability in 2009.
The first assessment of food availability in 2009 is now out, and the prognosis is not promising. Published by the Food and Agricultural Organization (FAO) of the United Nations, the first 2009 report on "Crop Prospects and Food Situation" provides a region-by-region overview of farm output around the world. Although some areas are expected to experience better-than-average harvests, most are not. The report's principal conclusion: "Early indications point to a reduction in global cereal output in 2009 [over 2008]. Smaller plantings and/or adverse weather look likely to bring grain production down in most of the world."
The report's most significant findings are to be found in its overviews of the various growing regions, where two key areas - Asia and South America - are at particular risk because of mounting water scarcity.
In Asia, the report indicated, "severe drought is reported in Northern and Western China, where precipitation levels have been registered at 70-90% below normal." Some 9.5 million hectares (23.5 million acres) of winter wheat - 44% of the total area planted - are reported to be seriously affected in the Hebei, Shandong, Henan, Shanxi, Anhai, Shaanxi, and Gansu provinces. The winter wheat prospects are considered somewhat better in India, but there, too, rainfall has been scarce in recent months, "with 30 of the 36 meteorological subdivisions reporting significantly below-normal rainfall." Put this together, and it appears that cereal production in the world's two most populous nations could be substantially lower in 2009 than in previous years. The resulting rise in grain imports will push up market prices around the world.
Conditions are even worse in the southern part of South America, where a severe drought has gripped Argentina and southern Brazil. In Argentina, wheat production in the 2008-09 growing season, now ending, was the lowest in 20 years and virtually half the record achieved in 2007. This means that wheat exports by Argentina - one of the world's leading producers - will be approximately 60% less than the average for the past five years, sharply reducing supplies available on world markets and pushing world prices even higher.
Corn production is also expected to decline throughout the southern part of South America. "Scarce and erratic precipitation, hot temperatures and relatively high prices of inputs [many derived from petrochemicals] have delayed planting operations and in some cases preventing planting altogether," the FAO report noted. Losses due to drought are reported to range between 40 and 60% in many producing areas of Argentina, and an agricultural emergency has been declared in the departments of Chaco, Entre Ríos, and Santa Fe. Similar conditions are reported in southern Brazil, leading to forecasts of crop declines there as well.
In other key producing areas, water supplies may be adequate but farmers are unable to plant sufficient crops for lack of seeds, fertilizers, and other essential inputs. This is especially true in the so-called "Low-Income, Food-Deficit Countries" (LIFDCs) - nations that are both poor and persistently hungry. One example is Zimbabwe, "where despite satisfactory weather conditions, supplies of quality seed, fertilizer, agricultural chemicals and tillage power and/or unaffordable prices for most agricultural inputs...have put severe constraints on maize [corn] production."
Other countries facing severe food insecurity, due to some combination of poverty, drought, storm damage, and internal disorder include Afghanistan, the Central African Republic, Chad, the Darfur region of Sudan, Democratic Republic of Congo, Eritrea, Ethiopia, the Gaza Strip, Haiti, Iraq, Myanmar (Burma), North Korea, Somalia, and Tajikistan. In these and 17 other LIFDCs, a significant proportion of the population faces persistent hunger, malnutrition, or starvation. This list is sure to grow, moreover, as the effects described in the World Bank report begin to make themselves felt in the months ahead. With more people falling into poverty around the world and food prices rising due to declining crop yields, the numbers of those experiencing food insecurity is bound to grow.
As these effects ripple through the developing world and millions upon millions of people face increasingly harsh conditions, social and political unrest of all forms will increase. Such unrest, involving angry protests over plants closings, mass layoffs, and government austerity measures, has already erupted in Europe, Russia, and China, and now threatens to spread to other areas of the world. Until now, such disorder has been limited to urban riots and rock-throwing incidents, but it is easy to imagine far more violent forms of turmoil - including the outbreak of armed rebellion or civil strife. This danger was raised in a third report worthy of attention, an annual threat assessment delivered by the Director of National Intelligence, Admiral Dennis C. Blair, to the Senate Select Committee on Intelligence on February 12.
Although much of Blair's report focuses on familiar issues like Iran's nuclear aspirations and the war in Afghanistan, it devotes considerable attention to the prospect of social and political turmoil arising from the current economic meltdown. "The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications," the report noted. In tracking this concern, "time is probably our greatest threat...Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period." Of course, the crisis has already lasted more than one year in the United States and appears destined to persist much longer in both the developed and developing areas - and so the danger of "regime-threatening instability" has to be taken very seriously indeed.
In his public testimony, Admiral Blair didn't provide a country-by-country assessment of where he expected to see instability. But he did point to several areas that are at particular risk, including Africa, Latin America, and Central Asia. Speaking of the latter, for example, he noted that Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, "with their highly-personalized politics, weak institutions, and growing inequalities are ill-equipped to deal with the challenges posed by Islamic violent extremism, poor economic development, and problems associated with energy, water, and food distribution." All of these countries, moreover, are particularly vulnerable to the global economic crisis, particularly as remittances fall. "Tajikistan and Kyrgyzstan have heavily depended on migrant worker remittances from both Russia and Kazakhstan for a significant portion of their gross domestic product - up to 45% in the case of Tajikistan - and will be severely affected by the financial crisis."
Economic deprivation is also spurring an increase in crime and piracy in certain areas, Blair testified. This is especially so in parts of West Africa, where poverty and diminished state capacity facilitated the trans-shipment of narcotics from Latin America to Europe. "Traffickers have successfully co-opted government and law-enforcement officials in these countries, further undermining weak and economically impoverished governments who lack adequate law enforcement and judicial capacity," the report notes. Blair pointed in particular to Guinea-Bissau, which he described as "Africa's first narco-state. On March 3, the country's president, João Bernardo Vieira, was killed in what some observers believe was a dispute between rival drug interests.
In more recent testimony, Blair has tied political unrest in the developing world even more closely to global economic conditions. Speaking of the current turmoil in Pakistan, for example, he told a House committee on February 25: "The government is losing authority in the North and the West, and even in the more developed parts of the country, mounting economic hardships and frustration over poor governance have given rise to greater radicalization."
While it's perhaps too early to specify where outbreaks of "regime-threatening instability" might occur as a result of the economic crisis, the analysis derived from recent World Bank and FAO reports suggests that many developing nations are at significant risk. The wealthier nations have experienced only the first shockwave from the global economic crisis. The effects of the second shockwave - on the world's less-developed nations - have yet to be felt. From all indications, the consequences of the second wave are likely to be even more earth-shattering than the first.