"Jot L=m -- -- i in.._

VOLUME I SEPTEMBER - OCTOBER 1983 NO. 2-3Hi- ii-- i| i i JL _ LIj _ ._inl . n m _m _r .... _a

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AGRICULTURE INPHILIPPINE DEVELOPMENTTHE IMPACT OF ECONOMIC POLICIES =ON AGRICULTURAL INCENTIVES EDITOR'S NOTE: This double-issue focuses on the role and

Project no. 82_06 importance of agriculture in Philippine economy. The studiesby Dr. Oistina C. David, presented here indicate that agliculture is a critical sector

Research Fellow, PIDS wtlose potentials should be developed on equal terms withindustry and manufacturing. This issue is particularly relevant

The efficiency by which scarce resources are utilized at a time when economic recovery, as seen by a number ofis a primary concern of any development strategy. The study economists in the country, depend much on the restructuring" The Impact of Economic Policies on Agricultural Incentives" of the agricultural sector in the Philippines.

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. 2) While most studies cover only those specific to

This analysis of economic policies in agriculture is corn- agriculture and each subsector, this study attempts to includeprehensive and differs substantially in approach from pre- the inrportant effect of the broad macroeconomic policiesvious studies of.agricultural policies in two major aspects: (exchange rate and protection policies, fiscal and monetary

1) While most policy studies are crop specific and policies). Past analysis of inacroeconomic policies often havefrequently pertain only to the rice econonry, this sL_qy been conducted from the perspective of the industrial sectorencompasses the entire agricultural sector in order to evaluate neglecting their pervasive efforts on the allocation of resources

the overall agricultural policy strategy,, and the differential and distribution of income with respect to the agriculturalimpact of policy across agricultural conrmodities and between sector.

agriculture and non-agriculture sectors. (Continued next page)

ANNUAL GROWTH RATES OF MAJOR AGRICULTURAL CROPS IN THE PHILIPPINES, 1955d980

1956-, 1961- 1966- 1971- 1976- 1956-1961a/ 1966 1971 1976 1979 1979

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

Coconuts - .0.2 5.3 1.9 13.9 8.9 5.6

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

Source: Philippine Statistical Yearbook. Nationa]( Economic and Development Authority.

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PlDS DevelopmentResearchNews 2 SEPTEMBER- OCTOBER1983

The study attempts to infer the pattern of government For instance, the poticy of depressing agriculturalpriorities rather than to quantify their impact. Although, the prices to raise the profitability of the industrial sector willfocus of the analysis is on the impact of government policies have negative long-run consequences on agricultural product-on the efficiency of resource allocation, the indirect impact ion, and thus, on the objectives of food self-sufficiency,on income distribution is also discussed, increasing exports, and improving income distribution.

The study reports theat the socio-economic disparities In the long-run, constraining the growth of agriculturebetween urban and rural sectors remain substantial. The will also limit industrialization. This is because the agricul-

average income of rural families is half as much lower than tural sector, by its sheer size, will continue to be an importantthat of urban families, source of capital, foreign exchange, and food for this effort

In addition, the proportion of rural families with as well as a potential source of market demand for its pro-incomes less than the acceptable minimum subsistence level ducts.is much greater than that of urban families. The level of Price intervention policies were found to have led tohealth, nutrition, education and housing in the rural sector is inefficient resoUrce allocation and to lower economic growth.consistently lower due not only to low income, but also to While no attempts were made to quantify the income dis-small pubhc expenditures for social services in rural areas, tribution effect of these polices, "subsidizing industrialization

The study likewise, seeks to find out whether and to through implicit taxation of agriculture represents an addi-what extent the country has a comparative advantage in tional burden on a sector that is characterized by relativelyundertaking various agricultural activites, and to what extent low per capita income."economic policies have aided or thwarted the realization of Dr. David, then, recommend_ increased protection forthis comparative advantage, agriculture, and the reduction of the distortions created by

Estimates of domestic resource cost to evaluate the economic policies in general. Also, broad reforms in the tariff

comparative advantage of selected major agricultural commo- and interest rates policies currently being instituted have adities, as well as an analysis of price intervention policies potentially favorable impact on agriculture.

including protection and exchange rate policies are presen- The study also recommends other measures to boostted. Findings indicate that such policies have created an agricultural growth. One is the general reduction' in tariffincentive structure that is significantly biased against agri- protection in manufacturing coupled with the policy of lettingculture, th peso float. These would somewhat reduce the extent of the

Before the 1970s, this bias was due mainly to the bias against agriculture.

policy objective of promoting industrialization via tariff pro- The other measure is on the reform in the financialtection. During the 1970s, regulations in the agricultural system, including a more flexible interest rate policy. Thissector led to an undervaluation of exportable products espe- measure may allow more financial resources to flow intociaUy sugar, coconut and logs through export taxes, export agriculture, which could also improve the global economicquotas, speciallevies, and government monopoly of marketing, policy for agriculture.

While prices of other agricultural products may not be Turning to sector specific price intervention policies,substantially distorted, protection of manufactured inputs these have often been directed to achieve the following: 1)

has introduced some measure of disincentive effect on their the promotion of processing or other use of raw agriculturalproduction. Moreover, the penalty imposed by the over- products, 2) the provision of food and other necessities tovaluation of the peso is shown to be substantial. Even a th poor at low prices, and 3) the strenthening of the country'spartial correction of this by foreign exchange adjustments bargaining position in international trade.

have had a dramatic impact on agricultural terms of trade. Dr. David states that these goals are by themselvesThese distortions in the price of foreign exchange have commendable; thus, to achieve these ends, the government

been due both to the overall protection system and the ten- has imposed export taxes and quotas, various price controldency to delay foreign exchange adjustment to correct balance measures, and in some cases, government monopoly of market-of payments disequilibrium, ing. However, the effect of these measures has been to de-

Agricultural credit policies, implemented mainly through press agricultural prices, thereby hanning incentives to produc-interest rate subsidies have not significantly altered the unfa- tion and reducing incomes of many poor families.vorable economic incentives in agriculture caused by price What needs to be emphas_ed therefore are more effi-intervention policies. Credit quotas and special credit programs cient and more equitable ways of pursuing these goals.have not prevented the decline in real loanable funds to agri- The more significant policy recommendations, basedculture in the 1970s. Cheap credit, on the other hand, cannot on the study's findings are: first, the application of directovercome the disadvantage of depressed prices and profitabi- subsidy, through fiscal incentives from the Board of Invest-lity. The spiralling prices of inputs and the falling prices of ments (BOI) to manufacturing activities which use raw agri-outputs have gravely disadvantaged agriculture, cultural products (e.g., converting copra into coconut oil,

Further, the policy structures affecting agriculture corn into meat products, or raw cotton into textiles). Thisrecommendation would be a better alternative than theare primarily influenced by the general objective of promo-

ting industrialization. The basic problem however is not in the present policy of depressing prices to farmers. Two advantages

objective but in the set of policy instruments used to attain of subsidy through fiscal incentives would be: 1) the disinec-this objective, tive to production of the raw product is eliminated, and 2) the

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PiDS Development Reseazch News 3 SEPTEMBER - OCTOBER 1983-. .....

l II I I I I III I I I I II

I II iiiili ii ii • _ iiiii i i i

TOTAL CROP PRODUCTION: CROP YEARS1978 - 1982

QUANTITY

THOUSANDMetric Tons

30,000 i

..... ., ..-. . .

-. ,-"..:": , .- - . .-:., :,.-v.•.,.. .' .... ..- ,,, .%- .y.......... '-' ". ':: '!;U--. ,..;.. .,. : •...:- :.,

m --.., : • , -.. -.-:;..: . ...... 3' !::-' ;,i= : .";]-,. ',:_"-::,- :-... .. , ,: ,-.. '.; .-...... .................... . --._. _ COMMERCIALCROPS_vg_;,elnr'-- .' : .- "-,- ....,, .. ,. ,_,,.,, ..,%.-.

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

::;4 ;_._i ..... " , ..... "'..... - .b ..'• ,, -, , , .... : ;.'. :".... -, ,-. ,' .j .. .......:"' ' " """ '" "'"'" ":"" ;:'-:'" VALUE

.., .-. .....

