PHILIPPINES 20918 Volume2 RURAL DEVELOPMENT & NATURAL RESOURCE MANAGEMENT: TRENDS, STRATEGY IMPLEMENTATION, AND FRAMEWORK PERFORMANCE INDICATOR SYSTEM Volume H: Annexes May 2,2000 A Joint Report of the Governrnent of the Philippines and The World Bank R- The World Bank Rural Development and Natural Resources Sector Unit East Asia and Pacific Region ABBREVIATIONS AND ACRONYMS ACPC Agricultural Credit Policy Council (ACPC) LGU Local Government Unit AFMA Agricultural and Fisheries Modernization Act LBMRO Legislative Budget Review and Monitoring Office AGILE Accelerating Growth Investment and Liberalization with Equity LFS Labor Force Survev AIMCFP A-ro-lndustrv Modern Credit and Facilitv Program M&E Monitoring and Evaluation AMCFP Agricultural Modernization Credit and Financing Program MOA Memorandum of Agreement APIS Annual Poverty Indicator Survey MOU Memorandum of lnderstanding ARB Agrarian Reform Beneficiaries MTPDP Medium Term Philippines Development Plan ARC Agrarian Reform Communities NAMRIA National Mapping and Resource Information Authority BAS Bureau of Agricultural Statistics NAPC National Anti-Poverty Commission BOT Build-Operate-Transfer NCC National Credit Council CARP Comprehensive Agrarian Reform Program NEDA National Economic and Development Authority CAS Country Assistance Strategy NFA National Food Authoritv CPBO Congressional Planning and Budgeting Office NGA National Government Agencies DA Department of Agriculture NGO Non-Government Organization DAR Department of Agrarian Reform NTISD National Testing of Indicators for Sustainable Development DBM Department of Budget and Management O&M Operation and Maintenance DCP Directed Credit Programs OED Overseas Economic Development DENR Department of Environment and Natural Resources PAMB Protected Area Management Board DILG Department of Interior and Local Government PC Planning Committee DOST Department of Science and Technology PCSD Philippine Council for Sustainable Development DSWD Department of Social Welfare and Development PD Presidential Decree DTI Department of Trade and Industrv Pi Project Implementation ECC Environmental Compliance Certificates PIDS Philippine Institute for Development Studies ENRAP Environmental and Natural Resources Accounting Project PMS Presidential Management Staff FAO Food and Agriculture Or2anization PPAPS Pilot Testing of a Participatory Agricultural Planning System FIES Family Income and Expenditures Survey RD Rural Development GAA General Appropriations Act RDC Regional Development Council GDP Gross Domestic Product RD/NRM Rural Development/Natural Resources Management GOP Government of the Philippines RFU Regional Field Unit GVA Gross Value Added SEER Sector Effectiveness and Efficiency Review HH Household SONA State of the iNation Address HPAE High Pertforming Asian Economies TRP Unilateral Tariff Reform Program ICM Integrated Coastal Management UNDP United Nations Development Programme IDF Institutional Development Fund WB The World Bank KRAs Key Result Areas WHO World Health Organization LGC Local GovernMnent Code WTO World Trade Organization Photo Credt: (1) "Drying Palay", by Ryan Anson; (2) "Class Under The Tree", by Nor Gonzales; (3) "Carabao"; and (4) "Fishnet" from The World Bank Photo Archive. PHILIPPINES RD/NRM: TRENDS, STRATEGY IMPLEMENTATION, AND FRAMEWORK PERFORMANCE INDICATOR SYSTEM VOLUME II: ANNEXES Annex 5 Agricultural Growth and Performance (by Dr. Tina David, Senior Research Fellow, Philippines Institute of Development Studies) Annex 6 Monitoring and Assessing Performance in Rural Poverty Reduction (by Professor Arsi Balisacan, University of the Philippines) Annex 7 Enhancing Food Security in the Philippines (by Dr. Ramon Clarete, Team Leader, AGILE Group) Annex 8 Agrarian Reform: Access to Land and its Productivity (by Richard Anson, Senior Rural Development Specialist, WB) Annex 9 Rural Sector Public Expenditures: Key Issues, Strategies and Performance Indicators (by Dr. Tina David, Sr. Research Fellow and Dr. Arlene Inocencio, Philippines Institute of Development Studies) Annex 10 Monitoring the Implementation of the 1999-2004 MTPDP With Regard to the Provision of Rural Roads (by Dr. Bruce Tolentino, Consultant) Annex 11 Private Investment s in Agriculture: Trends, Constraints and Key Indicators (by Rolando T. Dy, Executive Director, Center for Food and Agri Business, University of Asia and the Pacific) Annex 12 Assessing the Performance of the Rural Financial Sector (by Payday Geron, Senior Rural Credit Specialist/Consultant) Annex 13 Natural Resource Management: Trends, Strategies and Performance Indicators (by Dr. Marianne de los Angeles, Project Director/ENRAP) Annex 14 Decentralization and Devolution in the Philippines (by Professor Alex