DO SUBSIDIES IN EGYPT HELP ALLEVIATE POVERTY?

By: Mohamed Hassan Youssef

 

The adoption of the economic reforms in Egypt as from 1990s, known as Economic Reform and Structural Adjustment Program (ERSAP), led to a dramatic reduction in public spending. Food subsidies, the main component of the Egyptian public subsidies, decreased in both quantity and volume. Food subsidies are originally directed to assist the Egyptian poor, who greatly suffered because of the reform measures. Currently, there are increasing calls for reforming, not eliminating, the Egyptian food subsidy system.
It is well-known that ERSAP consists of three integrated components: stabilization program, structural adjustment program, and social aspects, which were taken into consideration through building up the Social Fund for Development (SFD). The first program aims at decreasing the budget deficit mainly through reducing the public spending (in which food subsidies are the major element). The second program aims at privatizing the public sector, and hence laying off its employees (Ghandour, 1992). The figure of unemployment, therefore, increased and the need for sufficient subsidies became evident.
In general, the main two arms of ERSAP, i.e. economic stabilization and structural adjustment, has not yielded the anticipated sustainable growth and poverty reduction. Great efforts, thus, are needed to achieve a pro-poor development strategy (Yamada, 2008).
Poverty is an intrinsically dynamic problem. It is a relatively new concept in Egypt, as academic studies started exploring it only in 1980s (World Bank, 2007). Although there is no unique definition of poverty (World Bank, 2007), Walton offered a generally accepted one. Walton (1990) defines poverty as the inability to attain a minimal standard of living. In order to combat poverty, the Egyptian government pursued the long-adopted policy of food subsidies, which had its origins in the 1940s after the World War II.
According to Adams (2000), food subsidy programs in developing countries differ in their objectives and targeting. As for objectives, they may be designed to improve the nutritional status of some vulnerable groups or to help the poor at large. From the targeting point of view, there is either administrative targeting or self-targeting. The administrative targeting uses some specific methods in selecting people deserving the subsidies, and is somewhat more efficient in resource allocation. Under the self-targeting method, food subsidies are offered to all people. However, it is originally designed to benefit only the poor through directing resources to goods used only by them, or what Adams (2000) refers to as inferior goods.
As a result of the application of ERSAP application in Egypt, food subsidies as percent of total public spending decreased dramatically - from 16.9 per cent in 1975 and 18.4 per cent in 1984-85 to 7.4 per cent in 1990-91, then to 6.5 per cent in 1996-97 (Adams, 2000).
     Poverty in Egypt, measured by the number of households living at or below the poverty level, has increased remarkably (Korayem, 1996). While less than eight percent of the population are abjectly poor (living on less than $1 per day), consumption surveys in the early- to mid-1990s show the overall poverty rate has risen, with 44 percent of the population unable to spend enough to have minimally adequate diet. Falling average incomes have resulted in falling household expenditure on food (Pfeifer, 1999).
     The impact of ERSAP on the poor can be well measured through the cost of living criterion. Cost of living increased because of the main ERSAP policies, such as the elimination of subsides; devaluation; increase in prices of energy, transportation, public enterprise commodities, … etc; as well as raising indirect taxes and widening their base. Subsidies were given for basic consumer commodities and services, like basic food items and transportation. Reducing the subsidy bill has a greater impact on the poor, since a large portion of a poor family's budget is spent on subsidized basic food items. Similarly, the devaluation of the pound raised energy prices, which led to an increase in the price of imported commodities, including basic food items like wheat and flour, as well as the prices of imported capital and intermediate goods. These in turn raised production costs of domestically produced goods and the general price level, and hence the cost of living (Korayem, 1997).
     ERSAP's impact on the poor could secondly be measured through observing the reduction in real income resulted from price increase. After adoption of ERSAP, the Egyptian economy has witnessed the decline of real wages (Said, 2002). This is measured as either the rising in prices or decreasing of nominal wages. The working poor, who are mostly illiterate or have low education levels, earned low incomes and were thus more vulnerable to increased prices. Moreover, ERSAP's tight fiscal and monetary policies and calls for reduction in government spending depressed job creation. Since the poor are the least educated and do not have influential social connections, their chances of getting jobs is thus relatively slim when the labor market tightens up (Korayem, 1996).
     The third criterion to measure the impact of ERSAP on the poor is through social services provided by the government at little or no cost. Despite the increase in real investment in education and health, their services remained below the level achieved in the late 1980s. With the increase in the number of students and population, the result was a decline in real investment per student and per capita in education and health. Consequently, although students at all levels now pay a small fee, this does not necessarily translate into improvement in the quality of education provided, nor may adequate reasonable quality health services be expected at subsidized price (Korayem, 1997).
The implementation of ERSAP, therefore, had negative effects on the poor, a matter that was acknowledged by both the IMF and the World Bank. The SFD was created to alleviate hardship on the poor, but the limited resources of the SFD made this unfeasible. This gives room for food subsidies to play a wider role in alleviating the suffering of the poor from the reform measures.
The subsidy scheme was under great pressures from international organizations to be eliminated. The whole debate on food subsidies in Egypt centers on economic and social considerations. Those who call for elimination of subsidies for economic considerations, such as Iliya Harik,[1] ignore any resulting social unrests that may happen. The claims for economic considerations are either the necessity for applying market mechanism or production efficiency. The other problem in their point of view is the volume of leakage of these subsidies to the rich (Salevurakis & Abdel-Haleim, 2008). Table 1 below illustrates some of the effects of such leakage in Egypt.
 
