Oil-linked inflation destabilizes Africa, Middle East

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WSWS : News & Analysis : World Economy

Oil-linked inflation destabilizes Africa, Middle East

By Alex Lantier
5 March 2008

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Writing in 1845 in The German Ideology, the young Karl Marx and Friedrich Engels noted, “It is certainly an empirical fact that separate individuals have, with the broadening of their activity into world-historical activity, become more and more enslaved under a power alien to them [...] which has become more and more enormous and, in the last instance, turns out to be the world market.”

The economic instability and social struggles breaking out in large parts of Africa and the Middle East over price inflation bear out this famous analysis. The financial shockwaves spread by the crisis of US imperialism—the fall of the dollar amid the US mortgage crisis, and the explosion of the world market price of a barrel of oil from $23 in 2002 to the present $103, after the 2003 US-led invasion of Iraq—are shaking the entire region.

Not only are fuel prices affected, but the rise in petroleum prices is pushing up food prices, which are closely dependent on the prices of energy, transport, and fertilizers, the component parts of which are produced from natural gas, the prices of which are in turn heavily affected by oil prices.

The origins and effects of this inflation should be noted: investors and firms in key areas of the economy (notably the oil sector) are responding to increased economic uncertainty by rapidly bidding up the prices for their goods. They are attempting to deal with the world financial crisis by placing the burden on the backs of the working class. As workers struggle to get by with fewer goods while working more jobs, these investors and firms are carrying out a huge transfer of real wealth away from the working masses.

For oil-importing countries, state budget deficits have increased dramatically, as the cost of providing national fuel subsidies has risen with oil prices. On February 8 the Jordanian parliament voted to eliminate fuel subsidies and subsidies on certain grains, such as barley. According to the Jordan Times, the elimination of subsidies would help decrease a budget deficit of $1.3 billion (7.1 percent of GDP) by $983 million. The government promised to distribute $427 million to “poorer Jordanians” to help them deal with the price increases.

Domestic fuel and kerosene prices jumped 76 percent upon passage of the law. In the month since the law was passed, the prices of several basic foodstuffs have doubled. Ratings agency Standard and Poor’s predicted that Jordan’s 2008 inflation rate would be around 10 percent, as fuel prices increase the cost of living.

A February 25 New York Times article, “Rising Inflation Creates Unease in Middle East,” noted, “Officials or business owners artificially inflate prices or take a cut of such increases.” The Times interviewed former Economy Minister Samer Tawil, who said: “Oil, cement, rice, meat, sugar: these are all imported almost exclusively by one importer each here. Corruption is one thing when it’s about building a road, but when it affects my food, it’s different.”

A clothing store employee in Amman told the Times, “No one can be in government now and be clean.” Describing the doubling of potato and egg prices, he said, “These were always the basics. Now they’re luxuries.”

Neighboring Syria is also considering abolishing fuel subsidies. Its official inflation rate last year was 5.5 percent. However, according to a February 2008 report from the UN Office for the Coordination of Humanitarian Affairs, prices for key fruits and vegetables have doubled over the last year, with rents also rising quickly. It quoted a Syrian civil servant who explained that his monthly costs had roughly doubled to 20,000 Syrian pounds (US$400) over the last two years.

Oil-producing countries also face spiraling inflation, due to both global and local factors. Most of those countries’ oil is sold in dollars, but most of their trade is conducted with European and Asian countries whose currencies are rising against the US dollar. Also, the unequal division of oil revenues between the ruling classes and the rest of the population in these countries aggravate financial difficulties. Large portions of the new oil revenues languish in the inflated bank accounts of various kings and dictators, squeezing the masses’ purchasing power.

Inflation in Iran has oscillated between 12 and 17 percent since 2003 and has become an important issue in the March 2008 legislative elections. President Mahmoud Ahmedinejad told the press, “Over the last 18 months, the rise in oil prices has increased national revenues but in the same period world prices have increased. And our economy is greatly dependent on imports.” He added the price of Iranian imports had increased by 16 percent over the last year.

The United Arab Emirates (UAE)-based Khaleej Times cited Iranian Central Bank director Tahmasb Mazaheri: “When the country’s objectives are based on an inflation rate of 8 percent, reaching 20 percent, for which the country is unprepared, it is worrisome. [...] Liquidity injected into the economy has led to increased inflation rather than rising employment.”

Inflation has also grown rapidly in the Persian Gulf monarchies, notably Saudi Arabia and the UAE. The Arab Times recently reported that rising Saudi inflation hit an annualized rate of 7 percent in January 2008, its highest point since 1981. There has been a 17 percent increase in rents over the last year along with large-scale price hikes in food, of which Saudi Arabia must import 65 percent of its consumption. According to the UAE-based Arabian Business, 2007 inflation in the UAE was 11 percent—with food prices jumping 8 percent and rents accounting for about two-thirds of price increases.

