The Egyptian Food Subsidy System Structure, Performance, and Options for Reform Akhter U. Ahmed Howarth E. Bouis Tamar Gutner Hans Löfgren Research Report 119 International Food Policy Research Institute Washington, D.C. Copyright © 2001 International Food Policy Research Institute All rights reserved. Sections of this report may be reproduced without the express permission of but with acknowledgment to the International Food Policy Research Institute. Library of Congress Cataloging-in-Publication Data The Egyptian food subsidy system : structure, performance, and options for reform / Akhter U. Ahmed . . . [et al.]. p. cm. — (Research report / International food Policy Research Institute ; 119) Includes bibliographical references. ISBN 0-89629-121-9 1. Food relief—Egypt. 2. Food relief—Egypt— Costs. 3. Subsidies—Egypt. I. Ahmed, Akhter U. II. Research report (International Food Policy Research Institute) ; 119 HV696.F6 E37 2001 363.8′82′0962—dc21 2001024291 List of Tables iv List of Figures vii Foreword viii Acknowledgments ix Summary xi 1. Introduction 1 2. The Policy Context 5 3. How the Present Food Subsidy System Operates 13 4. Household Surveys and Other Information Sources 17 5. The Geographic Allocation and Household-Level Use of Food Subsidies 20 6. Leakage, Targeting, and Cost-Effectiveness 49 7. Patterns of Food Demand 67 8. Policy Options and Their Simulated General Equilibrium Effects 82 9. Conclusions for Policy 101 Appendix A: Method for Estimating Food Subsidy Cost 106 Appendix B: Estimating the Proµtability of Baladi Bread Production 108 Appendix C: Leakage Estimation Method and Data 112 Appendix D: Mathematical Formulation for the Food Demand Model, Based on Demand for Characteristics 114 Appendix E: The Computable General Equilibrium Model 118 Appendix F: Supplementary Tables 135 References 142 About the Authors 148 iii Contents 2.1. Total explicit subsidy costs of Egypt’s food subsidy system, by commodity, 1980/81 to 1996/97 8 3.1. Rates of food subsidy to consumers per unit of commodity, 1996/97 14 5.1. Allocation of food subsidy beneµts, and distribution of population and poverty, by governorates 23 5.2. Urban and rural allocations of per capita absolute food subsidy beneµts, by governorates, 1997 26 5.3. Distribution of food subsidy beneµts and poverty, by region, 1997 27 5.4. Per capita purchases of subsidized and open-market bread and ×our, by region 31 5.5. Share of households purchasing subsidized baladi bread and wheat ×our, by region and expenditure quintile 33 5.6. Per capita monthly absolute beneµts to consumers from subsidized baladi bread and wheat ×our, by region and expenditure quintile 34 5.7. Average travel time to baladi bread outlets, by expenditure quintile 36 5.8. Average time waiting in line to purchase subsidized baladi bread, by expenditure quintile 36 5.9. Restrictions on subsidized baladi bread and wheat ×our purchases, by expenditure quintile 36 5.10. Share of households holding ration cards, by expenditure quintile 37 5.11. Households with green and red ration cards, by expenditure quintile 39 5.12. Prevalence of unregistered members in the ration card-holding households, by expenditure quintile 40 5.13. Self-reported reasons for unregistered household members, by expenditure quintile 42 5.14. Per capita purchases of rationed and open-market sugar and cooking oil, by region 42 iv Tables 5.15. Share of all households purchasing subsidized sugar and cooking oil, by region and expenditure quintile 43 5.16. Per capita monthly absolute beneµts to consumers from subsidized and rationed sugar and cooking oil, by region and expenditure quintile 43 5.17. Per capita monthly absolute beneµts to consumers from all four subsidized commodities, and total beneµts expressed as a percent of total per capita expenditures, by region and expenditure quintile 46 6.1. Purchases of subsidized baladi bread 51 6.2. Purchases of subsidized wheat ×our 51 6.3. Purchase of subsidized rationed sugar 52 6.4. Purchases of subsidized rationed cooking oil 52 6.5. Leakage in the baladi bread subsidy system 53 6.6. Leakage in the wheat ×our subsidy system 53 6.7. Leakage in the rationed sugar subsidy system 54 6.8. Leakage in the rationed cooking oil subsidy system 54 6.9. Per capita monthly baladi bread subsidy beneµts accruing to expenditure quintile groups, by region, and beneµts to nonneedy, 1997 56 6.10. Per capita monthly wheat ×our subsidy beneµts accruing to expenditure quintile groups, by region, and beneµts to nonneedy, 1997 58 6.11. Per capita monthly sugar subsidy beneµts accruing to expenditure quintile groups, by region, and beneµts to nonneedy, 1997 60 6.12. Per capita monthly cooking oil subsidy beneµts accruing to expenditure quintile groups, by region, and beneµts to nonneedy, 1997 62 6.13. International comparison of cost-effectiveness of selective programs 64 7.1. Per capita expenditures, calorie availability, and calorie cost, by food group for metropolitan Egypt, 1997 68 7.2. Per capita expenditures, calorie availability, and calorie cost, by food group for urban Lower Egypt, 1997 69 7.3. Per capita expenditures, calorie availability, and calorie cost, by food group for rural Lower Egypt, 1997 70 7.4. Per capita expenditures, calorie availability, and calorie cost, by food group for urban Upper Egypt, 1997 71 7.5. Per capita expenditures, calorie availability, and calorie cost, by food group for rural Upper Egypt, 1997 72 7.6. Food expenditure and calorie shares, by cereals, nonstaple plant foods, and animal/µsh products, by region, 1997 74 7.7. Regional patterns of cereal consumption 75 7.8. Expenditure elasticities of all commodity groups, by region 78 v 7.9. Uncompensated (observed) own-price elasticities of demand for all commodity groups, by region 79 7.10. Own-price and expenditure elasticities for the lowest 40 percent (poor) and highest 60 percent (nonpoor) of income distribution 80 8.1. Disaggregation of factors, institutions, and activities in the CGE model 84 8.2. Simulation assumptions 86 8.3. Summary of simulation results 88 8.4. Comparison of policy options for food subsidy reform 90 A.1. Calculation of the subsidy cost for the 82 percent-extraction wheat ×our supplied to bakeries for subsidized baladi bread production, 1996/97 107 B.1. Costs of subsidized baladi bread production, by bakeries 109 B.2. Average proµtability to bakeries of baladi bread production, by region, 1997 110 E.1. Structure of household factor incomes in Social Accounting Matrix (SAM) for 1996–97 125 E.2. Simulation results: Distribution of factor incomes 126 E.3. Simulation results: Foreign trade 127 E.4. Simulation results: Real production 128 E.5. Elasticity values used in the model 130 E.6. Mathematical statement for the Egypt Food CGE model 131 F.1. Imported and domestic wheat supplied through the subsidy system 135 F.2. Total domestic production and imports of cooking oil, and supply of subsidized cooking oil 136 F.3. Total domestic production and imports of sugar, and supply of subsidized sugar 136 F.4. Distribution of bakeries producing subsidized baladi bread, by governorates, 1997 137 F.5. Distribution of total quantity of subsidized wheat ×our, by governorates, 1997 138 F.6. Distribution of total quantity of subsidized sugar and cooking oil, by governorates, 1997 139 F.7. Population living in Egypt, by governorates, 1996 census 140 F.8. Distribution of ration cards, 1981/82–1997/98 141 F.9. Cost-effectiveness of Egyptian food subsidies for the consumers, 1997 141 vi 5.1. Map of the Arab Republic of Egypt 22 5.2. Distribution of population and food subsidy beneµts, by governorates, 1997 24 5.3. Urban and rural allocation of per capita absolute food subsidy beneµts, by governorates, 1997 25 5.4. Food subsidy allocations and distribution of poverty, by region, 1997 28 5.5. Share of households purchasing subsidized baladi bread and wheat ×our, all Egypt by expenditure quintile, 1997 32 5.6. Per capita monthly absolute beneµts to consumers from subsidized baladi bread and wheat ×our, all Egypt by expenditure quintile 35 5.7. Share of households holding ration cards, all Egypt by expenditure quintile 38 5.8. Share of household members not registered on the ration cards, all Egypt by expenditure quintile 41 5.9. Share of all households purchasing rationed commodities, all Egypt by expenditure quintile 44 5.10. Per capita monthly absolute beneµts to consumers from rationed subsidies, all Egypt by expenditure quintile 45 6.1. Cost-effectiveness of the food subsidy system (cost of supplying LE 1.00 to a consumer) 65 E.1. Production technology 120 vii Figures In the early 1980s, Egypt spent a substantial part of its national budget on subsi- dies for a dozen different rationed foods. The costs of the subsidies were rapidly becoming unsustainable. The Government of Egypt asked IFPRI to study the effec- tiveness of its food subsidy system and to look at ways to reduce costs without jeop- ardizing the welfare of the poor. Several IFPRI research reports were published as an outcome of this research (see Research Report 34, Egypt’s Food Subsidy and Ra- tioning System: A Description, and Research Report 45, The Effects of the Egyptian Food Ration and Subsidy System on Income Distribution and Consumption). As a result of the strategies Egypt has undertaken since the late 1980s, the cost of the food subsidy has fallen from 14 percent of total government expenditures in 1980/81 to less than 6 percent in 1996/97. Nevertheless, costs remain high (about US$1.1 billion in 1996/97). Because many policymakers are concerned that further efforts to cut costs and reform the system might threaten the food security of those who need it most, the Government of Egypt again asked IFPRI to conduct food policy research in collaboration with Egypt’s Ministry of Agriculture and Land Reclamation and Ministry of Trade and Supply over a three-year period beginning in 1996. This report is one result of comprehensive research evaluating key performance indicators of the system. It µnds that the current food subsidy system generally does a good job in providing food security for the poor, but much of the subsidized food also reaches those who are relatively well off. Tighter targeting of food subsidies could make the system more efµcient without increasing costs prohibitively. This work in Egypt adds to an extensive body of past research on food subsidies and food security for the poor in a number of countries including Bangladesh, Pak- istan, and the Philippines. Work is also under way in a number of other countries, particularly in Africa. Per Pinstrup-Andersen Director General viii Foreword Between 1996 and 1999, IFPRI, in collaboration with the Egyptian government’s Ministry of Agriculture and Land Reclamation (MALR) and Ministry of Trade and Supply (MOTS), conducted the research that underpins this report on food se- curity issues in Egypt. We gratefully acknowledge the U.S. Agency for International Development (USAID) for funding the Food Security Research Project in Egypt un- der USAID Grant Number 263-G-00-96-00030-00. We are particularly indebted to David Alverson, Craig Anderson, Thomas Olson, Mohamed Omran, Glenn Rogers, and Fenton Sands of the Economic Growth/Agricultural Policy Division at USAID Egypt for their advice and support. The Food Security Research Project was one of the units of the Agricultural Pol- icy Reform Program (APRP) in Egypt. We are grateful to Saad Nassar, director, and the members of the Program Planning Committee of APRP, particularly Hamdy Salem and Mahmoud Nour, for their guidance. Our thanks also go to the members of other APRP units, and especially to Gary Ender, Lehman Fletcher, and John Holtzman for their useful comments and suggestions on earlier versions of this report. We also thank the concerned ofµcials from MALR and MOTS for their cooperation. Our research in Egypt was a collaborative effort with many Egyptian experts and researchers. We are especially grateful to Ali Abdel Rahman Ali, Sonia Ali, Abdel- Razek Hassan Abdel-Razzek, Salwa Gomaa, Shaµka Nasser, Nagla Salem, and Gamal Siam for their contribution in conducting the research in Egypt. We also thank enumerators and supervisors from MALR and MOTS who helped us implement the Egypt Integrated Household Survey. The study would not have