Thursday, March 27, 2008

The price of subsidies

Voice of America
In Egypt, a shortage of subsidized bread has resulted in long lines and occasional clashes in which several people have been killed. The president has ordered the army to use its bakeries to try to end the bread crisis, but the roots of the problem are more than just simple supply and demand. Rising food prices and poverty have combined with corruption to create a bread problem that will not be easily solved. VOA Correspondent Challiss McDonough has more from Cairo.

About 30 people are crowding around two small windows at a Cairo bakery, shouting at each other and jostling for the best place in line. The heat is blistering already, and women in the crowd shade themselves from the sun with plastic bags.

A woman named Fatma says she waits here for two to three hours every day to buy bread for her family of five.

Gesturing toward the chaos at the bakery window, she says, "What can I say? You can see this bread problem for yourself. The prices of everything have gotten so high."

This bakery is selling round loaves of government-subsidized bread, known locally as "balady" or country bread. The price is fixed at five Egyptian piasters, or less than one U.S. cent a loaf.
Economist Hanaa Kheir el-Din is executive director of the Egyptian Center for Economic Studies.

"All other food prices have risen. There are a lot of food prices which rose sizably - look at the oil price for instance, rice, sugar, everything is rising - but balady bread has been kept at five piasters a loaf, and the flour which goes into it is delivered at a much lower price while the baker can sell it on the black market at several times the price," said Kheir el-Din.

The corruption is not limited to selling subsidized wheat flour on the black market.

At the bakery, a heavy metal door swings open and then clangs shut quickly, and a man scurries away holding five round pieces of freshly baked bread.

Another man who gives his name only as Samir waves his hand angrily toward the door.

He says the bakery employees let some people inside to get bread quickly while he and the rest are waiting in line outside in the sun for hours.

This is an emotional issue. Bread is such a vital staple food here that Egyptians use a different word for it than other Arabic-speakers do - they call it "aish," which literally means "life."
There is no shortage of bread for those willing and able to pay higher prices for it. Some people who buy the subsidized product resell it just down the street for twice the price. And unsubsidized bread is in plentiful supply at local markets, but that costs five times as much.
The last time the Egyptian government tried to remove subsidies on bread, in 1977, riots broke out and more than 70 people were killed.

But food subsidies now take up a huge portion of Egypt's annual budget, one that is growing as global food prices rise.
Back at the bakery, Fatma sighs as she stares at the raucous crowd pushing and shoving to get closer to the front. She shakes her head and moves into line, saying under her breath, "May God have mercy on the poor."
At the very least, Fatma surely values those two or three hours spent daily in line.

In the classic textbook analysis of subsidies there is no shortage. In this real life example there must be more going on. Either the government has limited the quantity it will subsidize, or it has it is not only subsidizing, but it is also controlling the price the bakers can charge. Otherwise, there would be no shortage, no favoratism, no reselling, no black market.

The same sort of policy mix is applied in Iraq in the petrol and diesel markets to sometimes deadly effect.

In Eypgt and in Iraq the governments needs to figure out how to remove these inefficient, distortionary and corrupting policies in a manner that is politically acceptable.

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