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Bahrain's plan to modify its blanket subsidy on fuel and staple food has created a storm of discontent, with parliament members vehemently opposing it.
Are subsidies necessary? In pure economic terms a subsidy is not such a good thing.
However, subsidies, and especially food aid, have their place. Many subsidies funded by the world's taxpayers are designed to increase access of the poorest of the poor to basic nutrition. For example, recent food aid and funding from the rich world's aid agencies to southern Africa has saved millions from malnourishment.
There are subsidy failures as well. According to Dr Per Pinstrup Andersen, the 2001 winner of the World Food Prize, many subsidy programmes are defended on the basis that they help the poorest, but instead often just help the middle classes.
Dr Andersen, who has worked on food-policy issues for 32 years, says that in the early 1990s the Egyptian government spent 25 per cent of its annual budget on providing food either for free, or very cheaply, to the poor.
But the subsidy rolled into the pockets of well-off farmers and other middlemen, meaning the poor gained little from the programme.
Andersen and other policy experts encouraged the Egyptian government to redirect the funds, so now the subsidies are at a far lower overall level and the poor have greater access to food.
Thus the problem of allocating funds to the correct people is sometimes the death knell of programmes.
What about countries like Bahrain, which finds it very difficult to balance the budget because of subsidies?
Food subsidies in Bahrain total BD11 million per year from the total cost of subsidies of BD500 million per year, which makes food subsidies only 2.2 per cent of total subsidies.
With rising global food prices likely to raise the Gulf region's inflation levels by 2010 as most food products are imported, it would be better if Bahrain continued its food subsidies across the board for some time more.
"We expect to see food inflation will increasingly become an issue for countries in the Gulf region as global food prices start rising again," says Monica Malik, senior economist at EFG-Hermes in Dubai.
"We expect that inflation will pick up again in 2010 partly due to a pickup in food prices along with other imported inflation," she adds.
Poor crop output this year has caused the price of basic food items such as rice and sugar to rise globally. But the impact of these prices has so far been less apparent in the region as some governments had signed fixed deals with traders.
But the fact remains that countries with crude oil will spend their way out of the food crisis and those without bust their budgets.
The region's powers are pursuing different approaches to defusing the tensions unleashed by the jump in the cost of staples such as rice, vegetable oils and dairy products. Egypt has forbidden the export of rice and is raising taxes to help pay for an 88 per cent increase in subsidies, while Saudi Arabia can afford to lower tariffs and the UAE is buying farms as far away as Thailand.
"Oil producers can easily pay for food subsidies," says John Sfakianakis, chief economist at Riyadh-based Saudi British Bank. The countries without oil or with fast-depleting oil resources like Bahrain are more fiscally challenged and face public contention and discontent.
What about fuel subsidies?
Bahrain is the fourth cheapest fuel seller in the GCC, despite the kingdom's oil field producing only about 30,000 barrels a day, which is nothing compared to Saudi Arabia's eight to 10 million barrels or Kuwait's or the UAE's production, which is around two million barrels a day.
Oil Minister Dr Abdulhussain Ali Mirza says the government spent BD235 million last year subsidising all oil products fed into the local market, including imports, of which BD112m went on petrol.
Prices at the fuel pumps have been pegged since 1983, while the cost of importing oil has soared, he says.
"The oil imported for refining cost $10 per barrel in 2000, but now it costs $75 per barrel," he says.
Pegged fuel prices have encouraged people to consume more, which the government believes has led to environmental problems and financial waste.
The problem is that when the price of a good is below its cost, people use it wastefully. In the case of a gallon of gasoline, the cost to a country is the value of every additional sacrifice that its use entails. That includes not just the price of buying the gallon in the world market but also external costs, like dirtier air and increased congestion. The external costs are often hard to measure but are nonetheless substantial.
Governments might want to reconsider their policy in the light of overwhelming economic evidence that the subsidies create net losses even for their ostensible beneficiaries.
To be sure, higher fuel prices produce economic suffering. The unfortunate reality, however, is that when the price of an imported resource rises in the world market, buyers must take a hit. Subsidising fuel does nothing to reduce the inevitable suffering, and actually makes it worse.
NOTE: In last week's column titled 'Transparency as vital as growth' ... Bahrain has fallen three places in the 2009 Corruption Perceptions Index (CPI). The kingdom, which was ranked 43 globally in 2008, fell to rank 46 this year (correcting the rankings). The error is regretted.