been possible without the dedication and hard work of the staff in the IFPRI Cairo ofµce, who facilitated various aspects of our research and project administration. Our special thanks go to Dawoud Al-Husseini, Ahmed Qadry Bahloul, Asmaa El-Ganainy, Amina Hegazy, Nelly Shaheen, Ayman Tawµk, and Maged El Wakkad. At IFPRI, we thank the director of the Food Consumption and Nutrition Division, Lawrence Haddad, who was also director of the Food Security Research Project in Egypt, for his stimulating comments and suggestions on this report, and for his over- ix Acknowledgments all guidance. Thanks also go to Gaurav Datt, Dean Jolliffe, Manohar Sharma, Jay Willis, and Yisehac Yohannes for their input to this study. We thank Mark Rosegrant for coordinating the review of this report. We beneµted from the helpful and valuable comments from the three reviewers: Mylène Kheral- lah, Joachim von Braun, and an anonymous reviewer. We are also grateful for the ed- itorial assistance of Uday Mohan and Phyllis Skillman. x Egypt’s food subsidy system has been a mainstay of the government’s long-term policy of promoting social equity and political stability. It has also been a ma- jor component of the social safety net for the poor, guaranteeing the availability of affordable staples, helping to reduce infant mortality and malnutrition, and mitigat- ing the adverse effects of recent economic reform and structural adjustment. The cost of the system has declined considerably from 14 percent of government expenditures in 1980/81 to 5.6 percent in 1996/97. The absolute cost, however, remains high: In 1996/97, the total cost was 3.74 billion Egyptian pounds (LE) or about US$1.1 bil- lion. The government and various stakeholders agree that the system’s costs can be further reduced and its efµciency improved with better targeting to the needy. The Egyptian Food Subsidy System: Structure, Performance, and Options for Re- form evaluates the economic, political, and technical feasibility of reducing costs while improving or maintaining the welfare of the poor. The report addresses µve questions: (1) How well does the present system target the poor? (2) How much leak- age—the pilferage of subsidized foods in the distribution channel—occurs? (3) At what cost does the government transfer income to the needy? (4) How can subsidies be better targeted to the needy? and (5) What are politically feasible options for reform? The subsidy system includes four foods: baladi bread, wheat ×our, sugar, and cooking oil. Baladi bread and wheat ×our are available to consumers of all income levels without restrictions. Sugar and cooking oil are targeted—they are available only to those with ration cards. In principle, higher-income households should get low-subsidy red ration cards and lower-income households should get high-subsidy green cards. Targeting the Needy The present system does not target the poor as well as it should. Subsidy beneµts are about equally distributed across income groups: 1 percent of the population receives more or less 1 percent of the beneµts. This distribution pattern is quite similar to the one of the early 1980s and reveals that the majority of beneµts accrue to the non- xi Summary needy. Poor targeting combined with system leakage led to only about one-third of the subsidy going to the needy. Of this, baladi bread accounted for 65 percent; wheat ×our, 13 percent; sugar, 12 percent; and cooking oil, 10 percent. Baladi bread and wheat flour accounted for about 77 percent of the subsidy in 1997. The untargeted system for these goods allows all consumers to beneµt, but is an expensive way to improve the food security and nutrition of the poor. Sugar and cooking oil subsidies are not well targeted. A majority of the wealthy households (about 71 percent of households in the top three quintiles) carry the high- subsidy green ration cards. These households receive about 62 percent of the rationed subsidy beneµts. On the other hand, about 10 percent of needy households hold the low-subsidy red cards, and about 14 percent of poor households have no card of any kind. Food subsidies can be better targeted to the poor. For this to occur, the following measures are needed: 1. Baladi bread distribution outlets should be concentrated in poor neighbor- hoods. Currently in urban areas, the number of baladi bread outlets in wealthy neighborhoods is greater per capita than in poor ones. 2. Rural areas and other areas where poverty is concentrated should receive higher shares of total food subsidies. A strong urban bias exists in the allo- cation of subsidies across Egypt. According to the 1996 census, 57 percent of the population lived in rural areas, but only 30 percent of food subsidies were allocated to these areas in 1996/97. Moreover, governorate-level allo- cations do not consider the geographic distribution of poverty. 3. The ration card system for sugar and oil should provide high-subsidy green cards only to low-income households and convert the green cards of non- needy families to low-subsidy red cards. 4. The government should mix maize ×our with baladi wheat ×our at ×our mills. Intermediaries would not then be able to sift the mixed ×our to sepa- rate the higher quality wheat ×our to sell at market prices. 5. A proxy means test, which relies on indicators highly correlated with house- hold income, should be applied to distinguish poor from non-poor house- holds. Leakage and Cost-Effectiveness Considerable leakage occurs because the subsidies create a strong incentive for in- termediaries to sell subsidized foods illegally at market prices. Twenty-eight percent of subsidized wheat ×our leaked in this way, 20 percent of sugar, 15 percent of cook- ing oil, and 12 percent of baladi bread. Overall, the government spends LE 3.06 to transfer LE 1.00 of income to a needy household through the food subsidy system. The cost of transferring LE 1.00 to gen- eral consumers of baladi bread is LE 1.16. But because 61 percent of the bene- µt from the baladi bread subsidy goes to the non-needy, the cost of reaching a needy xii household increases to LE 2.98. At LE 4.64, the cooking-oil subsidy is the least cost- effective in directing LE 1.00 of income to the needy. The costs of transferring LE 1.00 of beneµts to needy consumers through the sugar and wheat ×our subsidy sys- tem are LE 3.34 and LE 3.71, respectively. The current baladi bread subsidy provides a relatively effective means of trans- ferring beneµts to the poor, particularly the urban poor, helping to protect them against shocks that may arise from the ongoing economic reform process in Egypt. Practical Reforms A number of reforms are administratively and politically feasible. Because there is no pressing need for far-reaching change, government ofµcials and various stake- holders believe that extreme measures such as increasing the baladi bread price to eliminate the subsidy or targeting bread subsidies by using food stamps or coupons are unrealistic. The feasible reforms can be divided into two groups, based on the de- gree of political opposition they would probably encounter. Policies that would likely meet little opposition include revamping the ration card system by decreasing ra- tioned food subsidies for the non-needy, and mixing maize ×our with baladi wheat ×our at the milling site to reduce leakage. Options that would engender greater op- position are eliminating the sugar and oil subsidies, targeting bread outlets to poor neighborhoods, and reallocating supplies to the governorates according to their poverty levels. The losses the non-needy would incur from these reforms do not ap- pear to be large. Therefore, these options are feasible if the political will exists to im- plement them. xiii CHAPTER 1 INTRODUCTION The food subsidy system in Egypt—which presently covers baladi bread, baladi ×our, cooking oil, and sugar—has been effective as a major component of Egypt’s social safety net helping to protect the poor. Other components of the safety net include other consumer subsidies (water, energy, housing, education, health, and transportation), social insurance, cash transfers, microcredit programs, and activities µnanced by the Social Fund for Development, which was set up in 1991 to mitigate the adverse effects of structural adjustment on the poor. The food subsidy system is widely credited with guaranteeing the availability of affordable staples to the population and helping to reduce infant mortality and mal- nutrition (World Bank 1995). However, any household in Egypt has the option of participating in the food subsidy system. Such general, nontargeted programs can in- cur large costs to the government. Alternative policies and programs may be more cost-effective in helping the poor. But even if such alternatives can be identiµed, some in×uential groups may receive fewer beneµts than under the present system, so that it may be politically difµcult to implement such alternatives. At the request of the Government of Egypt, IFPRI conducted policy research on food security issues in Egypt over a three-year period starting in 1996, in collabora- tion with the Ministry of Agriculture and Land Reclamation (MALR) and the Min- istry of Trade and Supply (MOTS). This study is an outcome of that research. The overall objectives of this study are to evaluate the performance of Egypt’s food subsidy system and to examine the economic, political, and technical feasibil- ity and efµcacy of a variety of strategies for reforms that reduce costs but maintain or even improve the welfare of the poor. It is hoped that this analysis will serve the dual purposes of assisting the Egyptian government in improving the efµciency of the present system, while adding signiµcantly to the knowledge base on food sub- sidy systems and reforms in developing countries in general. Food subsidy costs in Egypt have declined to about 5 percent of government ex- penditures in recent years from a high of 14 percent in 1981/82. Nevertheless, their absolute costs remain high, totaling 3.7 billion Egyptian pounds (LE) in 1996/97 in 1 CHAPTER 1 Introduction current prices.1 In comparative terms, this expenditure roughly corresponds to total earnings from tourism, or 58 percent of the revenue generated by the Suez Canal in the same year. Moreover, subsidy costs are vulnerable to increases in international wheat prices. Indeed, Egypt is one of the world’s top importers of wheat, importing just under 50 percent of total wheat consumption.2 At present, about 85 percent of all wheat imports are channeled through the food subsidy system. Because baladi bread and wheat ×our account for more than 75 percent of subsidy costs, govern- ment ofµcials are aware that unanticipated price shocks in commodities such as wheat could immediately change the impact of food subsidy costs on the overall gov- ernment budget. Food subsidies are perceived to be important in promoting political stability in Egypt. Sharp increases in the prices of food staples and other products in 1977 ig- nited riots in Egypt that were seen as a threat to government stability. These riots left a legacy of government caution regarding strategies for reforming food subsidy, in order to avoid policy changes that may be a focus for discontent. Similar riots over the past 15 years in other countries in the region, such as Jordan, Morocco, Tunisia, and Yemen, have also reinforced this emphasis on gradualism. Since food subsidy expenditures reached unsustainable peaks in the early 1980s, the Egyptian government has employed a number of gradual policy steps to reform the system. It has made tremendous progress in this effort and has done so without political unrest. The challenge it currently faces is whether and how to re- form the system further to better target subsidies and therefore bring greater bene- µts to the poor, while working in a more efµcient and cost-effective manner. In as- sessing options for policy reform, the government is aware of the importance of balancing the economic beneµts and costs of different policy options with their po- litical and social beneµts and costs. In particular, options for food subsidy policy reform must be considered within the context of the far-reaching economic reform and structural adjustment programs that the government has pursued since 1991. These reforms have brought signiµcant macroeconomic beneµts, but they have also heightened the government’s desire to insulate the poor and others adversely af- fected by the reform process. Subsidized baladi bread and wheat ×our are intended to be available to all house- holds, although participation may be limited by the proximity of an outlet, and the willingness to wait in line to make a purchase.3 An untargeted food subsidy program has the advantage of maximum coverage of the population without requiring gov- ernment bureaucracy to identify people who are eligible for subsidy beneµts. How- 2 1 The exchange rate in 1997 was Egyptian pounds (LE) 3.40 to US$1.00. 