Summaries of Studies on Agriculture and Philippine Development by Ronald Yacat

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AGRICULTURE IN PHILIPPINE DEVELOPMENT THE IMPACT OF ECONOMIC POLICIES ON AGRICULTURAL INCENTIVES

= EDITOR'S NOTE: This double-issue focuses on the role and

Project no. 82_06 by Dr. Oistina C. David, Research Fellow, PIDS

importance of agriculture in Philippine economy. The studies presented here indicate that agliculture is a critical sector wtlose potentials should be developed on equal terms with industry and manufacturing. This issue is particularly relevant at a time when economic recovery, as seen by a number of economists in the country, depend much on the restructuring of the agricultural sector in the Philippines. ..

The efficiency by which scarce resources are utilized is a primary concern of any development strategy. The study " The Impact of Economic Policies on Agricultural Incentives" by Dr. Cristina C. David points out that a. significant factor for the country's proverty is limited capital resources and, in the rural sector, limited land. This analysis of economic policies in agriculture is cornprehensive and differs substantially in approach from previous studies of.agricultural policies in two major aspects: 1) While most policy studies are crop specific and frequently pertain only to the rice econonry, this sL_qy encompasses the entire agricultural sector in order to evaluate

2) While most studies cover only those specific to agriculture and each subsector, this study attempts to include the inrportant effect of the broad macroeconomic policies (exchange rate and protection policies, fiscal and monetary policies). Past analysis of inacroeconomic policies often have been conducted from the perspective of the industrial sector neglecting their pervasive efforts on the allocation of resources

the overall agricultural policy strategy,, and the differential impact of policy across agricultural conrmodities and between agriculture and non-agriculture sectors.

and distribution sector.

of income with respect to the agricultural (Continued next page)

ANNUAL GROWTH RATES OF MAJOR AGRICULTURAL

CROPS IN THE PHILIPPINES, 1955d980

1956-, 1961a/

19611966

19661971

19711976

19761979

19561979

Rice

2.9

1.4

5.2

3.1

5.7

3.5

Corn

7.2

2.8

2.7

2.6

5.1

5.8

Sugar

8.7

1.7

6.7

5.1

- 2.5

4.4

- .0.2

5.3

1.9

13.9

8.9

5.6

Coconuts

_a/End years are three year averages centered at the year shown. Source: In

Philippine Statistical Yearbook. Nationa]( Economic and Development Authority. I

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The study attempts to infer the pattern of government priorities rather than to quantify their impact. Although, the focus of the analysis is on the impact of government policies on the efficiency of resource allocation, the indirect impact on income distribution is also discussed,

For instance, the poticy of depressing agricultural prices to raise the profitability of the industrial sector will have negative long-run consequences on agricultural production, and thus, on the objectives of food self-sufficiency, increasing exports, and improving income distribution.

The study reports theat the socio-economic disparities between urban and rural sectors remain substantial. The average income of rural families is half as much lower than that of urban families, In addition, the proportion of rural families with incomes less than the acceptable minimum subsistence level is much greater than that of urban families. The level of health, nutrition, education and housing in the rural sector is consistently lower due not only to low income, but also to small pubhc expenditures for social services in rural areas, The study likewise, seeks to find out whether and to what extent the country has a comparative advantage in undertaking various agricultural activites, and to what extent economic policies have aided or thwarted the realization of this comparative advantage, Estimates of domestic resource cost to evaluate the comparative advantage of selected major agricultural commodities, as well as an analysis of price intervention policies including protection and exchange rate policies are presented. Findings indicate that such policies have created an incentive structure that is significantly biased against agriculture,

In the long-run, constraining the growth of agriculture will also limit industrialization. This is because the agricultural sector, by its sheer size, will continue to be an important source of capital, foreign exchange, and food for this effort as well as a potential source of market demand for its products. Price intervention policies were found to have led to inefficient resoUrce allocation and to lower economic growth. While no attempts were made to quantify the income distribution effect of these polices, "subsidizing industrialization through implicit taxation of agriculture represents an additional burden on a sector that is characterized by relatively low per capita income." Dr. David, then, recommend_ increased protection for agriculture, and the reduction of the distortions created by economic policies in general. Also, broad reforms in the tariff and interest rates policies currently being instituted have a potentially favorable impact on agriculture. The study also recommends other measures to boost agricultural growth. One is the general reduction' in tariff protection in manufacturing coupled with the policy of letting th peso float. These would somewhat reduce the extent of the

Before the 1970s, this bias was due mainly to the policy objective of promoting industrialization via tariff protection. During the 1970s, regulations in the agricultural sector led to an undervaluation of exportable products especiaUy sugar, coconut and logs through export taxes, export quotas, speciallevies, and government monopoly of marketing,

bias against agriculture. The other measure is on the reform in the financial system, including a more flexible interest rate policy. This measure may allow more financial resources to flow into agriculture, which could also improve the global economic policy for agriculture.

While prices of other agricultural products may not be substantially distorted, protection of manufactured inputs has introduced some measure of disincentive effect on their production. Moreover, the penalty imposed by the overvaluation of the peso is shown to be substantial. Even a partial correction of this by foreign exchange adjustments have had a dramatic impact on agricultural terms of trade. These distortions in the price of foreign exchange have been due both to the overall protection system and the tendency to delay foreign exchange adjustment to correct balance

Turning to sector specific price intervention policies, these have often been directed to achieve the following: 1) the promotion of processing or other use of raw agricultural products, 2) the provision of food and other necessities to th poor at low prices, and 3) the strenthening of the country's bargaining position in international trade. Dr. David states that these goals are by themselves commendable; thus, to achieve these ends, the government has imposed export taxes and quotas, various price control measures, and in some cases, government monopoly of marketing. However, the effect of these measures has been to depress agricultural prices, thereby hanning incentives to production and reducing incomes of many poor families. What needs to be emphas_ed therefore are more efficient and more equitable ways of pursuing these goals. The more significant policy recommendations, based on the study's findings are: first, the application of direct subsidy, through fiscal incentives from the Board of Investments (BOI) to manufacturing activities which use raw agricultural products (e.g., converting copra into coconut oil,

of payments disequilibrium, Agricultural credit policies, implemented mainly through interest rate subsidies have not significantly altered the unfavorable economic incentives in agriculture caused by price intervention policies. Credit quotas and special credit programs have not prevented the decline in real loanable funds to agriculture in the 1970s. Cheap credit, on the other hand, cannot overcome the disadvantage of depressed prices and profitability. The spiralling prices of inputs and the falling prices of outputs have gravely disadvantaged agriculture, Further, the policy structures affecting agriculture are primarily influenced by the general objective of promoting industrialization. The basic problem however is not in the objective but in the set of policy instruments used to attain this objective, II

corn into meat products, or raw cotton into textiles). This recommendation would be a better alternative than the present policy of depressing prices to farmers. Two advantages of subsidy through fiscal incentives would be: 1) the disinective to production of the raw product is eliminated, and 2) the III

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TOTAL CROP PRODUCTION: CROP YEARS 1978 - 1982

QUANTITY THOUSAND Metric Tons

30,000

i .....

., ..-.

"..:": -. ,•.,.. ...... -..... ,..;..

, .- .'.... .,.'-' :

...-.-:., ,,, ".':::., •...:-

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"-,:... ..... ..... " ,' .j .. "'"'" .....

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::;4

2o,o00-•

15,000

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VALUE

1,0(30 Million

Pesos

;OMMERGIAL CROPS

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///,

,,,

FOOD

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FOODCROPS

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CROPS

i1// 1978

Source:NEDA,1983PhilippineStatistical Yearbook. . II

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',:_"-:: '.; .-. . --._. _ COMMERCIALCROPS

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5,000

o --

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'10,000

3' !::-'

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-_. II II

1979

1980

1981

1982

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burden of the subsidy is borne by the general taxpayer, rather than by poor farmers. In both, there is a marked gain in efficiency and equity, Likewise, there should be an alternative policy which would emphasize subsidies to agricultural production to keep food supplies abundant, thereby benefitting both rural and urban poor. At present, the provision of"cheap food has been achieved only in urban areas through subsidies borne by the rural poor. Hence, in this system of subsidy, even the rich and not only the poor residents of urban areas benefit, There is a need to transfer the burden from the rural poor, again by having the general taxpayer bear the subsidy, In such case, even the general taxpayer will benefit as a consumer,

by subsidies to consumers to keep prices at present levels. Dr. David once again argues that it is better, from the standpoint of incentives to production and equity in income distribution, to keep food and feed cheap this way, rather than by depressing prices to farmers. This approach simply tries to correct distortionary impacts of economic policies on domestic production of supplies and to satisfy the objecrives of keeping food and feed cheap. There are other important issues related to the growing nationalization of marketing of agricultural crops. The study reports that this typically has reduced inntead of increased competition. With less incentive to minimize the unit cost of marketing, service to the buyers and sellers will likely be less efficient.

