The Subsidy Trap

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.

Egypt’s food subsidy program, which costs more than $5 billion a year, is in urgent need of reform as well. The price of bread has been kept so low that it is often fed to animals. Past attempts to reduce such subsidies in North African countries have brought unrest and even toppled governments. But the Sisi government appears to be making progress here as well. Bread subsidies have already been cut by 13%.