Brillantes, University of the Philippines) Annex 15 Monitoring the Implementation of the 1999-2004 MTPDP With Regard to the "Convergence Strategy" in the Institutional Structures for Rural Development Management (by Dr. Bruce Tolentino, Consultan) PREFACE This study is unique in several ways: it responds quickly to Government's request for assistance in a manner where the requesting group (NEDAJAgriculture Staff) becomes a central counterpart and "co-author"; it focuses on assessing the performance of a strategic sector by a premier team of Filipino analysts/consultants/advisers, who build upon and share their analysis and insights with an operational and poverty reduction focus; it links an updated assessment and trends of implementing RD/NRM strategies as outlined in the Medium Term Philippines Development Plan (MTPDP) with a proposed framework performance indicator system aimed at promoting improved and sustained results and impacts; it includes 10 Annex reports (Volume 2) on key indicator areas and are aimed at stimulating discussion and strategic actions by the relevant agencies and stakeholders; it follows a consultative process which enhances the content, involving a broad range of strategic rural stakeholders and the members of the Planning Comnmittee of the MTPDP; it is providing a vehicle to facilitating a Filipino-led process of institutionalizing a RD/NRM performance indicator system, which also aims to support GOP's proposed performance-based approach to budgetary allocations. The study team is very appreciative of the many valuable contributions provided by the "larger study team". It is hoped that readers will find the report useful in supporting the Philippines' efforts to promote shared growth and reduced rural poverty. Study Team Members: R. Anson (WB, Study Team Leader, and Sr. RD Specialist), C. Figueroa-Geron (RD Operations Officer), E. Guiang (NRM Specialist), J. Balbosa (Macro- economist/operations officer) (WB - Manila); Dr. A. de los Angeles (ENRAP), Professor A. Balisacan (UP/Dillman), Professor A. Brillantes (UP/Dillman), Dr. R. Clarete (AGILE Team), Dr. T. David (PIDS), Mr. R. Dy (U. Asia & Pacific), Ms. P. Geron (Consultant), Dr. A. Inocencio (PIDS), Ms. F. Mojica (U of Asia & Pacific), Dr. B. Tolentino (Consultant), Mr. E. Mercado (Consultant/stakeholder/communications expert), C. Umali (Consultant/Planning and M&E Expert). Ms. Marjorie Espiritu (RD Team Assistant) provided valuable assistance in the production and logistical aspects of the study. GOP Team and Review/Consultative Process: The study team's main GOP counterpart team was NEDA Agricultural Staff, under the overall leadership of its Director, Mr. Joey Virtucio, who provided the initial and on-going impetus for the study focus and process. The'study team also acknowldges the overall guidance and support provided by the MTPDP Planning Committee (PC) members, especially under the guidance of it chairman, Honorable E. Angara (Secretary of Agriculture). Mr. Angara chaired the PC's review meeting of the draft report, held on March 10, 2000. Two phases of regional consultations were held with rural stakeholders in October, 1999 and March, 2000 which provided valuable inputs to the study design and contents. Several follow-up discussions were held with selected members of the PC on key aspects of the revised report and whom also provided valuable contributions to the final report. WB Reviewers: Overall Guidance: Mr. Malcolm Bale (Manager for RD/NRM Unit, E. Asia and Pacific Region. Peer Reviewers: N. Okidegbe (Principal Investment Specialist, RD Dept., WB); J. Heath (Principal Economist, OED, WB); K. Deininger (Economist, WB); S. Tabor (Consultant). Two review meetings, several individual and written suggestions provided valuable inputs and guidance to the finalization of the report. ANNEX 5 AGRICULTURAL GROWTH AND PERFORMANCE By: Cristina C. David, Senior Research Fellow Philippine Institute of Development Studies TABLE OF CONTENTS Introduction ...............................................................2 Patterns of Gross Value Added Growth ..............................................................3 Competitive Advantage and Agricultural Trade .............................................................. 4 Agricultural Trade ..............................................................4 Rates of Protection ...............................................................6 Trade Openness ...............................................................6 Growth of Productivity ...............................................................6 Labor and Land Productivity ..............................................................8 Land Productivity by Crop ..............................................................8 Proposed Key Indicators of Agricultural Performance ............................................................ 