2 According to U.S. Department of Agriculture data, Egypt was the world’s top importer of wheat and wheat ×our in 1997/98 and was the second largest importer in 1996/97 (USDA 1999). 3 Recently the government has closed all subsidized wheat ×our warehouses in the metropolitan areas of Cairo, Alexandria, Suez, and Port Said. ever, because it provides beneµts to the nonneedy as well as the needy, an untargeted food subsidy program can be an expensive way to improve food security and the nu- tritional status of the poor. In contrast to baladi bread and ×our subsidies, rationed sugar and oil subsidies are explicitly designed to be targeted. Lower-subsidy red ration cards are intended for people who earn higher incomes, and higher-subsidy green ration cards are in- tended for the poor. But some wealthier Egyptians carry the higher-subsidy green ra- tion cards, while some of the poorest families hold red cards or no ration card at all.4 It seems likely that there is scope for improvement in the distribution of beneµts from the ration cards. Another factor reducing the effectiveness of the subsidy system in providing ben- eµts to the poor is leakage. Leakage is deµned in this study as the amount of subsi- dized foods that do not reach the consumer—that is, which disappear in the distri- bution channel. One of the questions that this report addresses is how much leakage is occurring and where? The remaining eight chapters of the report are organized as follows. Chapters 2 through 4 are descriptive, providing the policy context and describing how the bulk of the information used in Chapters 5 through 8 was gathered. Chapter 2 reviews the economic and political context of food subsidy reform in Egypt since World War II, in order to highlight some of the major factors that shape the feasibility of different options for reforming the subsidy system. Chapter 3 describes the operation and the structure of the present food subsidy system. Chapter 4 discusses the nationally rep- resentative household and community surveys conducted by IFPRI, primary data that are the basis for most of the empirical analysis. Secondary data obtained from MOTS, the Central Agency for Public Mobilization and Statistics (CAPMAS), and various other published sources are also used. In addition, the political analysis of policy options is based, in part, on structured interviews with policymakers at the central government and governorate level, and with major domestic stakeholders, major donors, and academics. Chapters 5 and 6 address speciµc topics related to the evaluation of the operation of the food subsidy system. These include an analysis of allocation of subsidized foods to 26 governorates and household participation in the food subsidy system by income group by urban and rural areas (Chapter 5). This information then provides the background and basis for measuring and understanding, in Chapter 6, the degree of leakage of food subsidies, how well food subsidies are targeted to the poor, and the cost-effectiveness of the present food subsidy system in reaching the poor. Chapter 7 provides an overview of overall food demand patterns and develops es- timates of consumer responses to price and income changes. Chapter 8 examines 3 4 The government is keen to improve targeting of ration cards and is currently considering steps to rectify the pres- ent distribution, that is to “clean” the ration card system. One of the major obstacles it has faced in its efforts to im- prove targeting is development of a “means test” that is inexpensive to administer and that also accurately identiµes poor and nonpoor households. The IFPRI research on this topic is reported in Chapter 9. multiple options for reforming the existing subsidy system and uses a Computable General Equilibrium (CGE) model of Egypt to simulate the impact of selected pol- icy options. Chapter 9 summarizes the µndings and conclusions concerning options for reform of the food subsidy system. Finally, Appendixes A to E describe various aspects of the methodology and data collection in detail. Appendix F presents sup- plementary tables. 4 The Egyptian government’s involvement in consumer food subsidies started as early as the years following World War I, when the government responded to rising food prices by importing large quantities of wheat and flour from Australia and selling it at a loss in government-owned shops in 1919/20 (Scobie 1981). Since World War II, Egypt’s food subsidy system has gone through two main phases: the growth of the system to unsustainable levels by the early 1980s and since then, the gradual contraction of the system to its current levels. This contraction has been un- dertaken quietly, without much publicity, given the political sensitivity of food sub- sidies in Egypt, particularly with respect to baladi bread. Over time, subsidized bread has become a powerful symbol of the broader social contract between the Egyptian government and the population. Since the Nasser era (1952–70), the state has made explicit its mandate to ensure basic food supplies for Egyptians (Khouri-Dager 1996). As Singerman (1995) has noted, “The Egyptian Government’s policies of political exclusion have gone hand in hand with their pub- lic commitment to provide for the basic needs of the population. Because it limits and controls mass participation, the government maintains its legitimacy by provid- ing goods and services to the population.” This chapter places Egypt’s food subsidy policies in a historical context, in order to highlight the political and economic con- siderations that have shaped them. Historical Background Food rationing began as a temporary measure in Egypt in 1941, designed to help Egyptians cope with scarcity and inflation resulting from World War II. The initial system was not targeted to the poor but was set up to provide everyone with neces- sities such as sugar, kerosene, coarse cotton textiles, edible oil, and tea (Ali and Adams 1996). Following President Gamal Abdel Nasser’s “July Revolution” in 1952, agrarian reforms marked the beginning of extensive government involvement in the production, marketing, and distribution of most agricultural products, which lasted until the start of liberalization of state agriculture in 1987 (Badiane, Kheral- lah, and Abdel-Latif 1998). 5 CHAPTER 2 The Policy Context The food subsidy system expanded in the 1960s and 1970s, becoming part of a broader set of consumer welfare programs that also subsidized transport, housing, energy, water, health, education, and some nonfood consumer products, such as soap and cigarettes. These policies reflected the government’s desire to hold consumer prices down in the face of urbanization and rapid population growth. In the mid-1960s, ration cards were introduced for a small number of goods in response to rising domestic prices and shortages, caused in part by the discontinu- ance of U.S. food aid at the time of the 1967 Arab-Israeli War (Alderman, von Braun, and Sakr 1982).5 As a result, Egypt was forced to use foreign exchange reserves to pay for imports, and food shortages resulted in rising food prices. The ration cards initially did not involve price subsidies, but were designed as a quantity rationing system to help ensure that all Egyptians would be shielded against commodity shortages. Indeed, consumer subsidies were reduced at the time of the 1967 war, in order to cut back on Egypt’s need for imported goods (Scobie 1981). In general, under President Nasser, spending on food subsidies remained a modest per- centage of the government’s budget, and the primary role of food subsidy policies was to ensure the supply of essential food items. Wheat imports began exceeding domestic production in 1963, and at its nadir in 1983, Egypt was producing less than 20 percent of its wheat needs (Scobie 1981; Ba- diane, Kherallah, and Abdel-Latif 1998). As a result of declining per capita domes- tic wheat production and growing demand for wheat, Egypt became increasingly de- pendent on wheat imports from the mid-1960s to the mid-1980s. Starting in 1987, however, the government embarked on a series of agricultural reforms. With these reforms, both area planted to wheat and wheat yields increased dramatically, which resulted in a tripling of wheat production from the early 1980s to the mid-1990s. Higher production, however, has only kept pace with growing consumption: since the mid-1980s, wheat import requirements have remained at 6–7 million metric tons per year (Badiane, Kherallah, and Abdel-Latif 1998). Expansion of Food Subsidies The food subsidy system grew significantly in scope and cost under President An- war Sadat, who took power in 1970. A broader set of foods was brought under the subsidy umbrella, including beans, lentils, frozen fish, meat, and chicken, as well as rice and yellow maize. At its peak, the subsidy system included 18 foods. Food security became a major policy issue in Egypt in 1972, as world wheat prices skyrocketed from $60 to $250 a ton in U.S. dollars by 1973, and the cost of Egypt’s wheat imports surged from $147 million to $400 million (Sadowski 1991). Overall, expenditures on food subsidies jumped from LE 3 million in 1970/71 (only 0.2 percent of total government expenditure) to LE 1.4 billion in 1980/81, which ac- counted for 14 percent of total government expenditure (Alderman 1982). 6 5 These included tea, kerosene, oil, and sugar. The 1977 Riots The infamous 1977 riots deeply unnerved Egyptian policymakers and left a legacy of government caution not only toward food policy reform, but economic reform more broadly. The riots illustrate all of the strategies policymakers should avoid in reforming food subsidy policy, that is, high, sharp price increases in a political con- text where the public perceives the changes to be inequitable (Seddon 1986). Al- though the riots are commonly termed “food riots,” they were in fact “equity riots,” since the underlying issues had more to do with the perception that the policy change was unfair, rather than the actual policy change itself (Alderman 1991). Indeed, the price increases announced in January 1977 did not include increases in a number of subsidized staples, such as baladi bread, beans, lentils, rationed sugar, or cooking oil. Price increases were announced for fino bread (50 percent) and for 72 percent- extraction flour from which fino bread is made (67 percent), as well as for regulated sugar (4 percent), rationed rice (20 percent), tea (subsidy canceled), butagas, the bu- tane gas used for cooking, (46 percent), gasoline (26–31 percent), and cigarettes (dif- ferent amounts) (Alderman 1986). The subsidy cuts stemmed from negotiations be- tween the government and the International Monetary Fund (IMF) in 1976 over a package of economic reforms for the economy. Subsidy cuts were part of the pack- age, although the actual policies that sparked the riots were more modest than those the IMF initially proposed (Sadowski 1991). Egyptians were angry about the sub- sidy cuts, since the government had promised that Sadat’s “Open Door Economic Policies” would result in greater prosperity for everyone, and that subsidies on basic commodities would remain intact (Gutner, Gomaa, and Nasser 1998). Rioting flared up in various places along the Nile Valley, but mainly in Cairo and Alexandria. The violence, however, ended only when the government backed down and rescinded the subsidy cuts on January 20, 1977. After the 1977 riots, Sadat fur- ther expanded the subsidy system to increase the value of existing subsidies and to extend the distribution of flour from urban areas to rural areas (Sadowski 1991). This move reflected his interest in placating the public and countering criticism that his government was not doing enough to promote social equity. Food subsidies came to be seen as both a safety net to protect the poor and an important tool in the promo- tion of social equity. Reduction Phase The subsidy system was becoming increasingly unsustainable by the late 1970s and early 1980s as demand for subsidized wheat and bread increased, and growing wheat imports left Egypt more vulnerable to swings in international wheat prices and sup- ply. Wheat is the foundation of the Egyptian diet, and subsidized bread and flour ac- counted for more than half (53.7 percent) of total food subsidy expenditures at its peak in 1980/81 (Table 2.1). When President Hosni Mubarak took office in 1981, he was faced with the daunt- ing task of easing the acute economic burden imposed by the food subsidy system. 