Alternative Policy Solutions | Bread Subsidies: A Necessity Created by Developmental Failure

Bread Subsidies: A Necessity Created by Developmental Failure

  • 24 Aug, 2021

Osama Diab

Osama Diab is a development and economic rights researcher, as well as a lecturer in development studies. Osama has a PhD in Political Science from the Department of Conflict and Development Studies at Ghent University, Belgium. He is also a member of the Economic Policy Working Group at the International Network for Economic, Social and Cultural Rights (ESCR-Net), and the Debt Justice Working Group at Progressive International."

 

AaAaAa

Introduction

This commentary explains why bread subsidies have become more necessary with increasing poverty levels, rising living costs and declining investment in public administration. Since Egypt has witnessed these three phenomena over the last decades, it is injudicious to consider reducing bread subsidies before reversing some or all of these trends, especially given the subsidies’ relatively small cost, and given how they have become more narrowly targeted over the years. The large number of beneficiaries — in spite of government efforts to make it more targeted — testifies to their indispensability amidst tightening living conditions, not to their being wasteful and benefiting citizens undeserving of subsidies, as the official narrative often implies.

Self-targeted subsidies of inferior goods that people will only consume out of desperation means that this subsidy system will no longer be necessary with improvements in general living conditions. Accordingly, if the government is serious and effective about its development objectives, bread subsidies will fade away with minimal effort and minimal social impact.

Bread subsidies are already targeted

In recent weeks, debates about bread subsidies intensified after signs that the government intends to increase the price of subsidized bread from the current 5 piasters a loaf to 20 piasters. The government currently spends about EGP45 billion to subsidize around 120 billion loaves, with an average cost of EGP0.375 per loaf benefiting over 66 million people (Hefzy, 2021). This subsidy represents less than 2% of total government expenditure which currently amounts to EGP2.46 trillion (Reuters, 2021). 

In recent years, the relative cost of bread subsidy was significantly reduced after the government limited access to subsidized bread to holders of ration cards, revoked millions of cards that it deemed its holders undeserving of food subsidy and reduced the size of the loaf from 150 grams in the 1980s to 90 grams now (Adams, 2000; Awadalla, 2020).

The secular reduction in the weight of the subsidized loaf challenges the claim that the price of subsidized bread had not changed since the 1980s. Limiting its access restricts beneficiaries to those who really need it, which in the case of Egypt, ranges from those in extreme poverty to those near poverty — a range that constitutes about 60% of the population. This makes bread subsidies in its current form a largely targeted subsidy, or a “self-targeted subsidy” that limits the number of beneficiaries by subsidizing inferior goods. Further, subsidies targeted at other food items such as sugar, food oil, etc. have substantially declined over the last few decades (Adams, 2000), making subsidized bread one of the last pillars of protection against hunger. Self-targeted subsidies work best when the targeted population consumes different food items than the general population (Adams, 2000), and therefore high levels of inequality and deprivation are a prerequisite to the subsidy of inferior goods that most people will choose to refrain from once they are economically able.

Increasing bread prices will be harder on the poor than increasing the prices of electricity and fuel

How a relatively insignificant amount of public expenditure provides a significant lifeline to tens of millions of Egyptians testifies to the prevalence of poverty and failure of effective development over many decades. But how important exactly is bread subsidy to the majority of Egyptian households? 

Extremely poor households spend on average 6.64% of their incomes on bread and cereal, and for some it can reach as high as 28%. Since one can only expect that households living in extreme poverty exclusively buy and consume subsidized bread, this means that quadrupling the price of bread from 5 piasters to 20 can cost those households a much larger chunk of their meager incomes. Surely for the poor and near-poor income groups, the impact will be less as slightly smaller portions of their incomes are spent on bread and cereal (5.84% and 5% for the poor and near poor respectively). Notwithstanding the effect that increases in electricity and fuel have on the cost of living of low-income households, the increase in bread prices is expected to be felt a lot more than the increases in electricity and fuel of the last few years. For example, the extreme poor only spend about 4% of their income on energy for dwelling, and it was never the case that energy prices would quadruple at once. 