10 Figure 1. Trends in the real world (Tw) and domestic (Td) agriculture/Non-agriculture terms of trade, 1960-1999 Figure 2. Trends in real gross value added in agriculture, 1960-1999 Figure 3. Trend in the production of livestock and poultry, 1980-1998 Figure 4. Trend in the quantity and value ofPhilippinefishery production, 1980-1998 Figure 5. Trends in degree of trade openness of the Phils. And its agricultural economy Figure 6. Trends in agricultural labor, cultivated land, crop area, cropping intensity, and the ratio of labor to land input, 1960-1999 Figure 7. Trends in labor and land References .............................................................. 1 8 Table 1. Average growth rates of agriculture gross value added, gross domestic product, and agricultural exports in selected South and Southeast Asia countries (%) Table 2. Growth rates of gross value added of crops Table 3a. Distribution of gross value added in agriculture (based on current prices), 1980-1999 Table 3b. Distribution of gross value added in agriculture (based on constant prices), 1980-1999 Table 4. Trends in revealed comparative advantage in agriculture and selected major agricultural exports Table 5. Agriculture's share in total imports and exports and ratio of agricultural imports to exports, 1960-1998 (%) Table 6. Philippine agricultural imports 1970-1998 Table 7. Philippine agricultural exports by commodity groups, 19 70-1998 Table 8. Philippine agricultural exports 1970-1998 Table 9. Trends in nominal protection rates of major agricultural commodities, 1970-1998 Table 10. Estimated effective protection rates by major sectors (lo) Table 11. Trends in total and agricultural experts and imports and gross domestic product and measure of trade openness Table 12. Growth rates of gross value added of agriculture (crops and livestock and poultry) and And crops, agricultural employment, cultivated land, and crop area (%o) Table 13. Growth rates of labor and land productivity of the agriculture, and crop sectors Table 14. Growth rates ofpalay production, area, and yield of major crops, 1960-1998 (lo) Annex 5 Page 2 of 18 Key Indicators of Philippine Agricultural Performance l * Cristina C David2 Introduction Rapid agricultural growth is key to achieving the country's developmental and social goals. The sector continues to be a major source of income and employment, employing nearly half of the total labor force and contributing over 20% of gross domestic product (GDP). When all economic activities related to agro-processing and supply of non-farm agricultural inputs are included, the agricultural sector broadly defined accounts for about two-thirds of the labor force and 40% of the GDP. The sector, therefore, has a strategic role in the country's overall economic development through its strong growth linkage effects as a source of food and raw material supply to the rest of the economy, and as a source of demand for non-agricultural inputs and consumer goods and services. The performances of the agricultural sector is also strategically important in the country's food security and poverty alleviation efforts. Food security means ensuring that food is affordable for all households particularly the poor urban and rural households, i.e., household incomes are sufficient to purchase the necessary food at reasonable prices. Rapid, sustainable, and equitable growth is a necessary condition for the attainment of food security and alleviation of poverty since the large majority of the poor are based in the rural sector and depend directly on agriculture-related economic activities for their major source of livelihood. The policy of increasing price or trade protection to achieve self-sufficiency in major food commodities clearly conflicts with the country's developmental and social goals. Highly distorted price incentives misallocate resources, lowering agricultural and overall economic growth. High food prices raise the clamor for higher wages, reducing the country's competitive advantages. Moreover, high food prices hurt the real incomes and food security of the majority of the poor, including the urban poor who are net buyers of food, and for whom the cost of food constitute a high proportion of their total expenditures. Several recent studies have attributed the poor economic performance and,declining competitive advantage of agriculture, rapid degradation of natural resources, and high poverty incidence in the rural sector to a variety of factors including the highly distorted price incentives, misallocation of public expenditure