The economic revolution the Philippines really needs

February 21, 2017 at 10:06

The economic revolution the Philippines really needs

Introspective by Calixto V. Chikiamco | Posted on February 20, 2017
For political, social, moral, and geo-political reasons, the revolution that the Philippines really needs is a productivity revolution in agriculture.

Only a productivity revolution in agriculture will solve the problem of poverty in the countryside where most of the poor live.

Only a productivity revolution in agriculture will lay the foundation for long-term sustainable growth and for the takeoff into industrialization. A productivity revolution in agriculture will lower the inputs to industry, make more food more affordable to wage workers, and expand the market for industrial goods.

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In addition, a productivity revolution in agriculture will strengthen democracy and change Philippine politics for the better. More and richer farmers and agri-entrepreneurs will serve to articulate the needs of the countryside and serve as a check to unequal relations fostered by political dynasties over their impoverished subjects.

A productivity revolution in agriculture will also strengthen the country geopolitically. At a time of rising global protectionism, export-led growth will be harder to achieve. On the other hand, increasing productivity in agriculture will lead to an expanded domestic market that can be the basis for industrial takeoff.

Although climate change is a threat to agriculture, it also represents an opportunity. By planting climate-change resistant crops, the country can not only avoid the negative consequences of climate change, but it can also sell them to countries which are not as well-prepared or cannot do anything about them.

The aging demographics of the world also present an opportunity. The increasing average age of farmers in Japan, China, Thailand and elsewhere could presage lowering farm output in those countries. This represents a golden opportunity for us if we can create an environment that would make it attractive for our relatively younger population to take up farming and produce for the world.

Alas, however, agricultural productivity in the Philippines is low and has remained low for decades. (See table from FAO provided by Dr. Rolando Dy.)

One reason is that there has been a historical bias in economic policy against agriculture. It started with gross overvaluation of the peso after independence in 1946. US colonizers deprived the Philippines of exchange rate sovereignty and imposed an overvalued exchange rate (P2 to $1) as a condition for independence so that Philippine agricultural exports will not threaten the US market.

This bias continued with an import-dependent, import-substitution policy in the ’50s that favored finished goods industrialization at the expenses of agriculture. On the other hand, the US also promoted rent-seeking and unproductive agriculture by awarding the Philippines sugar quotas that enabled sugar hacienderos (pro-American, of course) to sell sugar above world market prices.

These controls, from price control to fertilizer import control, hampered the growth of agriculture.

It didn’t help that the Department of Agriculture was a nest of corruption and rent-seeking. It’s not surprising that the major corruption scandals like the Napoles scam, the fertilizer scam, irrigation scams, and others occurred in the DA because its constituents, the farmers, are too poor, politically weak and dispersed to protest.

With low agricultural productivity persisting for decades, it’s no wonder that rural insurgency found a fertile ground.

The post-Edsa Cory Aquino government tried to deal with the rural insurgency that had grown under Marcos’s repressive rule by instituting the Comprehensive Agrarian Reform Program (CARP). CARP essentially sacrificed middle-class landlords by subjecting them to land reform (and forced land distribution) and exempting the big landlords who used devices like stock distribution or conversion to industrial and commercial uses to escape CARP.

Although the Comprehensive Agrarian Reform Program succeeded in reducing rural insurgency, it didn’t completely eliminate it, because it failed to increase agricultural productivity.

According to the World Bank, the Philippines has the most successful land distribution program in the world, with 84% of targeted lands having been distributed. Take note that the demand of the CPP-NPA has changed from “land to the landless” to “free land distribution to farmers” because under CARP, landless farmers got land but they are indebted to the Land Bank.

Why did CARP fail to increase productivity?

It created uncertainty in property rights and deterred investments in agriculture. It’s the longest continuing land reform program in the world (about 28 years to be exact until CARP-ER expired in 2016.) Successful land reform programs are limited in duration and scope. It also covered all crops — rice, corn, coconut, sugar. According to Dr. Fabella, land reform in Taiwan was confined to rice alone and took only two years. It also helped that Taiwan, which had been administered by the Japanese, had good land records, thereby facilitating land reform.

By freeing him from bondage to a landowner, CARP was supposed to unleash the farmer’s individual initiative. The problem was that most of the CARP beneficiaries didn’t get individual CLOAs, but only collective title. DAR didn’t bother with the tedious task of individual surveys and titling and instead relied on a single collective title to claim huge accomplishments.