7 8 Ta bl e 2. 1— To ta l e xp lic it s ub si dy c os ts o f E gy pt ’s fo od s ub si dy s ys te m , b y co m m od it y, 1 98 0/ 81 t o 19 96 /9 7 F oo d su bs id ie s as p er ce nt ag e To ta l of t ot al W he at C oo ki ng O th er To ta l f oo d To ta l f oo d go ve rn m en t go ve rn m en t Y ea r B re ad fl ou r Su ga r oi l co m m od it ie sa su bs id ie s su bs id ie sb ex pe nd it ur e ex pe nd it ur e (L E m ill io n (L E m ill io n (L E m ill io n (p er ce nt ) in n om in al te rm s) in r ea l t er m s) in n om in al te rm s) 19 80 /8 1 61 8. 7 14 7. 4 14 1. 2 76 .7 44 3. 3 1, 42 7. 3 5, 26 6. 8 10 ,2 50 13 .9 19 81 /8 2 63 3. 1 15 5. 0 95 .7 76 .1 66 2. 0 1, 62 1. 9 5, 98 4. 9 12 ,2 60 13 .2 19 82 /8 3 59 6. 0 14 2. 9 62 .2 46 .4 56 3. 6 1, 41 1. 1 4, 45 1. 4 14 ,6 45 9. 6 19 83 /8 4 54 4. 4 97 .6 46 .1 13 3. 1 87 8. 8 1, 70 0. 0 4, 65 7. 5 16 ,2 32 10 .5 19 84 /8 5 52 6. 8 10 0. 3 59 .5 16 6. 6 77 4. 5 1, 62 7. 7 4, 23 8. 8 18 ,2 77 8. 9 19 85 /8 6 55 7. 8 10 4. 6 11 7. 3 12 9. 0 65 9. 9 1, 56 8. 6 3, 90 2. 0 24 ,2 85 6. 5 19 86 /8 7 53 8. 1 97 .3 17 6. 3 52 .5 46 2. 3 1, 32 6. 5 2, 90 2. 6 24 ,5 30 5. 4 19 87 /8 8 57 8. 5 99 .8 25 5. 8 37 .4 14 2. 8 1, 11 4. 3 2, 14 2. 9 33 ,4 60 3. 3 19 88 /8 9 46 0. 7 16 4. 1 37 8. 0 48 .5 26 4. 8 1, 31 6. 1 2, 13 6. 6 33 ,4 00 3. 9 19 89 /9 0 69 8. 0 25 0. 4 51 6. 0 47 .7 31 5. 4 1, 82 7. 4 2, 50 3. 3 34 ,2 30 5. 3 19 90 /9 1 61 2. 5 37 7. 4 50 9. 3 16 0. 0 33 3. 9 1, 99 3. 0 2, 38 6. 9 50 ,3 90 4. 0 19 91 /9 2 92 8. 7 49 5. 8 58 3. 5 36 7. 9 10 6. 7 2, 48 2. 6 2, 48 2. 6 50 ,9 63 4. 9 19 92 /9 3 1, 02 6. 1 54 6. 9 50 7. 3 27 6. 9 . . . 2, 35 7. 2 2, 14 4. 8 52 ,2 23 4. 5 19 93 /9 4 1, 32 2. 6 24 1. 0 14 9. 5 24 3. 3 . . . 1, 95 6. 4 1, 66 3. 6 56 ,2 64 3. 5 19 94 /9 5 1, 32 8. 7 17 4. 8 20 9. 3 34 9. 2 . . . 2, 06 1. 9 1, 60 2. 1 58 ,5 26 3. 5 19 95 /9 6 1, 94 5. 6 30 5. 8 31 0. 6 40 2. 5 . . . 2, 96 4. 4 2, 11 1. 4 63 ,8 89 4. 6 19 96 /9 7 2, 30 7. 8 55 8. 6 48 9. 5 38 4. 7 . . . 3, 74 0. 6 2, 51 7. 2 66 ,8 26 5. 6 So ur ce s: B re ad , w he at × ou r, su ga r, an d co ok in g oi l s ub si dy c os ts w er e ca lc ul at ed b y au th or s fr om u np ub lis he d da ta , M in is tr y of T ra de a nd S up pl y. S ub si dy c os ts f or ot he r co m m od iti es w er e al so o bt ai ne d fr om th e M in is tr y of T ra de a nd S up pl y. T ot al g ov er nm en t e xp en di tu re d at a w er e ob ta in ed f ro m th e M in is tr y of F i- na nc e an d th e M in is tr y of T ra de a nd S up pl y. N ot es : E lli ps is ( . . .) in di ca te s co m m od iti es r em ov ed f ro m th e su bs id y pr og ra m . a O th er c om m od iti es in cl ud e m ai ze , r ic e, le nt ils , c hi ck en , f ro ze n µ sh , a nd f ro ze n m ea t. b To ta l f oo d su bs id ie s in r ea l t er m s w er e ca lc ul at ed b y de × at in g no m in al c os ts b y G D P de × at or ( 19 91 /9 2 = 10 0) . In 1982, he initiated a process of reforming the food subsidy system, which he launched by holding a conference on national economic issues to seek the advice of prominent Egyptian officials, businessmen, and intellectuals (Sadowski 1991). There was agreement at this conference that Egypt’s persistent budget deficits must be tackled in order to reduce inflation and high levels of foreign borrowing. In addition, rising subsidy costs were seen as a key contributor to the deficit problem. During this period, and over the next decade, Mubarak’s advisers developed several strategies to gradually reform the subsidy system. The broad approach they adopted was a slow transformation of the system as a means to avoid political protest. This approach, ac- cording to senior Egyptian officials involved in its development, was based on the assumption that the most important obstacle to subsidy reduction was public per- ception, and if change were introduced gradually, people would not perceive that their living standards were being sharply reduced (Sadowski 1991). The govern- ment’s specific strategies since the early 1980s have included 1. Attempts to better target the ration card system by introducing in 1981 red ration cards, which offer a lower subsidy on goods such as sugar, cooking oil, tea, and rice than the existing green card. The red cards are intended for people in higher-income jobs. 2. A reduction in the number of subsidized foods. Meat, chicken, fish, and other foods mainly consumed by higher-income groups were removed from the subsidy program. Subsidies on meat were removed in 1990/91, those on fish and tea in 1991/92, and those on rice in October 1992. 3. Reductions in the number of people on the ration card system. These were cut back from 99 percent in the early 1980s to around 70 percent in 1998. In 1989, MOTS stopped adding newborns to the ration card system. Other re- duction strategies included canceling cards owned by people who had died or moved abroad. 4. A slow reduction in subsidies through various techniques, such as gradually reducing the quantity of a particular subsidized food, in some cases gradu- ally replacing it with a more expensive version. An example of this is the in- crease in the price of bread from 1 piaster to 2 piasters in 1984, without protest. The government’s strategy was to introduce a higher-quality 2 pi- aster loaf alongside the 1 piaster loaf.6 Over time, the old loaf became harder to find and its quality had deteriorated. Finally, the 1 piaster loaf was no longer produced, but most people switched to the widely available 2 piaster version without complaint (Sadowski 1991). Using the same strategy, the government further increased bread prices to 5 piasters in 1989, also with- out protest. Other examples of this quiet reform process for baladi bread include decreases in loaf size (from 168 grams to 160 grams in 1984 and to 130 grams in 1991), and 9 6 Some outlets would offer higher-quality bread and other outlets lower-quality bread. That is, it was not possible for consumers to choose between the two types at the same outlet. more recently, the addition of maize flour in some areas. The government also ended subsidies on fino bread and 72 percent-extraction flour in 1992 and on shami bread and 76 percent-extraction flour in 1996. The result of these policy steps has been a significant reduction in the number of subsidized foods and a decline in subsidy costs in real terms from a peak of almost LE 6.0 billion in 1981/82 to LE 2.5 billion in 1996/97 in constant 1991/92 prices (Table 2.1). The current food subsidy system covers only four food items: baladi bread, baladi flour, cooking oil, and sugar. The explicit cost of food subsidies has fallen from 13.9 percent of total government expenditures in 1980/81 to 5.6 percent of such expenditures in 1996/97 (Table 2.1). Before the exchange rate was unified in Egypt in 1991/92, explicitly subsidized foods also received large implicit subsidies, because the government imported food and other commodities at an overvalued ex- change rate. According to World Bank calculations, implicit food subsidies ac- counted for 39.4 percent of total food subsidies (explicit plus implicit) and 2.8 per- cent of the gross domestic product (GDP) in 1989/90 (World Bank 1995). Gradual liberalization of wheat input and output markets since 1987 has resulted in a dramatic increase of domestic wheat production, which tripled between the early 1980s and 1995. While Egypt is still one of the world’s largest importers of wheat, its self-sufficiency has improved significantly in the past decade, to just under 50 per- cent by 1995 (Badiane, Kherallah, and Abdel-Latif 1998). Despite these improve- ments, there is still significant scope for further improvement in the food subsidy sys- tem, particularly by improving targeting and reducing leakage, which are discussed in subsequent chapters. Economic and Political Dynamics of Subsidy Reform Egypt began a substantive process of economic reform and structural adjustment in 1991, backed by agreements with the World Bank and the IMF. The goal of the eco- nomic reform and structural adjustment program was to promote economic growth— and therefore to reduce unemployment and poverty—by creating a market-based, export-oriented economy. The result of the program has been a significant improve- ment in Egypt’s macroeconomic performance. Despite the positive economic results brought about by the economic reform process, domestic support for the process among various political parties and social groups has been mixed. Sociopolitical unrest—as indicated by demonstrations, strikes, and riots, and violent attacks—did increase sharply in the early 1990s, com- pared with previous years, coinciding with the implementation of the structural ad- justment and economic reform programs (Ibrahim and Lofgren 1996; Clarke 1997). Currently in Egypt there is near consensus among major domestic political ac- tors that food subsidies are an important social safety net, but one that can be im- proved to better target the poor. President Mubarak has stressed numerous times that bread subsidies will not be removed, while at the same time playing the leading role in initiating the process of reforming the subsidy system that began in the early 1980s. The ruling National Democratic Party, in turn, has called for better targeting 10 of food subsidies since the late 1980s. Egypt’s other political parties, while not grass- roots organizations and without direct power, are mainly opposed to any removal of subsidies, but some have recommended a greater “rationing” of subsidies to reduce leakage and waste (Gutner, Gomaa, and Nasser 1998).7 At the same time, there is little external pressure on Egypt to undertake a dra- matic reform of its food subsidy system. This conclusion, based on interviews with Egypt’s major donors and analysis of policy documents (often confidential) high- lighting donors’ strategies in the country, is somewhat counterintuitive, in the sense that there is a perception among many domestic stakeholders that external pressure for subsidy reform is prevalent (Gutner, Gomaa, and Nasser 1998). In terms of the politically sensitive issue of baladi bread and flour, no major donors are calling for the abolishment of subsidies or an increase in prices. Donors do support measures to better target the system to the poor while reducing its cost, which are in line with the interests of the two ministries (MALR and MOTS). They are also aware that while Egypt’s macroeconomic climate has improved, unemploy- ment has increased, and there is also a widespread belief that social conditions must be improved. At the same time, donors have pushed for food subsidy reform in the past, and may reexamine the issue as Egypt’s economy becomes healthier. However, donor leverage has historically been mixed in Egypt; that is, what donors want and what they are able to achieve are not always the same (Zimmerman 1993; Clarke 1997; Cassandra 1995). Of the major donors, the United States Agency for International Development (USAID) has been more active than most in promoting better-targeted food subsi- dies, as a component of its Agricultural Policy Reform Program. One of the pro- gram’s goals is to target food subsidies to the poorest households. USAID officials in Cairo acknowledged that while there was donor pressure on the country to cut back on food subsidies in the early 1990s, by the mid-1990s the issue was less pressing, given the improving health of the Egyptian economy.8 In addition, in the early 1990s, USAID was keen on the idea of encouraging Egypt to set up a targeted food subsidy system—such as one using food stamps or coupons. This idea also lost some of its urgency a few years later, given the perception that such a policy reform was politi- cally unacceptable.9 USAID officials have said that USAID’s current goal is to help Egypt improve the efficiency of its food subsidy program in ways that safeguard the poor but are also more cost-effective.10 The IMF is also a highly influential donor institution in Egypt, in part because its standby agreements have been necessary for Egypt to receive World Bank loans, and 11 7 Only one party, the Liberal (Al Ahrar) party, called for the complete removal of subsidies during the 1987 elec- tions. However, more recently, it has maintained a more moderate position calling for better targeting, rather than abolishment. 