' ." ,, , .""i "" ;';'!_"[':" .i" _i';i_':::: _/// l II_fT'TiT[_ - 1,0(30 Million Pesos

2o,o00-- :,!/ t//i• ]...',,: I11/

•: '-".": 1/11 '//i

.... ,/////// ',,, ,/// _///

//// ..... /// y//

I//I//// ..../,,, __///_ _//_ -- FOODCROPS

15,000 -- / / / / .... ///,//// /1111/11 ii/i

//// ////.... I I t i i//i

IIII tll j.... //// I/// " " ".... itll _/// ///'///.... /I/i ".'.'- I/I I

'10,000 -- / s ,' ; i/// /// //X ;OMMERGIAL/I// //i/ '/// CROPS//// //// '/// ///

"" '////_/ ;//; ///,///I Eli

I/II IIII /11 " ' "

I//, 7/f . ..5,000

IIII ',;;IIII iii ,,, _/I/, FOOD

// / / _ CROPS

I/I/ I//I li/IIII " " "

//// ///I ///IIII

/_ " . ./111

o -- .., _ zzz i1//1978 1979 1980 1981 1982

' / I

Source:NEDA,1983PhilippineStatistical Yearbook.. -_. _,

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PIDSDevelopmentResearchNews 4 SEPTEMBER- OCTOBER1983III III II I

burden of the subsidy is borne by the general taxpayer, by subsidies to consumers to keep prices at present levels.rather than by poor farmers. In both, there is a marked gain Dr. David once again argues that it is better, from the

in efficiency and equity, standpoint of incentives to production and equity in incomeLikewise, there should be an alternative policy which distribution, to keep food and feed cheap this way, rather

would emphasize subsidies to agricultural production to keep than by depressing prices to farmers. This approach simplyfood supplies abundant, thereby benefitting both rural and tries to correct distortionary impacts of economic policiesurban poor. At present, the provision of"cheap food has been on domestic production of supplies and to satisfy the objec-achieved only in urban areas through subsidies borne by rives of keeping food and feed cheap.the rural poor. Hence, in this system of subsidy, even the rich There are other important issues related to the growingand not only the poor residents of urban areas benefit, nationalization of marketing of agricultural crops. The study

There is a need to transfer the burden from the rural reports that this typically has reduced inntead of increasedpoor, again by having the general taxpayer bear the subsidy, competition. With less incentive to minimize the unit cost

In such case, even the general taxpayer will benefit as a con- of marketing, service to the buyers and sellers will likelysumer, be less efficient.

The policy objective of strenthening the country's The private-sector has also expressed concern overposition in international trade is also examined. This objective the uncertainties introduced by this system since it is easierhas led to more government intervention, specially in directly to arbitrarily change prices and has provided a means fortaking over marketing, though this may not be the only raising implicit taxes that are difficult to account for and aremotive for government control of marketing, more arbitrarily allocated.

Yet, the case for this is rather weak, as the country is Government marketing monopolies, in the author'snot in a position to influence world prices for even its major opinion, may also hamper market adjustments to newexports, economic opportunities. For example, government monopoly

The study suggests that, to the extent in which some in rice exporting prevents the quality premiums in worlddegree of monopoly exists, the ideal policy would be an prices from being reflected in the domestic market. Rice

export tax equal to the reciprocal of the estimated world farmers and millers, threfore, have no incentives to producedemand elasticity for the product, rice with low percentage of brokens thus limiting profitable

The study notes that an unfortunate consequence of the exports.

government's attempt to attain monopoly power in world Finally, if the alternative policy approach recommendedmarkets has in some cases been the attaimnent of very sub- by this study were adopted, the total taxation of agriculture,stantial monopsony power. In coconut and cotton, this has both explicit and implicit, would be considerably reduced.been used to depress prices to farmers. This is beneficial insofar as disincentives to efficient produc-

In the government's marketing of rice and corn, it is tion are reduced and obvious inequalities are mitigated.noted that in recent years domestic prices have been near Agriculture should, however, pay its share of the cost.border prices. A key determinant of the domestic price of rice of government services. This will require strengthening ofis the government's decision on the level of exports; while income and land tax collection as part of an overall reform.in the case of corn, it is the government's decision on the At present, price intervention policies have placed alevel of imports. 20 percent implicit tax on agricultural products. Implicit

In making these decisions, the government evidently tax paid by agriculture is a direct resource transfer to

does not take into account the undervaluation of foreign consumers of agricultural products, and to producers ofexchange that is due to both industrial protection and balance non-agricultural commodities purchased by the agriculturalof payments disequilibrium, which is rather surprising because sector. Therefore, the implicit tax becomes an implicit subsidythe government in its decision-making usually places a premium from the point of view of non-agriculture.on earning or saving foreign exchange. This is seen in the set Considering the much lower per capita income in agri-of BOI incentives in the price differential allowance for culture compared to nomagriculture, the agricultural sectordomestic components in the automobile industry, and in has been excessively taxed. Hence, more efficient and equit-many other instances where the government indicates that it able taxation is called for. The study did not explore theundertstands the real social value of foreign exchange, area of tax reforms, but recognizes this to be the logical

extensions of the research. •By implication, it would seem that the government is

[ • I I

unwilling to treat agriculture on equal par with manufacturing,tourism, and shipping as foreign exchange earners and savers. GOVERNMENT POLICIES AND FAN MECHANIZATION

Thus, a countervailing move would be to expand rice exports IN THE PHILIPPINESand gradually reduce corn imports as supply responds to Staff Paper No. 82-03price until both domestic prices are 20 percent above border by: Dr. Cristina C David iprices (this being the minimum estimate of the proportion Research Fellow, PIDS

by which the peso in overvalued). Over the last two decades, mechanization has emergedFailure to do this means keeping the domestic price as a controversial issue in Philippine agriculture. This paper,

of rice and corn below their social values. These domestic on "Government Policies and Farm Mechanization" by Dr.prices are prices to producers, which could be accompanied Cristina C. David describes the p_ttem of growth of farm

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PlDSDevelopmentResemrehNews _ SEIrI'EMBER- OCTOBER1983IIIII IlllJ _ I J

mechanization, and examines how government policies have and nominal interest rates (including implicit changes) rangingaffected the economic incentives for mechanization in the from 14 to 20 percent interest rates in real terms have beenPhilippines. negative or at best zero, providing an important source of sub-.

In the face of a growing agricultural labor force, mecha- sidy to users of capital.

nlzation has lowered the demand for farm labor. In addition, The author argues that credit supplied by producers orevidence also indicates that the proportion of landless house- dealers of farm machineries was most likely obtained fromholds in the rural areas has risen over the past two decades, the formal sector including government, lending institutions.Farm wages, too, have at best remained constant in real terms. For self-financed purchases, the low interest rate policy may

The study also gives data on the number of farm also have an impact on the farmers' opportunity cost of ca-

machineries and equipment, which show that farm mechaniza- pital, to the extent that financial assets which are also subjecttion was generally limited to tractors and power tillers for land to interest rate regulations are the alternative forms of invest-preparations and mechanical threshers for threshing rice. ment.

At the national level, data show that there were fewer With the excess demand for credit created by low interestthan two units of tractors and tillers per thousand hectares of rate policy, lenders inevitably favor larger famaers as a means

cultivated area in 1971. In addition, mechanical land prepara- of minimizing risk and transaction costs. Bigger farms aretion and threshing was practiced by only five percent of farms, expected to be more productive when'large machines are used.The study emphasizes that mechanization has been unevenly Comparatively, small farms are likely to be more efficient withadopted across regions, with sugar and rice receiving the major small machines or draft animals.share. Thus, a low interest rate policy favors the use not only

Higher rates of mechanization in land preparation and of machines over labor, but also of large over small machines.threshing are associated with lower use of labor in these tasks. This expected bias is borne out by the dimtribution of loansAt the same time, no significant output or improvement in under the Central Bank-World Bank Credit Mechanizationtimeliness in crop operations was gained through mechaniza- Programs from 1966 to the present. These loans have financedtion. a higher proportion of sales of tractors (30 percent) than of

The adoption of mechanization was found also to have power tillers (7 percent) over the whole period.led to a worsening of income distribution. This was mostly In the case of land preparation in rice, there is no evid-

due to the lowering of the demand for farm labor. The study ence that the adoption of tractors and powers tillers has ledfurther reports that it is therefore not surprising to find posi- to higher productivity. Finally, the study notes the importancetive real growth rates in agricultural production being accom- of looking into the impact of policies on the whole economicpanied by stagnant or even declining real wages, environment in agriculture. Often, well-meaning agricultural

The study thus poses a question: to what extent have production programs fail because they do not consider thegovernment policies made mechanization artificially profit- structure of economic incentives existing at the countryside.able? Although there have been no explicit government poli- --cies on farm mechanization, broad economic policies have AN ANALYSIS OF FERTILIZER POLICIES IN THEindirectly and perhaps unintentionally tended to promote PHILIPPINESmechanization. Project No. 82-1

The government does not directly intervene in the by Dr. Cristina C David

farmer's decision to use farm machinery. However, it does Research Fellow, PIDSandaffect a farmer's decision indirectly by changing the profit- AJ/£ Balisacan,ability of using capital as against labor, i.e., by changing the UPatLos Bannsprice of farm machinery, fuels, and the interest rate.

