Roubini and the Egyptian Counterfactual

Nouriel Roubini, a well-known economics professor at New York University, commented in the video above that "...what's happening in Tunisia and Egypt is in part being driven exactly by rises in food prices." Dr. Roubini is well-known in part because, as early as September 7, 2006, he was predicting the Subprime mortgage crisis in front of the International Monetary Fund (here). Dr. Roubini's predictions were dismissed because he did not make use of mathematical models.

I'm not sure whether the criticism extends to statistical models (which are mathematical) but Dr. Roubini's assertions about Egypt can be tested with time series models. First, it is important to understand that Roubini's assertion (that protest in Tunisia and Egypt is the result of commodity price rises) is essentially a counterfactual historical statement. That is, had world commodity prices remained constant, Egyptians would not have gone to the street.

Without getting into all the details, we can test the counterfactual by using the WL20 world systems model to predict unemployment in Egypt (assuming that a large unemployed urban population is a precursor to protest). One of the cyclical state variables in the WL20 model captures world commodity prices (oil and wheat). Since Egypt is a peripheral economy in the world system, any effects of world commodity prices should affect the Egyptian economy (and thus employment) through the state of the world system.

The figure above displays the predicted dynamic attractor for unemployment in the Egyptian economy. It shows that through most of the late 20th century, unemployment has been cyclically increasing. What is interesting is that from 2007-2008 (the start of the world food crisis which did result in Egyptian protests) until the present, unemployment has actually been decreasing.

When we eliminate the commodity price state variable from the WL20 model and reconstruct the attractor (run a "free" counterfactual simulation of the model starting in 1960), we see that without the current increase in commodity prices, unemployment would have increased.

What is happening here is that Dr. Roubini and other commentators may be confusing correlation with causation. Yes, increases in food prices have appeared with increases in unemployment and conflict. And, increased commodity prices do squeeze the consumer (see a causal version of Roubini's theory here). Economic theory, however, suggests that there may be second round feedback effects.

Increasing world commodity should bring forth an economic and political response from the country being affected. Higher commodity prices should induce farmers to increase output (maybe with a year lag) and should induce governments to respond with agricultural programs, subsidies and price controls to offset any shocks from world markets.

Given the existing distortions in the Egyptian economy (read an overview of the economy here), there is plenty of room for negative feedback responses. And, any economic response to increases in world commodity prices would have some positive effect on employment. Still, the WL20 model attractor for Egyptian unemployment shows that the Egyptian economy is one of the "immiserizing" economies that produce growth without improving employment. And, immiserizing growth by itself might be enough to create protest (read more about immiserating growth in Mexico and Argentina, here).