The New York Times
By ALAN WHEATLEY | REUTERS
Published: January 31, 2011
BEIJING — Turmoil in the Arab world equals an inflationary spike in oil prices equals the risk of social unrest.
That is the unappetizing political economic equation facing governments across Asia, including China, as they seek lessons from a popular uprising in Tunisia and deadly clashes in Egypt.
It would be lazy to assume that the anger of disenfranchised Arabs will translate into similar pressure for change in Asia. But it would be just as wrong to assume that Asia has nothing to learn from the causes of the revolts in Tunisia and Egypt, including high unemployment, a yawning gap between rich and poor and frustration over a lack of political freedoms.
“What you will have is a greater focus on social and political risk in the coming year,” said Bob Broadfoot of the firm Political & Economic Risk Consultancy in Hong Kong.
Economic unknowns range from how high oil prices could rise if protests spread to big Middle East producers to the effect on the Philippines of any curtailment of remittances from tens of thousands of Filipino migrant workers in the Middle East.
Mr. Broadfoot’s initial assessment was that the unfolding unrest would not be as earth-shaking as, say, the U.S. subprime lending crisis, which led to a collapse of Asian exports as the global financial system tottered.
“I don’t think the straight economic fallout is going to be so profound that it causes the developing countries of Asia to lose a lot more momentum than they would have done anyway,” he said. After an exceptionally strong 2010, economic growth this year is likely to average 6 percent.
“But I am concerned on the political side,” Mr. Broadfoot said. “This could change the status quo and challenge assumptions that were being made at the start of the year.”
Dominique Dwor-Frecaut, a strategist in Singapore for Royal Bank of Scotland, said the risk of political contagion to other emerging markets was largely limited to the Middle East.
Indonesia and Malaysia, where the majority of people are Muslim, are established democracies and do not appear at risk of widespread anti-government demonstrations, she said.
“On the other hand, emerging markets with low per capita income, including Indonesia, are likely to be more vigilant with food prices going forward, possibly through a mix of subsidies and additional policy tightening,” she wrote in a blog post.
As for China, the ruling Communist Party reaffirmed just how sensitive it is to issues of political stability by restricting some Internet comments on the protests in Egypt.
Rioting in 2009 in the western region of Xinjiang, where Muslims make up a substantial minority of the population, demonstrated to Beijing how seeming social calm can suddenly shatter. Nearly 200 died in ethnic violence.
“Tunisia and Egypt have brought that home in spades to the leadership, and they’re no doubt wary of the potential triggers that can set things off,” said Alistair Thornton, an analyst in Beijing for IHS Global Insight.
One such trigger is inflation, which is already uncomfortably high at 4.6 percent and could rise further, according to Zhou Xioachuan, the governor of the Chinese central bank.
The risk is that high oil prices will increase inflation and add to domestic food costs by increasing transport and fertilizer bills for farmers.
“They’ll be very concerned what social implications that has, given that quite a large part of people’s disposable incomes is going towards food,” Mr. Thornton said.
China has introduced an array of administrative measures in recent weeks to try to tame food costs, and Mr. Thornton said he would expect more of the same if prices headed higher.
He said Beijing was also likely to increase subsidies and take more steps to reduce the gap in wealth and incomes.
Beijing’s challenge in tamping down inflation is that the economy is awash in cash, the legacy of a stimulative monetary policy implemented to counter the global financial crisis in 2008.
Andy Xie, an independent economist who used to work for Morgan Stanley, has fiercely criticized major central banks, especially the U.S. Federal Reserve, saying they have inflated a succession of asset price bubbles by keeping policy too loose for too long.
In Mr. Xie’s view, the unrest in the Middle East has to be seen in this broader context: Corruption and oppression provided the tinder for the explosion of anger; inflation set it alight.
“Loose money has caused the riots in Tunis and Cairo,” Mr. Xie said.
It was no coincidence, he said, that food and energy prices started to rise last year right after the Fed floated the idea of injecting more money into the markets.
Even if unrest does not spread to energy-producing countries, the rising risk to their stability will increase oil prices anyway, Mr. Xie said.
He said he still expected another global crisis in late 2012, set off by either a collapse of the market for U.S. Treasury securities or a hard landing in emerging economies.
“The political events in the Arab world point to another possibility: Surging oil prices could sink us all earlier,” he said.
As for food, rice prices are still at about half of the peak levels reached in early 2008, he added. The odds are that this is reflected in the release of stockpiles by East Asian governments.
“We don’t know how long the reserves can last,” Mr. Xie said. “When the turning point comes, the rice price could double or even triple quickly.
“There are a lot more rice eaters than wheat eaters in Asia. What is happening in North Africa — a wheat-eating region — could spread to Asia.”
Alan Wheatley is a Reuters correspondent.