By lowering the user cost of capital in agriculture (as Fertilizer policy has been a critical factor in agriculturalin industry), government policies have indirectly promoted growth in the Philippines, where land-man ratio is low andthe adoption of mechanization. The overall impact of tariffs declining, and technological innovations are directed towardand taxes in general, the overvaluation of the peso, and the incresing yields per hectare.interest rate subsidy have reduced the user cost of capital by The paper, "An Analysis of Fertilizer Policies in the Phil-as much as 70 percent during the 1960s. ippines" by Dr. Cristina C. David and A.M. Balisacan, analyzes

government policies affecting fertilizer prices during the post-In the 1970s, this implicit subsidy on the cost of mecha- war period, with emphasis on the policies after 1973.

nization has persisted at a somewhat lower rate of 60 per- The study indicates that with the gradual phasing out ofcent. However, the interest rate has become a more powerful direct subsidies to the domestic fertilizer industry and theinstrument for lowering the user cost of capital than the over- declining real price of rice and sugar, the issue of fertilizervaluation of the peso. price becomes crucial.

Government regulations on interest rates under the gen- The government's involvement in fertilizer covers amongeral umbrella of the Anti-Usury Law as well as a special pro- others the following: breeding for more fertilizer-responsive

gram on credit mechanization have lowered the real market crops, extension, development of domestic production capa-interest rate compared to the social opportunity cost of city for fertilizer, rural credit, andprices.capital. The research approach involves distinguishing between

With inflation rates of about 20 percent in the 1970s the impact of government policies on the price of fertilizeri I i ...........

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PIDSDevelopmentResearchNews 6 SEPTEMBER- OCTOBER1983I ] " I III ||1 _ I

paid by farmers, and the price received by domestic fertilizer tilizer. The remaining two_thirds was financed by the nationalproducers. The impact of both economic policies pertaining to budget, shouldered by the general public.exchange rate, tariffs, taxes, import quotas, etc., and policies The authors state that the growing subsidy required byspecific to the industry such as price control and direct sub- domestic producers has been growing, despite the decliningsidles is quantified, share of domestic production to total supply and the signi.

In 1973, the government intervened directly in the ficant profit margin pennitted by the FPA on imports.

operation Iofthe fertilizer industry. This move, the study re- Thus, the authors conclude that, even with technologic-port s, was prompted by the four-fold increase in the world ally up-to-date production plants, we probably do not have aprices of fertilizer and the immediate need to recover from the comparative advantage in the domestic production of ferti-20 percent drop in rice production, lizer, which involves a highly capital intensive technology and

By this time, President Decree (PD) 135 established the importation of basic raw materials. Likewise, economic poll-

Fertilizer Industry Authority (FIA) primarily to regulate cies on fertilizers are found to serve the interest of producers-prices, imports, domestic production and marketing aspects importers to increase protection on their activities. This de-of the fertilizer industry, feats the initial aim of protecting food production from the

In 1977, PD 144 reorganized FIA into the Fertilizer and sharp increases in world prices of fertilizers.

Pesticide Authority (FPA) to continue and extend the FIA Furthermore, on the implementing instruments of theseregulations to the agricultural chemical industry. In addition, policies, the study indicates that there was no attempt to re-the control of the quality and safety of fertilizer and agricul- late distribution of protection to efficiency of firms. Protec-tural chemicals became part of its fimctions, tion, through cash subsidies, is found to be determined by the

The study indicates that the FPA devised two sets of losses incurred rather than by some objective measure of effi-policy instruments to ensure that fertilizer prices are regulat- ciency.ed. First, the FPA, together with representatives from other Hence, a review of current fertilizer policies is callednational agencies, decides on the level of fertilizer imports for. Policymakers should focus on the unfortunate burdenwhich would "fill the gap between domestic production and •which farmers and the general public have to bear to protecttotal requirements." The FPA allocates the targeted imports the growing inefficiency of the domestic fertilizer industry.to existing domestic producers or to authorized importers. Furthermore, with the lifting of import quotas, tariffs,Imports are allowed only with FPA authorization and are and taxes, fertilizer prices would drop to world levels. Domes-

exempted from customs duties, advance sales tax, and the 50 tic fertilizer production may shrink, but this will put pressurepercent margin deposit on the value of the import letters of on the fertilizer industry to search for more efficient meanscredit, of meeting farmers' demand for fertilizers.

Second, domestic producers are also exempted from Thus, the study predicts that only efficient firms wouldthe same requirements for imports of raw materials. In addi- survive. The cost of subsidizing inefficient firms can be allo-tion, direct cash subsidies are paid from the government cared to economic activities which will use less resources tobudget for losses incurred by the domestic producers despite obtain foreign exchange needed to purchase imported ferti-tax and duty exemptions on imported fertilizer and raw lizer, or to other means which will raise the profitability ofmaterials. The authors state that this is a result of the price agriculture. •control. "

The impact of these policies were discussed from two CHANGING COMPARATIVE ADVANTAGE IN PHILIP-

viewpoints: the farmers and the producers. From the stand- PINE RICE PRODUCTIONpoint of farmers, the effect of government interventions has by L.J. Unneverhr, Research Associate, 1RRI and A.M.been on fertilizer price. The study quantified this effect Balisacan, Research Intern, East-West Centerthrough the implicit tariff, which measures the percentage

Between 1965 and 1980, rice production grew at andifference between domestic price and border price at a com-

parable point in the marketing chain, average annual rate of 5.3 percent, total production doublingDuring 1973 to 1981, the overall average implicit from 2.5 to 5 million tons of.milled rice. Growth in the

tariff indicates that farmers in general paid 10 percent more supply of rice has overtaken growth in demand, so that thePhilippines had exportable surpluses and roughly constantthan border prices. Border prices represent the social oppor-

tunity cost of fertilizer (i.e., the price farmers would have paid real rice prices between 1977 and 1982.without government intervention or under free trade). Thus, there is now a question of whether the country's

rice exports are profitable or not. To answer this, it is necessa-From the standpoint of producers, the impact of policies ry to examine the country's comparative advantage in rice

is measured by the concept of the total nominal protection production, as well as government policies which encouragerate. This rate measures the amount of total protection or the rice sector to exploit this advantage.subsidies received by the fertilizer producer as a proportion Growth in rice production can be attributed to threeof the value of domestic production at border prices, factors: the introduction of new modern varieties; the in-

From 1973 to 1981, the percentage excess of the value creased use of fertilizer; and the increase in the number of

of production, relative to the value at border prices, was over irrigated farms. The principal source of production increase,50 percent. One-third of this level of protection was funded by however, is irrigation, which is the government's most impor-implicit taxes borne by farmers through higher prices of fer- rant contribution to the rice sector.

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PIDSDevelopmentReseaTchNews 7 SEPTEMBER- OCTOBER19K

Wi_ the growing domesuc supply of rice, the govern- a barrier between domestic markets and world market qualityment's role in the rice sector has become more prominent, standards so that export price incentives for quality were notmaintaining two significant goals in its policy, namely: the available to domestic processors. Second, world demand for

provision of remunerative prices for producers, and the low quality rice is less elastic than demand for high qualitymaintenance of steady supplies of rice at stable prices afford- rice. In spite of its low price, low quality Philippine riceable by low-income households, cannot easily be absorbedLby the world market.

To implement these goals, government policy veered Thus, to exploit the country's comparative advantagetoward monopoly of international trade, and domestic market in rice production and maintain producer incentives, it isoperations to maintain official prices. Success in the mainte- necessary to develop higher quality processing to meet worldnance of official prices ultimately depends on international standards.

trade, since deficits must be supplied through imports and Producer incentives can be improved by examining thesurpluses disposed of through exports, effects of government policies on the prices of production

Government market interventions in the past took the inputs, These include subsidies on irrigation, credit, andform of disbursement of imports in consuming centers. During fertilizer. Irrigation has introduced dramatic increases in rice

the 1960s, the Rice and Corn Administration (RCA) pur- production. Irrigated farms yielded 1.2 tons more during thechased less than two percent of production. Then the National wet season, plus an additional 2.5 tons in the dry season.Grains Authority (NGA) replaced RCA in 1972. Later, NGA The use of fertilizer complements irrigations, and bothbecame the National Food Authority (NFA), which increased are needed to bring about the miracle in modern rice varieties.

procurements to at least five percent of the increased pro- To enable farmers to adopt this new technology, Masagana-99duction since 1977. (M-99), a low-interest loan package recommending the use of

With growing domestic supplies, the government's fertilizers and insecticides, was launched in 1973.

role in disbursement declined. Now, its task is to dispose of The impact of these policies on value added or returns

surplus production through exports and increased stock to domestic factors of production is measured by the effect-holding. And since yearly changes in stocks have been small, ive protection rate (EPR). EPR is defined as the ratio of value

the control of trade has been the principal means of control- added in domestic prices to value added in world prices,ling domestic supply and prices, minus one.