The policy objective of strenthening the country's position in international trade is also examined. This objective has led to more government intervention, specially in directly taking over marketing, though this may not be the only motive for government control of marketing, Yet, the case for this is rather weak, as the country is not in a position to influence world prices for even its major exports, The study suggests that, to the extent in which some degree of monopoly exists, the ideal policy would be an export tax equal to the reciprocal of the estimated world demand elasticity for the product, The study notes that an unfortunate consequence of the government's attempt to attain monopoly power in world markets has in some cases been the attaimnent of very substantial monopsony power. In coconut and cotton, this has been used to depress prices to farmers. In the government's marketing of rice and corn, it is noted that in recent years domestic prices have been near border prices. A key determinant of the domestic price of rice is the government's decision on the level of exports; while in the case of corn, it is the government's decision on the level of imports. In making these decisions, the government evidently does not take into account the undervaluation of foreign exchange that is due to both industrial protection and balance of payments disequilibrium, which is rather surprising because the government in its decision-making usually places a premium on earning or saving foreign exchange. This is seen in the set of BOI incentives in the price differential allowance for domestic components in the automobile industry, and in many other instances where the government indicates that it undertstands the real social value of foreign exchange,

The private-sector has also expressed concern over the uncertainties introduced by this system since it is easier to arbitrarily change prices and has provided a means for raising implicit taxes that are difficult to account for and are more arbitrarily allocated. Government marketing monopolies, in the author's opinion, may also hamper market adjustments to new economic opportunities. For example, government monopoly in rice exporting prevents the quality premiums in world prices from being reflected in the domestic market. Rice farmers and millers, threfore, have no incentives to produce rice with low percentage of brokens thus limiting profitable exports. Finally, if the alternative policy approach recommended by this study were adopted, the total taxation of agriculture, both explicit and implicit, would be considerably reduced. This is beneficial insofar as disincentives to efficient production are reduced and obvious inequalities are mitigated. Agriculture should, however, pay its share of the cost. of government services. This will require strengthening of income and land tax collection as part of an overall reform. At present, price intervention policies have placed a 20 percent implicit tax on agricultural products. Implicit tax paid by agriculture is a direct resource transfer to consumers of agricultural products, and to producers of non-agricultural commodities purchased by the agricultural sector. Therefore, the implicit tax becomes an implicit subsidy from the point of view of non-agriculture. Considering the much lower per capita income in agriculture compared to nomagriculture, the agricultural sector has been excessively taxed. Hence, more efficient and equitable taxation is called for. The study did not explore the area of tax reforms, but recognizes this to be the logical extensions of the research. â&#x20AC;˘

By implication, it would seem that the government is unwilling to treat agriculture on equal par with manufacturing, tourism, and shipping as foreign exchange earners and savers. Thus, a countervailing move would be to expand rice exports and gradually reduce corn imports as supply responds to price until both domestic prices are 20 percent above border prices (this being the minimum estimate of the proportion by which the peso in overvalued). Failure to do this means keeping the domestic price of rice and corn below their social values. These domestic prices are prices to producers, which could be accompanied III

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GOVERNMENT POLICIES AND FAN IN THE PHILIPPINES Staff Paper No. 82-03 by: Dr. Cristina C David Research Fellow, PIDS

MECHANIZATION

Over the last two decades, mechanization has emerged as a controversial issue in Philippine agriculture. This paper, on "Government Policies and Farm Mechanization" by Dr. Cristina C. David describes the p_ttem of growth of farm III II

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mechanization, and examines how government policies have affected the economic incentives for mechanization in the Philippines. In the face of a growing agricultural labor force, mechanlzation has lowered the demand for farm labor. In addition, evidence also indicates that the proportion of landless households in the rural areas has risen over the past two decades, Farm wages, too, have at best remained constant in real terms. The study also gives data on the number of farm machineries and equipment, which show that farm mechanization was generally limited to tractors and power tillers for land preparations and mechanical threshers for threshing rice. At the national level, data show that there were fewer than two units of tractors and tillers per thousand hectares of cultivated area in 1971. In addition, mechanical land preparation and threshing was practiced by only five percent of farms, The study emphasizes that mechanization has been unevenly adopted across regions, with sugar and rice receiving the major share. Higher rates of mechanization in land preparation and threshing are associated with lower use of labor in these tasks. At the same time, no significant output or improvement in timeliness in crop operations was gained through mechanization. The adoption of mechanization was found also to have led to a worsening of income distribution. This was mostly due to the lowering of the demand for farm labor. The study further reports that it is therefore not surprising to find positive real growth rates in agricultural production being accompanied by stagnant or even declining real wages, The study thus poses a question: to what extent have government policies made mechanization artificially profitable? Although there have been no explicit government policies on farm mechanization, broad economic policies have indirectly and perhaps unintentionally tended to promote mechanization. The government does not directly intervene in the farmer's decision to use farm machinery. However, it does affect a farmer's decision indirectly by changing the profitability of using capital as against labor, i.e., by changing the price of farm machinery, fuels, and the interest rate. By lowering the user cost of capital in agriculture (as in industry), government policies have indirectly promoted the adoption of mechanization. The overall impact of tariffs and taxes in general, the overvaluation of the peso, and the interest rate subsidy have reduced the user cost of capital by as much as 70 percent during the 1960s. In the 1970s, this implicit subsidy on the cost of mechanization has persisted at a somewhat lower rate of 60 percent. However, the interest rate has become a more powerful instrument for lowering the user cost of capital than the overvaluation of the peso. Government regulations on interest rates under the general umbrella of the Anti-Usury Law as well as a special program on credit mechanization have lowered the real market interest rate compared to the social opportunity cost of capital. With inflation rates of about 20 percent in the 1970s i

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and nominal interest rates (including implicit changes) ranging from 14 to 20 percent interest rates in real terms have been negative or at best zero, providing an important source of sub-. sidy to users of capital. The author argues that credit supplied by producers or dealers of farm machineries was most likely obtained from the formal sector including government, lending institutions. For self-financed purchases, the low interest rate policy may also have an impact on the farmers' opportunity cost of capital, to the extent that financial assets which are also subject to interest rate regulations are the alternative forms of investment. With the excess demand for credit created by low interest rate policy, lenders inevitably favor larger famaers as a means of minimizing risk and transaction costs. Bigger farms are expected to be more productive when'large machines are used. Comparatively, small farms are likely to be more efficient with small machines or draft animals. Thus, a low interest rate policy favors the use not only of machines over labor, but also of large over small machines. This expected bias is borne out by the dimtribution of loans under the Central Bank-World Bank Credit Mechanization Programs from 1966 to the present. These loans have financed a higher proportion of sales of tractors (30 percent) than of power tillers (7 percent) over the whole period. In the case of land preparation in rice, there is no evidence that the adoption of tractors and powers tillers has led to higher productivity. Finally, the study notes the importance of looking into the impact of policies on the whole economic environment in agriculture. Often, well-meaning agricultural production programs fail because they do not consider the structure of economic incentives existing at the countryside. -AN ANALYSIS OF FERTILIZER POLICIES IN THE PHILIPPINES Project No. 82-1 by Dr. Cristina C David Research Fellow, PIDSand AJ/ÂŁ Balisacan, UPatLos Banns Fertilizer policy has been a critical factor in agricultural growth in the Philippines, where land-man ratio is low and declining, and technological innovations are directed toward incresing yields per hectare. The paper, "An Analysis of Fertilizer Policies in the Philippines" by Dr. Cristina C. David and A.M. Balisacan, analyzes government policies affecting fertilizer prices during the postwar period, with emphasis on the policies after 1973. The study indicates that with the gradual phasing out of direct subsidies to the domestic fertilizer industry and the declining real price of rice and sugar, the issue of fertilizer price becomes crucial. The government's involvement in fertilizer covers among others the following: breeding for more fertilizer-responsive crops, extension, development of domestic production capacity for fertilizer, rural credit, andprices. The research approach involves distinguishing between the impact of government policies on the price of fertilizer

