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Philippine agricultural sector reaps what it sows

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In Brief

Based on output shares, the Philippine economy has undergone significant structural transformation, with the contribution of agriculture to GDP now only 11 per cent. However, based on employment shares, structural transformation is far from complete, as one-third of employed workers still operate in the agricultural sector.

Labour productivity in agriculture is therefore lower than the national average.


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Worse, growth in labour productivity has been slower than the average for Asia since the 1970s.

Within agriculture, there has been limited crop diversification. The major crops from the 1970s remain the same major crops today, namely rice, maize, coconut, banana and sugarcane. The confluence of stagnant productivity and stable crop composition is no coincidence. Traditional crops exhibit lower profitability, and structural transformation within agriculture would generate high pay-offs in productivity growth. Such transformation is strongly associated with the formation of diverse and thriving value chains for marketing and processing farm output.

The lack of transformation is partly the result of government failure. Rather than allowing the economy to reap the gains of lower comparative costs elsewhere, the government has imposed tariff and non-tariff barriers to protect domestic farmers. The government has also intervened in the economy with its expenditure program, which is heavily skewed towards production support for rice, mainly in the form of irrigation investment and rehabilitation.

But the reality of government failure does not mean that ‘getting prices right’ is sufficient to address stagnant agricultural productivity. Agricultural transformation usually does not occur by mere operation of commercial forces, which are themselves prone to market failure. At the very least, government intervention of some sort will be required to provide the public goods needed for agricultural transformation. Among the most pressing public goods are innovation and dissemination of new technologies, including in traditional crops, especially rice. Other public goods include gravity irrigation and rural roads; yet due diligence must be exercised to ensure only efficient projects are identified and implemented.

Investment in rural roads not only serves to reduce the transport costs of bringing harvest to markets; it allows rural dwellers greater access to markets, modern facilities and capital, and promotes virtuous circles of development outside metropolitan centres. A rural road network is ideally part of a wider infrastructure system, encompassing physical assets and facilities (including power and communications), business and other support services (such as logistics and finance), and governance frameworks for property rights, contract law and enforcement, and product grades and standards. Not all of these entail public provision; however, even private sector provision will require guidance and other support from government to coordinate investment and operations.

A concrete example is the Philippine sugar industry. Thanks to government organisation of mill districts, farmers’ planting decisions have been coordinated with large-scale investments in sugar mills, and the mill district serves as the locus of service delivery, including the development and dissemination of modern sugarcane varieties. The government has also established a warehouse receipt system (the quedan), which has greatly facilitated trade and finance in the sugar business.

However, the government has also imposed distortionary policies, such as mandatory sharing of raw sugar between mills and planters, mandatory market segmentation using the quedan, and a restrictive import permit system, combined with an exorbitant out-quota tariff of 65 per cent. On balance, the industry remains globally competitive despite distortions and indirect market support. Removal of the more onerous distortions — while maintaining mill district coordination and the integrity of the warehouse receipt system — would have salutary effects on sugar-consuming households and improve the competitiveness of the food and beverage industry. Reform, however, will not be easy: there will be trenchant resistance from parties whose sense of entitlement is threatened.

This type of troubleshooting along the value chain through multi-stakeholder consultation underlies the implementation of agribusiness ‘road maps’, which are now being promoted under the new wave of industrial policy, as pronounced in the current Philippine Development Plan. Hopefully this initiative moves beyond agenda-setting and mobilises a constituency for effective reform.

Roehlano M. Briones is a senior research fellow at the Philippines Institute for Development Studies.

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