Agriculture: protection and underdevelopment

The author is a professor of economics at the Department of Economics, College of Business and Economics, and the executive director of the Angelo King Institute for Economic and Business Studies, De La Salle University.

In contrast to manufacturing, the Philippine agricultural sector
received increased protection during the latter 1980s and the 1990s.
Thus, the nominal rate of protection (NRP) for rice increased from an
average of -4% during 1970-79 to 19% during 1990-94 and 68% during
1995-1998. Similarly, the NRP for corn increased from 24% during
1970-79 to 78% during 1990-1998. The NRP for sugar increased from 5%
during the 1970s to 84% during the 1990s. The NRPs for pork and chicken
increased from 6% and 34%, respectively, during the 1970s to 44% and
84%, respectively, in 1995. (See David 1999, p. 11). The rise in the
nominal rate of protection is also reflected in the effective rates of
protection estimates. Specifically, agriculture overtook the erstwhile
leader in effective rates of protection by late 1990s (Medalla 1999).

The high rate of protection could be expected to help cushion in
principle the impact on the whole economy of the adjustment problems in
industry. That is, other things being equal, the growth of agriculture
could be expected to be robust. Agriculture did grow better in the
1990s than in the 1980s. However, the growth rate was much lower than
during the 1970s when protection rates were significantly lower.
Similarly, the growth rate of Philippine agriculture was also much
lower than in many other countries in East and South Asia).

Although poor weather bedeviled Philippine agriculture in the 1980s and
the 1990s (i.e., the El Nino and La Nina phenomena), the more
compelling reason for the comparatively poor performance of Philippine
agriculture is inadequate and poor allocation of public expenditures in
agriculture. Public expenditures for agriculture and natural resources
in real terms declined substantially in the early 1980s, recovered in
the late 1980s, declined during the early 1990s, recovered in the
mid-1990s and increased further in the latter 1990s (David 1999).
However, government expenditure in productivity-enhancing investments
in agriculture (e.g., irrigation, agricultural R & D) was niggardly
during the latter 1980s until the mid-1990s. David (1999) estimates
that only about 30%-40% of public expenditures in agriculture in the
latter 1980s up to the mid-1990s was in productivity enhancing
investments.

David (1999) points out that irrigation, which accounted for about half
of all agricultural public spending and one-fifth of total
infrastructure budget during 1947-1984, dropped sharply in the
mid-1980s and continued to decline thereafter. Indeed, it is worthwhile
to note that the Philippines remains one of the countries with the
lowest share of irrigated land to total cropped land in East Asia and
South Asia. The Philippine share in the mid-1990s of around 16% is
lower than Thailand’s 24% and much lower than China’s 38%, Korea’s 61%,
Bangladesh’s 43%, Vietnam’s 31%, and Pakistan’s 81%. This share is low
especially relative to countries where grains such as rice and wheat
are very important in their agricultural systems (e.g., China, Vietnam,
Korea, Pakistan, Bangladesh). This is also particularly low for a
country like the Philippines which has a population density higher than
Indonesia, Malaysia and Thailand, thereby requiring a more intensive
use of its agricultural land to feed its people and produce for
exports. The share of irrigated land to total agricultural land barely
increased from about 15% during the early 1980s to around 17% in the
1990s. Moreover, the lack of proper maintenance of the irrigation
facilities has meant the deterioration in the facilities and the
reduction in the effective irrigated area covered.

David (1999) also points out the severe under-funding of agricultural
research and technology generation. The Philippine agricultural
research intensity in the mid-1990s, at 0.41%, pales in comparison with
Thailand’s 1.40%, Malaysia’s 1.06% and Taiwan’s 4.65%. Moreover, the
commodity allocation of agricultural R&D leaves much to be desired.
For example, there has been virtually no public R&D expenditures on
corn and little on coconut and in Mindanao. Yet, they are the two
commodities which account for the largest agricultural imports (corn)
and exports (coconut) together with the region(s) with the greatest
potential for agricultural growth and diversification (Mindanao). The
long neglect of coconut R&D is one reason for the declining
competitiveness of the country’s coconut oil exports in the
international lauric oil market especially vis-a-vis palm.