Government intervention have had two effects. First, Findings show that only policies on irrigation invest-government monopoly of trade has caused domestic rice ments and operations increase private profitability in riceprices to diverge from world prices. Seond, government production. Other price policies do not favor rice producers,policies have tended to maintain domestic prices at official as the price of fertilizer, insecticides, machinery, and fuelprice levels, are all higher than border prices.

The impact of trade monopoly on domestic prices is The EPRs for rice are very close to zero, indicating thatmeasured by the nominal protection coefficient (NPC), de- growth in production has occurred without any gross dis-fined as the ratio of Manila wholesale prices to border prices tortions in net incentives. Policies have favored irrigated farms(i.e., adjusted Thai prices). NPC is estimated to have averaged slightly, which has led to a sudden increase in the number of

close to 1.00 for the period 1960 to 1980. irrigated farms. Other policies have taxed producers to benefitThe control on imported quantities caused domestic connumers and domestic manufacturers of agricultural inputs.

prices to be above world prices however, in the 1960s, even Moreover, for rice to be socially profitable, the socialas official ceiling prices were at or below world prices levels, cost of domestic factors used in production should be lessOnly in 1962 and 1963 were imports sufficient to keep than the foreign exchange earned. Domestic resource costdomestic prices below world prices. Therefore, actual domes- (DRC) measures the social value of domestic resources neededtic market prices were usually above the ceiling price. As a to produce one dollar's worth of rice.

result, domestic prices slightly favored producers over consu- Findings show that in 1979, all Central Luzon rice farm-

reefs, hlg systems were socially profitable. Rice production on

In 1972 and 1973, Philippine rice production declined irrigated farms was slightly more efficient in earning foreignwhile world prices rose sharply dues to global production exchange, because the higher yield resulted in lower pro-shortfalls. Subsidized imports combined with domestic ration- duction cost per unit of rice.

ing served to buffer domestic prices from the abnormally Currently however, there is a rise in irrigation invest-high world prices, ment cost due to additional areas which are more difficult

Since 1976, rice supplies have been adequate to keep to irrigate. Continued growth in irrigation costs might quicklydomestic consumer prices below ceiling prices, while at the erode Philippine comparative advantage in rice. •same time exporting substantial quantities in 1980 and 1981. -- .......Domestic producer prices have now fallen below the official IMPACT O17 GOVERNMENT POLICIES ON PHILIPPINEfloor price, so that price policy implementation now favors SUGAR

consumers over producers, by Gerald C Nelson, Professor, UPat Los Banos

During these years however, rice exports proved to be and Mercedita Agcaoili, NEDA Staffunprofitable. The government reportedly lost P90 million inexport subsidies between 1977and 1979. Two factors account Since the early part of the 20th century, sugar has been

for these losses. First, government control of exports has put (Continued next page)[ IIII I ........

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PII_ Development Research News 8 SEPTEMBER - OCTOBER 1983

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a major foreign exchange earner in the country. In the 1960s; large loans from domestic and foreign banks.sugar exports comprised up to 18 percent of total export Despite high world prices in 1973 and 1974, domestic ]earnings, stocks of sugar were built up and by 1975-1976 the stocks

However, during the 1970s, sugar's share in the total reached 1.68 million tons. Within the next two years, Philex

exports of the country declined to only 10 percent. This is exported sugar at a record high, however, these exportspartly due to the increasing domestic sugar consumption were made when world prices were at their lowest and exportand growth in other commodities, revenues did not increase nearly as much as the increase in

The predominace of sugar in Philippine trade before the sugar production.1970s was largely the result of colonial and post-colonial As a result of the substantial losses, government controlties with the US when Philippine sugar received preferential of sugar was transferred in 1978 to a newly created policy-treatment in the US markets, making body, the Philippine Sugar Commission (Phflsucom).

Until 1974, almost all sugar imports were sold duty- Day to day operations were delegated by Philsucom to thefree into the protected US markets where prics were kept National Sugar Trading Co. (NASUTRA).stable at levels usually well above world market prices. At Philsucom and NASUTRA were still faced with a recordthis time, government policies on sugar were largely designed high of domestic stocks, and the need to repay large loansto secure maximum benefits from these arrangements, made by Philex. In 1980, NASUTRA entered into long-term

After 1974, preferential access to US markets ended, contracts of three and four years to sell half of total exportsprompting the government to take over control of both at roughtly 51.8 US cents/kg. (or P3.7/kg.). This move proveddomestic and international marketing. This move has been to be a remarkably good bargain because world prices fell tojustified as a way of protecting producers and consumers from about 22 cents/kg, in 1981 and remained at or below thatworld price fluctuations, and improving the country's bargain- level until 1982.ing position in world trade. However, because of the need to repay loans, world

However, even before 1974, substantial government prices were not fully passed on to producers. Fifty percentintervention in sugar production, processing and trade has of NASIZfRA's profits were kept to pay off tire loans made bybeen implemented. Up to now, government sugar policies Philex, and the other half were paid to planters/millers.include: export taxes, and import ban, controls on price, The impact of these policies has been in the decline in

production, and marketing; and low interest rates on pro- nominal protection to producers and the transition from im-duction and equipment loans, plicit taxation to implicit subsidization of sugar consumers.

In addition to its importance in trade, sugar is also a On average, producers received only 77 percent of the worldconsumer good. Thus, it is also important to examine the prices. On the other hand, consumers paid only 69 percenteffects of government policies on domestic prices and on the of world prices.distribution of income from sugar production and processing. The impact of government monopoly on domestic and

Before 1974, when the Philil)pines still had prefe- international marketing of sugar has been on the following:rential access to US markets, the goverr_:ment allocated domes- price stabilization, improved bargaining position in the exporttic and export quotas on sugar production. However, private market, and increase earning for producers.traders were allowed to handle marketing. Price stabilization has brought about benefits for both

After 1974, the Philippine Exchange Company, Inc. consumers and producers. However, benefits have not been

(Philex) was established as the sole buyer of sugar from the greater than the social costs of imple:menting the policy.mills and the sole exporter of sugar. Philex was an agency of The opportunity cost of the foreign exchange loans made bythe Philippine National Bank (PNB), the major financial the government to subsidize producers reached US$370institution for the sugar industry at that tinre, million between 1977 and 1979. This amount is about one-

In constrast to the previous system in which mills and-a-half times the value of annual sugar exports in thosewere responsible for marketing its exports and domestic years.

quotas, Philex bought all sugar at a single "composite" price - In. addition, price stabilization of sugar prices has notcalculated by taking weighted shares of the officially deter- had si:gnificant effect on the real income of sugar consumers.mined "export," "domestic" and "reserve" prices. Philex This is because sugar, unlike rice, does not entail a big portionsold sugar for the domestic market to licensed traders and of consumers' expenditures.exported the remainder itself. Producers als0 appeared not to have gained much from this

The creation of Philex was bad timing for the Philip- policy since prices have been kept well below world prices.

pine sugar industry. At that time, world prices were so high It appears that either from a theoretical or an empiricalthat an additional export tax was implemented, and a tempo- standpoint, the long run overall gains from government mar-

rary ban on exports was declared to protect domestic con- keting n_nopoly of sugar are not large. But, there have beensumers, large income transfers from sugar producers to consumers.

By 1975 and 1977, world "sugar prices began falling, NASUTRA's good: decision in making long term con-and Phflex lowered the composite price from 'P2.23/kg. to tracts at least partially m_de up for the bad decisions of Philex.

P1.28/kg. in 1976, but increased it to P1.40/kg3n 1977, However,tiae Philippine sldges not have a significant positionuntil world prices began rising. Despite this reduction, export in world trade to influence world prices for sugar. Thus, itunit values in 1977, 1978 and 1979 were still lower. In order would be doubtful whether a national body can significantly

to maintain producer prices above world prices, Philex made bring price changes for Philippine sugar than private exporters. ]--m[ ...... , ........ "................... i , " 1 I " I I II III III I

PIDSDevelopmentResearchNews 9. SEPTEMBER- OCTOBER1983• IIII1| I I II

ECONOMIC INCENTIVES AND COMPARATIVE keting of livestock products. At present, there is theADVANTAGE IN THE LIVESTOCK INDUSTRY Food Terminal Inc. (FTI) and the Livestock Auction Markets,

by L. S_ Cabanilla which were established for this purpose. However, studies wereAssistant Professor, UPat Los Ba_os presented to cite the importance of middlemen in the market-

ing scheme.With increasing demand for livestock products, questions Moreover, research and extension programs of the gov-

have arisen concerning the most efficient way of increasing emment have long-term effects of the industry. Better tech-production, nology and higher efficiency would lead to low production

To meet the growing demand, the country could costs which would benefit even consumers. Unfortunately,either increase importation of livestock products, or expand as in most agricultural activities, there is little research expen-domestic production. Increasing importation entails use of diture on livestock. Improvements in domestic technologymore foreign exchange, which may sacrifice other importable have been mainly through direct technology transfer fromcommodities, abroad.

