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 Rios, 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.

Regime-Threatening Unrest

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, Joao 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.