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Jasmine Revolution’s economic consequences

butterfly030911_optBY WILLIAM R. FEIST AND DOMINIC ANDRADE
ANALYSIS

In chaos theory there is something called the butterfly effect in which, as the story goes, the flapping of the wings of a butterfly in Brazil may lead to a tornado touching down in Texas. Most people who hear this story dismiss it as fictitious and fanciful. Nevertheless, if climatic conditions are just right, a butterfly can conceivably cause catastrophic weather by simply flapping its wings.

Evidently, the meteorological event from the butterfly effect appears to have a human parallel in what has been happening of late in North Africa and the Middle East. The popular uprisings that have occurred in Tunisia, Egypt, Bahrain and Libya started with a well-educated but disaffected young man who was forced to be a street vendor because there were no job prospects in his field of study in Tunisia. His plight was made unbearable when the authorities took away his makeshift stand because he was unable to purchase a vendor’s license, thus removing his only means of livelihood. Desperate and hopelessly despondent, the young man set himself ablaze.

It was this single act of desperation that literally enflamed the populace of the region to seek a redress from their despotic governments. Their numbers have proved to be too many and their voices too loud to ignore, as the former Egyptian president, Hosni Mubarak, found out to his chagrin.

With the exception of the situation in Libya, the so-called Jasmine Revolution has been remarkably free of mass bloodshed given that tyrannical regimes usually stop at nothing to maintain their control on the levers of power.

As we may hope that these Islamic peoples will develop functioning representative governments to better express their desires and wishes for freedom and prosperity, it must be said that with few exceptions (Turkey and Lebanon are two) the nations of North Africa and the Middle East have no tradition of democracy and popular government. Thus the popular revolts may still turn out badly for them and for ourselves as the French Revolution reminds us that the noble desire for “liberty, equality, and fraternity” still may give way to a Reign of Terror and continent-wide armed conflicts.

With the potential for the uprisings to go wrong, an assessment of how the Jasmine Revolution can impact the global economy is in order.

Oil

At the top of the list of things to worry about as a result of the turmoil is almost assuredly the flow of oil. Recently the price of North Sea Brent crude oil exceeded $100 per barrel for the first time since the start of the recession. This price was reached as a result of speculation that supplies of oil may be interrupted because of the unrest within the region. There is reason for concern. A sustained increase in the price of oil will adversely affect employment in the US and elsewhere that continues to struggle to recover from job losses resulting from the recession.

Furthermore, higher prices will hit consumer spending hard. For instance, a $1 per gallon increase in the price of gasoline is estimated to reduce economic activity by more than $1 billion. Besides gasoline prices, other energy costs, such as jet fuel airplanes and heating oil for homes, will increase along with the price of oil. Moreover, sustained increases in the price of oil will reduce economic activity not only because of higher energy expenses but also because petroleum is an input in the manufacture of an assortment of products such as plastics.

Currently, some of the concern about higher oil prices is justified. The turmoil in Libya, a country with the ninth largest reserves of oil in the world, has forced some oil companies to curtail operations and evacuate their employees. In addition, inventories of oil are less than they were a year ago, which puts additional pressure on a US economy trying to recover from the worst economic crisis since the Great Depression. Furthermore, the instability within Egypt may lead to disruptions and even the closing of the Suez Canal. This vital artery allows the passage of oil from the Middle East on oil tankers to proceed to Western Europe and North America without these ships having to travel around the African continent that extend the journey another 6,000 miles. Without the Suez Canal the delivery of oil would take longer and be more expensive.

However, the turmoil within North Africa and the Middle East does not necessarily mean the flow of oil is impacted. Saudi Arabia, the largest producer of oil and the country with the largest known oil reserves, promised to maintain world output at the levels as before the uprisings had occurred. Of course, this assumes that Saudi Arabia remains unaffected by the turmoil spreading throughout the Middle East. Future events may prove this assumption to be unfounded.

Transport

It was previously discussed that the Suez Canal may be a choke point for the transportation of oil to much of the West. But the Suez Canal also provides an important short cut for the delivery of other merchandise such as computers, autos, and electronic equipment. Interruptions to passage through the canal are likely to raise the costs of these goods, which may be passed on as higher prices to consumers struggling to pay for goods in the face of weak economy.

Furthermore, commerce and tourism will be curtailed as higher prices for crude oil will result in higher jet fuel costs that are passed on to air travelers and air cargo companies. The affect on air travel will be especially severe as much of the region in turmoil depends on tourism as a significant part of the economy and as a source for hard currency. For example, tourism is between 6% and 11% of Egypt’s overall gross domestic product (GDP), depending on whose estimate one chooses to believe. Many potential visitors to Egypt have canceled their plans because of the unrest there and many of them may not return soon even after things settle down because the cost of air travel may become too prohibitive.

Unemployment, Poverty, and Investment

As stated previously, the Jasmine Revolution started when a young man set himself on fire because he thought there was little to no hope of making a decent living. The same can be said of millions of others in the region. Poverty is rampant. For example, roughly 24 million of the 80 million Egyptians are living on $2 a day or less. And while the official unemployment rate in Egypt is given as around 9%, comparable to the unemployment rate in the US, such a figure is viewed with suspicion and the actual unemployment rate may be significantly worse. Similar and even worse conditions can be found in other countries



 

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