Egypt and Tunisia latest events highlight the risks from a lack of distribution of income

Below is a special article by Gary Dugan, CIO of Private Banking in Emirates NBD Bank, commenting on the latest events that took place in Egypt and Tunisia:

The demise of the previous regime in Tunisia and growing problems in Egypt highlight what we believe are the growing imbalances in the global economy. In particular, the widening gap between rich and poor in several parts of the world is only exacerbated by the significant pick up commodity price inflation. Even before the recent food price crisis, in many countries the rich were getting richer and the poor were getting poorer. The continued increase in the world population and the upward pressures it will put on commodity prices will only reinforce the risk of further political upheaval in many parts of the world. The global economy must work to more efficiently produce and supply food. Income inequalities must be arrested in order that social instability and sharp political change does not become the order of the day. 

Investors are understandably worried. The previous Tunisian political regime has fallen and there are growing problems in Egypt and the Yemen. Why have these problems occurred now? After all, both governments have been in place for some decades. From a broader perspective investors should be aware of the growing imbalances around the world that may trigger political discontent. The issues are not just focused on the poorer nations. As we will go on to discuss, the US also has what we believe to have unsustainable imbalances that may cause problems over the longer term. 

We do not think that it is just a coincidence that the current problems in Tunisia and Egypt have occurred at a time of some of the strongest ever increases in food prices in modern times. Higher food prices reduce the real incomes of the poor and increase income disparities between rich and poor. A report from the UK government concluded that the era of cheap food is at an end with the real prices of key crops set to increase 50‐100 per cent during the next 40 years. Many of the problems of food supply and demand are created in the West. Subsidies and trade barriers and waste deplete the supply of food. Analysts estimate that between 30 and 50% of food grown is lost or wasted before it reaches the consumer. The report shows that an estimated 925m people lack enough to eat and a further one billion people suffer from a lack of crucial nutrients in their diets. However one billion people over‐consume leading to health issues such as obesity. Two‐thirds of Americans are either overweight or obese according to the Robert Wood Johnson Foundation and the Trust for America’s Health. 

Industralisation, an increase in the global population will keep upward pressure on all commodity prices increasing the risks of further political problems in many parts of the world. The increase in the price of food is mirrored in the general increase in commodity prices. Rising commodity prices are leading to an increase in global inflation. Some commentators try to imply that much of the rise in prices is due to one‐off factors such as weather destroying crops and traders dealing in the commodity derivatives market. In truth, the growth of the global population and the rise of China, India and Brazil has generated a sustained increase in commodity demand. The global population is set to rise still further. The UN estimates that the global population will grow to 8.9 billion from today’s 6.9 billion by 2050.