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paid by farmers, and the price received by domestic fertilizer producers. The impact of both economic policies pertaining to exchange rate, tariffs, taxes, import quotas, etc., and policies specific to the industry such as price control and direct subsidles is quantified, In 1973, the government intervened directly in the operation Iofthe fertilizer industry. This move, the study report s, was prompted by the four-fold increase in the world prices of fertilizer and the immediate need to recover from the 20 percent drop in rice production, By this time, President Decree (PD) 135 established the Fertilizer Industry Authority (FIA) primarily to regulate prices, imports, domestic production and marketing aspects of the fertilizer industry, In 1977, PD 144 reorganized FIA into the Fertilizer and Pesticide Authority (FPA) to continue and extend the FIA regulations to the agricultural chemical industry. In addition, the control of the quality and safety of fertilizer and agricultural chemicals became part of its fimctions, The study indicates that the FPA devised two sets of policy instruments to ensure that fertilizer prices are regulated. First, the FPA, together with representatives from other national agencies, decides on the level of fertilizer imports which would "fill the gap between domestic production and total requirements." The FPA allocates the targeted imports to existing domestic producers or to authorized importers. Imports are allowed only with FPA authorization and are exempted from customs duties, advance sales tax, and the 50 percent margin deposit on the value of the import letters of credit,

tilizer. The remaining two_thirds was financed by the national budget, shouldered by the general public. The authors state that the growing subsidy required by domestic producers has been growing, despite the declining share of domestic production to total supply and the signi. ficant profit margin pennitted by the FPA on imports. Thus, the authors conclude that, even with technologically up-to-date production plants, we probably do not have a comparative advantage in the domestic production of fertilizer, which involves a highly capital intensive technology and importation of basic raw materials. Likewise, economic pollcies on fertilizers are found to serve the interest of producersimporters to increase protection on their activities. This defeats the initial aim of protecting food production from the sharp increases in world prices of fertilizers. Furthermore, on the implementing instruments of these policies, the study indicates that there was no attempt to relate distribution of protection to efficiency of firms. Protection, through cash subsidies, is found to be determined by the losses incurred rather than by some objective measure of efficiency. Hence, a review of current fertilizer policies is called for. Policymakers should focus on the unfortunate burden â&#x20AC;˘which farmers and the general public have to bear to protect the growing inefficiency of the domestic fertilizer industry. Furthermore, with the lifting of import quotas, tariffs, and taxes, fertilizer prices would drop to world levels. Domestic fertilizer production may shrink, but this will put pressure on the fertilizer industry to search for more efficient means of meeting farmers' demand for fertilizers.

Second, domestic producers are also exempted from the same requirements for imports of raw materials. In addition, direct cash subsidies are paid from the government budget for losses incurred by the domestic producers despite tax and duty exemptions on imported fertilizer and raw materials. The authors state that this is a result of the price control.

Thus, the study predicts that only efficient firms would survive. The cost of subsidizing inefficient firms can be allocared to economic activities which will use less resources to obtain foreign exchange needed to purchase imported fertilizer, or to other means which will raise the profitability of agriculture. â&#x20AC;˘ "

The impact of these policies were discussed from two viewpoints: the farmers and the producers. From the standpoint of farmers, the effect of government interventions has been on fertilizer price. The study quantified this effect through the implicit tariff, which measures the percentage difference between domestic price and border price at a comparable point in the marketing chain, During 1973 to 1981, the overall average implicit tariff indicates that farmers in general paid 10 percent more than border prices. Border prices represent the social opportunity cost of fertilizer (i.e., the price farmers would have paid without government intervention or under free trade).

CHANGING COMPARATIVE ADVANTAGE IN PHILIPPINE RICE PRODUCTION by L.J. Unneverhr, Research Associate, 1RRI and A.M. Balisacan, Research Intern, East-West Center

From the standpoint of producers, the impact of policies is measured by the concept of the total nominal protection rate. This rate measures the amount of total protection or subsidies received by the fertilizer producer as a proportion of the value of domestic production at border prices, From 1973 to 1981, the percentage excess of the value of production, relative to the value at border prices, was over 50 percent. One-third of this level of protection was funded by implicit taxes borne by farmers through higher prices of ferII IIII

Between

1965 and 1980, rice production

grew at an

average annual rate of 5.3 percent, total production doubling from 2.5 to 5 million tons of.milled rice. Growth in the supply of rice has overtaken growth in demand, so that the Philippines had exportable surpluses and roughly constant real rice prices between 1977 and 1982. Thus, there is now a question of whether the country's rice exports are profitable or not. To answer this, it is necessary to examine the country's comparative advantage in rice production, as well as government policies which encourage the rice sector to exploit this advantage. Growth in rice production can be attributed to three factors: the introduction of new modern varieties; the increased use of fertilizer; and the increase in the number of irrigated farms. The principal source of production increase, however, is irrigation, which is the government's most imporrant contribution to the rice sector.

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Wi_ the growing domesuc supply of rice, the government's role in the rice sector has become more prominent, maintaining two significant goals in its policy, namely: the provision of remunerative prices for producers, and the maintenance of steady supplies of rice at stable prices affordable by low-income households,

a barrier between domestic markets and world market quality standards so that export price incentives for quality were not available to domestic processors. Second, world demand for low quality rice is less elastic than demand for high quality rice. In spite of its low price, low quality Philippine rice cannot easily be absorbedL by the world market.

To implement these goals, government policy veered toward monopoly of international trade, and domestic market operations to maintain official prices. Success in the maintenance of official prices ultimately depends on international

Thus, to exploit the country's comparative advantage in rice production and maintain producer incentives, it is necessary to develop higher quality processing to meet world standards.

trade, since deficits must be supplied through imports and surpluses disposed of through exports, Government market interventions in the past took the form of disbursement of imports in consuming centers. During the 1960s, the Rice and Corn Administration (RCA) purchased less than two percent of production. Then the National Grains Authority (NGA) replaced RCA in 1972. Later, NGA became the National Food Authority (NFA), which increased

Producer incentives can be improved by examining the effects of government policies on the prices of production inputs, These include subsidies on irrigation, credit, and fertilizer. Irrigation has introduced dramatic increases in rice production. Irrigated farms yielded 1.2 tons more during the wet season, plus an additional 2.5 tons in the dry season. The use of fertilizer complements irrigations, and both are needed to bring about the miracle in modern rice varieties.

procurements to at least five percent of the increased production since 1977. With growing domestic supplies, the government's role in disbursement declined. Now, its task is to dispose of surplus production through exports and increased stock holding. And since yearly changes in stocks have been small, the control of trade has been the principal means of controlling domestic supply and prices,

To enable farmers to adopt this new technology, Masagana-99 (M-99), a low-interest loan package recommending the use of fertilizers and insecticides, was launched in 1973. The impact of these policies on value added or returns to domestic factors of production is measured by the effective protection rate (EPR). EPR is defined as the ratio of value added in domestic prices to value added in world prices, minus one.

