02/02/2011 12:28 am ET | Updated May 25, 2011

Are Emerging Markets Uninvestible?

When Ben Bernanke launched the now infamous Quantitative Easing, his goal was to return liquidity to global financial markets. He was successful, and got the Dow to 12,000 to show for it. But he also got side effects in the form of escalating food prices, which are inevitable when you print money in such vast quantities.

Since last June, the price of wheat rose by 68%. Other essential foods like corn, soybeans and sugar made similar moves. In most western countries this makes little difference. Yet in many parts of the world people live on $2 a day, and food is a significant portion of total expenditures. A sharp increase in the price of food tips the delicate scales from mere poverty to actual hunger. Suddenly people cannot feed their families. (Check out AdventuresInCapitalism for this excellent blog post.)

Napoleon used to say that people fight for their interests, not their rights. Indeed, history shows you can deprive people of political freedom and civil rights for extended periods of time and get no push back. Julius Caesar turned the proud Roman Republic into a military dictatorship and the Romans never had democracy again; there are many modern examples. But when people can't eat, they have no choice but to fight.

And so we have Egypt, where the minimum wage is about $7 a month, and has not risen in 27 years. The masses are now experiencing food shortages and demand immediate response.

But Egypt is hardly unique. Many countries all over the world are vulnerable. Nuclear armed Pakistan spends 47% of household consumption on food, about the same percentage as Egypt, but has GDP per capita of less than $1,000 (compared to $2,000 in Egypt). And the most conspicuous, and chilling, examples are India (49.5% of household consumption spent on food, $1,000 GDP per capita) and China (39%, $3,000).

So long as the world is awash in liquidity, food prices are likely to keep rising. And should food shortages worsen, people in these countries and others could revolt. This inherent instability makes emerging markets uninvestible.

Americans seem to rejoice in the freedom movement currently sweeping the Arab world. But this is not good news for us. Firstly, democracy is meaningless without a free press, an independent judiciary and an informed public that has a tradition of tolerance and respect for the rights of minorities. None of these exist in any Arab country. And secondly, the current governments in most Arab countries (including in Egypt) are likely to be the most pro-west regimes these countries will see in our life time.

Sooner or later Egypt will go to the ballot box. The city-dwelling, college educated now rioting in the streets comprise maybe one percent of the country's population. 80 million villagers, a third of whom are illiterate, will determine the results of the elections.

Democracy cannot provide the immediate solutions people want, and so Egypt will likely end up in the hands of the radical Islamists. In that way they will be no different from their neighbors. Free elections in Gaza produced a Hamas government, and Lebanese democracy got the country a dominant Hezbollah.

The dream of a democratic Egypt will become a nightmare, and Egyptian liberals will have no choice but to accept their new reality. They are the minority, and even some of them have tired of their country, with its 3,000 years history, constantly placating the United States. If they resist, their fate will be similar to the socialists and liberals that threw out the Iranian Shah and were hanged when the Ayatollahs took over.

Do not misconstrue the Arab people. They are traditionalists who love their religion. Liberty as understood by Americans is foreign to their culture. They simply do not accept our democracy as a gift, despite our good intentions.

It is no coincidence that throughout the long history of the Middle East, democracy never took hold there. Perhaps the vast desert makes central power a necessity, required to organize the scant natural resources so that people could survive. The Ancient Egyptians had a highly developed civilization, but their language had no word for freedom. Again, this is no coincidence.

So it is very possible that religious fundamentalists will soon control Egypt, and with it one of the largest and most capable military forces in the region. The kingdom of Jordan could easily topple next. The regime that will replace the current King there is unlikely to be nearly as favorable to western civilization. Saudi Arabia has an old and very unpopular king. If he is dethroned, Saudis are likely to elect a bin Laden clone as their leader. Oil rich states in the Persian Gulf are ruled by tiny families of historical accidents. Syria has a dictator from the Allawi tribe, which is only 10% of the population.

Within a few years, it is not inconceivable that radical Islam will dominate all these countries, plus the West Bank, Gaza, Iraq and Afghanistan, forming an Islamist axis deeply hostile to the west, heavily armed and sitting on the world's oil supplies.

The world has just become much more complex.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at