Expanding domestic production on the other hand, To quantify the impact of these policies on the outputentails increased use of domestic resources. Thus, it must be

prices of chicken, meat, eggs, pork and beef, the nominalascertained that the use of domestic resources for livestock pro- protection rate (NPR) was calculated for each product. NPRduction would be socially profitable. The expansion of live- measures the rate by which domestic price deviates from thestock production also requires more feedstuffs which at

border price.present have a high import content. In his calculations, the author did not use the country's

However, because of the chronic foreign exchange pro- import value (CIF) as a measure of the border price, becauseblem of the economy, it is more beneficial to increase domes- the country's imports of livestock products comprise a verytic production of both feedstuffs and livestock products, insignificant proportion to total domestic supply. Instead,which has been the thrust of past government policies, the import unit values of Hongkong were used for poultry

Nevertheless, the extremely limited resource base of the and pork, and that of the US for beef.country makes it necessary to determine whether present Hongkong import prices were used because of its sub-policies are geared toward a more efficient utilization of stantial import quantities of livestock products. Further,domestic resources, geographical location relative to international supply points

Since livestock products are considered essential goods, is comparable to the Philippines. Also, import values ofone of the major concerns of government is the maintenance Hongkong are found to be similar to other countries likeof low and stable consumer prices for these products. This has South Korea and Singapore. For beef, US imports consistled the government to intervene in the livestock industry by mainly of low quality beef.altering the relative prices of inputs and outputs in thedomestic market, and putting a wedge between domestic and Analysis shows that the NPRs for poultry were irigherborder (world)prices. than for hogs and cattle during the post-war period. This is

Government intervention can be classified as tariff and consistent with the tariff structure, in which poultry enjoys

non-tariff. Tariff policy has long been used to protect domes- higher protection than hogs and cattle. This also indicatesthe importance of tariff in promoting domestic production.tic producers from foreign competitors. Various other pro-

In terms of government intervention in inputs, policiesgrams were also instituted to make the price of inputs, espe-cially feeds, low. affected the prices of feeds which comprise as much as 70

Direct price intervention has also been used to main- percent of the total cost of livestock production. The govern-ment also tries to maintain low capital cost primarily throughtain stable consumer prices of livestock products. If effective,low interest credit,and through other forms of incentivesthis should cushion the impact of tariffs on domestic prices,under the Investment Priorities Plan of the Board of Invest-

which tend to go up with the absence of foreign productsdue to tariff, ments.

The government likewise undertook distribution of live- The impact of government policies on inputs was quart-stock products in rolling stores and other distribution outlets titled by calculating the implict tariff (IT) for different typesat controlled prices. However, the small size of these opera- of feeds. IT measures the amount by which domestic pricestions relative to the total market renders price control in- paid by farmers for compound feeds deviate from worldeffective in depressing the upward pressure exerted by tariff prices. Findings show that soybean meal and yellow corn (feedon domestic prices, ingredients under the National Food Authority's control)

Reports and studies were also cited in this research to have IT rates of 59 and 17 percent respectively. Apparently,show that these distribution centers, mostly located in Metro NFA's priving policy on these ingredients imposes a penalty

Manila, handles less than one percent of the meat sold in the for users of these ingredients.area. To synthesize the impact of government policies affect-

In addition, other studies were also citied regarding the ing both output and input prices, the effective protection ratepreference of farmers to sell their produce to middlemen (EPR) was estimated. It appears that there is high effectiverather than directly to government centers. The government orotection for poultry and negative effective protection forhas exerted efforts to regulate the activities of middlemen, hogs and cattle. Domestic broiler production in particular

which many blame as the cause of inefficiency in the mar- (Continued nextpage)

A

PIDSDevelopmentResearchNews I 0 SEPTEMBER- OCTOBER1983II II I I , I ii

enjoys a high average of 200 percent effective protection, implications and policy suggestions for improvement of theThis is primarily because of the very small value added to efficiency of allocation of resources within the forestrybroiler production, sector.

Hogs and cattle production on the other hand axe pena- The study reports that forestry offers an opportunitylized by the protection system. Their continued existence for the country to have additional efficient means of earning

and sustained growth in production levels, nonetheless, indi- and saving foreign exchange. Efforts should focus on the pro-cate that they are efficient producing units, motion of domestic processing of wood, together with refo-

The high protection accorded to poultry has created a restation and forest protection, as means of enhancing fores-

more favorable business environment for private entrepre- try's long-run capacity to earn and save foreign exchange.

neurs, attracting investments from various groups, notably In this study, the efficiency of the sector in utilizingbig feedmillers, resources for production of forest goods and services is mea-

However, a relevant question would be: is there social sured through the domestic resource cost of earning or savingbenefit derived from the continued protection of an import foreign exchange or DRC. The authors explain that the DRCsubstitution endeavor, like poultry. This issue arises because measure represents, in effect, the rate at which domestic

of the divergence between private and social profitability, resources, measured in pesos of opportunity cost, can beHence, it should be determined whether domestic poultry converted into foreign exchange through a particular econo-production is socially efficient in saving foreign exchange mic activity. Comparative advantage for this activity is indi-relative to other activities, cated if DRC is less than the shadow price of foreign exchange.

The high domestic resource cost (DRC) for broiler In addition, the study also gives an assessment of govern-production compared to other activities indicates that broiler ment policies affecting forestry. The authors state that it isproduction is less efficient than layer, hogs and cattle pro- possible for price intervention and other policies to turn aducfion. As the DRC estimates are compared to the shadow socially advantageous activity into a privately unattractiveexchange rate, it becomes apparent that the country at present one, and vice versa, In this connection, their study includes andoes not possess comparative advantage in broiler production, assessment of the effects not only of government l_oliciesThe social value of domestic resources used in broiler pro- specific to the forestry sector (e,g. export tax or export banduction is higher than the shadow exchange rate. on logs) but also the powerful and pervasive effects of fire ta-

Egg production in contrast, possesses comparative ad- rift system and exchange rate policy on tradable forest pro-vantage. The high protection rate afforded by tariff in the ducts.

early fifties to egg production has enabled it to attain its The estimates of DRC indicate a strong potential compa-present competitive position. Given enough time, likewise rative advantage in all three major wood product activitiesthe same thing may happen to broiler production. - logging, lumber and plywood veneer, if the goal of sustained

On the other hand, the low DRC estimates for hog and yield forestry can be met.cattle show their efficiency in the use of domestic resources. The degree of comparative advantage is measured asThis is specially true with hog production which, despite nega- the ratio of the DRC to the shadow exchange rate (SER).

rive effective protection, continues to grow. Domestic hog A value less than One indicates comparative advantage and theproducers show competitive advantage in the world market, lower the value the greater is the degree of comparative

With its linkage to the teed milling and drug/chemical advantage.industries, livestock shows remarkable comparative advantage For their study, ratios for estimated DRC's (assumingand should be considered significant in the country's economic zero land rent) range from .37 to .7 l, indicating a very substan-

development. The industry can effectively serve as an import- tial margin within which prices and costs could vary withoutant income-generating activity for the rural population and, at sacrificing the country's comparative advantage.the same time, serve as the source of essential protein-rich The authors state that the DRC results depend on the

food for the rest of the population.e particular levels of pOces and costs that prevailed in the, , .... period of study, 1977-1979. Moreover, the results dependCOMPARATIVE ADVANTAGE AND GOVERNMENT on their assumptions about the shadow price of land, laborPRICE INTERVENTION POLICIES IN FORESTRY and capital, as well as about future forest management.

by Dr. John H. Power, Research Consultant, PIDS, and Turning to price intervention policies, the authors setTessieD. Turnaneng four major goals for policy implementation. These are: 1)

For the past 30 years, .forestry products have been limiting output to meet conservation target, 2) capturingamong the country's top ten dollar earners; and their private rents from logging concessions, 3)promoting foreign

combined output constitutes about five percent of the nation's exchange earnings consistent with comparative advantage,n_:donlestic product. _ and 4) raising revenue for forest administration.

John Po_¢r .and Tessie Tumaneng's study on " Corn- The authors also note that no single policy can be ex-parative advantage and Government Price Intervention Policies pected to attain all these goals. Hence, they conclude that fourin Forestry " assesses the comparative advantage of the Philip- separate policies are needed to meet these goals.pines in producing major forest products such as logs, lumber On the policy on raising revenues, the study reportsand plywood; quantifies the protection or penalty bestowed that forest charges and export taxes cannot be designedon these activities by government policies; and draws policy primarily for this purpose, since they have other roles to play.