Government intervention have had two effects. First, government monopoly of trade has caused domestic rice prices to diverge from world prices. Seond, government policies have tended to maintain domestic prices at official price levels, The impact of trade monopoly on domestic prices is measured by the nominal protection coefficient (NPC), defined as the ratio of Manila wholesale prices to border prices (i.e., adjusted Thai prices). NPC is estimated to have averaged

Findings show that only policies on irrigation investments and operations increase private profitability in rice production. Other price policies do not favor rice producers, as the price of fertilizer, insecticides, machinery, and fuel are all higher than border prices. The EPRs for rice are very close to zero, indicating that growth in production has occurred without any gross distortions in net incentives. Policies have favored irrigated farms slightly, which has led to a sudden increase in the number of

close to 1.00 for the period 1960 to 1980. The control on imported quantities caused domestic prices to be above world prices however, in the 1960s, even as official ceiling prices were at or below world prices levels, Only in 1962 and 1963 were imports sufficient to keep domestic prices below world prices. Therefore, actual domestic market prices were usually above the ceiling price. As a result, domestic prices slightly favored producers over consureefs, In 1972 and 1973, Philippine rice production declined while world prices rose sharply dues to global production shortfalls. Subsidized imports combined with domestic ration-

irrigated farms. Other policies have taxed producers to benefit connumers and domestic manufacturers of agricultural inputs. Moreover, for rice to be socially profitable, the social cost of domestic factors used in production should be less than the foreign exchange earned. Domestic resource cost (DRC) measures the social value of domestic resources needed to produce one dollar's worth of rice. Findings show that in 1979, all Central Luzon rice farmhlg systems were socially profitable. Rice production on irrigated farms was slightly more efficient in earning foreign exchange, because the higher yield resulted in lower production cost per unit of rice.

ing served to buffer high world prices,

ment

domestic prices from the abnormally

Currently however, there is a rise in irrigation investcost due to additional areas which are more difficult

Since 1976, rice supplies have been adequate to keep domestic consumer prices below ceiling prices, while at the same time exporting substantial quantities in 1980 and 1981. Domestic producer prices have now fallen below the official floor price, so that price policy implementation now favors

to irrigate. Continued growth in irrigation costs might quickly erode Philippine comparative advantage in rice. â&#x20AC;˘ -....... IMPACT O17 GOVERNMENT POLICIES ON PHILIPPINE SUGAR

consumers over producers, During these years however, rice exports proved to be unprofitable. The government reportedly lost P90 million in export subsidies between 1977and 1979. Two factors account for these losses. First, government control of exports has put

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Gerald C Nelson, Professor, UP at Los Banos and Mercedita Agcaoili, NEDA Staff Since the early part of the 20th century, sugar has been (Continued next page) II

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to maintain producer prices above world prices, Philex made , ........

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a major foreign exchange earner in the country. In the 1960s; sugar exports comprised up to 18 percent of total export earnings, However, during the 1970s, sugar's share in the total exports of the country declined to only 10 percent. This is partly due to the increasing domestic sugar consumption and growth in other commodities, The predominace of sugar in Philippine trade before the 1970s was largely the result of colonial and post-colonial ties with the US when Philippine sugar received preferential treatment in the US markets, Until 1974, almost all sugar imports were sold dutyfree into the protected US markets where prics were kept stable at levels usually well above world market prices. At this time, government policies on sugar were largely designed to secure maximum benefits from these arrangements, After 1974, preferential access to US markets ended, prompting the government to take over control of both domestic and international marketing. This move has been justified as a way of protecting producers and consumers from world price fluctuations, and improving the country's bargaining position in world trade. However, even before 1974, substantial government intervention in sugar production, processing and trade has been implemented. Up to now, government sugar policies include: export taxes, and import ban, controls on price, production, and marketing; and low interest rates on production and equipment loans, In addition to its importance in trade, sugar is also a consumer good. Thus, it is also important to examine the effects of government policies on domestic prices and on the distribution of income from sugar production and processing. Before 1974, when the Philil)pines still had preferential access to US markets, the goverr_:ment allocated domestic and export quotas on sugar production. However, private traders were allowed to handle marketing. After 1974, the Philippine Exchange Company, Inc. (Philex) was established as the sole buyer of sugar from the mills and the sole exporter of sugar. Philex was an agency of the Philippine National Bank (PNB), the major financial institution for the sugar industry at that tinre, In constrast to the previous system in which mills were responsible for marketing its exports and domestic quotas, Philex bought all sugar at a single "composite" price calculated by taking weighted shares of the officially determined "export," "domestic" and "reserve" prices. Philex sold sugar for the domestic market to licensed traders and exported the remainder itself. The creation of Philex was bad timing for the Philippine sugar industry. At that time, world prices were so high that an additional export tax was implemented, and a temporary ban on exports was declared to protect domestic consumers, By 1975 and 1977, world "sugar prices began falling, and Phflex lowered the composite price from 'P2.23/kg. to P1.28/kg. in 1976, but increased it to P1.40/kg3n 1977, until world prices began rising. Despite this reduction, export unit values in 1977, 1978 and 1979 were still lower. In order --m[ ......

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large loans from domestic and foreign banks. Despite high world prices in 1973 and 1974, domestic stocks of sugar were built up and by 1975-1976 the stocks reached 1.68 million tons. Within the next two years, Philex exported sugar at a record high, however, these exports were made when world prices were at their lowest and export revenues did not increase nearly as much as the increase in sugar production. As a result of the substantial losses, government control of sugar was transferred in 1978 to a newly created policymaking body, the Philippine Sugar Commission (Phflsucom). Day to day operations were delegated by Philsucom to the National Sugar Trading Co. (NASUTRA). Philsucom and NASUTRA were still faced with a record high of domestic stocks, and the need to repay large loans made by Philex. In 1980, NASUTRA entered into long-term contracts of three and four years to sell half of total exports at roughtly 51.8 US cents/kg. (or P3.7/kg.). This move proved to be a remarkably good bargain because world prices fell to about 22 cents/kg, in 1981 and remained at or below that level until 1982. However, because of the need to repay loans, world prices were not fully passed on to producers. Fifty percent of NASIZfRA's profits were kept to pay off tire loans made by Philex, and the other half were paid to planters/millers. The impact of these policies has been in the decline in nominal protection to producers and the transition from implicit taxation to implicit subsidization of sugar consumers. On average, producers received only 77 percent of the world prices. On the other hand, consumers paid only 69 percent of world prices. The impact of government monopoly on domestic and international marketing of sugar has been on the following: price stabilization, improved bargaining position in the export market, and increase earning for producers. Price stabilization has brought about benefits for both consumers and producers. However, benefits have not been greater than the social costs of imple:menting the policy. The opportunity cost of the foreign exchange loans made by the government to subsidize producers reached US$370 million between 1977 and 1979. This amount is about oneand-a-half times the value of annual sugar exports in those years. In. addition, price stabilization of sugar prices has not had si:gnificant effect on the real income of sugar consumers. This is because sugar, unlike rice, does not entail a big portion of consumers' expenditures. Producers als0 appeared not to have gained much from this policy since prices have been kept well below world prices. It appears that either from a theoretical or an empirical standpoint, the long run overall gains from government marketing n_nopoly of sugar are not large. But, there have been large income transfers from sugar producers to consumers. NASUTRA's good: decision in making long term contracts at least partially m_de up for the bad decisions of Philex. However,tiae Philippine sldges not have a significant position in world trade to influence world prices for sugar. Thus, it would be doubtful whether a national body can significantly 1

bring price changes for Philippine sugar than private exporters. I

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ECONOMIC INCENTIVES AND COMPARATIVE ADVANTAGE IN THE LIVESTOCK INDUSTRY

keting of livestock products. At present, there is the Food Terminal Inc. (FTI) and the Livestock Auction Markets,

which were established for this purpose. However, studies were presented to cite the importance of middlemen in the marketing scheme. Moreover, research and extension programs of the govemment have long-term effects of the industry. Better technology and higher efficiency would lead to low production costs which would benefit even consumers. Unfortunately, as in most agricultural activities, there is little research expenditure on livestock. Improvements in domestic technology have been mainly through direct technology transfer from abroad.

L. S_ Cabanilla Assistant Professor, UPat Los Ba_os

With increasing demand for livestock products, questions have arisen concerning the most efficient way of increasing production, To meet the growing demand, the country could either increase importation of livestock products, or expand domestic production. Increasing importation entails use of more foreign exchange, which may sacrifice other importable commodities, Expanding domestic production on the other hand, entails increased use of domestic resources. Thus, it must be ascertained that the use of domestic resources for livestock production would be socially profitable. The expansion of livestock production also requires more feedstuffs which at present have a high import content. However, because of the chronic foreign exchange problem of the economy, it is more beneficial to increase domestic production of both feedstuffs and livestock products, which has been the thrust of past government policies, Nevertheless, the extremely limited resource base of the country makes it necessary to determine whether present policies are geared toward a more efficient utilization of domestic resources, Since livestock products are considered essential goods, one of the major concerns of government is the maintenance of low and stable consumer prices for these products. This has led the government to intervene in the livestock industry by altering the relative prices of inputs and outputs in the domestic market, and putting a wedge between domestic and border (world)prices. Government intervention can be classified as tariff and non-tariff. Tariff policy has long been used to protect domestic producers from foreign competitors. Various other programs were also instituted to make the price of inputs, especially feeds, low.