In a bid to contain discontent, the UAE announced a 70 percent raise in its public sector workers’ salaries in February 2007; Oman raised them by 43 percent. However, this does not address the difficulties of private sector workers.

Price inflation is eating into the earnings of the massive numbers of foreign workers who power the highly strategic oil and construction sectors of the Gulf economies, and who send cash home to their families. Not only do workers face decreased earnings in local currencies due to inflation, but these currencies—pegged to the US dollar—are falling in value against their home currencies in India, Pakistan, etc. This has led to a sharp increase in militancy in these highly oppressed sections of the working class.

In Dubai, a UAE emirate, construction of the Burj Dubai, the tallest building in the world, has been interrupted in 2006 and 2007 by strikes and protests by workers demanding improved pay, housing, and conditions. Forty-five Indian workers were recently tried for organizing the protests. Unions and strike action are illegal in Dubai, and the workers face 6 months in prison, then deportation back to India.

Strikes have also hit Bahrain, where 1200 mostly Indian workers won a wage increase after a weeklong strike. Jane Kinnimount of the Economist Intelligence Unit told the BBC: “The recent strike in Bahrain was essentially about low wages. [...] Some Indian workers are paid as little as $160 a month for a six or seven-day week, whereas the average national is paid seven times as much.” Workers complain of being worked so hard that several workers per work site suffer from heat exhaustion on a typical day.

In December 2007, a group of 19 prominent Saudi clerics, including the prominent conservative Nasser al-Omar, addressed an open letter to the Saudi monarchy, criticizing it for its handling of inflation and in particular for pegging its currency to the US dollar. In repeated comments, however, Saudi Central Bank Governor Hamad al-Sayari reiterated his support for the peg of the Saudi riyal to the US dollar, criticizing “easy solutions” to the inflation problem.

Underlying the Saudi Central Bank’s decision are complex geopolitical factors tied to the crisis of American capitalism. The riyal is pegged to the dollar because Saudi Arabia’s foreign currency earnings overwhelmingly come from oil sales, in markets currently denominated in US dollars. Removing the riyal’s peg to the dollar could only take place in the context of a decision by Saudi Arabia to denominate its oil sales in other currencies.

Such a shift would have massive implications for the US. The American balance-of-payments deficit is financed largely by foreign investors, who use the dollars they buy on US debt markets to purchase goods and raw materials on dollar-denominated world markets for oil and other essential commodities. Absent the need to hold dollars for purchases on world markets, demand for US dollars would fall substantially, threatening a further collapse of the US dollar’s value and a crisis in the US’ ability to finance its foreign trade.

The growing integration of Africa into world trade, particularly as a source of oil and metals, is increasingly producing social and financial effects in Africa similar to those in the Middle East.

The International Monetary Fund’s (IMF) 2006 Regional Economic Outlook for Sub-Saharan Africa gives statistics detailing the remarkable dependency of oil-exporting African countries on their oil revenues. Among eight petroleum-exporting African countries (Ivory Coast, Cameroon, Chad, Gabon, Nigeria, Angola, the Democratic Republic of Congo, and Equatorial Guinea) the percentage of real GDP generated by the oil revenues was under 5 percent for the Ivory Coast, but 10, 40, 50, 52, 55, 60, and 90 percent respectively for the remaining countries. Overall inflation in those countries was 13.5 percent in 2005.

Violent demonstrations against price hikes rocked Cameroon and Burkina Faso last week. In Cameroon, strikes by taxi drivers and transport workers against fuel hikes turned into street battles against police and then army units, as President Paul Biya announced that he intended to modify the Constitution to allow him to remain longer in power. Strikes shut down Douala, the main port city on the Atlantic coast, and Yaoundé, the capital, as well as several smaller towns in western Cameroon.

Twenty people were killed in the demonstrations, according to the government. The government denied widespread reports by eyewitnesses, published in the European media, that the victims had been shot by government troops.

In Burkina Faso, February 28 demonstrations planned by the Popular Call for Democracy led to street violence and attacks on government buildings in the capital, Ouagadougou, as well as Bobodioulasso, Banfora, and Ouahigouya. The government carried out hundreds of arrests, but also announced that it would seek negotiations with local producers to bring down the price of sugar and cooking oil, which had increased by 10 to 65 percent in different parts of the country.

The week before, violent demonstrations had led the government to announce a moratorium on import taxes of imported staples like rice, milk, flour, and salt.

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Oil-linked inflation destabilizes Africa, Middle East

By Alex Lantier 5 March 2008

By Alex Lantier
5 March 2008