Agricultural backwardness and agrarian reform

The author is dean and professor of the University of the Philippines School of Economics in Diliman, Quezon City.

There are many reasons for the relative backwardness of Philippine
agriculture and rural economy. Some of them are acts of God like typhoons. Some are failures of the Philippine state such as the lack of irrigation and rural infrastructure. Others are failures of well-intentioned policy, e.g. price distortions and shortcomings of the land reform law.

Borne more out of ideological ardor than of good sense, the
Comprehensive Agrarian Reform Law (CARL) – in the pursuit of a worthy
political goal that is the more equitable distribution of land assets
and an economically progressive farm sector – has sadly become one of
the roots of economic stagnation in the rural areas.

Among the reasons are:

  • The fruits of land reform are most abundant when land
    redistribution is implemented with dispatch. The longer it takes, the
    greater the cost and the paltrier the benefits. It took all of two
    years from 1950-1951 to effect a complete land reform in Taiwan. Land
    reform in the Philippines since Presidential Decree 27 is now 30 years
    old. The Philippines has reaped the harvest of uncertainty and
    noninvestment in agriculture.
  • Where it has started or been implemented, the CARL (Section 27)
    has outlawed and, thus, effectively destroyed the legal rural land
    market and in its wake the formal rural credit market.
  • CARL has also outlawed the so-called new tenancy contracts and,
    in effect, outlawed leasehold, usufruct and other efficiency-enhancing
    arrangements.
  • There is no reason to believe that three hectares is economically viable for all crops.

Taken together, these have rendered CARL an economic liability.

A Nexus of Markets

The rural economy is a complex nexus of interlinked markets. Each one
contributes singly and collectively to the overall productivity of the
rural economy. Undermine one market and the others are degraded. Not
one contributes more than the existence of a viable, and reliable rural
credit market. Farming without credit is a subsistence and poverty
trap. The rural credit market is, however, intimately interlinked with
the rural land market. Credit flows on the river of security and land
is the most important collateral. If the land market is outlawed, land
security cannot be priced or cashed and credit flows dry up. Consider,
for example, what will happen even to urban credit market if the land
market is outlawed. The urban economy will shrivel.

CARL has effectively destroyed the formal rural credit market by
outlawing the rural land market. This absence of credit affects both
landowners before actual land reform and beneficiaries after land
reform. The former cannot get credit from banks once the farm has been
declared a land reform area. Thus, CARL – born of good intentions but
very short of wisdom – has created a new underclass of the “landowning
poor.”

Responses

The continued poverty among many beneficiaries is the result of the
various responses (or lack of responses) to the retreat of formal rural
credit.

  • Since land is not tradeable, if the beneficiary or his/her heir
    is incompetent, unwilling or elsewhere more productively engaged (say,
    as a public school teacher in another town), the land becomes very
    unproductive. There is a saying: “Land belongs to him/her who can make
    it flower.” This is not only common sense. It also serves efficient
    allocation of land. CARL disallows this bit of wisdom.
  • If the three-hectare limit is not economically viable for a
    particular crop and soil quality, the beneficiary is condemned to
    poverty and eventual loss of the property to informal creditors.
  • The market for land fortunately did not completely expire; it
    just went underground. The leasing and transfer of land is occurring
    everyday outside the law. Since these are illegal, they are brokered by
    powerful politically connected local elites who can enforce these
    contracts outside the law. These may also intimidate or collude with
    some Department of Agrarian Reform officials to milk the transactions.
    Thus, the prohibition serves as a funnel of payoffs to political
    elites. Who pays? The buyers and the beneficiaries. In the underground
    economy, the powerful reap the harvest and the cost of doing business
    is prohibitive.
  • Farmers can access informal sector credit, either (a) from
    informal lenders at very high cost (60% per crop season vs. 9.5% per
    six months from a bank in Maragol and Gabaldon in Nueva Ecija in 1998),
    or (b) by pawning all or part of their farm to creditors (P100,000 per
    hectare for emancipation pantent-covered land; P50,000 for certificate
    of land transfer-covered land in the same area). Beneficiaries would
    rather default on Landbank payments than private creditor dues. This,
    in effect, means that most farmer-beneficiaries will never reach
    emancipation patent-status and never will “own” their land.
  • Farmers also resort to porsiyentuhan where workers (in truth,
    shareholders) pay 90% of gross output to owners. Since this is
    considered a labor contract, not a tenancy contract, it is not
    prohibited by CARL so it is argued. This is by far worse than a
    shareholder contract (60/40).
  • Because formal credit cannot thrive in rural areas, it flees to
    the urban areas. So rural savings deposited in rural banks will be
    loaned to urban borrowers. The rural economy is starved. That is why
    that other knee-jerk reaction called Agri-Agra Law designed to force a
    credit reflow does not move.
  • Consolidation of land is happening outside the law with all sorts of subterfuges, one of which is just forced idleness.

Thus, the puristic infirmities of CARL adopted in the pursuit of
equitable asset distribution and beneficiary welfare, have resulted in
a dynamic which undermines these very goals in the long run. The
message of this essay is that those worthy political goals of equitable
asset distribution and a farm population invested with well-being and
hope should still be pursued with a CARL that is compatible with
economic efficiency. Otherwise, these goals are mere mirages and not
sustainable.

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