PIDSDevelopmentResearchNews 1 I SEPTEMBER- OCTOBER1983a I II II II I I III I II I I I I lJ

Revenues from general taxation must be used to fill the gap In the study, a second-best approacn to policy rerormbetween this need and revenues from strictly forest policies, would include at least: 1) removal of export tax on processed

With respect to conservation, the study notes that, wood products, 2) increased forest _charges, 3) perhaps anbecause of externalities and the need to meet qualitative and increase in th export tax on logs, 4) elimination of quotas on

quantitative aspects of conservation, direct controls and logs exports, and 5) hopefully an improved land tax on forestreguiations are needed. Forest charges, by themselves, could concessions.limit output (if they are effective), but could not meet the Finally, in approaching the problem of estin]ating DRCs,

qualitative requirements of conservationpolicy, the assumption -s that the government would be able toNevertheless, forest charges could play a role in supple- administer reasonably well in the future an efficient sustained

menting direct controls. Forest charges have declined in real yield system of forest management; this being the crucialterms over the period studied. Moreover, while a decade ago element int he forestry policy package. •revenue from forest charges roughly matched government ,......... '

expenditures on forestry, they now represent only about RESEARCH ON FOREST POLICIES FORone-sixth of those expenditures. Undoubtedly, these charges PHILIPPINE DEVELOPMENT PLANNING:could be raised substantially without reducing incentives to A SURVEYoutput below the conservation target. By Marian Segura-de los Angeles

In addition, if forest charges were raised to the point UP, School ofl_'onomics

where it is just profitable at the margin ro produce the conser- This study focuses on a review of specific public andvation-determined output, marginal rents would be eliminated, private forest management issues in terms of how peculiaritiesHowever, the problem of intramarginal rents remain. The ideal of timber are incoiporated into forest policies,method of eliminating these, which is competitive bidding, Central to this study is the question of how benefits and

is presently not avilable. A higher land tax would be a possible costs from using a potentially renewable resource such assubstitute, but serious study is needed to. determine the extent forests could be optimized for ,Philippine economic growth.

of intramarginal rents and how to administer a land tax on This issue is better understood through a study of policiesforest concessions that might largely capture such rents for affecting forest management and their impact on physical,

society, economic and institutional considerations in resource conser-Finally, the" study reports on the policies promoting vation.

optimal foreign exchange earnings from forest products. There are generally two viewpoints in the analysis ofThese include policies on: l) the industrial protection system forestry policies. These are: 1) those of the individual corn-which penalizes all exports via undervaluing foreign exchange, portents of the economic system, such as the producers andand 2) export taxes, quotas and subsidies, consumers, 2) and those of society in general.

The study notes a strong comparative advantage in Although Philippine forests are publicly owjled, they

producing togs and processing them for export. Further, there are used privately under a system of granting consessions,is an advantage in creating a wedge between world and domes- licenses, and permits. This is a system of co.management

tic prices of logs, that reflects world elasticity of demand. In wherein government imposes controls on the manner inthis connection, an export tax is the ideal instrument while which forests are used by private individuals.

export quotas (or ban) represents an inferior method. Finally, The study recognizes the need to provide a basis for athe study indicates that the protection system imposes a more comprehensive planning in forestry, which is generally

penalty on all exports in the range of 17 to 23 percent via labor-intensive and therefore significant for rural develop-undervaluation of foreign exchange, ment. A Philippine forestry development program should

The study reports that this penalty is quite apart from have the following objects: 1) to develop and maintain the

any peso overvaluation that result from disequilibrium in the country's resources at maximum productivity, to assureforeign exchange market. It is due solely to the/distortion contribution to national welfare, 2) to complete the refores-caused by industrial protection. To correct this penalty in ration of all barren areas with top priority given to the 1.4a first-best manner would require the removal of the four million hectares of degraded critical watersheds, 3) to con-

percent export tax and its replacement by a 20 percent centrate and stabilize forest occupancy in order to mini-subsidy. A first-best package would include this plus removal mize, if not entirely eliminate, the destructive activities ofof quota or ban on log export, illegal encroaches on the forests; and 4) to promote eco-

There is an assumption here that the implicit export logical balance by requiring forest users to adopt environ-

tax on logs from undervaluation of the currency is about right mentaUy sound methods of exploiting forest resources.for the optimal exploitation of foreign demand. The implied The following issues are also vital in forest develop-elasticity of world demand is probably too low on a long-run ment planning: First, the need for an inventory of the factorview, according to the authors, of production in the Philippine forestry sector. This would

This first-best package has financial implications that necessitate the gathering of information initially at ground

might be disturbing. Not only processed wood products,, level, instead of through satellite photos, secondary databut all exports, face the same penalty, and in a sense, "deserve" sources, or aerial photographs. This should account for thethe same subsidy. To implement this subsidy might imply cropping system of upland farmers, the socioeconomic pro-an impossible tax and transfer problem for the government. (Continued next page)

,1 I II II

I I .....

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PIDSDevelopmentResearchNews 12 SEPTEMBER- OCTOBER1983II II i II I -ll_IIll II I I I' I II IIII I

fde of upland farmers, the work conditions of laborers in toward import substitution. The program was a response to

forest based industries, and the biophysical, climate, and findings that the country's importation of cofton over a ten-other factors which need to be considered in forest .renewal. year period (1966-75) involved an average annual outflow ofand the development of upland communities. $30 million, and that studies have shown cotton can be grown

Second, the formulation of a framework for a corn- in suitable areas of the country with a profitable rate of return.

prehensive forestry development program. The role that More than 350,000 hectares have been delineated asforestry would assume in the nation'.s growth and develop- potential areas technically suited for cotton productionment goals needs to be specified through a set of criteria. About 150,000 hectares of these fall into the existing croppingThis formulation would entail the participation of various system, and represent more than the required 115,000 hec-disciplines and agencies, as well as the private sector, tares to enable the country to be self-sufficient in its new

Third, the operationalization of multiple use and eco- cotton needs.nomic sustained-yield forestry concept. This would be defined During crop year 1974-75, a modest 194 hectares werein terms of biological, ecological, and economic terms. From already planted with cotton, but by crop year 1980-81, this

the public sector's viewPoint , sustained-yield forestry would increased to 17,000 hectares.take into account self-rehance in forest-based commodities In 1973, Presidential Decree (PD) 350, as later amended

and services, and their distribution across different genera- by PD 1063, created the Philippine Cotton Corporation (PCC)tions. Such economic and sustained yield forestry would most as the central authority to undertake, implement and superviselikely result in multiple use forestry as well. And, from the the commercial scale production of cotton in the count_.private sector's side, sustained yield, in practice, would mean PCC is a semi-government corporation attached to the Ministrythe long-run viability of the firm given in the economic con- of Agriculture.straints. The PCC, through participation rural and commercial

Fourth, the evaluation of forest renewal strategies, banks, grants production credits to farmers. Like other super-Microlevel studies of present forest renewal strategies need to vised credit programs, cotton production loans carry 10 per-be conducted in order to determine their appropriateness cent interest rate and two percent service charge. From 1975to local conditions. This should include studies on: a) corn- to 1981, the average actual production loans ranged frompleteness of the strategy, b) identification of beneficiaries _535 to 1_2,001 per farmer, or from P1,270 to P_2,581 peland bearers of costs of projects, and c) availability of support hectare. During this period, repayment averaged 85 percent,facilities and infrastructure. At the macrolevel, there is a which is one of the highest among agricultural productionneed to identify the various demands for wood products loans.

from reforestation projects, the establishment of_strategically The study also reports on the estimation of the total

located processing centers, forest products marketing arrange- nominal protection to th cotton industry, i.e., to seedcottonments, and the like. production and to processing (which is a monopoly of the

Fifth, studies on the local environment within which Philippine Cotton Corporation). Total protection was mea-forest development strategies are being implemented. There sured by direct price comparison between domestic and border

is a need to constantly assess the economic, pohtical, and prices evaluated at a comparable point in the marketing chain.institutional environment within which forestry development The impact of government policies, notably trade andis taking place. This implies relating the economic demands on fiscal policies, measured by these price comparison came outforest and wood industries to the controls (economic, tech- to be favorable to the cotton industry as a whole.

nological, or legal) used for satisfying these demands, From the total nominal protection conferred by govern-Sixth, continuous monitoring of the global environment ment policies on the cotton industry, the nominal protection

affecting Philippine Forestry. Evidently, forest destructive to cotton farmers for the production of seedcotton was esti-activities are also affected by the international trade for wood mated indirectly.products. Hence, there is a need to define well the role of These estimates reveal that the nominal protection rateforestry, as a sector in foreign trade, and tackle issues on self to farmers was-negative, averaging minus seven percent duringsufficiency in forest based commodities. • 1975-81. This indicates that the producers' output was

......... ' generally not protected, i.e., not conferred with incentives byECONOMIC INCENTIVES AND COMPARATIVE price policy set by PCC, but rather penalized. Domestic pro-ADVANTAGE IN THE PHILIPPINE COTTON INDUSTRY ducer prices were pegged, on the average, seven percent belowby Arsenio M. Balisacan, comparable world prices.

