Policymakers in developing countries are well aware that it is politically easier to expand consumer subsidy programs than to contract them. This fact of life is particularly evident in the case of food subsidy reform. In the past 25 years numerous government attempts to reduce food subsidies have ignited violent and, in some cases, politically destabilizing protests. Yet, despite the political benefits of food subsidy programs, they often perform poorly at providing a safety net for the truly needy, and they tend to be costly. The dilemma policymakers face when overseeing large food subsidy programs is whether, when, and how to implement reform without sparking political unrest. The question of timing is also of interest to donors looking to encourage food subsidy reform in recipient countries and to scholars seeking to better understand the political and economic factors that contribute to the success or failure of policy reform.

This study examines the political economy of food subsidy reform in Egypt and discusses the economic and political advantages and disadvantages of nine possible reforms. Egypt has a large food subsidy program that has created a relatively effective social safety net, but it is an expensive program that has proved to be poorly targeted toward the poor. Discussions about reforming the system to improve its effectiveness have run into extreme political sensitivities surrounding the issue of food subsidies. Egypt, therefore, well illustrates the quandaries that policymakers and others contemplating food subsidy reform face in developing countries.

The Egyptian Food Subsidy System
The food subsidy system in Egypt currently covers four staples: the flat baladi bread, baladi flour, cooking oil, and sugar. Bread and flour prices are subsidized for everyone, but oil and sugar subsidies are targeted to the poor through a ration card system. Highly subsidized green cards are assigned to the poor and less subsidized red cards to higher-income groups. The problems besetting the current system include high absolute costs, which stood at LE 3.7 billion in 1996/97 in current prices, roughly equaling total earnings from tourism; poor targeting vis-à-vis the needy; considerable leakage of subsidized foods before they reach consumers; and market distortions in the domestic wheat and milling sectors. Although widespread agreement exists among policymakers, donors, and other political actors that the subsidy program should be reformed to function more efficiently and reach the poor more effectively, the search for politically feasible reform strategies continues.

Food subsidy policy is politically sensitive in Egypt primarily because the state has made explicit its mandate to ensure basic food supplies for all Egyptians since the Nasser era. Over time, Egypt's provision of certain subsi- dized foods, bread in particular, has become a powerful symbol of the broader social contract between the government and the population, in a political system in which par- ticipation is otherwise highly limited. Sharp increases in the price of food staples and other products in 1977 ignited riots in Egypt that were seen as regime threatening. The riots left a legacy of government caution and gradualism toward food policy reform and economic reform more broadly.

But Egypt has, in fact, quietly reformed its food subsidy system over the past two decades. Food subsidy costs have declined to around 5 percent of government expenditures in recent years, from a high of 14 percent in 1981–82. The food subsidy system is also widely credited with guaranteeing affordable staples to the population and helping to reduce infant mortality and malnutrition. Yet, there is clearly scope for more reform.

Although food subsidy reform in Egypt is highly politicized, we identify numerous options that can simultaneously strengthen the social safety net and better target the poor without straining national resources.

Options for Reform
The relationship between subsidy cuts and political stability is complex and depends greatly on the specific economic and political climate a country faces when its government implements policy reform. But even with knowledge about economic and political contexts, it is difficult to know exactly when reform will trigger disruptive actions because the relative strengths of the different causal mechanisms are not well understood.

Clearly the most politically acceptable cost-cutting options are those that stay somewhere between expanding the system without excluding the rich and removing large numbers of people, including the near poor. The reforms that have the greatest chance of success are those that reduce the access of the wealthy while increasing the access of the truly needy.

The paper suggests that if reform options were to be listed in order of descending political acceptability, the first three options would focus on sugar and oil subsidies, because these are more acceptable reform targets than bread and wheat flour subsidies. A two-phase reform process might first transfer some percentage of the highest-income consumers from the green card to the red card, and later remove the red-card subsidy. The main drawback to this option is that members of lower income groups holding red cards would be adversely affected. These individuals would have to be transferred to the green cards, but sorting them out from higher income red-cardholders will be a challenge. Alternately, the price of goods bought with the green card could be increased, or the quantity of goods allowed for purchase decreased. Although prices for rationed sugar have been successfully increased in the past, the poor do get hurt more than the rich with this reform. This option does have the advantage of reducing government expenditures, bringing ration prices for sugar more into line with market prices, and potentially encouraging wealthier consumers to buy market-priced sugar if the quality is higher.

Reforming the bread and flour subsidy program is more difficult, although the price of subsidized bread has been increased in the past and the size of the bread reduced. Both leakage and wheat imports could be reduced by mixing maize flour into subsidized wheat flour. This would reduce leakage because bakers would be unable to sift mixed flour into a higher quality wheat flour for sale (as flour or baked goods) at unsubsidized prices. The mixed-flour loaf could improve targeting as well because it may be less attractive to the nonpoor. The downside is that cereal imports may not decrease in the short term because the scope for domestic maize production is limited at present.

The paper emphasizes that moves to implement such reforms should be sensitive to sequencing and other issues: all members of the ruling coalition should not be hurt simultaneously by a reduction in subsidy benefits; policies to compensate the most vocal losers should be considered; and the living standards of the poor should be directly increased.

The choice of options also depends on how trade-offs are addressed. Reforms that expand the social safety net, for example, can result in increased costs, but they can also result in reduced costs if they are taken in conjunction with other measures to make the subsidy system work more efficiently. In addition, policymakers must differentiate between short-term and long-term goals, while recognizing their interconnectedness. Short-term goals must be placed within the context of Egypt's far-reaching economic adjustment and reform process, and the important role that social safety nets such as food subsidy policies play during that process.

Conclusion
While major reforms of the food subsidy system are not currently high on the Egyptian government's agenda, significant interest exists both inside and outside the government to make the food subsidy system perform in a manner more cost-effective for the government and helpful to the poor. The government therefore has time to devise programs with a long-term impact in mind. Although the issue is highly politicized, numerous options exist that can simultaneously strengthen the social safety net and reform the system so that subsidies reach the poor more effectively without straining national resources.

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