“I went down to Cairo with a little wheat in my pocket and they had the red carpet out for me there…. I was speaking the language of food and they understand.” — US Secretary of Agriculture Earl Butz, 1974
For more than a decade now, the political embrace of Washington and Cairo has directly affected what Egypt’s 45 million people eat and how much they pay for it. Once a leading granary for the entire Mediterranean, Egypt today is one of the largest food importers in the world, and one of the largest markets for US agricultural exports. Each year more than $4 billion worth of imported food comes through its ports. About one quarter of this comes from the United States.
The key commodity is wheat. Cheap bread is the dietary staple for Egyptians. Wheat accounts for more than half of the daily caloric consumption of Egyptians, and an even higher proportion — more than 63 percent — of those living in cities. [1] Local food production has grown, but not enough to keep pace with population growth or higher income and per capita consumption. Wheat imports doubled from an average of two million tons per year during the 1960s to four million tons by 1977, and now total roughly seven million tons. Egypt today imports three times as much wheat as it produces.
Egypt, like many other developing countries, has subsidized basic commodities in order to foster industrial development by keeping urban wages low. Through its import policies and subsidies, the Egyptian state has assumed increasing responsibility for feeding the masses. [2] The task facing the government in Cairo and its patrons in Washington is complicated by the need to insulate Egypt’s urban consumers from rising prices while at the same time opening up the country’s economy to the world market. The cost of sustaining this policy has been enormous, both to Egypt’s financial position and to its agricultural infrastructure.
There is a clear and important link between the political purpose of food subsidies and Egypt’s dire dependence on food imports. Contrary to received wisdom, however, this is not a special consequence of the “socialist” policies of Egypt’s years under President Gamal ‘Abd al-Nasser. The policy of subsidizing basic commodities actually dates back to the World War II period. The system has been restructured several times to account for changes in Egypt’s political and economic environment. The present discrepancy between the subsidized price and actual cost of basic commodities, and the enormous weight it represents for the state budget, is a legacy of President Anwar al-Sadat’s infitah policies, domestic and international. Subsidies served as an important tool for buying social peace and regime legitimacy.
Egypt has become the second largest recipient of US foreign economic and military aid — some $18 billion since 1975. Nearly a quarter of this has come in the form of concessional food sales. The purpose of this food aid is twofold. The first is commercial: to secure and maintain a leading American position in what will be a very competitive major agricultural export market for years to come. The second is political: to protect the regime. The bread riots of January 1977 shook the Sadat government and its American supporters to the root. Subsequent spasms of popular violence and increasingly frequent and militant labor strikes have served as potent reminders that the survival of the government and its pro-American policies lie in the balance.
Nasser and the Wheat Weapon, 1956-1967
Egypt’s capacity to absorb enormous quantities of wheat has long attracted Washington’s interest. From 1956 to 1967, successive American administrations used food aid to try to influence the policies of President Gamal ‘Abd al-Nasser. Seventy percent of US assistance to Egypt was in the form of PL 480 food aid. In 1956, Egypt was receiving about $70 million in Title I concessional food aid. In response to Nasser’s growing ties with the Soviet Union, the US withdrew its moderate program of technical and commodity aid. At the outbreak of the Suez War, a $19.2 million surplus wheat agreement reached early that year was suspended. Egypt received no US economic assistance during 1957 and 1958. But after the Iraqi revolution in July 1958 torpedoed the Baghdad Pact, the Eisenhower administration tried to ease US-Egyptian tensions with a revived economic aid program, consisting almost entirely of PL 480 food aid. PL 480 shipments worth $158 million supplied 24 percent of Egyptian grain imports in 1959 and 66 percent in 1960. [3]
The Kennedy administration made a major effort to build relations with Nasser on a foundation of American wheat. In 1961, PL 480 shipments accounted for 77 percent of Egyptian wheat imports, and 38 percent of Egypt’s net supply of wheat and wheat flour; in 1962, the corresponding figures were 99 percent of wheat imports and 53 percent of net supply. [4] By 1963, Egypt had become the world’s largest per capita consumer of American food aid.