CARP also saddled the farmer beneficiaries with so many restrictions. Beneficiaries can’t borrow or mortgage the land for 10 years, and they can only do so after they have paid off their 30-year amortizations to the Land Bank. If a beneficiary is allowed to sell after 10 years, it can only be to another beneficiary.

However, the most pernicious restriction is the prohibition to own more than five hectares of agricultural land. This prevents more efficient farmers from buying out inefficient ones, and condemns farms to be low productivity forever and poor farmers to be chained to their land.

The atomization of agricultural land is therefore encouraged. It’s no wonder then that the average size of agricultural land is less than a hectare.

CARP was also implemented on public agricultural lands, applying the law on agricultural free patents, i.e. land was given to farmer-tillers out of the public domain rather than forcibly taken from private landowners.

Unfortunately, these agricultural patents, about 2.5 million of them, carry Commonwealth-era restrictions that prevent land consolidation and make them unbankable and unsaleable. These restrictions include a five-year prohibition in the sale or mortgage of the land within five years of the grant of free patent, and a perpetual option of the free patent holder or his heirs to buy back the property within five years of its sale or alienation. These restrictions make them toxic to banks, which have to hold them as foreclosed property for five years, as well as to investors, who will not buy land and improve it only to have it bought back by the seller in five years.

The problem of increasing agricultural productivity has received short shrift from the Duterte administration. President Duterte appointed a politician to head the Department of Agriculture whose idea of developing agriculture is to give away goodies, such as free irrigation. Also, the Secretary of the Department Agrarian Reform is a leftist who mainly pushes for an anti-development agenda, such as the two-year moratorium on land conversion from agricultural land to other uses.

How can we foster an economic revolution in agricultural productivity?

We have to make the countryside hospitable to private investments and the injection of management and science into agriculture. As I said before, increasing agricultural productivity requires management skills and some knowledge of genetics, biochemistry, soil science, meteorology, mechanical, civil and industrial engineering. It also requires the knowledge and use of digital technologies such as sensors, satellites, drones, and lately, data science (“Big Data”). These technologies may be advanced but we have to move in that direction. Our agricultural sector needs the infusion of capital, modern management, and science and technology. Unfortunately, current laws favor agricultural stasis, with efficient farmers unable to buy out inefficient ones.

The process by which efficient farmers buy out inefficient ones and increase agricultural productivity should not be feared. Increases in agricultural productivity will lead to an increase in general welfare. The farmer who can produce only P10,000 from a hectare of land may be better off as a farm worker earning P50,000 a year in a land that can produce P1,000,000 from a hectare of land.

A productivity revolution in agriculture will also allow industry, especially those producing wage goods, to take off because the market in the countryside will expand and food costs, and therefore wage costs, will fall. The unemployed and underemployed in the countryside can find work and better paying jobs in labor-intensive manufacturing.

To increase agricultural productivity, we need to free the rural land market.

I will agree with the Communist Left on its main demand of “genuine agrarian reform”: giving the CARP lands free to the farmers. i.e. cancel their loan amortizations to the Land Bank. After all, only 17% are able to pay their loan amortizations.

However, CARP lands should be free from restrictions. Farmers should be free to mortgage, sell, or lease them to whomever they want, not just to qualified land reform beneficiaries.

At the very least, according to Dr. Raul Fabella, National Scientist for Economic Science, CARP farmers should be able to lease them. The lease income acts as a safety net for small farmers while leasing will allow consolidation of lands in favor of more efficient and productive farmers.

(Transfer of ownership is still superior to leasing in land consolidation since it provides an incentive for maintaining soil productivity over the long term but for political reasons, leasing will do.)

The government, in fact, should encourage land consolidation. It should designate an agency to negotiate with farmers, consolidate lands, and offer them to investors on long-term leases or usufruct.

Even China, a supposedly socialist country, is encouraging land consolidation. About a third of China’s farmlands have been leased and consolidated through a system of tradable land rights. Chinese President Xi Jinping clearly sees agricultural modernization through land consolidation as a key to food security.

Aside from freeing CARP lands from restrictions, the Commonwealth-era restrictions on agricultural patents have to be removed. These property rights reforms in rural land will then form the basis of a productivity revolution in agriculture.

Of all the arrows needed to develop the Philippine economy, the arrow of a productivity revolution in agriculture is the most important. Not a golden age of infrastructure. Not investments in education. Not an expanded Conditional Cash Transfer program. A productivity revolution in agriculture is the economic revolution the Philippines really needs.

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