Domestic Food Prices and the Politics of Subsidies

Global food prices are different from local food prices, which are moderated by subsidies and local costs of food processing and distribution. The latter partly depend on the quality of logistics infrastructure and on domestic fuel costs and might show different price dynamics than those of agricultural raw materials. In developed countries like the us people spend a relatively low proportion of their overall budget on food, and packaged foods constitute a large proportion of spending on food items (see Figure 8.1). Hence, inflation with regard to crops only affects a fraction of overall spending on food, and the impact on overall consumer price inflation is more limited than in developing countries where people spend a larger share of their income on food and rely less on processed and packaged foods.

People in many mena countries, including Egypt, Algeria and Morocco, spend more than a third of their disposable income on food. This is close to the figures for developing countries like Kenya, and considerably above other

Percentage of income spent onfood, 2013 SOURCE

figure 8.1 Percentage of income spent onfood, 2013 SOURCE: USDA, 2014A.

middle-income countries such as China or Russia. Hence, these mena countries are particularly vulnerable to food price inflation. Only the smaller Gulf countries with their higher incomes have allocation profiles that resemble those of developed countries, with food accounting for less than 20 per cent of overall household spending (see Figure 8.1).

Food, and fuel subsidies for food distribution networks, can cushion the impact of global food price shocks for local consumers and place the burden of adjustment on the shoulders of respective governments. Subsidy regimes have absorbed some of the global price hikes for consumers in mena countries, but there has been pass-through of global food price rises by a factor of 0.2-0.4, in line with a global average of 0.3. With the exception of the United Arab Emirates (uae) and Yemen, food prices in mena countries are also downward- sticky—meaning that they adjust on the way up, but do not fall back to the same extent when price corrections occur on global markets (Ianchovichina et al., 2012).

Food prices in mena countries outpaced overall inflation rates from late 2005 to mid-2008. Overall consumer price inflation rose from 3.4 per cent in July 2007 to 10 per cent in July 2008, driven to a large extent by food price inflation, which jumped from 5.8 per cent to 14.8 per cent over this 12-month period (Albers and Peeters, 2011, 10). It has been argued that such food price rises were a contributing factor to the Arab-Spring protests. Jane Harrigan points out that this impact did not occur as a quasi-mechanical transmission, but should be seen in the broader context of socio-economic deterioration and a lack of political freedoms, both of which were in place prior to the protests. The impact was also uneven: while there was a significant correlation between food prices and unrest in the poorer mena states, this was not the case in the oil-rich Gulf monarchies, and food prices did not play a role in the Libyan protest that led to the fall of the Gaddafi regime (Harrigan, 2014b). Domestic price increases in mena have been considerably below international averages. Rather than causing outright depravation they led to a reorientation of household budgets towards basic food needs. Thus they compromised purchasing power for nonfood items, which contributed to widespread grievances about stagnating or declining living standards that have been associated with economic liberalisation, corruption, and inequalities of wealth and opportunities (Cammett et al., 2015; Verme et al., 2014).

Food and fuel subsidies in mena countries as a proportion of gdp vary, especially in the case of fuels. In 2008 at the time of the global food crisis, they stood at around 2 per cent for food in many mena countries and—for fuel—reached more than 6 and 12 per cent, respectively, in Egypt and Syria. Fuel subsidies have usually been considerably higher than food subsides: only Tunisia and Jordan spend more on food subsidies (Albers and Peeters, 2011). These expenditures on subsidies have been a substantial fiscal burden. In the cases of Morocco and Egypt, that burden accounted for 20 and 31 per cent, respectively, of total budgetary expenditure. This has raised questions about the sustainability of such spending. International organisations such as the World Bank and the International Monetary Fund (imf) have called for indiscriminate food and energy subsidies to be replaced with targeted aid for the poor.

General subsidies applied to basic food items are self-targeting, as poor people spend a larger share of their disposable income on these items. They are less distorting than subsidies on energy, which disproportionately benefit the middle and upper classes with their higher ownership ratios of cars and energy-using appliances (air conditioning, washing machines, etc.). For this reason, and because they are much higher, energy subsidies are more likely candidates for further subsidy reforms than are food subsidies. Kuwait and Egypt both cut fuel subsidies in 2014, but maintained food subsidies, although Egypt introduced a smart-card system to better target bread subsidies. Food subsidies have great significance with regard to political legitimacy. This could be seen during the Arab Spring when Egyptian protesters strapped loaves of bread to their heads. It is unthinkable that they would have done the same with gallons of gasoline. Food clearly commands a greater emotional appeal and— because of their self-targeting nature—the abolition of subsidies on staple foods would disproportionately hurt the poor. Moving to targeted financial aid is easier said than done, as it requires considerable monitoring capacity. Financial aid can also be subject to considerable erosion via inflation, as the recent experience of Iran with subsidy reform has shown (the Guardian,

 
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