As a result of the neglect of productivity-enhancing investments in
agriculture, the performance of the agricultural crops subsector was
very mixed and volatile. It was primarily the protected livestock and
poultry subsector, especially the commercial segment, that registered
robust growth during the period, in response to the rising domestic
demand.

The weak support to productivity-enhancing investments in agriculture
meant that the sector could not provide a robust and sustained growth
impulse for the country. It also means that the Filipino poor, most of
them relying on agriculture for livelihood, could not earn enough to
pull them out of poverty. Indeed, there is an indirect backlash against
the poor families in the rural areas from the protectionist approach to
agricultural growth. Specifically, the resulting high food costs in the
country engenders demand for high nominal wages, which given the
declining trade protection and appreciating peso makes the country
uncompetitive in unskilled labor intensive manufactures. Hence, the
shift towards the more skilled labor industries. However, it is the
children of the rural poor who are particularly handicapped with low
level of educational attainment. Thus, they have lower probability of
getting the more remunerative jobs in the skilled labor-intensive
industries. At the same time, the probability of getting unskilled
labor-intensive job is also diminished by the deteriorating
competitiveness of domestic unskilled labor-intensive industries.

Yet, it is increasingly acknowledged that one key means of pulling the
rural poor out of poverty is to increase the proportion of
non-agricultural income to total income of the rural households.
Moreover, a recent study (Habito, Briones and Paterno 2001) suggests
that farm households that also have non-agricultural sources of income
tend to undertake agricultural investments. In short, there seems to be
a new loop out of poverty; that is, investment in education leading to
nonfarm employment that leads to higher family income that encourages
investments in agriculture leading to higher productivity in
agriculture and higher agricultural incomes to add to the
nonagricultural sources of income.

It may be worth noting that the Philippines seems to have wasted
opportunities for greater growth promoting agriculture-industry
linkages and spillovers. Thus, for example, the robust growth in
agriculture in the latter 1970s (when the returns from the so-called
green revolution and intensive investments in irrigation bore fruit)
did not result in large positive spillovers in the non-agricultural
sector. This was because the period saw the intensification of
industrial protection that encouraged capital intensive manufactures as
well as of rent seeking. Similarly, the dismantling of protection in
industry in the 1990s coincided with increased agricultural protection
without the needed support for productivity-enhancing investments. As a
result, there was also no significant positive spillover between
industry and agriculture in the 1990s.

Tradable services and comparative advantage

Tradable services are likely to be an important anchor for the
Philippines in a globalized environment. For example, many people
consider the Philippines to have a big potential in tourism given the
variety of natural and adventure-related tourism assets. Moreover, the
country is very near major tourist sending countries like Japan, Korea,
Taiwan and increasingly China. Tourism development in the Philippines
is likely to contribute to poverty reduction because many of the
tourism assets of the country are in the countryside; e.g., several of
the island provinces and the far north in Luzon. However, poor
infrastructure facilities, peace and order problems, political
uncertainty, low priority accorded to tourism, and lack of promotional
budget have all conspired to prevent the Philippines from benefiting
fully from the tourism boom in East Asia during the 1990s.

Information-based services such as backroom operations and computer
programming have gained currency in recent years after the deregulation
of the telecommunications industry contributed to one bright spot in
the Philippines during the 1990s; i.e., investments and growth in
telecommunications in the country. The Philippine tertiary educational
institutions have been responsive to the increasing market demand for
information-based skills as reflected in the sharp rise in enrollments
in fields such as computer studies as well as robust growth in
engineering programs.

In short, tradable services may become a substantial area for
employment creation in the future for the Philippines. However, it is
only now that tourism development is being given larger importance in
the development programs of the country and it is still severely
constrained by budget constraints because of the overall fiscal
tightening of the government. Similarly, the potentials for the use of
information-based services for employment creation in the countryside
outside of Metro Manila and its environs are still hampered by the
inadequacy of telecommunication facilities outside Metro Manila and a
few major cities in the country.

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