8 Author interviews with USAID officials, Cairo, Egypt, May 3 and 5, 1998. 9 Author interviews with USAID officials, Cairo, Egypt, May 3 and 5, 1998. 10 Author interviews with USAID officials, Cairo, Egypt, May 3 and 5, 1998. more recently, compliance with IMF and World Bank stabilization measures has been necessary for the 1992 and 1994 reductions in debt owed to the Paris Club group of Western creditor countries (Amin 1995). Food subsidy reform appeared as a com- ponent of the 1991 IMF program, as one of many measures to help reduce the gov- ernment budget deficit. However, the necessity of addressing food subsidies has de- clined in importance, and the most recent standby agreement—covering the period October 1996–September 1998—did not mention food subsidy reform. A third major donor in Egypt is the World Bank, and its strategies have been rel- atively modest compared with the United States or IMF. World Bank average annual lending commitments to Egypt in the period FY95–97 averaged $110 million, down from $375 million in 1992. In addition, Egypt’s access to International Development Association (IDA), the Bank’s soft-lending arm, is being phased out after 1999, given the country’s access to other forms of external financing and its per capita income of around $1,060. Because the World Bank’s leverage, based on financial contributions, is “severely limited” in Egypt, the Bank has emphasized its contribution to Egypt’s development through its nonlending services, such as analytical assistance and pol- icy advice (World Bank 1997). The World Bank’s focus in Egypt is to help support the government’s goal of re- ducing unemployment and increasing living standards. Food subsidy issues in Egypt are not a direct area of World Bank work, but it has noted that improvements in Egypt’s social safety net are important in the country’s war on poverty. In summary, at present, there is relatively limited political pressure for reforms in a significantly slimmed-down food subsidy system. Nevertheless, about US$1.1 billion is currently spent annually by the government on the food subsidy system, which could be allocated to help the poor in other ways. Subsequent chapters explore the extent to which the present system helps the poor and alternatives for reform to reduce government costs and improve targeting to help the poor. 12 In 1996/97, the total cost of Egypt’s food subsidy system was LE 3.74 billion (see Table 2.1), of which baladi bread accounted for 61.7 percent; wheat flour, 14.9 percent; sugar, 13.1 percent; and cooking oil, 10.3 percent.11 The rates of subsidy to consumers per unit of commodity are shown in Table 3.1. The General Authority for Supply Commodities (GASC), an agency of MOTS, is the government agency that absorbs most of the food subsidy costs through its budget. The government obtains wheat both from the international market and from local production. The GASC is responsible for all imports of subsidized wheat, which it undertakes through international tenders and long-term bilateral contracts.12 The Principal Bank for Development and Agricultural Credit (PBDAC), whose ac- tivities are coordinated by MALR and supervised by the Central Bank, is responsible for purchasing wheat from local farmers for the subsidy system under the domestic wheat procurement program. This wheat is processed both in government-run mills and private mills contracted by the government. Since 1989/90, private millers also have been permitted to purchase wheat directly from farmers to produce 82 percent- extraction wheat flour for use in the food subsidy system. Sugar from domestic production is supplied to the subsidy system through the Food Industries Holding Company (FIHC), an agency of the Ministry of Public En- terprises. Subsidized sugar comes entirely from domestic production. The GASC makes payments to the PBDAC, wheat flour mills, and the FIHC for the domestic supplies of wheat and sugar that enter the food subsidy system. In the case of cooking oil, the FIHC both imports and procures oil from domes- tic production, which is then turned over to the GASC without payment. The GASC collects the proceeds from the sales of cooking oil at a subsidized price to ration 13 11 Appendix A describes the method used to estimate the cost of the food subsidy system and, as an example, cal- culates the cost for the baladi bread subsidy system in 1996/97. 12 There are some private imports of wheat. CHAPTER 3 How the Present Food Subsidy System Operates (tamween) shops and then transfers the revenue to the Ministry of Finance. As a result of this structure, the GASC’s budget does not bear the cost of subsidizing cooking oil. In 1997/98, 77.4 percent of all subsidized wheat was imported. Historically, the share of imported wheat in the subsidy system has been even higher (Appendix F, Table F.1), but it has been gradually declining in recent years. Although some cook- ing oil used in the food subsidy system is domestically produced, the bulk of it, 89.8 percent in 1997/98, was imported (Appendix F, Table F.2). Imports are mostly in the form of semi-refined or crude oil, which is refined locally. Since 1991/92, all subsi- dized sugar has been procured from domestic production (Appendix F, Table F.3). The following sections discuss the structure and operation of each of the subsidized foods in more detail. Subsidized Bread Subsidized baladi bread is available without restriction to all consumers living in Egypt. The fixed price of baladi bread is currently 5 piasters per loaf throughout the country, and no official limits are set on the quantity or frequency of purchases at this price. The price of baladi bread has been unchanged since 1989, when it was 2 pi- asters per loaf. Consumers normally buy baladi bread from outlets run by local municipalities. These outlets are located either inside or close to bakeries. There are 10,693 bakeries in Egypt making baladi bread, and virtually all of them (96 percent) are privately 14 Table 3.1—Rates of food subsidy to consumers per unit of commodity, 1996/97 Subsidized foods Full costa Subsidized price Rate of subsidy (LE) (LE) (percent) Baladi bread (per loaf) 0.12 0.05 56.9 Wheat ×our (per kilogram) 0.97 0.55 43.1 Sugar (per kilogram): Green card (fully subsidized) 1.32 0.50 62.1 Red card (partially subsidized) 1.32 0.75 43.2 Edible oil (per kilogram): Green card (fully subsidized) 2.18 1.00 54.1 Red card (partially subsidized) 2.18 1.25 42.7 Sources: Calculated by the authors from unpublished data provided by the Ministry of Trade and Supply, and data for baking costs of baladi bread taken from the community survey component of the “Egypt Integrated Household Survey, 1997,” undertaken for IFPRI’s Food Security Research Project in Egypt. a Full costs are calculated by adding costs of internal transportation, storage, handling, milling, and baking (for bread) to c.i.f. import prices. Rate of subsidy is the difference between the full cost and subsidized price, divided by full cost. owned. Most of the bakeries (71 percent) are located in urban areas (Appendix F, Table F.4). In 1996/97, these urban bakeries received 82 percent of the total amount of subsidized wheat flour allocated to all bakeries; rural bakeries received the remainder. In 1996/97, a total of 4,669,680 metric tons of subsidized wheat flour (82 per- cent extraction) was supplied by MOTS, of which 73.2 percent was distributed to bakeries to produce subsidized baladi bread and the remainder was distributed to consumer warehouses for distribution as subsidized wheat flour. Bakers receive their subsidized wheat flour in the form of a daily quota of sacks; they pay LE 14.50 for a 50-kilogram sack of flour (that is, LE 290.00 per metric ton). Bakers are re- quired to produce 10 loaves of baladi bread per kilogram of flour. Each loaf of baked baladi bread is expected to average 130 grams in weight (after water and other ingredients are added). The local municipality sales outlet selling baladi bread receives a commission of LE 1.00 per 1,000 loaves of bread sold. The baker, in turn, receives the sales pro- ceeds after deducting the outlet commission. These proceeds, after subtracting pro- duction costs such as the purchase of subsidized flour and other ingredients and bak- ing costs, are intended to provide a “normal” profit margin. In 1996/97 baladi flour was sold to bakeries at a price that was about 70 percent below the full cost to the government. To guard against leakage at the bakery level, officials from MOTS monitor the production of subsidized baladi bread. Fines and jail sentences are commonly issued to those bakers who (1) fail to produce the re- quired number of loaves of baladi bread, (2) bake underweight loaves of baladi bread, or (3) increase the moisture content of baladi bread. Subsidized Wheat Flour With the exception of the four metropolitan governorates (Cairo, Alexandria, Port Said, and Suez), warehouses for baladi wheat flour (82 percent extraction) are lo- cated in all governorates, and this wheat flour is, in principle, available to all con- sumers without restriction.13 In 1996/97, a total of 1,253,640 metric tons of wheat flour was distributed to consumer warehouses. Consumers purchase subsidized wheat flour directly from warehouses, usually in a 25-kilogram sack. Currently, there are 20,996 warehouses in Egypt, and they are all privately run. Seventy-two percent are located in rural areas and the rest are in nonmetropolitan urban areas. In 1996/97, rural warehouses received 73 percent of the total quantity of subsidized wheat flour allocated to all warehouses in Egypt. Subsidized wheat flour is sold to warehouses at LE 520 per metric ton, around 80 percent higher than the price of the subsidized flour sold to bakeries. Consumers pay a fixed price of 55 piasters per kilogram, or LE 550 per metric ton. 15 13 The government, in fact, is in the process of phasing out wheat flour subsidies. This phase-out started with met- ropolitan governorates because only a small percentage of city dwellers bake bread at home. This percentage is much higher in rural areas. Subsidized Sugar and Cooking Oil Sugar and cooking oil are distributed on a monthly quota basis to consumers through ration cards (betaka tamween). In 1996/97, 590,000 metric tons of subsidized sugar and 220,000 metric tons of subsidized oil were supplied to outlets. Consumers hold- ing ration cards buy subsidized sugar and oil at outlets (tamweens) located in private groceries that also sell nonsubsidized consumer goods. The tamweens are registered by MOTS to receive rations from government wholesale companies operated by the ministry. Ration card holders register their cards with the grocer of their choice. The grocer records monthly purchases of sugar and oil on the card, which has space for recording purchases over a full decade. It is the responsibility of the card holder to report changes in family size to local offices run by MOTS. However, in 1989, MOTS stopped registering newborn chil- dren for the ration system. Deaths or migration of family members must be reported. As a result of these and other measures, coverage of the population under the ration system has fallen from 91.6 percent in 1986/87 to 69.2 percent in 1996/97. In 1981, in an effort to reduce subsidy costs, MOTS divided all ration card hold- ers into two categories: fully subsidized (green cards) and partially subsidized (red cards). People with higher incomes were assigned to the partially subsidized pro- gram. However, from the outset, the number of participants in the partially subsi- dized program has been very small, accounting for only about 7 percent of the total number of participants in the ration system in 1996/97. All government employees are entitled to hold green ration cards. The monthly quota for subsidized cooking oil varies between regions. Currently, in metropolitan Cairo, Alexandria, coastal cities, and the frontier governorates, the per capita monthly quota is 500 grams, while it is 300 grams in all other parts of the country. Oil is sold at a price of LE 1.00 per kilogram to green card holders. Red card holders pay LE 1.25 per kilogram of oil. The private market price for cooking oil of similar quality was about LE 3.50 in 1996/97. For sugar, the monthly quota per capita is 1 kilogram, which is uniform through- out the country. Subsidized prices per kilogram of sugar are LE 0.50 for green card holders and LE 0.75 for red card holders. The private market price for sugar of sim- ilar quality was about LE 1.60 in 1996/97. 