To quantify the impact of these policies on the output prices of chicken, meat, eggs, pork and beef, the nominal protection rate (NPR) was calculated for each product. NPR measures the rate by which domestic price deviates from the border price. In his calculations, the author did not use the country's import value (CIF) as a measure of the border price, because the country's imports of livestock products comprise a very insignificant proportion to total domestic supply. Instead, the import unit values of Hongkong were used for poultry and pork, and that of the US for beef. Hongkong import prices were used because of its substantial import quantities of livestock products. Further, geographical location relative to international supply points is comparable to the Philippines. Also, import values of Hongkong are found to be similar to other countries like South Korea and Singapore. For beef, US imports consist mainly of low quality beef. Analysis shows that the NPRs for poultry were irigher than for hogs and cattle during the post-war period. This is consistent with the tariff structure, in which poultry enjoys higher protection than hogs and cattle. This also indicates the importance of tariff in promoting domestic production. In terms of government intervention in inputs, policies affected the prices of feeds which comprise as much as 70

Direct price intervention has also been used to maintain stable consumer prices of livestock products. If effective, this should cushion the impact of tariffs on domestic prices, which tend to go up with the absence of foreign products due to tariff,

percent of the total cost of livestock production. The government also tries to maintain low capital cost primarily through low interest credit,and through other forms of incentives under the Investment Priorities Plan of the Board of Invest-

The government likewise undertook distribution of livestock products in rolling stores and other distribution outlets at controlled prices. However, the small size of these operations relative to the total market renders price control ineffective in depressing the upward pressure exerted by tariff on domestic prices, Reports and studies were also cited in this research to show that these distribution centers, mostly located in Metro Manila, handles less than one percent of the meat sold in the area. In addition, other studies were also citied regarding the preference of farmers to sell their produce to middlemen rather than directly to government centers. The government has exerted efforts to regulate the activities of middlemen, which many blame as the cause of inefficiency in the mar-

The impact of government policies on inputs was quarttitled by calculating the implict tariff (IT) for different types of feeds. IT measures the amount by which domestic prices paid by farmers for compound feeds deviate from world prices. Findings show that soybean meal and yellow corn (feed ingredients under the National Food Authority's control) have IT rates of 59 and 17 percent respectively. Apparently, NFA's priving policy on these ingredients imposes a penalty for users of these ingredients. To synthesize the impact of government policies affecting both output and input prices, the effective protection rate (EPR) was estimated. It appears that there is high effective orotection for poultry and negative effective protection for hogs and cattle. Domestic broiler production in particular (Continued nextpage)

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enjoys a high average of 200 percent effective protection, This is primarily because of the very small value added to broiler production, Hogs and cattle production on the other hand axe penalized by the protection system. Their continued existence and sustained growth in production levels, nonetheless, indicate that they are efficient producing units, The high protection accorded to poultry has created a more favorable business environment for private entrepre-

implications and policy suggestions for improvement of the efficiency of allocation of resources within the forestry sector. The study reports that forestry offers an opportunity for the country to have additional efficient means of earning and saving foreign exchange. Efforts should focus on the promotion of domestic processing of wood, together with reforestation and forest protection, as means of enhancing forestry's long-run capacity to earn and save foreign exchange.

neurs, attracting investments from various groups, notably big feedmillers, However, a relevant question would be: is there social benefit derived from the continued protection of an import substitution endeavor, like poultry. This issue arises because of the divergence between private and social profitability, Hence, it should be determined whether domestic poultry production is socially efficient in saving foreign exchange relative to other activities, The high domestic resource cost (DRC) for broiler production compared to other activities indicates that broiler production is less efficient than layer, hogs and cattle producfion. As the DRC estimates are compared to the shadow exchange rate, it becomes apparent that the country at present does not possess comparative advantage in broiler production, The social value of domestic resources used in broiler production is higher than the shadow exchange rate. Egg production in contrast, possesses comparative advantage. The high protection rate afforded by tariff in the

In this study, the efficiency of the sector in utilizing resources for production of forest goods and services is measured through the domestic resource cost of earning or saving foreign exchange or DRC. The authors explain that the DRC measure represents, in effect, the rate at which domestic resources, measured in pesos of opportunity cost, can be converted into foreign exchange through a particular economic activity. Comparative advantage for this activity is indicated if DRC is less than the shadow price of foreign exchange. In addition, the study also gives an assessment of government policies affecting forestry. The authors state that it is possible for price intervention and other policies to turn a socially advantageous activity into a privately unattractive one, and vice versa, In this connection, their study includes an assessment of the effects not only of government l_olicies specific to the forestry sector (e,g. export tax or export ban on logs) but also the powerful and pervasive effects of fire tarift system and exchange rate policy on tradable forest products.

early fifties to egg production has enabled it to attain its present competitive position. Given enough time, likewise the same thing may happen to broiler production. On the other hand, the low DRC estimates for hog and cattle show their efficiency in the use of domestic resources. This is specially true with hog production which, despite negarive effective protection, continues to grow. Domestic hog producers show competitive advantage in the world market, With its linkage to the teed milling and drug/chemical industries, livestock shows remarkable comparative advantage and should be considered significant in the country's economic development. The industry can effectively serve as an important income-generating activity for the rural population and, at the same time, serve as the source of essential protein-rich food for the rest of the population.e , , .... COMPARATIVE ADVANTAGE AND GOVERNMENT PRICE INTERVENTION POLICIES IN FORESTRY by Dr. John H. Power, Research Consultant, PIDS, and TessieD. Turnaneng

The estimates of DRC indicate a strong potential comparative advantage in all three major wood product activities - logging, lumber and plywood veneer, if the goal of sustained yield forestry can be met. The degree of comparative advantage is measured as the ratio of the DRC to the shadow exchange rate (SER). A value less than One indicates comparative advantage and the lower the value the greater is the degree of comparative advantage. For their study, ratios for estimated DRC's (assuming zero land rent) range from .37 to .7 l, indicating a very substantial margin within which prices and costs could vary without sacrificing the country's comparative advantage. The authors state that the DRC results depend on the particular levels of pOces and costs that prevailed in the period of study, 1977-1979. Moreover, the results depend on their assumptions about the shadow price of land, labor and capital, as well as about future forest management. Turning to price intervention policies, the authors set four major goals for policy implementation. These are: 1)

For the past 30 years, .forestry products have been among the country's top ten dollar earners; and their

limiting output to meet conservation target, 2) capturing private rents from logging concessions, 3)promoting foreign

combined output constitutes about five percent of the nation's n_:donlestic product. _ John Po_Â˘r .and Tessie Tumaneng's study on " Cornparative advantage and Government Price Intervention Policies in Forestry " assesses the comparative advantage of the Philippines in producing major forest products such as logs, lumber and plywood; quantifies the protection or penalty bestowed on these activities by government policies; and draws policy

exchange earnings consistent with comparative advantage, and 4) raising revenue for forest administration. The authors also note that no single policy can be expected to attain all these goals. Hence, they conclude that four separate policies are needed to meet these goals. On the policy on raising revenues, the study reports that forest charges and export taxes cannot be designed primarily for this purpose, since they have other roles to play.

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Revenues from general taxation must be used to fill the gap between this need and revenues from strictly forest policies, With respect to conservation, the study notes that, because of externalities and the need to meet qualitative and quantitative aspects of conservation, direct controls and reguiations are needed. Forest charges, by themselves, could limit output (if they are effective), but could not meet the qualitative requirements of conservationpolicy, Nevertheless, forest charges could play a role in supplementing direct controls. Forest charges have declined in real terms over the period studied. Moreover, while a decade ago revenue from forest charges roughly matched government expenditures on forestry, they now represent only about one-sixth of those expenditures. Undoubtedly, these charges could be raised substantially without reducing incentives to output below the conservation target.

