Egypt’s Subsidy Blues: When Egypt’s Next Rulers Finally Tackle Urgently Needed Economic Reform, They Should Look to Iran
If people are hungry, provide food at prices they can afford. If they need fuel to cook it, or perhaps to bring their crops to market, give them a break at the pump. What could be fairer or more straightforward?
What, indeed. Governments all over the developing world have been seduced by the populist logic of subsidizing consumer necessities. The approach was especially alluring in centrally planned economies (including hybrids such as China and India), where prices didn’t reflect costs to begin with. And, of course, subsidies for petroleum proved to be as Arab as hummus for the oil exporters of the Middle East, where citizens have come to think of fuel at circa 1979 prices as a birthright.
If subsidies are good for the poor, why not let everybody else in on the deal? That’s a formula for multiplying the waste — subsidies reduce prices below cost, after all, artificially increasing demand and, where the subsidies are borne by the producers, undermining supply incentives. Nonetheless, extending eligibility to include both middle-class and business users has, more often than not, proved irresistible.
The catch, of course, is that few developing countries can really afford the drag on efficiency or budgetary cost. Case in point: Egypt, which devotes an astounding 10 percent of GDP to subsidies for food and fuel - both of which it must import. Whoever wins the presidential election runoff this weekend will thus face the unenviable task of prying both the middle-class and powerful business interests from their accustomed perquisites.
It needn’t (and probably shouldn’t) be done overnight; among other problems, that would spike inflation, which Egypt can’t afford, either. The big question is whether the new government will have the will and the way to manage it at all. Much, alas, is at stake here: Egypt’s failure to confront the subsidy issue would put at risk the gains of two decades of growth in which GDP per capita, measured in terms of purchasing power, almost tripled.