16 The analyses of the performance of the Egyptian food subsidy system presented in subsequent chapters are primarily based on data collected in household and community surveys planned and conducted by IFPRI in 1997 in collaboration with MALR and MOTS. These surveys provide key information, otherwise unavailable. They match the characteristics of households (for example, their income level and geographic location) with the extent to which the households use and beneµt from the food subsidy system. Community-level surveys were also undertaken in con- junction with the household surveys in order to understand how local services and infrastructure in×uence use of the food subsidy system. Additional secondary data were obtained from MOTS, CAPMAS, and various other published and unpublished sources. The political analysis of policy options is based, in part, on structured interviews with policymakers at the central government and governorate levels, and with major domestic stakeholders, donors, and academics. This chapter describes how the household surveys, community surveys, and structured interviews with policy- makers and stakeholders were conducted and their content. Egypt Integrated Household Survey From March to May 1997, IFPRI, together with MALR and MOTS, carried out the Egypt Integrated Household Survey (EIHS). This was a single-round, nationally rep- resentative survey that included urban and rural households. The EIHS collected in- formation on multiple topics, including income, expenditures, food consumption, nutrition and health status, education, employment, rural credit and savings, farm- ing, housing, maternity history, child care, remittances and transfers, migration, and the use of the food subsidy system by households. The survey was administered by a team of male and female interviewers who completed separate male and female questionnaires for each household. The male interviewer questioned a male member 17 CHAPTER 4 Household Surveys and Other Information Sources of the household, usually the head, and the female interviewer questioned a female household member, typically the wife of the head of the household. The questionnaires were administered to 2,500 households14 from 20 gover- norates (the 6 frontier governorates were excluded), using a two-stage, stratiµed se- lection process. The 1986 Egypt census frame and a 1993 listing of households, sup- plied by CAPMAS, were used for the sample frame. CAPMAS uses this sample frame as a master sample for much of its survey work. The frame consists of 492 pri- mary sampling units, of which 296 are urban and 196 are rural. Households were selected from the master sample in a two-stage process. In the µrst stage, 125 primary sampling units were randomly selected with probability pro- portional to size from the CAPMAS master sample. In the second stage of the process, 20 households were randomly selected from each primary sampling unit. The two-stage process has the advantage over a pure random sample process in that it dramatically reduces the number of primary sampling units to be visited and there- fore reduces survey costs. The disadvantage is that standard errors resulting from two-stage samples tend to be signiµcantly higher than those resulting from pure ran- dom samples. The design also stratiµed selection for the following µve regions of Egypt: metropolitan, lower urban, lower rural, upper urban, and upper rural.15 Much of the household-level analysis in this report aggregates the regional esti- mates. The EIHS regional samples of households are not self-weighted. Therefore, it is necessary to use weights for any estimates aggregated over regions. These weights are the ratio of the expected number of households in each region if the re- gional samples were self-weighted, and the actual number of sample households in that region. The regional weights are as follows: metropolitan, 1.3829; lower urban, 0.9456; lower rural, 1.0692; upper urban, 0.8527; and upper rural, 0.7637. With a nationally representative EIHS sample, it is possible to examine average characteristics of the households at the national level as well as at the regional level. (For more information on the EIHS, including more details on the sample design, strata weights, and µeldwork, see Datt, Jolliffe, and Sharma 1998.) Community Survey In June 1997, IFPRI conducted a community survey (a subcomponent of the larger EIHS) to provide primary data for the evaluation of community-level variables. This survey was conducted in communities where respondents from the EIHS households resided. A total of 125 urban and rural communities (corresponding to the 125 pri- mary sampling units sampled in the EIHS) from 20 governorates were surveyed. 18 14 Although the EIHS included 2,500 households, 148 households had to be dropped from the analysis because of missing or incomplete data. This report is based on data from 2,352 households, 1,078 of which are classiµed as ur- ban and 1,274 classiµed as rural. 15 This regional classiµcation for Egypt has often been used in the tabulation of data from the Household Income and Expenditure Surveys conducted by CAPMAS. The community surveys were carried out by EIHS supervisors. In rural areas, the community survey collected information on population characteristics, infrastruc- ture, and access to facilities (this information was obtained from a village counselor); land cultivation patterns, irrigation, crop cycles, and wages (from a local agricultural cooperative ofµcer); microµnance and other development programs (from persons in local government units and other institutions); informal µnancial markets (from a village counselor); subsidized foods (from the local tamween ofµce of MOTS); op- eration of baladi bread bakeries (from bakery owners); and on markets and prices through spot market checks. In urban areas, the community survey covered only a subset of the above information: subsidized foods (from local tamween ofµces), op- eration of baladi bread bakeries, and markets and prices. Structured Interviews with Policymakers and Stakeholders Structured one-on-one interviews were undertaken with policymakers at national and governorate levels and with academics and ofµcials from Egypt’s major donor agen- cies (Gutner, Gomaa, and Nasser 1998). The primary objective was to elicit the view- points of the actors who would be involved in making policy changes and of elites and others on the political efµcacy of a range of policy options for food subsidy re- form. As part of this process, IFPRI cosponsored, with Cairo University’s Public Administration Research and Consultation Center, a workshop of stakeholders, held June 28, 1998. The workshop was attended by Egypt’s Minister of Trade and Sup- ply, Ahmed Goueli, as well as ofµcials from different ministries, members of Par- liament, opposition party leaders, and scholars. 19 How does the government allocate food subsidies in each of Egypt’s 26 gover- norates? And how do households use and derive benefits from the food sub- sidy system? Overall, the urban bias one finds in a number of developing countries is evident in Egypt. The geographical allocation of subsidies is biased toward urban areas, and governorates where proportionately fewer poor reside receive a larger- than-warranted share. This finding is mirrored in the demand-side analysis. This chapter first analyzes regional patterns of subsidy allocation and subsidy benefits and then turns to household use of the food subsidy system. The analysis suggests that there is considerable scope for better targeting of food subsidy benefits to the poor and points out the particular importance of subsidized baladi bread vis-à-vis the other three subsidized foods. Administrative System of Allocations Given the Egyptian government’s objective of reforming the food subsidy system to better target the poor, it is important to understand how the present system of gov- ernment food subsidy distribution works. Each year, representatives from MOTS (which has overall responsibility for management of the food subsidy system), MALR, the Ministry of Finance, GASC, the Ministry of Public Enterprises, and PBDAC form a program committee that determines the quota of subsidized foods that is to be delivered to each governorate. The committee’s assessment is based on an annual Needs Plan, which is essentially calculated by extrapolating past usage based on population growth. This rule of thumb, however, does not necessarily take into consideration the changes in economic conditions in specific governorates (or perhaps even the baseline conditions). Distribution committees in each governorate, in turn, provide local input into the preparation of the annual national Needs Plan by submitting a governorate- 20 CHAPTER 5 The Geographic Allocation and Household-Level Use of Food Subsidies level needs plan to the governorate council, which is then transmitted to MOTS. The distribution committees are responsible for allocating quotas to the districts (markazes). The composition of distribution committees varies by governorate but typically representatives from MOTS, consumer cooperatives, the Ministry of Inte- rior, the police, and the local Chamber of Commerce are included. The committees may also include markaz officials. However, the program committee in Cairo has the final authority for determining the size of each governorate’s quota (Alderman, von Braun, and Sakr 1982). Regional Allocation of Food Subsidy Benefits The map of the Arab Republic of Egypt presented in Figure 5.1 locates the gover- norates. Table 5.1 presents the allocation of food subsidy benefits by governorates in 1997. For each subsidized food, the benefit to consumers has been calculated as the difference between the subsidized price of the food and what households would have to pay for this food in the free market in the absence of food subsidies.16 This ben- efit may be interpreted as an income transfer from the government to consumers. The subsidy benefit per unit of commodity is multiplied by the total reported supply of that commodity to each governorate to calculate the total subsidy benefit for that commodity. Figure 5.2 shows the relationship between the distribution of total food subsidy benefits and population by governorates. Cairo receives preferential treatment in al- location of food subsidy benefits. In Dakhalia, Sharkia, Kafr El-Sheikh, and Behera (all in Lower Egypt), the share of population significantly exceeds the share of ben- efits. In the remaining 21 governorates, benefits are distributed more or less in ac- cordance with population distribution. Figure 5.3 and Table 5.2 show the regional differences in 1997 allocations of ab- solute food subsidy benefits in per capita terms, disaggregated by urban and rural gov- ernorates. Clearly, there is a strong urban bias in the allocation of food subsidies in Egypt. At the time of the 1996 census, 57 percent of the Egyptian population lived in rural areas, but only 30 percent of total food subsidies were allocated to rural areas. Recent poverty estimates for Egypt show a higher incidence of poverty in the rural ar- eas than in urban areas (Datt, Jolliffe, and Sharma 1998; Cardiff 1997; INP 1996). A major reason for the difference in the allocation of benefits to urban and rural areas is that much higher quantities of subsidized baladi bread are made available to urban dwellers. There are two probable reasons for the urban bias: (1) many rural house- holds are producers of wheat and other staple foods, and therefore they are perceived to depend less on purchased food staples than do their urban counterparts; (2) for political stability, it is important to keep bread prices low for urban consumers. 