Tuesday, February 12, 2013

Did monetary expansion cause the Arab Spring?

South Africa's top economic and financial daily, Business Day, ran an article yesterday referring to research conducted in part by my old school friend and occasional commentator on this blog, Chris Becker.
Proof that high inflation leads to more public violence 
NEW research appears to show a direct link between inflation and social violence. In the months before the Marikana massacre, in which more than 30 miners died, there was a spike in nondiscretionary inflation — the inflation the poor experience — from 3% to more than 10%. The same is true of the xenophobic attacks in 2008. Just before these attacks, nondiscretionary inflation surged to 20%. The recent violence in Sasolburg was also preceded by an acceleration in inflation.
One might blanch at the definitive description (i.e. "proof") given to an in-house research document that, as far as I can tell, is unscrutinised by outside review. Certainly, I can immediately think of a host of problems that would need to be accounted for before we even begin to talk about proper causation.

That said, I don't doubt that food shortages and price hikes can, and do, trigger civil unrest and social upheaval. The idea is eminently plausible and there have been many attempts to quantify this relationship (more on this below). I commend Chris for trying to establish a more systematic understanding of the issue in the South African context.

However, I find it striking that this particular article makes no mention whatsoever of the real factors that have been driving high food prices in recent years. You know, massive crop failures due to historic droughts in the former Soviet Union, North America, and elsewhere... That kind of thing. In fact, here's a timely case study on South Africa that pinpoints these exact issues, which is itself part of a broader research programme linking food riots and political instability to agricultural supply-side shocks (in particular, those related to climate).

In contrast, the singular premise of the above BD article seems to be that food hikes -- and subsequent violence -- are entirely the fault of "delinquent" monetary policy.[*] I'm certainly not suggesting that loose monetary policy can't lead to inflation. Rather, the failure to acknowledge these severe real shocks makes any kind of simple analysis very misleading. (I should say that I am going strictly on the article here; Chris and his co-authors may well try to account for real factors in their actual research. At least, I sincerely hope so.) 

However, my faith in journalistic competence is somewhat shaken by the inevitable reference to -- you guessed it -- Shadowstats, the preferred purveyor of hyperinflation statistics for conspiracy theorists freedom lovers everywhere!™ Furthermore, statements like "The conclusion[...] is inescapable: inflation leads to violence" are more or less misleading in the same sense as the suggestion that increasing the temperature of your bath water will lead to you being boiled alive. There may may a kernel of truth therein, but it is clearly important to recognise that this is a matter of degree.

The passage that really caught my eye, however, was the following.
Becker conducted similar research internationally and found that countries experiencing the highest levels of social upheaval, such as Syria, Tunisia, Egypt and Algeria, embarked on huge monetary expansion in the months before the outbreak of violence. This monetary expansion translated into sharp increases in inflation just before the outbreak of violence. In Egypt and Tunisia, the violence culminated in the overthrow of the previous governments.
Woah. Let's just back up there a bit. We are now treading very dangerous territory as far as correctly identifying causation goes. It strikes me as as borderline irresponsible to intimate that the proximate cause of the "Arab Spring" was loose monetary policy. There are a myriad, interwoven factors at play and it would take a highly skilled statistician, armed with reams of data, to tease out the underlying drivers from concurrent symptoms. The fact is I've yet to see a paper on this subject make it through the peer-review process to journal publication... and I'm pretty certain that this is precisely due to the difficulties in attributing causation. With respect to my friend, I'm not convinced that he has managed to crack the problem that has stymied so many others.

I'll leave you with a final thought on this question of monetary expansion and the Arab Spring. A quick Google search on the topic throws up an article by Andrew Lilico that appeared in The Telegraph: How the Fed triggered the Arab Spring uprisings in two easy graphs (4 May 2011).  After demurely suggesting that most analysts are simply too afraid or short-sighted to "join the dots between the Federal Reserve’s second phase of quantitative easing and these revolutions [in the Middle East and North Africa]", Lilico bravely plunges forth to do exactly that. True to his word, he also produces two graphs, the most important of which appears below.

Now, I don't know about you, but that graph seems to show a rise in food prices that precedes the Fed's sharp increase in asset purchases... by several months. I am glad to report that this discrepancy wasn't lost on readers at the time. One commentator sardonically observes: "In my experience causes occur before effects."

It is a matter of some debate among economists how inflation manifests itself in the economy during times of monetary expansion. (E.g. Some of you may recall the rather heated discussions on Cantillon Effects that occurred in the blogosphere only recently.)  Well, it is a relief to know that the issue has been resolved thanks to the careful work of Mr Lilico. It turns out that expansionary U.S. monetary policy is so potent that it can positively impact the price of global commodities with a negative lag of several months!

Note (13/02/13): Follow-up here.
[*] To be clear, South Africans have also experienced sharp increases in the cost of amenities like electricity and water provision due to some boneheaded policy decisions and as a legacy of inefficient parastatal monopolies. I've covered these issues numerous times before on this blog and elsewhere.


  1. Grant,

    Nice piece - I have made reference to the climate-agriculture-food price-social unrest link in informing our approach to urban resilience...

    I would be interested to see some more analysis on the causes of inflation in countries with a large proportion of people living close to the breadline. Would inflation driven primarily by food prices, as opposed to, say, monetary policy or utility issues, have a disproportionate impact on the poor and therefore be more closely tied to social unrest...

    Thanks for the god read.


    1. Thanks Richard. W.r.t. your first paragraph, I'd be interested to see a link if you have one.

      Yes, seeing more analysis on this sort of thing would be great... But it is extremely tricky for all the reasons that I have been trying to point out. You run a very real risk of confusing correlations and causations, because of how interwoven (i.e. endogenous) everything is.

  2. My comments here http://chrislbecker.com/2013/02/13/response-to-a-criticism-of-my-inflation-social-unrest-research/

    1. Thanks pal. Just posted a reply as you might already have seen.

  3. Hi Grant,

    In launching WSP's Future Cities initiative, the links between social unres, climate change and food security have been important (large-scale social unrest seems to be primarily, if not exclusively an urban problem, and certainly in the case of the Arab Spring).

    There's a long way to go to unravel the complexities of resilience (and monetary policy may be important too), but it does appear that climate change - both in terms of food security and extreme weather are substantial contributors to instability (and fundamental contributors - root causes, which I don't think is the case for monetary policy).

    My post on Future Cities is here: http://thepointyend-of-sustainability.blogspot.com.au/2012/09/future-cities-africa-story.html

    One of the drawbacks of a professional offering is the lack of scope for research, so if you're interested in digging a bit deeper on cities and climate/food/resources etc, let me know. Future Cities is intended as a collaborative exercise, and I can put you in touch with our South African business leaders (I have been transferred back to our Asia Pacific business).

    Rich (richard.palmer@wspgroup.com.au)


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