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As we wait to see what will happen with the Syria situation and we see the markets react in anticipation, I believe it is a good moment for us to take a step back and reflect on the root cause of the current instability. It helps to see the big picture in order to understand the wider context in which policy decisions are being taken. At this moment, we are talking about possible military confrontation with Syria, and possibly diplomatic confrontation with the international supporters of Syria's regime, but we are forgetting to remember the root causes and that leads us to lose sight of the fact that we are not only looking at trying to patch up a relatively small, broken country such as Syria. We need to gear up for a long-term commitment spanning many decades to keeping a potentially unstable region from imploding, stretching from Afghanistan and Pakistan in the East, all the way to Morocco in the West and from Yemen in the South, all the way to Russia and the Baltic in the North. The root causes of this large area of potential instability are two opposite demographic trends in two different, but neighboring regions, with the same disastrous effect for the long term. We need to start looking for solutions and work with the nations involved in trying to solve this problem, before we get to the point where there will be no meaningful national level authority to deal with, because then it gets much worse.

The Middle East:

The Arab Spring ignited by food commodity price spikes started right where we should have expected it to start. It started in countries with a large youth population struggling to make their way through life. It is a region, which has relatively low capacity to be self-sustained in food, yet it is among global leaders in population growth rates. Qatar is right on the top of the global list with a yearly population growth rate of 4.93% according to the CIA factbook. The Gaza Strip is 6th, the Emirates are 9th and so on. Egypt's population growth rate has slowed somewhat to 1.9% per year, but it is already the largest country population wise in the Middle East region currently at over 85 million inhabitants. Countries, which may not be able to be even close to self-sufficient in food, but have a large volume of hydrocarbons they can sell and thus pay for the food imports for their growing populations, such as Saudi Arabia and Kuwait, have so far been spared the turmoil seen in countries such as Egypt and Syria. We have to remember however that it is not so much an issue of countries, which have oil & gas to produce and export, versus those that do not. Egypt does produce a significant volume of petroleum and gas, but it is not nearly enough to help take care of a population of 85 million and growing. In effect, what we are seeing today in Egypt, Libya[i], Yemen, Syria and other countries in the region, will likely be repeated rather soon in countries with more resources. It will start with countries like Iran and move towards the Emirates and Saudi Arabia as oil prices cannot move much higher from here and neither will supply volumes for most of these countries, while food prices will continue to increase driven by global population growth and continued growth of the global middle class. Their ratio of barrels produced and exported to number of people gets worse and worse.

Note: I assumed that petroleum production capacity in the kingdom will remain flat, while population will continue to increase at the current rate of 1.5% per year.

Eastern Europe:

We do not have food growing capacity issues in Eastern Europe. In fact, it is one of the few regions with significant potential spare capacity that can still be brought into production. What we do have is a region that suffered from one of the worst and longest running political experiments of the twentieth century, which rendered them ill-equipped to compete in the capitalist world culturally and infrastructurally speaking. The region is also geographically situated close to another region, which has been one of the most successful economically speaking throughout most of the twentieth century, and still leads the global rankings in living standards. In the case of Eastern Europe, what we have is a culture that strongly resembles the developed world when it comes to attitudes towards family, but with an economy which does not come even close to resembling that of the western world's, except for a few countries such as the Czech Republic, where they managed to close the gap quite substantially.

Given the fact that in Europe we have birth rates substantially below the replacement rate of 2.0 per woman, we have all the ingredients necessary to continue and amplify what has been a trend for some years now. We have a fast-paced trend of migration from Eastern Europe to Western Europe. According to Romania's 2011 census results, that country's population has already declined by over 15% in the 1990-2011 period. Only a small fraction of that decline is attributable to the natural trend, due to low birth rates, which actually only started kicking in about a decade ago, because of its relatively young population it had in 1990, compared to most European countries. I suspect things will get much worse starting next year when fellow EU members such as Germany and France will open their doors to Romanian workers as per EU treaties. Up to now, Rumanians were mainly heading to weaker economies in the EU, such as Italy and Spain, where they already opened the job market to them.

Romania's case is not alone. Bulgaria is another EU member which is not looking very good demographically speaking. Within the EU, there are a number of countries such as Poland, Czech Republic, Slovakia, Slovenia the Baltic States and perhaps Hungary, which fit into the category of countries, which still have a chance to maintain their relative demographic viability. The exodus of people from these countries is not as intense as what we have seen from Romania, but there is still significant danger for them as well. There are other countries outside the EU, which also face this same problem. Countries in the Balkan region such as Serbia, as well as former Soviet members such as Ukraine are all on the path of demographic collapse within decades. Even Russia with all its resources and a recent rebound in fertility rates back to replacement rates is still in danger of demographically induced collapse, because despite all their wealth, it seems they have a very hard time keeping their young people from migrating.