21 16 The rates of subsidy vary between subsidized foods. Estimates of “free-market” prices were derived by adding costs of internal transportation, storage, handling, milling, and baking (for bread) to cost, insurance, and freight (c.i.f.) import prices. Thus, the free-market or unsubsidized prices reflect the equivalent international or border prices of the subsidized commodities. These unsubsidized prices are referred to as “full cost” in Table 3.1. 22 Figure 5.1—Map of the Arab Republic of Egypt Note: The frontier governorates are excluded from this report. 23 Table 5.1—Allocation of food subsidy beneµts, and distribution of population and poverty, by governorates Subsidy beneµts, 1997a INP poverty measure Head-count Contribution Baladi Wheat Cooking Population poverty to total Governorate bread ×our Sugar oil Total share (P0) povertyb (percent of total beneµts) (percent) Cairo 23.9 0.0 15.8 19.2 19.0 11.5 10.8 5.40 Alexandria 8.7 1.0 6.5 9.5 7.3 5.6 29.4 7.21 Port Said 1.1 0.1 0.8 1.2 0.9 0.8 3.7 0.13 Suez 1.0 0.2 0.7 0.7 0.8 0.7 2.4 0.07 Metropolitan 34.8 1.3 23.9 30.5 28.1 18.6 16.0 12.97 Damietta 1.8 3.5 2.0 2.0 2.1 1.5 0.7 0.05 Dakahlia 4.3 0.7 8.0 7.3 4.3 7.1 11.4 3.55 Sharkia 5.3 0.0 5.7 4.0 4.5 7.2 13.9 4.39 Kalyoubia 6.6 0.8 5.2 5.0 5.4 5.6 28.3 6.89 Kafr El-Sheikh 1.2 3.4 4.4 4.4 2.1 3.8 10.1 1.65 Gharbia 4.2 3.7 6.6 5.4 4.5 5.7 9.4 2.36 Menouµa 3.6 7.2 9.9 4.1 4.9 4.7 22.8 4.63 Behera 3.6 5.6 4.4 6.3 4.2 6.7 28.5 8.36 Ismailia 1.6 1.0 1.3 1.5 1.5 1.2 9.7 0.51 Lower Egypt 32.2 25.9 47.5 39.9 33.5 43.5 17.1 32.52 Giza 10.4 6.8 4.8 8.2 9.1 8.1 12.0 4.23 Beni-Suef 2.7 1.2 0.3 0.2 2.0 3.1 34.0 4.66 Fayoum 2.3 7.3 3.7 2.9 3.3 3.4 40.6 5.95 Menia 5.9 0.1 4.3 4.6 4.7 5.6 35.8 8.73 Assyout 3.5 9.1 5.0 2.1 4.5 4.7 53.4 11.02 Suhag 2.7 17.7 0.6 3.0 4.8 5.3 39.4 9.07 Quena 2.5 20.8 5.2 4.7 5.8 4.7 38.3 7.91 Aswan 1.4 7.4 2.9 2.1 2.5 1.6 30.8 2.21 Upper Egypt 31.4 70.3 26.7 27.8 36.7 36.5 34.1 54.36 Frontier governorates 1.6 2.5 1.9 1.8 1.8 1.4 16.0 0.96 Total 100.0 100.0 100.0 100.0 100.0 100.0 22.9 100.0 Sources: Subsidy beneµts are calculated by the authors using the 1997 allocations of quantities of subsi- dized commodities to governorates (see Appendix Tables F.5 and F.6), data obtained from Ministry of Supply and Trade. Population shares are calculated from the 1996 population census data, representing the population living in Egypt (see Appendix Table F.7). Head-count poverty estimates are from the INP (Institute of National Planning), “Egypt Human Development Report 1996,” based on the Household Income and Expenditure Survey of 1995/96, conducted by CAPMAS. a For each subsidized food, the beneµt to consumers per unit of subsidized food has been calculated as the difference between the subsidized price of the food and what consumers would have to pay for this food in the absence of subsidies (that is, the full costs of the food, provided in Table 3.1). Subsidy beneµt per unit of commodity is multiplied by the total reported supply of that commodity to each governorate to calculate the total subsidy beneµt for the commodity in that governorate. b Contribution to total poverty is calculated as 100 × (governorate population/total population) × (governorate P0/total P0). If targeting food subsidies to the poor is the goal, then the pattern of allocation of these subsidies should correspond to the geographical distribution of poverty among governorates. How does the current pattern of food subsidy allocation among governorates compare with the pattern of poverty in the current system? The IFPRI Food Security Research Project in Egypt completed a poverty profile for Egypt based on the 1997 EIHS survey data (Datt, Jolliffe, and Sharma 1998). Ref- erence poverty lines take into account regional differences in food and nonfood prices, age and composition of households, and food and nonfood consumption pref- erences. Regional reference poverty lines in monthly, per capita figures are as fol- lows: metropolitan, LE 129.19; lower urban, LE 101.72; lower rural, LE 85.38; upper urban, LE 101.36; and upper rural, LE 82.81. The poverty profile provides three types of poverty measurements: the head-count index, or poverty incidence 24 Figure 5.2—Distribution of population and food subsidy beneµts, by governorates, 1997 Source: Table 5.1. (P0); the poverty gap index, or poverty depth (P1); and the distribution-sensitive poverty index, or poverty severity (P2).17 Table 5.3 presents the head-count poverty index and the distribution-sensitive poverty index for Egypt and for each of the five regions. The head-count index indi- cates that 26.5 percent of the population in Egypt was poor in 1997. The poverty 25 Figure 5.3—Urban and rural allocation of per capita absolute food subsidy beneµts, by governorates, 1997 Source: Table 5.2. 17 The head-count index (P0) shows the proportion of the poor population to the total population. The head-count in- dex is a simple poverty measure and its interpretation is straightforward. However, this measure is insensitive to the depth of poverty, which the poverty gap index (P1) takes into account. The poverty gap is an estimate of the income (or expenditure) that would be required to bring every individual up to the poverty threshold. A reduction in the in- come of any poor individual would increase the poverty gap (and vice versa), but the poverty head count would re- main unchanged. But the poverty gap index is insensitive to the redistribution of income among the poor. As the name indicates, the distribution-sensitive poverty measure (P2) is sensitive to the reallocation of income among the poor. This poverty measure decreases if income is transferred from a poor individual to a poorer individual (and vice versa). 26 Table 5.2—Urban and rural allocations of per capita absolute food subsidy beneµts, by governorates, 1997 Total food subsidy beneµµtsa Governorate Urban Rural Average (LE/person/year) Cairo 94.62 0.00 94.62 Alexandria 74.36 0.00 74.36 Port Said 67.56 0.00 67.56 Suez 65.43 0.00 65.43 Metropolitan 86.23 0.00 86.23 Damietta 139.24 54.33 77.64 Dakahlia 80.34 17.17 34.75 Sharkia 115.00 11.86 35.15 Kalyoubia 79.88 39.14 55.74 Kafr El-Sheikh 69.83 20.37 31.71 Gharbia 95.19 21.30 44.24 Menouµa 165.93 34.31 60.50 Behera 88.00 20.08 35.62 Ismailia 104.03 36.80 68.84 Lower Egypt 97.23 23.55 43.84 Giza 68.40 58.85 64.02 Beni-Suef 114.72 13.27 37.15 Fayoum 134.60 32.94 55.78 Menia 134.71 27.40 48.25 Assyout 116.97 30.16 53.81 Suhag 105.22 37.37 52.23 Quena 138.59 50.53 69.19 Luxor 70.47 0.00 70.47 Aswan 110.68 70.93 87.94 Upper Egypt 98.93 37.95 57.29 Frontier governorates 97.52 38.49 74.48 Total 92.94 29.99 57.04 Source: Subsidy beneµts are calculated by the authors, using the 1997 allocation of quantities of subsi- dized commodities to governorates, data obtained from the Ministry of Trade and Supply. a For each subsidized food, the beneµt to consumers per unit of subsidized food has been calculated as the difference between the subsidized price of the food and what consumers would have to pay for this food in the absence of subsidies (that is, the full cost of the food, provided in Table 3.1). The subsidy beneµt per unit of commodity is multiplied by the per capita supply of that commodity to each governorate to calculate the per capita subsidy beneµt for the commodity in that governorate. measure used in this analysis is additively decomposable, making it possible to de- termine the percentage contribution of any subgroup to total poverty. Table 5.3 pro- vides the percentage share or contribution of each region to the total number living in poverty (P0) and to the total severity of poverty (P2). For instance, this analysis suggests that if the poor in the upper rural region were no longer poor, then head- count poverty in Egypt as a whole would be reduced by 30.3 percent, while the sever- ity of poverty would be reduced by 32.7 percent. Figure 5.4 illustrates the shares of food subsidy allocations and poverty by re- gion. At present, the regional allocation of food subsidies is not sensitive to the re- gional distribution of poverty. Using IFPRI’s 1997 regional head-count poverty shares, the urban regions (metropolitan, lower urban, and upper urban) accounted for 37.1 percent of total poverty in Egypt, but they received 69.8 percent of total food subsidy allocations. In contrast, rural areas in Lower and Upper Egypt, which re- ceived only 30.2 percent of total subsidy allocations, accounted for 62.8 percent of total poverty. The IFPRI 1997 poverty profile disaggregates poverty measures by five regions and not by governorates. Governorate-level poverty measures are available from the 1996 Egypt Human Development Report, prepared by the INP. The poverty estimates in the INP study are based on the 1995/96 Household Income and Expenditure Sur- vey, conducted by CAPMAS. The INP’s poverty estimate yields a national-level head-count index of 22.9 percent (INP 1996). 27 Table 5.3—Distribution of food subsidy beneµts and poverty, by region, 1997 IFPRI poverty measure Share Share Contributionof total of total Distribution to totalallocation of benefits Head-count sensitive povertyb food subsidy received by Population poverty poverty Region beneµtsa consumers share (P0) (P2) P0 P2 (percent) Metropolitan 28.6 22.7 18.8 26.1 2.4 18.5 17.9 Lower urban 20.8 15.5 12.2 24.2 2.0 11.1 9.3 Lower rural 13.3 25.1 31.9 27.0 2.7 32.5 33.2 Upper urban 20.4 13.1 11.7 17.1 1.5 7.5 6.9 Upper rural 16.9 24.1 25.3 31.7 3.3 30.3 32.7 Egyptc 100.0 100.0 100.0 26.5 2.6 100.0 100.0 Sources: IFPRI poverty data are from Datt, Jolliffe, and Sharma 1998. Allocation of subsidy beneµts are calculated by authors using 1997 data from the Ministry of Trade and Supply for the distribution of subsidized foods (Tables F.5 and F.6). Subsidy beneµts received by consumers are calculated from Tables 6.9 to 6.12 in Chapter 6. Population shares are calculated from the 1996 population census data (Table F.7). a For each subsidized food, the beneµt to consumers per unit of subsidized food has been calculated as the difference between the subsidized price of the food and what consumers would have to pay for this food in the absence of subsidies (that is, the full cost of the food, provided in Table 3.1). The subsidy beneµt per unit of commodity is multiplied by the total reported supply of that commodity to each region to calculate the to- tal subsidy beneµt for the commodity in that region. b Contribution to total poverty is calculated as 100 × (region population share) × (region P/total P). c IFPRI poverty measures exclude the frontier governorates. Accordingly, the shares of total food subsidy beneµts and population for the frontier governorates are excluded. Table 5.1 provides the INP head-count poverty index and the contribution of each governorate to total poverty in Egypt. The pattern of distribution of poverty shows a lack of correspondence to the pattern of allocation of food subsidies across gover- norates. This is consistent with the patterns across regions based on IFPRI’s poverty estimates. For instance, Cairo and Giza received 28.1 percent of the total food sub- sidy benefits in 1996/97, but these two governorates accounted for only 9.6 percent of total poverty in Egypt. In contrast, Assyout, Behera, Beni-Suef, Fayoum, Menia, Quena, and Suhag, which accounted for 55.7 percent of total poverty, received only 29.3 percent of total food subsidies. The regional pattern of allocation of food subsidies is, however, quite different from the regional pattern of distribution of food subsidy benefits actually received by consumers. Table 5.3 shows that the shares of total food subsidy benefits re- ceived by consumers in the five regions correspond closely to the regional popu- lation shares and the regional distribution of total poverty.18 Why is the supply- 28 Figure 5.4—Food subsidy allocations and distribution of poverty, by region, 1997 Source: Table 5.3. 