For Egypt, China is threatening the Nile

By buying land in Sudan and Ethiopia to raise grain, China is threatening to appropriate Egypt's water source.

By , Guest blogger

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    Chinese Foreign Minister Yang Jiechi (left) meets with head of the Egyptian Supreme Council of the Armed Forces Field Marshal Hussein Tantawi in Cairo, Egypt , May 3, 2011. By buying up agricultural land in Sudan and Ethiopia, China is threatening to divert the Nile's waters.
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The New York Times rarely published general equilibrium pieces but today Lester Brown has published one. His logic chain is the following; importing Asian nations such as South Korea and China seek grain from exporting nations in Africa. They are signing mutually beneficial deals with nations such as the Sudan, Ethiopia, the Congo and Zambia. The Asian nations are buying land with dedicated agricultural output to be shipped to the Asian nations. Adam Smith would like this but Lester Brown does not.

He says; "These land grabs shrink the food supply in famine-prone African nations and anger local farmers, who see their governments selling their ancestral lands to foreigners. They also pose a grave threat to Africa’s newest democracy: Egypt."

Why?

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"Egypt is a nation of bread eaters. Its citizens consume 18 million tons of wheat annually, more than half of which comes from abroad. Egypt is now the world’s leading wheat importer, and subsidized bread — for which the government doles out approximately $2 billion per year — is seen as an entitlement by the 60 percent or so of Egyptian families who depend on it.

As Egypt tries to fashion a functioning democracy after President Hosni Mubarak’s departure, land grabs to the south are threatening its ability to put bread on the table because all of Egypt’s grain is either imported or produced with water from the Nile River, which flows north through Ethiopia and Sudan before reaching Egypt. (Since rainfall in Egypt is negligible to nonexistent, its agriculture is totally dependent on the Nile.)

Unfortunately for Egypt, two of the favorite targets for land acquisitions are Ethiopia and Sudan, which together occupy three-fourths of the Nile River Basin. Today’s demands for water are such that there is little left of the river when it eventually empties into the Mediterranean."

SO, there is a piece of interesting economics here. The Nile is a "Regional Public Good" and thus a tragedy of the commons issue arises. Brown is arguing that Egypt will lose twice from nearby nations exporting their production to other nations such as China.

1. Due to general equilibrium effects, the people of Egypt will pay higher prices for Bread as grain prices will rise.

2. Since the Nile is a regional water way and neither Ethiopia or the Sudan has any incentive to recognize that Egypt suffers when water is extracted from the river, international trade exacerbates an existing regional externality issue.

The Coase Theorem tells us that if Ethiopia and the Sudan have the property rights to this river then Egypt will need to pay them to allow more water to flow to Egypt.

Lester Brown's point is that the original regional water deal is being undermined by this new international trade:

"The Nile Waters Agreement, which Egypt and Sudan signed in 1959, gave Egypt 75 percent of the river’s flow, 25 percent to Sudan and none to Ethiopia. This situation is changing abruptly as wealthy foreign governments and international agribusinesses snatch up large swaths of arable land along the Upper Nile. While these deals are typically described as land acquisitions, they are also, in effect, water acquisitions."

So, how can regional rivers be allocated fairly and efficiently? Europe has faced this challenge with the Danube. Economists have thought about the challenge of international rivers and how they are shared by neighbors. Hilary Sigman has written the best paper and here it is.

How does Lester Brown want to resolve this regional challenge? Here I disagree with him;

"Finally, for the sake of peace and future development cooperation, the nations of the Nile River Basin should come together to ban land grabs by foreign governments and agribusiness firms."

This is not smart. This is a pretty dumb quote from an interesting man. The NY Times should think twice before it publishes an OP-ED with suggestions to suspend international trade. This is a dangerous precedent. Does the NY Times support ending international migration? Does it support ending international capital flows and Foreign Direct Investment?

There are gains to trade between China and African nations. I agree that there are externalities associated with this trade. Such a trade is still "good" if the gains to trade between China and its African exporting partners exceed the losses imposed on downstream areas such as Egypt. Brown is assuming this is the case without offering any evidence and this is a dangerous precedent.

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