programs, underpricing of natural resources, weak property rights, and so forth (David 1999; Balisacan 2000; de los Angeles 2000). The Philippine Medium-Term Plan and Development Program (1999-2004) or MTPDP aims to reverse the poor performance of agriculture over the past two decades, halt the degradation of natural resources, promote a more equitable distribution of land ownership and access to other natural resource, and ultimately reduce poverty. These objectives are supposed to be achieved through policy and institutional reforms, and expenditure programs that will increase productivity and competitiveness, promote a more diversified production and l Paper prepared for the World Bank 2Senior Research Fellow, Philippine Institute for development Studies. The author acknowledges the research assistance of Elbe Daguplo and Brenda Solis. Annex 5 Page 3 of 18 resource use, and complete the agrarian reform program. The MTPDP also identified various policy measures and expenditure programs to promote environmental sustainability strengthening regulations, expanding the use of market-based instruments, and implementing rehabilitation programs. Finally, the MTPDP recognizes the need to improve the overall governance of the agriculture and natural resources sector by empowering the stakeholders and streamlining the bureaucracy. The purpose of this study is to develop key indicators of agricultural performance for monitoring and evaluating the implementation of the MTPDP. The first section briefly describes the growth patterns of gross value added of the agricultural sector. In the second section, measures of changing competitive advantage and agricultural trade are analyzed. The third section presents the trends and patterns of productivity growth. And finally, some key indicators for monitoring and evaluation of agricultural perform.ance are proposed. Patterns of Gross Value Added Growth Economic performance of the agriculture sector has been quite erratic and poor since the 1980's. Whereas Philippine agriculture performed well relative to the other Asian countries in the 1970s because of the early advent of the Green Revolution and the world commodity boom, the country has had one of the lowest average growth rate in gross value added in agriculture (GVA) and agricultural exports over the past two decades (Table 1). The other countries did not seem to have suffered as much for the drop in world commodity prices in the 1980's (Fig 1). In fact growth of agriculture accelerated in South Asian countries and Indonesia as the impact of the Green Revolution became more widespread and in China as a result of decollectirization and shift to a more market-based economy. Table 2 shows the average annual gross value added by major commodities over the past four decades. The annual growth rates in the 1990's are also presented to illustrate the highly unstable nature of agricultural production. To examine medium and long-term agricultural performance, the average growth rates and moving average trends in gross value added are more meaningful (Fig 2). With the exception of livestock and poultry, growth rates of crops, fishery and forestry all decelerated over time. Indeed, gross value added in forestry has been contracting since the 1970's, to much as -22% in the 1990's, reflecting the unsustainability of forest management policies in the past. From an average contribution of 10 to 12% of GVA in the early 1980's, forestry 's share dwindled to only 1 % in recent years (Tables 3a and 3b). Crops and fisheries grew faster than livestock and poultry in the 1960's and 1970's, but growth rates of all these sub -sectors were way above population growth rate. Growth rates of livestock and poultry accelerated since then, as their GVA contribution at current prices rose from 13% around the 1980's to close to 25% by the late 1990's. That growth was led by the rapid expansion of the poultry, followed by the hog industry as domestic demand grew and international technology transfer, contract farming, and economies of scale lowered cost of production (Fig 3). Growth rate of the fishery sector has been declining over time form an annual average high of almost 7% in the 1960's to only about 1.4%, significantly below the population growth rate. Hence, its previous share in GVA of about 17% at current prices is now below Annex 5 Page 4 of 18 that of livestock and poultry. At constant prices, it share is higher (20%) indicating a declining trend in real prices of fisheries over the past decade. The poor performance of the municipal fisheries as depicted in Fig 4 largely dragged down the growth of the sector. Prior to the late 1980's, it dominated the sector, contributing more the half of the quantity of