Mediterranean Thoughts

After decades of stability or reductions, the upward trend in food prices – peaking between 2006 and 2008 and causing serious problems in several countries – highlights the limitations of Egypt’s existing subsidy rules and the need to reform them in order to bring down costs and better target the poorest households, as highlighted in a FEMISE study.

It’s April 2008. Hunger riots are breaking out in several countries across the world. In Haiti, Burkina Faso, Mauritania and Egypt, the poorest members of society are demonstrating, sometimes violently, against a rise in food prices. Between 2006 and the middle of 2008, prices soared: dairy products by 80% and cereals by 42% in 2007 alone. In Egypt, for example, basic household spending increased by 50% between January and April 2008 (according to the World Food Programme). The situation became unbearable for the lowest-income families.

Egypt decided many years ago to subsidise several products and services. With the country importing at least half of what it consumes and food representing more than 15% of total imports, the government introduced a universal subsidy for ‘baladi’ bread, with no quota restrictions, and monthly ration cards for eligible households.

Expensive aid

However, the problems in 2008 brought about by a combination of structural and contextual factors – high oil prices, increased meat consumption in Asia, transformation of land for the production of biofuels, a volatile climate and economic speculation – highlighted the limitations of these aid measures.

In a study carried out under the auspices of Femise (FEM33-14), researchers at the Center for Social and Economic Research in Poland (CASE) and the Egyptian Center for Economic Studies in Egypt (ECES) found that the Egyptian system was not only very costly but also highly ineffective for the poorest members of society.

The increase in food prices between 2006 and 2008 almost doubled the subsidy budget from 1.3% of GDP in 2006-2007 to 2.1% of GDP in 2008-2009 – an untenable situation if prices remain high. Moreover, because the food subsidies are poorly targeted, the majority of aid currently goes to relatively rich households, while between a quarter and a third of low-income families do not get any help.

Direct transfers rather than subsidies

We need to come up with fresh political solutions by analysing the repercussions of various measures. The researchers predict that reducing or scrapping customs duties may slightly improve things for the poorest members of society, but they think the most important step is a reform of the current system of subsidies by replacing them with money transfers to the lowest-income households.

They also suggest introducing direct support for farmers so they can respond better to global fluctuations in food prices. The ideas are there, but reform does not appear to be on the agenda for now.

Article by Marie Pierre Vega, from the website Econostrum. It belongs to a series of articles that will be published in the context of the partnership between Econostrum and Femise for the year 2010. These articles will also feed the “Mediterranean Reflection” part of the Econostrum Website. You can find this topic and all information at the following address:www.econostrum.info. Registration for the Econostrum newsletter is available here: http://www.econostrum.info/subscription