As Ambassador John Badeau later explained, “we attempted to expand the size and duration of our food aid agreements with Egypt very gradually at first, so that Nasser would be made to appreciate the link between his behavior and Congressional support for our aid program.” [5] In October 1962, the administration announced a three-year agreement whereby the US would provide Egypt with more than $400 million worth of food for fiscal years 1963, 1964 and 1965. [6]
Egypt’s intervention in North Yemen that same month marked a downturn in US-Egyptian relations. Kennedy came under heavy Congressional attack, and in late 1963, he threatened to terminate US aid if Nasser did not begin troop withdrawals from Yemen by December of that year. In the transition of power to Lyndon Johnson, the deadline passed with neither a troop withdrawal nor a suspension of aid. But Congress’ mood grew increasingly hostile in response to events in late 1964: the burning of the US Information Agency Library in Cairo; the downing of a US private airplane over Egypt; a speech by President Nasser attacking US policy; and the confirmation by Nasser of Egyptian aid to rebels fighting the Western-installed regime in what had been the Belgian Congo. Congress was also upset at the lack of publicity Nasser gave to PL 480. After a brief trip to Egypt in the fall of 1964, Congressman Thomas Stafford (R-Vt.) concluded that “it was my very strong impression that the citizens of that country, except for those in the seaport where some of our aid comes in, have no idea that the wheat being distributed there comes from the United States. They believe that Mr. Nasser raised it himself.” [7] In a December 23, 1964 speech, Nasser claimed that Egyptians were prepared to reduce their food consumption in order to fight Western imperialism.
In late 1964-early 1965, the Johnson administration withheld the last $37 million of the three-year PL 480 agreement in order to soothe Congress’ retributive mood and thus protect the fiscal year 1966 foreign aid bill. At the same time, the administration negotiated a new agreement much more limited in size and scope — only $55 million for only six months. Moreover, now 25 percent would have to be repaid in dollars. Egypt was now on a much tighter food leash.
The next step came in April 1966, when President Johnson refused to respond to Nasir's request for a renewal of the six-month PL 480 agreement. In late February 1967, Nasser told the US ambassador that “we have been patient with all the pressure you have applied to us with your aid program, but our patience has run out.” [8]
In July 1967, the Cairo AID mission concluded that it had been “unrealistic to expect that President Nasser would abandon or significantly modify political actions which he determined to be in his own and Egypt’s best interest in consideration of continued American wheat imports.&rsdquo; [9]
US Food Aid and the Infitah
When Secretary of State Henry Kissinger visited Egypt in November 1973, there had been no American food assistance to Egypt for nearly six years. World grain prices were soaring and most food aid recipients had been cut back by Congress. Kissinger cabled Washington to propose that the US send substantial amounts of grain to Egypt. Since then, food aid to Egypt has grown to become the largest program to any country.
Today, Economic Support Funds (ESF) are the main source of economic assistance to Egypt. [10] ESF is distributed to recipient countries in the form of “project” assistance and/or “program” assistance. Program assistance is mainly budget support through the Commodity Import Program (CIP) or direct cash transfers. From 1976 through fiscal year 1984, the ESF assistance package for Egypt remained at approximately $750 million a year, not including military assistance or PL 480.
Most US assistance to Egypt has been allocated to project aid. But only 50 percent of project aid since 1973 has been spent, owing to the funding backlog. The Commodity Import Program (CIP) is thus highest in actual expenditure. CIP supplies concessionary loans and grants so that governments can import US-produced commodities (including a small amount of agricultural products) and capital equipment. PL 480 is the third largest segment of the US aid program in Egypt.
ESF assistance for Egypt amounted to $815 million for fiscal year 1985, second only in size to the cash assistance program for Israel. “Funding is kept at this high level for political purposes — peace in the Middle East,” observes a recent General Accounting Office (GAO) report. “While Egypt does have substantial economic needs, the consensus of development experts…was that US assistance to Egypt would range from $100 million to $200 million if it was based solely on relative economic need.” [11] Political considerations are also reflected in the desire to benefit certain target groups. A 1979 GAO report bluntly stated that “AID involvement in the improvement of the Cairo telephone service is geared, in part, to affecting the Egyptian middle class whose support is necessary to President Sadat.” [12]
PL 480 wheat to Egypt rose more than a hundredfold, from $2.6 million in 1974 to $287 million in 1981. Since 1981, the value of food aid to Egypt has slightly declined, along with world wheat prices, but the actual tonnage of wheat sent under the PL 480 program has remained roughly the same. Over $2.5 billion has been obligated to Egypt under Title I from 1973 and 1986. Since 1981, the program includes only wheat and wheat flour. Corn, tobacco and beans are now financed through the CIP.