Table (1): Food Subsidies Distribution between the Poor and the Better-off

Source: World Bank. 2007. Arab Republic of Egypt: Poverty Assessment Update. Washington, D.C.: The World Bank. (P: 71)
 
In conclusion, the above analysis reveals that despite the normative goals of ERSAP, the reforms do not effectively alleviate poverty. One should not criticize the subsidies policy only for ideological concerns, as it demonstrates viability, especially in case of Egypt after adopting ERSAP. The social and human considerations cannot be sacrificed for the sake of pure theoretical hypnoses. With continuous price increases, vast groups of population become unable to fulfill their basic needs. The need, therefore, arises for reforming, not eliminating, the current subsidy system in Egypt. Food subsidies in Egypt appears more like a safety valve.

REFERNCES
1. Adams, R (Jr). 2000. “Self-Targeted Subsidies: The Political and Distributional Impact of the Egyptian Food Subsidy Program". Economic Development and Cultural Change, Vol. 49/1 (October): 115-136.
2. Adams, R. & J. Page. 2003. “Poverty, Inequality and Growth in the MENA Countries, 1980-2000”. World Development, Vol. 31(12): 2027-2048.
3.  Ghandour, A. 1992. "ERSAP in Egypt" in Abdel-Khalek, G. & H. Kheir-El-Din (ed.), Economic Reforms and its Distributional Effects. Cairo: Dar Al-Mostakbal Al-Arabi. (in Arabic).
4. Korayem, K. 1996. Structural adjustment, stabilization policies, and the poor in Egypt. Cairo: The American University in Cairo Press.
5.  Korayem, K. 1997. Egypt's economic reform and structural adjustment (ERSAP). Cairo: ECES.
6. Pfeifer, K. 1999. "Parameters of economic reform in North Africa". Review of African Political Economy, 82(26): 441-454.
7.  Said, M. 2002.  “A Decade of Rising Wage Inequality? Gender, Occupation, and Public-Private Issues in the Egyptian Wage Structure?” in R. Assaad (ed.), The Egyptian Labor Market in an Era of Reform. London: IB Taurus.
8.  Salevurakis, J & S. Abdel-Haleim 2008. "Bread Subsidies in Egypt: Choosing Social Stability or Fiscal Responsibility". Review of Radical Political Economies, Vol. 40/1 (Winter): 35-49.
9. Walton, M. 1990. "Combating Poverty: Experience and Prospects". Finance & Development, 27(3): 2-5.
10. World Bank. 2007. Arab Republic of Egypt: Poverty Assessment Update. Washington, D.C.: The World Bank.
11. Yamada, T. 2008. Sustainable Development and Poverty Reduction under Mubarak's Program. Japan: Institute of Developing Economies.


[1] Harik, Iliya. 1992. "Subsidization in Egypt: Neither Economic Growth nor Distribution". International Journal of Middle East Studies, 24: 481-499.