In the study, a second-best approacn to policy rerorm would include at least: 1) removal of export tax on processed wood products, 2) increased forest _charges, 3) perhaps an increase in th export tax on logs, 4) elimination of quotas on logs exports, and 5) hopefully an improved land tax on forest concessions. Finally, in approaching the problem of estin]ating DRCs, the assumption -s that the government would be able to administer reasonably well in the future an efficient sustained yield system of forest management; this being the crucial element int he forestry policy package. â&#x20AC;˘ ,......... ' RESEARCH ON FOREST POLICIES FOR PHILIPPINE DEVELOPMENT PLANNING: A SURVEY By Marian Segura-de los Angeles

In addition, if forest charges were raised to the point where it is just profitable at the margin ro produce the conservation-determined output, marginal rents would be eliminated, However, the problem of intramarginal rents remain. The ideal method of eliminating these, which is competitive bidding, is presently not avilable. A higher land tax would be a possible substitute, but serious study is needed to. determine the extent of intramarginal rents and how to administer a land tax on forest concessions that might largely capture such rents for society, Finally, the" study reports on the policies promoting optimal foreign exchange earnings from forest products. These include policies on: l) the industrial protection system which penalizes all exports via undervaluing foreign exchange, and 2) export taxes, quotas and subsidies,

UP, School ofl_'onomics This study focuses on a review of specific public and private forest management issues in terms of how peculiarities of timber are incoiporated into forest policies, Central to this study is the question of how benefits and costs from using a potentially renewable resource such as forests could be optimized for ,Philippine economic growth. This issue is better understood through a study of policies affecting forest management and their impact on physical, economic and institutional considerations in resource conservation. There are generally two viewpoints in the analysis of forestry policies. These are: 1) those of the individual cornportents of the economic system, such as the producers and consumers, 2) and those of society in general.

The study notes a strong comparative advantage in producing togs and processing them for export. Further, there is an advantage in creating a wedge between world and domestic prices of logs, that reflects world elasticity of demand. In this connection, an export tax is the ideal instrument while export quotas (or ban) represents an inferior method. Finally, the study indicates that the protection system imposes a penalty on all exports in the range of 17 to 23 percent via undervaluation of foreign exchange, The study reports that this penalty is quite apart from any peso overvaluation that result from disequilibrium in the foreign exchange market. It is due solely to the/distortion caused by industrial protection. To correct this penalty in a first-best manner would require the removal of the four

Although Philippine forests are publicly owjled, they are used privately under a system of granting consessions, licenses, and permits. This is a system of co.management wherein government imposes controls on the manner in which forests are used by private individuals. The study recognizes the need to provide a basis for a more comprehensive planning in forestry, which is generally labor-intensive and therefore significant for rural development. A Philippine forestry development program should have the following objects: 1) to develop and maintain the country's resources at maximum productivity, to assure contribution to national welfare, 2) to complete the reforesration of all barren areas with top priority given to the 1.4 million hectares of degraded critical watersheds, 3) to con-

percent export tax and its replacement by a 20 percent subsidy. A first-best package would include this plus removal of quota or ban on log export, There is an assumption here that the implicit export tax on logs from undervaluation of the currency is about right for the optimal exploitation of foreign demand. The implied elasticity of world demand is probably too low on a long-run view, according to the authors,

centrate and stabilize forest occupancy in order to minimize, if not entirely eliminate, the destructive activities of illegal encroaches on the forests; and 4) to promote ecological balance by requiring forest users to adopt environmentaUy sound methods of exploiting forest resources. The following issues are also vital in forest development planning: First, the need for an inventory of the factor of production in the Philippine forestry sector. This would

This first-best package has financial implications might be disturbing. but all exports, face the the same subsidy. To an impossible tax and I I

that

Not only processed wood products,, same penalty, and in a sense, "deserve" implement this subsidy might imply transfer problem for the government. .....

necessitate

the gathering of information

initially at ground

level, instead of through satellite photos, secondary data sources, or aerial photographs. This should account for the cropping system of upland farmers, the socioeconomic pro(Continued next page) ,1

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fde of upland farmers, the work conditions of laborers in forest based industries, and the biophysical, climate, and other factors which need to be considered in forest .renewal. and the development of upland communities. Second, the formulation of a framework for a cornprehensive forestry development program. The role that forestry would assume in the nation'.s growth and development goals needs to be specified through a set of criteria. This formulation would entail the participation of various disciplines and agencies, as well as the private sector, Third, the operationalization of multiple use and economic sustained-yield forestry concept. This would be defined in terms of biological, ecological, and economic terms. From the public sector's viewPoint , sustained-yield forestry would take into account self-rehance in forest-based commodities and services, and their distribution across different generations. Such economic and sustained yield forestry would most likely result in multiple use forestry as well. And, from the private sector's side, sustained yield, in practice, would mean the long-run viability of the firm given in the economic constraints. Fourth, the evaluation of forest renewal strategies, Microlevel studies of present forest renewal strategies need to be conducted in order to determine their appropriateness to local conditions. This should include studies on: a) cornpleteness of the strategy, b) identification of beneficiaries and bearers of costs of projects, and c) availability of support facilities and infrastructure. At the macrolevel, there is a need to identify the various demands for wood products from reforestation projects, the establishment of_strategically located processing centers, forest products marketing arrangements, and the like. Fifth, studies on the local environment within which forest development strategies are being implemented. There is a need to constantly assess the economic, pohtical, and institutional environment within which forestry development is taking place. This implies relating the economic demands on forest and wood industries to the controls (economic, tech-

toward import substitution. The program was a response to findings that the country's importation of cofton over a tenyear period (1966-75) involved an average annual outflow of $30 million, and that studies have shown cotton can be grown in suitable areas of the country with a profitable rate of return. More than 350,000 hectares have been delineated as potential areas technically suited for cotton production About 150,000 hectares of these fall into the existing cropping system, and represent more than the required 115,000 hectares to enable the country to be self-sufficient in its new cotton needs. During crop year 1974-75, a modest 194 hectares were already planted with cotton, but by crop year 1980-81, this increased to 17,000 hectares. In 1973, Presidential Decree (PD) 350, as later amended by PD 1063, created the Philippine Cotton Corporation (PCC) as the central authority to undertake, implement and supervise the commercial scale production of cotton in the count_. PCC is a semi-government corporation attached to the Ministry of Agriculture. The PCC, through participation rural and commercial banks, grants production credits to farmers. Like other supervised credit programs, cotton production loans carry 10 percent interest rate and two percent service charge. From 1975 to 1981, the average actual production loans ranged from _535 to 1_2,001 per farmer, or from P1,270 to P_2,581 pel hectare. During this period, repayment averaged 85 percent, which is one of the highest among agricultural production loans. The study also reports on the estimation of the total nominal protection to th cotton industry, i.e., to seedcotton production and to processing (which is a monopoly of the Philippine Cotton Corporation). Total protection was measured by direct price comparison between domestic and border prices evaluated at a comparable point in the marketing chain. The impact of government policies, notably trade and fiscal policies, measured by these price comparison came out to be favorable to the cotton industry as a whole.

nological, or legal) used for satisfying these demands, Sixth, continuous monitoring of the global environment affecting Philippine Forestry. Evidently, forest destructive

From the total nominal protection conferred by government policies on the cotton industry, the nominal protection to cotton farmers for the production of seedcotton was estimated indirectly. These estimates reveal that the nominal protection rate to farmers was-negative, averaging minus seven percent during 1975-81. This indicates that the producers' output was generally not protected, i.e., not conferred with incentives by price policy set by PCC, but rather penalized. Domestic producer prices were pegged, on the average, seven percent below comparable world prices.

activities are also affected by the international trade for wood products. Hence, there is a need to define well the role of forestry, as a sector in foreign trade, and tackle issues on self sufficiency in forest based commodities. â&#x20AC;˘ ......... ECONOMIC INCENTIVES AND COMPARATIVE ADVANTAGE IN THE PHILIPPINE COTTON INDUSTRY by Arsenio M. Balisacan,

Research Intern, East-West Center This research attempts to answer two crucial questions in the promotion of the cotton industry in the Philippines. These issues are: 1) how economically competitive is domes, tically produced cotton compared to imported cotton, and 2) have government policies encouraged domestic cotton production? During the 1970s, the national cotton development program began in support of the government's development goal IIIII