Since the early 1980s, the US has faced increased competition for the Egyptian food market. France, in particular, made big inroads with what the Americans regarded as unfairly subsidized agreements. The US share of Egypt’s agricultural imports averaged nearly 40 percent during 1974-76, but by 1983 it had declined to 28 percent.
In 1983, the US tried to break European Economic Community (EEC) encroachment on the Egyptian market with 600,000 metric tons of subsidized wheat flour and sales of wheat under the Blended Credit program and PL 480. As a result, US exports of wheat flour rose to about 1.5 million tons in 1983, against 657,000 tons the previous year, while France’s exports of wheat flour fell. But overall US exports to Egypt have continued to decline, and EEC exports have increased.
As a result of the fierce US-European grain competition, the price has been steadily falling for the 7 million tons of wheat and flour Egypt imports every year. Egypt’s balance of payments has benefited, but the falling price also makes it more attractive to give up local production.
The Subsidy System and Its Cost
Renewed American food aid came at a time when Egypt was particularly hard-pressed to meet its domestic food needs. Egypt’s import bill doubled between 1973 and 1974, increased by 40 percent in 1975, and again by 35 percent in 1976. Subsidies for food stood at about 11 million Egyptian pounds (£E) in 1972. Within a year, the figure jumped to £E89 million and then leaped to £E329 million in 1974.
Egypt introduced a rationing and subsidy system for major food items during World War II to cope with wartime scarcities. Since then, consumers have benefited from a subsidy on bread, since the fixed consumer price of wheat has generally stayed below production or import costs. The difference is paid out of the state budget. In 1965-66, the rationing and subsidy system for basic food commodities was restructured in the face of economic difficulties and rising domestic prices, and as a result of the sharp drop in the availability of US food aid. Ration cards were issued for some basic items such as sugar and oil, but bread and other subsidized items continued to be available without ration.
Changes in subsidies and taxes reflect government responses to fluctuations in world prices and supply, [13] and changes in the class alliances supporting and opposing the government. After the 1952 revolution, land reform broke the back of the old rural elite. The tax on wheat producers was also rapidly eliminated. At the same time, consumer subsidies to the urban classes were decreased in light of the reduced capacity of the country to import.
These cycles recurred with the 1956 Suez crisis and the 1962 military incursion in Yemen. Consumer subsidies had been raised and producer taxes on wheat increased. But as military expenditures rose, pressures on the budget and foreign accounts reversed the pattern of taxes and subsidies again, encouraging domestic production of wheat relative to cotton and reducing consumer subsidies. Following the 1967 war, the government further reduced consumer subsidies to discourage domestic consumption and to reduce imports. From 1967 to 1970, wheat consumption was actually taxed while the tax on wheat production was reduced in order to increase domestic output.
After 1973, the Sadat regime increased consumer subsidies as prospects for foreign exchange receipts improved and US aid shipments were resumed. The government also taxes domestic wheat production. The subsidy scheme since 1973 has insulated urban consumers from world price fluctuations, while the economy is simultaneously opened up to the international market.
The rise in wheat consumption during the 1970s reflects the growth in population and income. The government encouraged consumption and discouraged production by keeping prices low. Bread consumption steadily increased during the period. Wheat consumption increased from 112 kilos per person per year in 1970 to 185 kilos in 1983.
Thirty years ago, Egypt was actually a net exporter of wheat. It was self-sufficient into the mid-1950s and began importing grain as a consistent policy only towards the end of that decade. This was partly a result of the availability of US food aid. Over the past 30 years, wheat production increased by 71 percent, population by 102 percent, and imports of wheat by 612 percent. [14] Grain imports nearly tripled from 1972 to 1982 (increasing from 2.1 to 5.7 million tons). During the same period, wheat production grew by less than nine percent. [15]
Wheat subsidies put an enormous strain on the government budget. [16] In 1971 and 1972, the government was actually able to generate revenues from the sale of imported grains to consumers. But from 1973 to 1982, in spite of the resumption of US food aid, subsidies increased on a per ton basis (Table I). In 1974, the peak year, subsidies on wheat represented 30 percent of the government budget. Today they represent 15 percent of the budget.