Consequences:

When it comes to the Middle East, we are all quite familiar with the consequences of the region blowing up and becoming a battlefield. It is all about the 20 million barrels per day of oil that leaves the region and brings us the ability to go on with our lives, so no need to spell it out again. If more and more countries in the region become failed states, as is currently the case with Syria, Yemen and possibly soon to be failed states Egypt, Libya Iraq and others, the chance that the more solid Arab states such as Saudi Arabia, Kuwait, and the Emirates can maintain their own internal as well as external stability diminish. These countries will be faced with internal pressures, having to do with providing food, shelter, fresh water and an overall satisfactory standard of living for a fast-growing population and external pressures stemming from potentially hundreds of millions of fellow Middle East inhabitants living in unstable conditions. The unnecessary war in Iraq, as well as the civil wars in Yemen, Libya and Syria are increasingly churning out entire generations of young men who grow up knowing not much else aside from fighting. Now we have Egypt with its 85 million inhabitants, where we have one of the main political movements there be told that they may not rely on winning a mandate through the political process, because they will be deposed. It is feasible that their hard-core supporters who number in the millions may be turned towards the path of violence as we speak, unless the political mess is resolved quickly.

Food price spikes will occur again and we have an overall long-term trend of growing food prices, which is advancing at a much faster rate than global economic growth, putting pressure on millions of poor people in the Middle East. Since the year 2000, food prices increased by 135%, according to the UN food price index. By comparison, the world's economy has been growing at an average rate of about 3% per year during the same period. The Middle East region is among the worst affected areas by this phenomenon, because of their poor and worsening ratio of food production to people.

In Eastern Europe, where as I mentioned we have the opposite demographic trend of low birth rates, the effect is intensified by a fast-paced outflow of their young population. Sticking with Romania, which is one of the worst off countries in the region in this respect, the point when we can expect probable implosion should be somewhere between 2030-40. Its population will continue to be decimated by a steady outflow of young people, which will make development there very difficult to achieve, while the birth to mortality rate factor will play an increasing role as well (currently it contributes to a yearly drop in population of 0.25% per year). Romania's problems will intensify as people who were born in the 1967-77 period will reach the age of 65, thus entering retirement (whether that will be the legal age or not by then, because many people there are in bad health condition by the time they get older). To put things into perspective, in 1967, over 500,000 people were born in Romania, while in 2012 less than 200,000. So, in just one year, there will be a net loss in the country's labor force of 300,000 in the year 2032. Of the 200,000 people per year who were born in recent years, a large number of them will not even reach adulthood in Romania, because many people end up moving with their family to pursue a career somewhere else. Of those who will reach adulthood in Romania, if the current wide gap in incomes will persist between Romanian and EU workers, many of them will not even consider starting work in Romania, but look directly abroad. This will go on year after year and it will worsen significantly starting in 2032. I frankly do not see how they will be able to keep it together. Many other countries in the region are facing a similar situation.

As we contemplate what there is to do about situations such as Syria, we should also remember that Syria, Egypt, Yemen and other unstable countries are just an early symptom of a greater regional problem spanning dozens of countries, including some of the world's nuclear powers, world's largest producers of oil, hundreds of millions of people, and collective sovereign and private debts measured in the $trillions. In the absence of smart instead of ideological or selfishness driven action to shore up these regions, things will get very bad. We have to work towards their stability in an intelligent and thoughtful manner meant to help them rather than ourselves, otherwise we are looking at many decades of geopolitical instability induced hardships affecting the global economy and thus our livelihoods. It is a larger long-term challenge that makes the current immediate challenge of dealing with Syria look like a comparatively easy and straight-forward matter. But if we will fail to effectively deal with this immediate symptom, aside from letting millions of unfortunate Syrians down, we will also prove that we are nowhere near ready to deal with one of the great challenges of the increasingly complex 21st century. We will allow the signal to be sent out there that we are not up to this, therefore those who want to sow chaos in order to benefit them, will do so with the added confidence that the rest of the world will just look on.


[i] The case of Libya is a-typical because while it had plenty of oil production given its relatively low population, they still experienced the same pressures as neighboring countries because the economy was badly managed, thus the oil did not suffice to keep it together.

Source: Down Month For The Markets And Oil Up On Geopolitical Concerns: Get Used To It.