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In addition to price policy on output, farmers' incentires also depend on the prices of inputs which are likewise affected by various measures. Thus, the effective protection rate (EPR) is a more relevant measure than the nominal rate. Because the implicit tariffs on tradable inputs used in cotton production were substantially higher than the nominal protection rate on farmers' outputs, the effective protection rate was generally lower than the nominal protection rate. Over the seven year period studies, EPR averaged - 12 II

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value added) were lower by 12 percent as a result of the implicit tariffs i.e., on outputs inputs. In primary the author's words, returns percent returns and to domestic factors (domestic to these factors were diminished by the protection system. Despite a clear positive nominal protection conferred by price policy on the cotton industry, the protection to cotton farmers' value added tended to be negative. This is an indication of the penalty imposed on farmers by the government price policy, The protection to the cotton industry did not necessarily accrue totally to the processing of cotton, which is a monopoly of PCC. A proportion of PCC's profits was apparently used to supplement the budget for agricultural extension, and research and development, Thus, a part of the overall protection to the industry was ultimately channeled down to cotton farmers in the form of government services_ If the impact of these services to the domestic value added could be reasonably quantified and incorporated in the effective protection measure, the overall protection received by cotton farmers might have to be modifled. It was also reported that the estimated protection rates on seed cotton were generally lower than those conferred by price policy on food crops, but higher than those on export crops. Considering that export crops (notably sugar and tobacco) are the predominant alternatives of farmers in the choice for second crops in most cotton-growing areas, it may be less disheartening to observe a nominal penalty on cotton

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SEPTEMBER - OCTOBER1983 II

[UPDATE PIDS On-Going

Projects

]

on Agriculture

WELFARE ISSUES AFFECTING LANDLESS COCONUT FARMERS: A CRITICAL REVIEW OF THE CURRENT RESEARCH PROBLEMS by Sylvia H. Guerrero The objective of the study is to undertake a critical review of existing literature/documents regarding welfare issues affecting landless coconut farmers. Specifically, it aims to synthesize basic information and research findings on the coconut industry in related post-war materials and to identify knowledge gaps in major problem areas for further research. The following are the major study areas: 1)industry income and profit distribution; 2) labor conditions of landless agricultural workers; 3) government policies affecting industry growth; 4) distributive impact of the coconut levy; and 5) composition/classification of "coconut farmers." The study will basically rely on secondary data found in related literature, and to a limited extent, through Laterviews with key informants and purposive field visits. • ' .......... ECONOMIC EVALUATION OF THE PHILIPPINE ALCOGAS AND COCODIESEL PROGRAM by

Armando C Armas, Jr.

farmers' output, since the penalty imposed by price policy o11expo_rt crops is more severe, However, considering that cotton is a relatively new

The research is an economic evaluation of the Philippine alcogas mad cocodiesel fuels program. It intends to examine the social cost-benefit as well as cost-effectiveness of the

agricultural crop in farmers' cropping system, the slight output protection advantage of cotton relative to export crops may be easily outweighted by greater risks and uncertainty perceived in shifting to a new crop. Moreover, income distribution questions arise: why should farmers' incomes be reduced substantially below what a free market would offer? Also, in the long-run, as the national cotton development program expands, a more favorable price policy on cotton may be necessary to reduce farmers to plant cotton, Relative to the manufacturing sector, which received an effective protection from government policies of about 44 percent during flae seventies, the protection conferred on the cotton industry was very low. Thus, government pricing policies seem not to be designed to attract resources to the cotton industry in competition with manufa_cturing industries. If this discrepancy continues hi the long-run, the government would increasingly have to bear the burden of subsidizing the expansion of cotton production. While the author explicitly states that there is comparative advantage in producing cotton, he adds that economic efficiency is not the only consideration in implementing a policy which will promote or penalize an agricultural activity. Rather, policymakers and planners should consider the socio-political effects of policies, particularly on issues of employment, income distribution, and 'the concentration of

different projects of the progrmn and determilqe the conditions and policies that would significantly affect the economic desirability of the program. In particular, the comparative advantage of alternative fuel sources vis-a-vis imported petroleum will be determined. The implication of energy pricing and other government macroeconomic policies on the competitiveness of alternative energy sources will be assessed under various simulated settkngs. The equity aspect of the projects will be considered, and their impact on sectoral welfare determined. Secondary data are readily available from government sources such as NCSO, CB, NEDA, alad the Ministry of Energy. Primary data can be obtained from feasibility studies and participating institutions like the UNICOM and PNOC. The research is relevant because the alcogas and cocodiesel program demands huge resources that have significant effect on national resources allocation. •

economic power. • III

Subscriptions to the PIDS DEVELOPMENT RESEARCH NEWS are now accepted. Private firms and individuals are charged for a minimal fee to cover mailing and delivery costs. For details, please write or call the Research Information Department of the Philippine Institute for Development Studies (PIDS-RID). Telephone numbers are: 865-705 or 857-902 (lot. 250). ....

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Beginning with this issue, the Philippine

Institute for

editorship of the former NEDA Philippine Journal of DevelopDevelopment ment. This issue Studies includes (PIDS) studies takes on the overeffective the management protection and of Survey of Philippine Development Research I This book highlights and integrates the findings and recommendations of development research in the country, It deals with such subjects as: urbanization and spatial development, income and wealth distribution, poverty, monetary policy, and macroeconometric models.

manufacturing industries, fertilizer policies, demand for gasoline, export price index, estimating literacy rate, and on revenue.

Survey of Philippine Development Research H This second volume of development researches deals with the following areas of concern: forest and mineral pollties, foreign investments, public finance, and population and development.

issue are articles by Dr. Gerardo P. Sicat on the national economic strategy, and by Dr. Mitsuo Ono on the integrated survey of houselrolds. ;" " HOW PARTICIPATORY IS PARTICIPATORY DEVELOPMENT?

Industn'al Promotion Policies in the Philippines by Romeo M. Bautista, John H. Power and Associates This study describes quantitatively recent economic policies toward Philippine manufacturing industries and recolnmends modifications in the country's industrial promo-

tion policies with the view of making them more supportive of national development goals,

Journal of Philippine Development (1982} Tiffs volume contains studies on the following: industrial development strategy, invention, and on statistics. Also in this

Gelia T Castillo

The study, which took two years to complete, is a twopart treatise on: (a) changing rural institutions, e.g., ore-designed rural institutions like the Samahang Nayon (SN), Cornpact Farms and Seldas, and Masagana 99; traditional" forms of cooperation; and emerging new

Essays in Development Economics in Honor of Harry T. Oshima A collection of essays written by leading economists here and abroad., the book treats various subjects like inflation, population, modernization, employment and other development issues of much. impportance to planners and policymakers. The book also features case studies on the economic performance of countries like Japan, Sri Lanka, Taiwan, Hawaii (USA), Thailand and the Philippines.

relationships among various characters in a rural setting; and (b) participatory development experience in the Philippines. The first part reviews, organizes, and synthesizes available research, data, and experience on rural institutions and seeks to identify gaps in knowledge in this area where further research can be done. Part Two, wlrich deals with people participation, looks into various examples of Philippine field experiences as pro-

Integration, Participation and Effectiveness: An Analysis of the Operations and Effects of Five Rural Itealth Delivery Mechanisms

vided by projects initiated or supported by government and non-government agencies, it attempts to define and clarify the basic ingredients of people participation like "who are the

by Ledivina K Cariao and Associates This study identifies and evaluates existing mechanisms for the delivery of health and health-related services to the poor. Specifically, five health programs of different agencies were studied: the Rural Health Unit of the Ministry of Health

'people'?", "what constitutes participation?", etc. The study's short term, interim v_erdict on the overall assessment of these various approaches of participation is that benefits from participatory development have yet to substantially accrue to the poor.

in Pilaf, Bataan; the Comprehensive Community Health Program in Laguna; Project Compassion in Rizal; the Sudtonggan Human Development Program; in Lapu-lapu City; and the Makapawa Project in Leyte.

