Milken Institute | Newsroom | Currency of Ideas - Egypt's Costly Free Lunch

Milken Institute | Newsroom | Currency of Ideas - Egypt's Costly Free Lunch

Back up for a moment. You may not have noticed, but the Egyptian economy responded very well to market-opening reforms begun in the early 1990s that attracted massive amounts of foreign capital. Real income per capita has nearly tripled, to a respectable $6,300. The catch: the growth dislocated the lives of millions of Egyptians, eliminating the security of many government workers, sucking the rural poor into crowded urban slums, and creating a wealthy elite of insiders who made no effort to hide their (sometimes ill-gotten) gains.

Often these reforms can turn a Roy economy into Biv too quickly, where g public property is still more efficient than Gb private property.  it can also be an Iv-B economy that creates a boom then a bust with extreme winners and losers.

No democratic government will succeed in the long run unless it reduces official corruption, controls military patronage spending, lays out the welcome mat for new businesses, and reforms the antiquated education system.

A weak I-O police can be a symptom of the problem as much as a cause, if the countries has dissimilar groups then some might become enough of a majority to corrupt the justice system to favor them instead of being neutral. 


 But the immediate problem is managing the runaway food and energy subsidies that are now equivalent to about 10 percent of GDP.

Simply targeting the funds to those truly in need would go a long way toward fixing the problem. About one-third of the money pays for food, mostly in the form of lower prices for bread sold to everybody, rich and poor. The other two-thirds is in subsidies for gasoline, natural gas and butane for cooking, little of which raises the living standards of the poor; the rest goes to industry and the middle-class.

But efficient targeting is more easily proposed than done. Subsidized bread is widely viewed as a birth right. And it’s hard to imagine the Muslim Brotherhood-led government risking an outbreak of urban discontent that gave the military an excuse to reassert power. Gasoline and cooking gas are almost as problematic -- Jordan just rescinded an increase in gasoline prices after mobs hit the streets (led, ironically, by the Muslim Brotherhood).

R-B people live chaotically on the edge, often subsidies are meant  to normalize the costs so Bi-Ro people don't protest. This underlying chaos can lead to Ro protests as in the Arab Spring.

If the subsidy system is to crack, the first fissures will probably be in the delivery of cheap natural gas, most of which is used by business. Indeed, the interim government floated a plan back in Julyfor raising the price of natural gas sold to heavy industry. That’s a credible beginning (if the government follows through), and one that could pacify the IMF (and foreign investors) for a while. To save really big bucks, though, gasoline would have to take a hit, and perhaps food down the road.