Raul V. Fabella, PhD  is a professor and former dean of the University of the Philippines School of Economics. This article was published in the May 11, 2009 edition of the BusinessWorld, pages S1/1 and S1/3.

Congress is once more contemplating the extension of the Comprehensive Agrarian Reform Program last extended in 1998. The proposed extension ranges from five to ten years and the proposed appropriation for Land Acquisition and Distribution (LAD) is between P100b and P150b.  The proposed yearly appropriation from the General Appropriations Act runs between P3b and P5b annually. On the provision of credit which is of crucial importance in our view, one proposal is for a fund of P10b to guarantee loans to beneficiaries; another is for collateral-free loans (presumably provided or guaranteed by the government); yet another proposes “mandating financial institutions to accept as collateral for loans the purchase orders, marketing agreements or expected harvests….” One thing is sure: the extension will cost the taxpayer a lot of money. Thus far, the nation has shelled out P160b for land acquisition and distribution alone. What is not clear is what society got in return?

Did CARP make a difference in the economic welfare of agrarian reform beneficiaries (ARB)? The evidence here is very tenuous:

(a) The 2006 data collected by the Institute for Agrarian and Rurban Studies (IARDS) for DAR show that the average net profit from the average 2 hectares of   ARB farms was P10387 while that from the average 1.4 hectares non-ARB farms was on average P9356 or 10% lower. This is hardly a difference of any significance given that the ARBs have on average 30% larger plots and have to amortize the land to boot.

(b) The CARP-IA Micro-Meso Component data collected in 1990 and 2000 for about 1800 households and funded by DAR to evaluate CARP showed among others that: (i)  ARBs tend on average to have a higher per capita income than non-ARBs (P98,653 vs P76,159), (ii)  ARBs have as a group lower poverty incidence than non-ARBs (45% vs 56%); (iii) controlling for other influences, being an ARB lowers  the likelihood of the household being under the poverty line. Is the conclusion that CARP produced significant improvements on the lives of the beneficiaries warranted?

There are grave reasons for doubt: (i) 49% of the ARBs are from the Central Luzon, Southern Tagalog and Cagayan Valley areas while only 21% of the non-ARBs come from the same regions. By contrast, only 36% of the ARBs come from Visayas and Mindanao while 56% of the non-ARBs come from there. Since the first three regions constitute the most affluent in the Philippines and poverty incidence is highest in the last two, the average income and poverty incidence comparison may be picking up the income and poverty incidence differences across these regions.
(ii) ARBs in the sample on average have larger farm sizes than non-ARBs (4.45 has vs 2.86has or 36% larger on average). The differences in incomes and poverty incidence may be reflecting this asset differential rather land reform beneficiary status! Thus it is not clear that ARBs are better off than non-ARBs controlling for other influences.

A government program praying for extension must demonstrate that it has not been a government failure! What’s more the burden of proof is on the advocates. That CARP was not a government failure of the second order remains hypothetical. (A government intervention is a “government failure of the second order” if there is another intervention which delivers the same benefit at the lower cost or a higher benefit at the same cost.). Government failures abound where interventions do not factor in the capacity of the state for such intervention. And in the current CARP, good intentions notwithstanding, the state’s grasp far exceeded its reach!

The proposals in the proposed bills suggest that the shared reason for the meager harvest is that CARP was “incomplete”: the extension services required to make the farmers economically viable were “underprovided.” The prescription: throw in more money.

We do not share this view. First, “under-provision” is a common long-recognized feature of land reform all over the world and yet the meager harvest outcome has persisted. Why? The claims on state resources are myriad and land reform has not emerged as the best use of money. The commonly cited land reform successes, viz., Japan, Taiwan and South Korea, were largely on ricelands and were implemented with great dispatch by strong governments (Taiwan’s land reform took all of two years; Japan’s was done by the occupying Allied Command).  Third, CARP is flawed by design: it appears at once to empower the farmer with ownership then to dis-embowel this ownership by (a) forcing a 5ha limit on farm sizes for all crops thus negating possible scale economies that may exist (this is rife in sugar for example) and (b) outlawing all forms of market transactions on land (sale, lease, share tenancy) which mediate optimized use. The demise of the formal land market effectively killed the formal rural credit market, making credit accessible only from the underground or trader-mediated credit market. The exorbitant interest rates in the latter (up to 70%) meant that the farmer is no better than under a share-tenancy contract (50-70%). Worse yet, private capital is chased to the cities.

The credit access proposals do not come close to a sustainable credit flow in the rural economy. Mandating financial institutions to accept as collateral purchase orders, marketing agreements or expected harvest amounts to a prescription for disaster. Guarantees and subsidies by government soon dry up. Credit cooperatives that require no collateral may help but may need subsidies and will not solve the viability problems related to possible economies of size, forced entrepreneurship, and absence of option for farmers.

A well-established canon in Economics called the Coase Theorem says that one can have a redistribution of assets without sacrificing efficiency as long as those assets are subsequently tradable! Example of the Coase theorem in action? The Sumilao Farmers-San Miguel Corp deal brokered by Cardinal Rosales: after Malacanang determined that the contested 144has belonged to the farmers, the two sides sat down and hammered a deal where the farmers get 50has outright from the contested area, San Miguel keeps 94has where the San Miguel piggery stands, and the farmers get the remaining 94has procured by San Miguel in adjacent areas on VOS basis. This trade in assets was Solomonic and quintessentially Coasian! A parable of many lessons.

The problem is that  Section 27 of CARL outlaws the Coase Theorem! Allowing the Coase theorem amounts to making land or its use tradable. In turn this means allowing market transactions on land (sale, rent, usufruct) and easing up on the land ownership ceiling. The latter can be done by lifting/raising the post distribution ceiling altogether or lifting/raising the ceiling for a particular class of owners, say for example, corporations whose shares are publicly traded in the stock exchange. As the Sumilao parable showed, San Miguel Corp as a reputable market player stood to lose more by legally bullying its way. This trading in assets, moreover, allowed private capital, which Section 27 of CARP has booted out, a re-entry into agriculture. Let the Sumilao legacy thrive!

CARP has both equity and efficiency goals. But equity without efficiency is just, as Deng Shiao Peng aptly described it, “redistributing poverty.”