The conspicuous consumption of the “infitah class” — those traders and speculators enriched by Sadat’s “economic opening” which began in 1974 — has intensified class conflict in Egypt. In the face of growing popular resentment of inequality, food subsidies may take on a more important symbolic value.
Part of the subsidy increase was due to the attempt to insulate consumers from fluctuations in the world wheat market and thus to buy social peace by maintaining low and stable food prices. But the real price of wheat to consumers actually fell consistently throughout the 1970s. Thus external factors alone do not explain the persistence of food subsidies. The character of the regime is another important part of the explanation. The episodes of popular resistance to subsidy cuts suggest that the regime pays for its legitimacy with the subsidies on basic commodities.
Following the food riots of January 1977, consumer subsidies rose again. The International Monetary Fund reduced the severity of its conditionally for its credits. Debt rescheduling and foreign aid from the US eased the balance-of-payments pressure. In the late 1970s, foreign exchange receipts from oil, migrant workers, tourism and the Suez Canal grew rapidly, augmenting the capacity to import wheat. The country went through a period of high growth which could have provided for the opportunity to initiate meaningful economic reform. An overhaul of the economic system and a change in the food subsidy system never took place. The same four sources of revenue now provide dwindling and meager resources which have pushed the economy to the brink of crisis. Egypt’s mounting foreign debt [17] and the shortage of foreign exchange have led to increased reliance on US food aid and other subsidized wheat programs since fiscal year 1983.
PL 480 wheat shipments have helped US wheat exporters, and they have helped Egyptian planners postpone reform of the food and agricultural sectors. Without American food aid, the Egyptian government would have lacked the resources to sustain its consumption-oriented policies. US food aid is a prop for Egypt’s urban food pricing system, without which the Egyptian government would be in big trouble.
Endnotes
[1] Ibrahim Soliman and Shahla Shapouri, “The Impact of Wheat Price Policy Change on Nutritional Status in Egypt,” US Department of Agriculture, Economic Research Service, International Economics Division, February 1984.
[2] E. Boutrif, “Food and Nutrition Situation in the Near East: Evolution and Need for Monitoring,” Paper presented at an Inter-country Workshop on Nutrition Assessment sponsored by the UN Food and Agriculture Organization and the Nutrition Institute of Egypt in Cairo, November 1-5,1986, p. 12.
[3] William J. Burns, Economic Aid and American Foreign Policy Toward Egypt, 1955-1981 (Albany: SUNY Press, 1985), p. 119.
[4] Burns, p. 126.
[5] Quoted in Burns, p. 127.
[6] Former Ambassador John Badeau recalls that the decision to consider a multiyear PL 480 program in Egypt was brought about by the Kennedy administration’s desire to ameliorate Egyptian-Israeli tension through negotiations for food aid with Nasser’s government that paralleled those underway in Israel (The Middle East Remembered, Washington, DC, 1983, p. 192.)
[7] Congressional Record, vol. Ill, part 1, January 23, 1965, p. 1187. Quoted in Burns, p. 172.
[8] Quoted in Burns, p. 170.
[9] Quoted in Burns, p. 173.
[10] The Foreign Assistance Act of 1961, as amended, stipulates that the intent of ESF is to provide economic assistance to certain countries important to US security and political interests.
[11] The US Economic Assistance Program for Egypt Poses a Management Challenge for AID, General Accounting Office, July 31,1985.
[12] Meeting US Objectives Through Economic Aid in the Middle East And Southern Africa, General Accounting Office, May 31,1979.
[13] See Grant Scobie, Government Policy and Food Imports: The Case of Wheat in Egypt, Washington, DC: International Food Policy Research Institute, Report No. 29 (1981), p. 27. See figures 4 (real wheat prices) and 6 (subsidies and taxes).
[14] John Waterbury, The Egypt of Nasser and Sadat. The Political Economy of Two Regimes (Princeton: Princeton University Press, 1983), p. 199.
[15] George Gardner and Johu Parker, Egypt: An Export Market Profile, USDA Economic Research Service, pp. 27, 29.
[16] In addition to the high cost of the subsidies to the government, the efficiency losses created by wide divergences between international prices and producer prices of wheat and of all other controlled agricultural commodities were a major cause of concern.
[17] Egypt’s foreign debt amounted to approximately $36 billion at the end of 1986.
