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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.
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