Subsidized bread also forms the most basic and cheapest assurance of biological continuity, and is therefore indispensable and cannot be cut down on as a response to increase in prices. In fact, it is possible that the consumption of subsidized bread could increase with the increase of its price in the phenomenon known as Giffen Paradox. On the other hand, fuel and electricity, as essential as they are, are not as directly linked to biological survival and are not Giffen goods.

Further, wide scale bread subsidies are better suited for Global South macroeconomic conditions, including: 1) high levels of poverty that deems targeted social support inefficient; 2) price volatility that gives price stability through subsidy an additional value; 3) an under resourced administrative apparatus and unavailable income data that benefits from the low administrative cost of wide scale targeting and the lack of need for high-quality income data. In recent years, poverty has substantially increased in Egypt, where official poverty rates rose significantly from 27.8% in FY2015/2016 to 32.5% in FY2017/2018 (Kassab, 2019). Although the official poverty rate slightly dropped to 29.7% in FY2018/2019, this is still magnitudes higher than that of 16.7% in 1999 (World Bank, n.d.). Poverty rates are expected to have shot up again in 2020 — whose figures are not yet available — as a result of the pandemic-related loss of income.

Recent years have also been characterized by high inflation, especially of basic consumer goods. Investment in public administration has also witnessed significant cuts, where wages in the public administration and government dropped from 7.8% of GDP in 2013 to about 5% in 2020 (Diab, 2021). The more these three phenomena intensify, the more bread subsidies become indispensable.

The hollow promise of subsidy cuts and better-targeted social spending

As we discussed above, bread subsidies in their current form combine a level of targeting with relatively low administrative costs, which is a difficult balance since these two forces should typically be in a state of contradiction (i.e. the more you make the subsidies targeted, the higher the administrative cost). 

Further, the Egyptian government has a poor track record of using savings from cutting down on untargeted subsidies in targeted support programs. This was most evident in the late elimination of energy subsidies, whose savings were supposed to be used for better targeted social safety net programs. 

This narrative can be found in the reviews of the 2016 International Monetary Fund (IMF) program, such as in the following:

Egypt is moving from a social protection system relying on energy subsidies to a better-targeted social safety net. Energy subsidies are costly and inequitable. To better target the poorest households, the authorities plan to expand cash transfer programs and increase semicash allowances under the food subsidy program (IMF, 2017, p. 11). 

There is little evidence to support the argument that the authority’s targeted social support program (mostly cash transfers) strengthened the social safety net, given the steep increases in  poverty rates. This is primarily because the savings from slashing untargeted subsidies outweighed the increase of targeted social spending, not to mention that the cuts were implemented quite regressively with the poorest households bearing the largest brunt (Diab & Hindy, 2021). The importance of bread subsidies has increased in recent years with the steep increase in poverty rates, and with higher inflation that has caused the prices of non-subsidized bread and foods to skyrocket, leaving the poor with very few dietary options, hence the overreliance on subsidized bread. 

Over-relying on subsidized bread contributes to  an extremely unbalanced diet for lower-income groups (Sawle, 2017). Ultimately, a government policy that does not encourage carbohydrate-heavy food with low nutritional value might be a good thing. However, this must not happen before the underlying causes for the overreliance on subsidized bread are abolished. When people are lifted out of poverty, they will organically tend to consume less bread and even less subsidized bread, and therefore bread subsidy will automatically fall out of grace. In short, the wide scale prevalence of self-targeted bread subsidies reflect a situation of deep societal imbalance, but removing them is not going to remove the conditions that gave rise to them and continue to make them necessary.

References

Views and opinions expressed are those of the authors only and do not reflect the opinions of The American University in Cairo or Alternative Policy Solutions.