18 Chapter 6 provides estimates of food subsidy benefits received by consumers. side pattern different from the demand-side pattern? This difference can mainly be attributed to two factors: (1) benefits received by consumers are net of system leak- ages of subsidized foods,19 and the magnitude of these leakages vary widely among the regions; (2) bakeries producing subsidized baladi bread are highly con- centrated in urban areas, and, therefore, the allocation of subsidized flour to urban bakeries is much greater. On average, urban areas have about 30 bakeries per 100,000 urban population, while rural areas have only 9 bakeries per 100,000 ru- ral population. However, many rural residents purchase subsidized baladi bread from outlets located in their neighboring urban centers. Therefore, the purchased quantity of subsidized baladi bread by rural consumers is higher than the alloca- tion of flour to rural bakeries for subsidized baladi bread production. As a result, the subsidy benefits received by rural consumers are higher than the allocation in- dicates.20 While this practice helps mitigate some of the urban bias in the alloca- tion of food subsidies, the rural consumers nevertheless accrue transaction costs (for travel, for example), which reduces their real benefits to the extent that such transactions occur. This analysis suggests a role for improved geographical targeting of food sub- sidies at the governorate level as a means to bring greater benefits to the poor. In order to increase the accuracy of geographic targeting of food subsidies in Egypt, a two-step method could be followed. First, the total annual food subsidy resources could be allocated to each governorate according to its contribution to total poverty. Second, at the governorate level, a larger share of total food subsidies re- ceived could be distributed in villages and urban neighborhoods where the poor are known to be concentrated. Political considerations such as favoritism toward the politically more influential urban consumers, of course, may prevent such al- locations (in the bargaining and negotiation between governorate-level distribution committees and the national-level program committee), based simply on where the poor live. Nevertheless, geographic targeting can be highly cost-effective. For example, a Philippine study demonstrates that a geographically targeted program costing 2 billion pesos can reduce poverty by as much as a general food subsidy costing 18 billion pesos (Balisacan 1994). Experience in the Philippines with a pilot food sub- sidy scheme suggests that targeting by location is logistically simple and, thus, rep- resents a low-cost form of targeting food subsidies (Garcia and Pinstrup-Andersen 1987). Many social programs in Latin America use geographic targeting. Simula- tions using household survey data from Jamaica, Mexico, and Venezuela show that both leakage to the nonpoor and undercoverage of the poor diminish as the size of the targeted geographic area gets smaller (Grosh 1994). 29 19 Leakage is defined as the illegal diversion of subsidized foods for sale at higher prices in black markets or open markets, before subsidized foods reach the consumers. Chapter 6 presents estimates of leakage. 20 Baladi bread is by far the most important subsidized food in Egypt, accounting for 61.7 percent of total food sub- sidies in 1996/97. Household-Level Use of the Food Subsidy System This section addresses household use of food subsidies in Lower and Upper Egypt, by urban and rural areas, and by income group. The discussion is based on data col- lected in the 1997 EIHS, described in Chapter 4.21 Baladi Bread and Wheat Flour Table 5.4 shows regional differences in per capita purchases of subsidized and open- market bread and flour. Subsidized baladi bread is purchased at a higher rate in ur- ban areas and subsidized baladi wheat flour is purchased at a higher rate in rural ar- eas. Because baladi bread enjoys a higher rate of subsidy than does wheat flour, the different purchasing patterns probably reflect differences largely in access (supply) rather than choice (demand).22 Bakeries are more highly concentrated in urban ar- eas. On average, urban areas have about 30 bakeries per 100,000 population, while rural areas have only 9 bakeries per 100,000 population (see Appendix F, Table F.4). Figure 5.5 shows the average share of households in each expenditure quintile that purchased subsidized baladi bread and wheat flour at the national level at the time of the survey. As indicated in Table 5.5, a very high percentage of households living in metropolitan governorates purchased subsidized baladi bread (92.5 per- cent). This percentage was somewhat higher for the lowest quintile than for the high- est quintile. Despite the low concentration of bakeries in rural areas, and the fact that allocation of subsidized wheat flour to rural bakeries is only about one-sixth of the urban quota, 56.1 percent of the rural households reported purchases of subsidized baladi bread during the week prior to the date of interview. Purchases of baladi wheat flour were much lower at all levels. At the national level, 19 percent of all Egyptian households purchased subsidized wheat flour. About 30 percent of households in rural areas purchased subsidized wheat flour. Metropol- itan governorates are not offered subsidized wheat flour. In the governorates outside of the metropolitan region, only 13 percent of urban households purchased subsi- dized wheat flour. Both subsidized and open-market purchases of wheat flour are 30 21 Much of the household-level analysis in this report disaggregates the population of the sample households into quintile groups. Quintile groups are based on population quintiles ranked by total per capita expenditures. A “fitted” total expenditure per capita variable was calculated for each household. From this point on, “expenditure quintile” should be understood to mean population in any stratum (such as metropolitan, urban, rural, upper, lower) ranked using fitted total expenditure per capita. Although income data are available in the EIHS, per capita expenditures are used as a proxy for income for two reasons. First, expenditures are likely to reflect permanent income and are, hence, a better indicator of consumption behavior. Second, data on expenditures are generally more reliable and stable than income data. Because expendi- tures are intended to proxy for income, the terms “expenditure” and “income” will be used interchangeably. 22 The purchase figures for subsidized wheat flour, when aggregated over all households, are consistent with gov- ernment figures on the supply of baladi wheat flour distributed to urban and rural areas. However, figures for bal- adi bread purchases in rural areas are considerably higher than the aggregate national-level distribution of subsi- dized wheat flour to rural bakeries. This difference is probably because many rural households purchase subsidized baladi bread from neighboring urban outlets. 31 Table 5.4—Per capita purchases of subsidized and open-market bread and ×our, by region Lower Lower Upper Upper Commodities Metropolitan urban rural urban rural Egypta Subsidized baladi bread (loaves/day) 2.6 2.8 1.4 2.2 1.4 1.9 White baladi bread (loaves/day) 0.1 n.a. 0.1 0.1 n.a. 0.1 Shami bread (loaves/day) n.a. n.a. n.a. n.a. n.a. n.a. Fino bread (loaves/day) 0.6 0.3 0.1 0.6 0.1 0.3 Subsidized wheat ×our (kilograms/month) 0.0 0.3 1.0 1.4 3.7 1.2 Open-market wheat ×our (kilograms/month) 0.3 0.6 0.8 0.6 2.3 1.0 Maize ×our (kilograms/month) 0.1 0.4 2.1 0.5 2.2 1.4 Source: IFPRI Food Security Research Project in Egypt, “Egypt Integrated Household Survey, 1997.” Note: n.a. = negligible amount. a Data for Egypt are weighted averages by regional population. much higher in rural Upper Egypt than in rural Lower Egypt. Consumption of own- produced wheat and rice is higher in rural Lower Egypt. Table 5.6 provides estimates of absolute benefits (or income transfers) to con- sumers from subsidized baladi bread and wheat flour, by region and expenditure quintile. The absolute food subsidy benefit to a household, or income transfer, is the difference between what households actually pay for subsidized foods and what they would have paid for these foods in the free market in the absence of food subsidies. Estimates of “free-market” prices were derived by adding costs of internal transport, storage, handling, milling, and baking to cost, insurance, and freight (c.i.f.) import prices of wheat. Thus, the free-market or unsubsidized prices reflect the equivalent international or border prices of the subsidized commodities. Subsidized baladi bread and wheat flour prices were estimated to be 57 percent and 43 percent below free-market prices, respectively.23 The average per capita monthly benefits from subsidized baladi bread were higher in metropolitan (LE 5.22) and other urban areas (LE 4.95) than in rural areas (LE 2.78). Benefits declined with income in metropolitan areas, but did not vary markedly with income for other urban and rural households (Table 5.6). The average national-level benefit from subsidized wheat flour was relatively small, only LE 0.56 per capita per month, although benefits were relatively higher for rural households. As Table 5.6 shows, benefits were somewhat higher for middle-income groups. Fig- 23 In Chapter 3, it was reported that the government sold subsidized baladi wheat flour to bakers at 70 percent below full cost. Because consumers pay for the cost of baking the bread, the subsidy to consumers is a lower percentage. 32 Figure 5.5—Share of households purchasing subsidized baladi bread and wheat ×our, all Egypt by expenditure quintile, 1997 Source: Table 5.5. Note: One is the lowest quintile and µve is the highest. ure 5.6 illustrates the pattern of distribution of absolute benefits from subsidized bal- adi bread and wheat flour among expenditure quintiles at the national level. With respect to the income transfers derived from consumption of baladi bread, some Egyptians are concerned that, because the rate of subsidy is so high (and the bread is therefore so inexpensive), much of it is wasted, particularly if it is fed to an- imals. Indeed, there is a perception that the percentage of subsidized bread diverted to feed poultry and sometimes larger animals is high (Sadowski 1991). The house- hold survey results indicate that 13.0 percent of all households purchasing baladi bread fed some or all of it to animals. Of those households who fed baladi bread to animals, 7.2 percent of their total purchased bread was fed to animals. Thus, only about 1 percent of all baladi bread purchased was fed to animals.24 24 The figures reported by households on baladi bread fed to animals may understate this use of bread in that house- holds might perceive this as an immoral act; therefore, they may have reported a lower than actual amount to sur- vey enumerators. Outlet characteristics influence the extent to which households purchase subsi- dized foods and these characteristics may affect poor and rich households differently. For example, food subsidies can effectively target the poor (indirectly without re- sorting to a means test) if subsidized food distribution outlets are concentrated in poor neighborhoods. Table 5.7 shows, however, that there is little difference between income groups in the average traveling time from household to baladi bread outlet. In fact, in all regions, the average distance from a household to an outlet (in terms of minutes of walking) is slightly longer for the poorest 20 percent of the population than for the richest 20 percent. Because poorer neighborhoods are expected to be more densely populated than richer neighborhoods, this suggests that the concentra- tion of outlets relative to numbers of people served is higher in richer than in poorer neighborhoods. Related to travel time is the cost of waiting time. As shown in Table 5.8, it takes approximately half an hour waiting time to purchase subsidized baladi bread in the metropolitan and other urban areas, with longer waiting times in rural areas. In all regions,