- ....... INDUSTRIAL POLICY ASEANCOUNTRIES by Romeo 3£ Bautista

A Study of Energy-Economy Interaction in the Philippines by Leander J. Ale]o This monograph reports on the results of an econometric modelling project aimed at studying energy-economy interactions in the Philippines. Specifically, the project sought to

This paper describes the evolution of industrial policy and development in each of the ASEAN countries, indicating also the general thrusts of recent industrial promotion policies in the region. Because trade policies form a part, and in the context of the ASEAN countries a major part, of the overall

quantify the impact of the energy crisis on macroeconomic variables. Alejo's model could serve as a tool for policymakers and planners in estimating the effects of' alternative policy •packages for varying energy scenarios.

policy climate affecting the performance of manufacturing industries, the discussion of industrial policy inevitably indudes the', incentive effects of foreign trade regimes adopted. . \ The discussmn then shif_t_sto .the Korean industrialization

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IIIIII experience from which some lessons are drawn that could provide guidance for ASEAN policymakers. This is followed by an examination of potential areas for industrial complementarity and trade expansion between the ASEAN countries and the Asian NICs, given the rising protectionism in the industrialized countries. The paper ends with some general remarks on the possibilities for promoting mutually beneficial development through trade in manufactures among the NICs and the "near-NICs" (including the ASEAN countries) under the constraint of continuing restrictions in access to industrialized country markets

Essentially, the study aime_ to generate both micro and macro data on the entire range of s0cio-economic, managerial, and technical issues faced by the small scale industries. Moreover, the study intended to develop the necessary parameters for policy formulation and implementation, and to evolve a set of relevant guidelines for managerial and technical decisions on these industries. Specifically, the data of the study covered the following: a) Organization and general management, including managerial practices and capabilities; b) Production facilities, systems and capabilities;

d) c) e) f)

LECTURE SERIES ON ECONOMETRIC METHODS A

PIDS-sponsored

lecture

series

econometric

methods is on-going every other thursday at the NEDA sa Makati bldg. operations room. The lecturer is Dr. Roberto S. Mariano, a research consultant of PIDS and a professor of economics at the University of Pennsylvania. The lecture series attempts to provide pohcynlakers, government economists, and methods. statisticiansThiswith an upgraded skill in applying econometric lecture series includes a workshop, where the participants can have a chance to apply the econometric theories through exercises and examples. The lecture series started last October 6, and it included discussions on linear regression. For the next sessions, the topics to be covered are: generalized least squares, simultaneous equation models, dynamic and nonlinear simultaneous systems, time series models for short-term forecasting, model simulation and multiplier analysis, model validation and specification testing, time series cross-section analysis, qualitative responses models and limited dependent variables, forecasting, and other special topics.

pects; Financial growth and performance; Market factors and marketing problems and prosTechnological trends and developments, and Socio-economic ramifications - employment, foreign exchange generation and environmental

implications. Among the issues discussed was the problem of financing and access to financial sources, which is a recurring problem for these industries. For the furniture industry, this problem, aggravated by the inadequate supply of raw material and the fluctuating demand for furniture. This is particularly true for the small firms. The situation, in turn, has led to a significant degree of underutilization of resources (which is primarily laborbased), and inefficient operation. The problem of low financing is even more difficult for smaller firms, which do not have access to the more formal sources of capital, due to their inability to meet collateral requirements. However, the infusion of collateral-free, low-interest, medium to long-term financing may not prove to be viable in the long-run, unless the government would treat such fman-

A PIDS-sponsored seminar on wood-based furniture, leather tanning, leather products and footwear manufacturing industries was held last October 13 at the Operations Room of the NEDA sa Makati bldg. Findings of a research project on these industries were presented by a team of researchers from the College of Business Administration and the Business Research Foundation, Inc. of the University of the Philippines. The research team, headed by Dr. Niceto Poblador, is composed of Adriano Sobs, Roy Ybahez, and Bienvenido Aragon. Members of the panel of discussants were Dr. Philip Medulla of the UP School of Economics, Director Quintin Tan of the Bureau of Small and Medium Scale Industries of

cing scheme as subsidy. The study recommends that the best policy is for these small manufacturers to be "left alone". Nonetheless, government assistance will be useful in financing the more important need for researches and developments to identify new products and markets for the industry. Since domestic demand for furniture is low, it would be necessary for the industry to pursue export as a source of growth. However, the Philippines is at a competitive disadvantage in terms of the high cost of transporting furniture to the principal markets (Europe in particular). To offset this disadvantage, in the export markets for wood furniture, there is a need to develop a high level standard of quality and design. This calls for an upgrading of production facilities and technical capabilities. But the absence of strong marketing and technical assistance prgrams, would make it dangerous for exports. promotion through cheap credit as both prospective wood furniture exporters and the government may be on the losing end.

the Ministry of Trade and Industry, Alejo Aquino Jr., chairman of the technical division of the Chamber of Furniture Industiies of the Philippines, and Cora Jacob, proprietress of Cojac leather products. The moderator was Dr. Linda Medalla,

The problem the leather tanning were high interest tion and processing

SEMINAR ON FURNITURE, LEATHER AND FOOTWEAR

a PIDS research fellow. I

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of inadequate financing was also cited by industry. Among the problems mentioned rates, collateral requirements, documenta. costs.

The local tanning industry has difficulty in supplying the I Jll II II

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domest]c-_ieather-using industries with ample quantities and quality for export production. The solution to this problem is a long-term process which include: a) proper instruction in the care and maintenance of livestock, b) proper instruction in techniques of flaying (taking off) and preserving hides and skirts including the appreciation of the economic value of hides and skins, c) a systematic way of gathering hides and skins especially for livestock slaughtered in the provinces, d) in the long run, increase and improvement of the quality of the livestock especially large animals (e.g., cattle), The study recommends that the importation of raw or semi-processed hides and skins or even finished leather be per-

products. These are on: 1. Product development - Products to be exported should be identified and product design must be carefully selected, and its developmeni monitored, Also, production and delivery schedules must be met. 2. Market penetration - Establishing a credible presence in the export market is beyond the capability of small, even big, firms. 3. Financing - Assistance in financing may be extended where a foreign exchange earning is possible. For the footwear industry, financing was also found to be another big problem. There is very limited access to the formal sources of financing while informal sources, the principal type of which is supplier's credit, tend to be costly.

mitred at minimal or no tariff, especially if the end product is to be exported. It may take sometime before domestic leather in sufficient quantity and quality will be available for the footwear and leather products industry. In the meantime, the revenue and employment potentials of these industries are not being exhausted. Importation may even force domestic tanners to improve their efficiency and product quality,

Another major finding of the study on the footwear industry concerns the marketing of footwear products. The current practice of "wholesalers" (i.e., middlemen) and large retailers (e.g., department stores) play a dominant position in the marketing of footwear products. And should be evaluated closely to be able to explore the possibility of expansion in other urban centers,

The leather product industry, was observed to be a labor-intensive industry that requires minimal capital investmerit and can be operated on a small scale. However, one of the industry's principal problems is inadequate and poor quality of domestic leather. This problem is especially important, since quality and timely delivery are crucial to its export markets. Moreover, the leather products industry has to depend on export markets. Since the domestic market is very limited, The authors also gave recommendations where government assistance is needed to expand the exportation of leather

This move necessitates developing a domestic marketingprogram which will: 1. reduce distribution costs, 2. substantially reduce, if not eliminate, any monopsonistic profits that current wholesale/trading operations may be enjoying, 3. provide a more efficient mechanism by which manufacturers obtain market infomration on the domestic market, and 4. bring efficient footwear manufacturers under the umbrella of such a distributive system.

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DEVELOPMENT RESEARCH NEWS is a monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights research findings and recommendations, seminars, publications, on-going and forthcoming projects which are of interest to policymakers, planners, administrators, and researchers. This publication is part of the Institute's program to promote the utilization of research findings and recommendations. PIDS is a non-stock, non-profit government research institution engaged in long-term policy-oriented research. The views and facts Published here are those of the authors and do not necessarily reflect those of the Institute. Inquities regarding any of the studies discussed in this publication may be addressed to the following: RESEARCH INFORMATION DEPARTMENT (RID) PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS) ROOM 515, NEDA SA MAKATI BUILDING 106 AMORSOLO STREET, LEGASPI VILLAGE, MAKATI, METRO MANILA Entered as Second-ClassMarl at the MIA Post Office On October 13, 1983. ....

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