The Subsidy Trap

Once subsidies for food and energy are in place, they are extraordinarily difficult to remove. But that does not necessarily mean that keeping them is a savvy politician’s best option.

CAMBRIDGE – Few policies place good economics so directly at odds with good politics as subsidies for food and energy. The issue of unaffordable subsidies is now front and center for three of the world’s most important new leaders: Egyptian President Abdel Fattah el-Sisi, Indonesian President-elect Joko “Jokowi” Widodo, and Indian Prime Minister Narendra Modi.

Sisi is confronting the need to cut subsidies better than might have been expected. Modi, by contrast, is doing worse than expected – even torpedoing a long-anticipated Word Trade Organization agreement. With Jokowi, it is too soon to tell.

In July, Sisi accomplished what few leaders in North Africa or the Middle East have: he sharply cut longstanding fuel subsidies and allowed prices to rise by 41-78%. Surprisingly, few protests materialized.

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