Research Intern, East-West Center In addition to price policy on output, farmers' incen-

This research attempts to answer two crucial questions tires also depend on the prices of inputs which are likewisein the promotion of the cotton industry in the Philippines. affected by various measures. Thus, the effective protectionThese issues are: 1) how economically competitive is domes, rate (EPR) is a more relevant measure than the nominal rate.

tically produced cotton compared to imported cotton, and Because the implicit tariffs on tradable inputs used in2) have government policies encouraged domestic cotton cotton production were substantially higher than the nominal

production? protection rate on farmers' outputs, the effective protectionDuring the 1970s, the national cotton development pro- rate was generally lower than the nominal protection rate.

gram began in support of the government's development goal Over the seven year period studies, EPR averaged - 12IIIII I[ I I Ill I I II I.. II I I I

-= .,

PIDSDevelopmentResearchNews I 1 3 t SEPTEMBER- OCTOBER1983II III I I IIII " ' " i II

percent i.e., returns to domestic primary factors (domestic [UPDATE ]value added) were lower by 12 percent as a result of the impli-cit tariffs on outputs and inputs. In the author's words, returnsto these factors were diminished by the protection system. PIDS On-Going Projects on Agriculture

Despite a clear positive nominal protection conferred by

price policy on the cotton industry, the protection to cotton WELFARE ISSUES AFFECTING LANDLESS COCONUTfarmers' value added tended to be negative. This is an indica- FARMERS: A CRITICAL REVIEW OF THE CURRENTtion of the penalty imposed on farmers by the government RESEARCH PROBLEMS

price policy, by Sylvia H. GuerreroThe protection to the cotton industry did not neces-

The objective of the study is to undertake a criticalsarily accrue totally to the processing of cotton, which is areview of existing literature/documents regarding welfaremonopoly of PCC. A proportion of PCC's profits was appa-issues affecting landless coconut farmers. Specifically, it aims

rently used to supplement the budget for agricultural exten-sion, and research and development, to synthesize basic information and research findings on the

coconut industry in related post-war materials and to identifyThus, a part of the overall protection to the industry wasultimately channeled down to cotton farmers in the form of knowledge gaps in major problem areas for further research.

The following are the major study areas: 1)industrygovernment services_ If the impact of these services to theincome and profit distribution; 2) labor conditions of land-domestic value added could be reasonably quantified and in-less agricultural workers; 3) government policies affectingcorporated in the effective protection measure, the overall

protection received by cotton farmers might have to be modi- industry growth; 4) distributive impact of the coconut levy;fled. and 5) composition/classification of "coconut farmers."

The study will basically rely on secondary data foundIt was also reported that the estimated protection rateson seed cotton were generally lower than those conferred by in related literature, and to a limited extent, through Later-

price policy on food crops, but higher than those on export views with key informants and purposive field visits. •crops. Considering that export crops (notably sugar and ' ..........tobacco) are the predominant alternatives of farmers in the ECONOMIC EVALUATION OF THE PHILIPPINE ALCO-

GAS AND COCODIESEL PROGRAMchoice for second crops in most cotton-growing areas, it maybe less disheartening to observe a nominal penalty on cotton by Armando C Armas, Jr.

farmers' output, since the penalty imposed by price policy The research is an economic evaluation of the Philippineo11expo_rt crops is more severe, alcogas mad cocodiesel fuels program. It intends to examine

However, considering that cotton is a relatively new the social cost-benefit as well as cost-effectiveness of the

agricultural crop in farmers' cropping system, the slight out- different projects of the progrmn and determilqe the conditionsput protection advantage of cotton relative to export crops and policies that would significantly affect the economic

may be easily outweighted by greater risks and uncertainty desirability of the program. In particular, the comparativeperceived in shifting to a new crop. advantage of alternative fuel sources vis-a-vis imported petro-

Moreover, income distribution questions arise: why leum will be determined. The implication of energy pricingshould farmers' incomes be reduced substantially below what and other government macroeconomic policies on the compe-a free market would offer? titiveness of alternative energy sources will be assessed under

Also, in the long-run, as the national cotton develop- various simulated settkngs. The equity aspect of the projectsment program expands, a more favorable price policy on will be considered, and their impact on sectoral welfarecotton may be necessary to reduce farmers to plant cotton, determined. Secondary data are readily available from govern-

Relative to the manufacturing sector, which received ment sources such as NCSO, CB, NEDA, alad the Ministry ofan effective protection from government policies of about Energy. Primary data can be obtained from feasibility studies44 percent during flae seventies, the protection conferred on and participating institutions like the UNICOM and PNOC.the cotton industry was very low. Thus, government pricing The research is relevant because the alcogas and cocodieselpolicies seem not to be designed to attract resources to the program demands huge resources that have significant effectcotton industry in competition with manufa_cturing indus- on national resources allocation. •tries. If this discrepancy continues hi the long-run, the gov-ernment would increasingly have to bear the burden of sub-

sidizing the expansion of cotton production. Subscriptions to the PIDS DEVELOPMENT RESEARCH

While the author explicitly states that there is compa- NEWS are now accepted. Private firms and individuals

rative advantage in producing cotton, he adds that economic are charged for a minimal fee to cover mailing andefficiency is not the only consideration in implementing a delivery costs. For details, please write or call the

policy which will promote or penalize an agricultural activity. Research Information Department of the PhilippineRather, policymakers and planners should consider Institute for Development Studies (PIDS-RID). Tele-

the socio-political effects of policies, particularly on issues of phone numbers are: 865-705 or 857-902 (lot. 250).employment, income distribution, and 'the concentration of

economic power. • .... ,,,|.,, , ,

III I I II [ II III IIII IIIIII I I ii iiii

PIDSDevelopmentResearchNews 1 4 _ SEPTEMBER- OCTOBER1983

! ProS 1• Beginning with this issue, the Philippine Institute for

Development Studies (PIDS) takes over the management andeditorship of the former NEDA Philippine Journal of Develop-ment. This issue includes studies on the effective protection of

Survey of Philippine Development Research I manufacturing industries, fertilizer policies, demand for gaso-This book highlights and integrates the findings and line, export price index, estimating literacy rate, and on reve-

recommendations of development research in the country, nue.It deals with such subjects as: urbanization and spatial deve-

lopment, income and wealth distribution, poverty, monetary Journal of Philippine Development (1982}policy, and macroeconometric models. Tiffs volume contains studies on the following: industrial

development strategy, invention, and on statistics. Also in this

Survey of Philippine Development Research H issue are articles by Dr. Gerardo P. Sicat on the national eco-This second volume of development researches deals nomic strategy, and by Dr. Mitsuo Ono on the integrated

with the following areas of concern: forest and mineral poll- survey of houselrolds.ties, foreign investments, public finance, and population and ;" "

HOW PARTICIPATORY IS PARTICIPATORYdevelopment. DEVELOPMENT?

Industn'al Promotion Policies in the Philippines by Gelia T Castillo

by Romeo M. Bautista, John H. Power and AssociatesThis study describes quantitatively recent economic The study, which took two years to complete, is a two-

policies toward Philippine manufacturing industries and re- part treatise on:colnmends modifications in the country's industrial promo- (a) changing rural institutions, e.g., ore-designed rural

tion policies with the view of making them more supportive institutions like the Samahang Nayon (SN), Corn-of national development goals, pact Farms and Seldas, and Masagana 99; tradi-

tional" forms of cooperation; and emerging new

Essays in Development Economics in Honor of Harry T. relationships among various characters in a ruralOshima setting; and

A collection of essays written by leading economists (b) participatory development experience in thehere and abroad., the book treats various subjects like infla- Philippines.

tion, population, modernization, employment and other The first part reviews, organizes, and synthesizes avail-development issues of much. impportance to planners and able research, data, and experience on rural institutions and

policymakers. The book also features case studies on the seeks to identify gaps in knowledge in this area where furthereconomic performance of countries like Japan, Sri Lanka, research can be done.Taiwan, Hawaii (USA), Thailand and the Philippines. Part Two, wlrich deals with people participation, looks

into various examples of Philippine field experiences as pro-

Integration, Participation and Effectiveness: An Analysis of vided by projects initiated or supported by government andthe Operations and Effects of Five Rural Itealth Delivery non-government agencies, it attempts to define and clarify theMechanisms basic ingredients of people participation like "who are the

by Ledivina K Cariao and Associates 'people'?", "what constitutes participation?", etc. The study'sThis study identifies and evaluates existing mechanisms short term, interim v_erdict on the overall assessment of these

for the delivery of health and health-related services to the various approaches of participation is that benefits from parti-

poor. Specifically, five health programs of different agencies cipatory development have yet to substantially accrue to thewere studied: the Rural Health Unit of the Ministry of Health poor.

in Pilaf, Bataan; the Comprehensive Community Health Pro- - .......gram in Laguna; Project Compassion in Rizal; the Sudtonggan INDUSTRIAL POLICY AND DEVELOPMENT IN THEHuman Development Program; in Lapu-lapu City; and the ASEANCOUNTRIES

Makapawa Project in Leyte. by Romeo 3£ Bautista

A Study of Energy-Economy Interaction in the Philippines This paper describes the evolution of industrial policy

by Leander J. Ale]o and development in each of the ASEAN countries, indicatingThis monograph reports on the results of an econometric also the general thrusts of recent industrial promotion policies

modelling project aimed at studying energy-economy inter- in the region. Because trade policies form a part, and in theactions in the Philippines. Specifically, the project sought to context of the ASEAN countries a major part, of the overall

quantify the impact of the energy crisis on macroeconomic policy climate affecting the performance of manufacturingvariables. Alejo's model could serve as a tool for policymakers industries, the discussion of industrial policy inevitably in-

and planners in estimating the effects of' alternative policy dudes the incentive effects of foreign trade regimes adopted.', . \

•packages for varying energy scenarios. The discussmn then shif_t_sto .the Korean industrialization

A

lIDS DevelopmentResearchNews 15 SEPTEMBER- OCTOBER1983IIIIII

experience from which some lessons are drawn that could Essentially, the study aime_ to generate both micro and

provide guidance for ASEAN policymakers. This is followed macro data on the entire range of s0cio-economic, managerial,by an examination of potential areas for industrial com- and technical issues faced by the small scale industries. More-plementarity and trade expansion between the ASEAN coun- over, the study intended to develop the necessary parameterstries and the Asian NICs, given the rising protectionism in the for policy formulation and implementation, and to evolve a

industrialized countries. The paper ends with some general set of relevant guidelines for managerial and technical de-remarks on the possibilities for promoting mutually beneficial cisions on these industries.development through trade in manufactures among the NICs Specifically, the data of the study covered the follow-

and the "near-NICs" (including the ASEAN countries) under ing:the constraint of continuing restrictions in access to indus- a) Organization and general management, includingtrialized country markets managerial practices and capabilities;

b) Production facilities, systems and capabilities;

c) Market factors and marketing problems and pros-

pects;d) Financial growth and performance;e) Technological trends and developments, and

f) Socio-economic ramifications - employment,LECTURE SERIES ON ECONOMETRIC METHODSforeign exchange generation and environmental

A PIDS-sponsored lecture series on econometric implications.Among the issues discussed was the problem of financing

methods is on-going every other thursday at the NEDA sa and access to financial sources, which is a recurring problemMakati bldg. operations room. The lecturer is Dr. Roberto for these industries. For the furniture industry, this problem,S. Mariano, a research consultant of PIDS and a professor of aggravated by the inadequate supply of raw material and the

economics at the University of Pennsylvania. fluctuating demand for furniture. This is particularly true forThe lecture series attempts to provide pohcynlakers, the small firms.

government economists, and statisticians with an upgraded The situation, in turn, has led to a significant degreeskill in applying econometric methods. This lecture series in-of underutilization of resources (which is primarily labor-cludes a workshop, where the participants can have a chancebased), and inefficient operation.to apply the econometric theories through exercises and

examples. The problem of low financing is even more difficult forThe lecture series started last October 6, and it included smaller firms, which do not have access to the more formal

sources of capital, due to their inability to meet collateraldiscussions on linear regression. For the next sessions, thetopics to be covered are: generalized least squares, simulta- requirements.neous equation models, dynamic and nonlinear simultaneous However, the infusion of collateral-free, low-interest,

systems, time series models for short-term forecasting, model medium to long-term financing may not prove to be viablein the long-run, unless the government would treat such fman-simulation and multiplier analysis, model validation and speci-

fication testing, time series cross-section analysis, qualitative cing scheme as subsidy. The study recommends that the bestresponses models and limited dependent variables, forecasting, policy is for these small manufacturers to be "left alone".and other special topics. Nonetheless, government assistance will be useful in

financing the more important need for researches and develop-SEMINAR ON FURNITURE, LEATHER AND FOOTWEAR ments to identify new products and markets for the industry.

Since domestic demand for furniture is low, it would be neces-A PIDS-sponsored seminar on wood-based furniture, sary for the industry to pursue export as a source of growth.

leather tanning, leather products and footwear manufacturing However, the Philippines is at a competitive disadvantage inindustries was held last October 13 at the Operations Room of terms of the high cost of transporting furniture to the principalthe NEDA sa Makati bldg. Findings of a research project on markets (Europe in particular). To offset this disadvantage, inthese industries were presented by a team of researchers from the export markets for wood furniture, there is a need to

the College of Business Administration and the Business Re- develop a high level standard of quality and design. This calls

search Foundation, Inc. of the University of the Philippines. for an upgrading of production facilities and technical capa-The research team, headed by Dr. Niceto Poblador, is bilities. But the absence of strong marketing and technical

composed of Adriano Sobs, Roy Ybahez, and Bienvenido assistance prgrams, would make it dangerous for exports.Aragon. Members of the panel of discussants were Dr. Philip promotion through cheap credit as both prospective woodMedulla of the UP School of Economics, Director Quintin furniture exporters and the government may be on the losingTan of the Bureau of Small and Medium Scale Industries of end.

the Ministry of Trade and Industry, Alejo Aquino Jr., chair- The problem of inadequate financing was also cited byman of the technical division of the Chamber of Furniture In- the leather tanning industry. Among the problems mentioneddustiies of the Philippines, and Cora Jacob, proprietress of were high interest rates, collateral requirements, documenta.Cojac leather products. The moderator was Dr. Linda Medalla, tion and processing costs.

a PIDS research fellow. The local tanning industry has difficulty in supplying theI illII L III III III I Jll II II

-PlDSDevelopmentResearchNews 1 6 SEPTEMBER- OCTOBER1983illil II Ill I I [

domest]c-_ieather-using industries with ample quantities and products. These are on:quality for export production. The solution to this problem is 1. Product development - Products to be exporteda long-term process which include: should be identified and product design must be

a) proper instruction in the care and maintenance of carefully selected, and its developmeni monitored,

livestock, Also, production and delivery schedules must beb) proper instruction in techniques of flaying (taking met.

off) and preserving hides and skirts including the 2. Market penetration - Establishing a credible pre-appreciation of the economic value of hides and sence in the export market is beyond the capabi-skins, lity of small, even big, firms.

c) a systematic way of gathering hides and skins espe- 3. Financing - Assistance in financing may be ex-cially for livestock slaughtered in the provinces, tended where a foreign exchange earning is pos-

d) in the long run, increase and improvement of the sible.

quality of the livestock especially large animals For the footwear industry, financing was also found to

(e.g., cattle), be another big problem. There is very limited access to the for-The study recommends that the importation of raw or mal sources of financing while informal sources, the principal

semi-processed hides and skins or even finished leather be per- type of which is supplier's credit, tend to be costly.

mitred at minimal or no tariff, especially if the end product is Another major finding of the study on the footwear in-

to be exported. It may take sometime before domestic leather dustry concerns the marketing of footwear products. The cur-in sufficient quantity and quality will be available for the foot- rent practice of "wholesalers" (i.e., middlemen) and large re-wear and leather products industry. In the meantime, the reve- tailers (e.g., department stores) play a dominant position innue and employment potentials of these industries are not the marketing of footwear products. And should be evaluatedbeing exhausted. Importation may even force domestic tanners closely to be able to explore the possibility of expansion into improve their efficiency and product quality, other urban centers,

The leather product industry, was observed to be a This move necessitates developing a domestic marketing-labor-intensive industry that requires minimal capital invest- program which will:merit and can be operated on a small scale. However, one of 1. reduce distribution costs,the industry's principal problems is inadequate and poor 2. substantially reduce, if not eliminate, any monop-quality of domestic leather. This problem is especially impor- sonistic profits that current wholesale/tradingtant, since quality and timely delivery are crucial to its export operations may be enjoying,markets. Moreover, the leather products industry has to de- 3. provide a more efficient mechanism by whichpend on export markets. Since the domestic market is very manufacturers obtain market infomration on the

limited, domestic market, andThe authors also gave recommendations where govern- 4. bring efficient footwear manufacturers under the

ment assistance is needed to expand the exportation of leather umbrella of such a distributive system............ - ....... , , lull

DEVELOPMENT RESEARCH NEWS is a monthly publication of the PHILIPPINE INSTITUTEFOR 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 findingsand recommendations. PIDS is a non-stock, non-profit government research institution engaged inlong-term policy-oriented research.

The views and facts Published here are those of the authors and do not necessarily reflect those ofthe Institute. Inquities regarding any of the studies discussed in this publication may be addressedto the following:

RESEARCH INFORMATION DEPARTMENT (RID)PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS)ROOM 515, NEDA SA MAKATI BUILDING106 AMORSOLO STREET, LEGASPI VILLAGE,MAKATI, METRO MANILA

Entered as Second-ClassMarl at the MIA Post Office On October 13, 1983.

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