output; by the late 1990, its share was down to 30%. Commercial fisheries grew at a modest but steady rate and now contribute about 30 % of value of fisheries output; except in the late 1980's, aquaculture grew very fast and now contribute more then 40% of output value of fisheries. The weakening performance of the fisheries sector has resulted from resource depletion caused by overfishing, destructive fishing, destruction of coral reefs and mangroves, and the pollution of major river and lakes (Israel 1999). The aquaculture industry is now plagued by the scarcity of fries for milkfish culture, diseases and high cost of production in prawn culture, and red tide problem in mariculture. The marked slowdown in the growth rate of the crops sector way below population growth rate since the 1980's can be observed generally across crops. The poorest performers are the major exports, i.e., coconut, sugar, and even bananas. The high growth rate of a few non-traditional crops such as mangoes could not overcome the slow growth of many other crops. The main staple crops of rice and corn were growing at a relatively rapid pace even up to the late 1980's. in the 1990's, however, corn production was on a downward trend mainly through reductions in crop area planted to white corn used mostly as subsistence food in the marginal areas of Visayas and Mindanao. Growth rate of rice was positive, but at less than 1% annual average. Unless the performance of the crop sector which continue to account for 50% to 60% of GVA improves, the prospects for agriculture remain bleak. Problems related to price distortions, weak property rights structure, constraints to land market operations, and insufficient public support service provisions will need to be a aggressively addressed to accelerate agricultural growth. Competitive Advantage and Agricultural Trade The slower growth of Philippine agriculture compared to other developing Asian countries suggests that the country has been losing its competitive advantage in the sector. Indeed, Table 4 shows measures of revealed comparative advantage declining sharply for agriculture as a whole, and for all major agricultural exports. The country has turned from being a net exporter to a net importer of sugar. Although some sugar continue to be exported, these are only for the preferential US market at prices higher than world market. Even in non-traditional exports such as bananas and pineapples, the share of the Philippines in world markets have declined since the mid-1980's. Agricultural Trade Agriculture has historically been the major source of foreign exchange. Back in the sixties, agriculture earned almost two-thirds of total exports and accounted for only about 20% (including imports of manufactured agricultural inputs such as fertilizers) of total imports (Table 5). The sector's share in total exports, however, decreased quite rapidly since then, dropping down to just 7% by the late 1990's. Relative to total imports, its share also decreased, but at a much slower pace. Consequently, the agricultural sector ceased to be a Annex 5 Page 5 of 18 net earner of foreign exchange, as agricultural imports rose from about 30% of agricultural exports in the 1960's and 1970's to more than 150% by the late 1990's. The rapid growth of agricultural imports stemmed from several factors. First, economic development increased demand for food products with higher income elasticities, but in which the country does not have inherent comparative advantage in production, e.g., wheat, milk and other dairy products, beef, etc., or which require agricultural inputs which are also cheaper to import than produce domestically, e.g., soybean meal, corn, fish meal, and other feed ingredients for the growing livestock and poultry industry. Second, declining competitive advantage in domestic production of food staples has led to greater imports or lower self-sufficiency ratios (e.g., sugar, rice, etc.). Third, agricultural modernization itself through technological change and commercialization induced greater reliance on mostly imported manufactured inputs such as fertilizers, agricultural chemicals, farm and agro- processing machineries and imported feed ingredients and veterinary medicines as the livestock and poultry sector began shifting from backyard to commercial operations. Lastly, trade liberalization increased imports of former highly protected agricultural commodities and inputs such as fruits, fish, cattle, and so forth. As agricultural imports grew more than tenfold over the past three decades, its composition also changed. Interestingly, the import ratio of primary commodities increased fiom 22% around 1970 to nearly 60% by the late 1990's, as the share of agricultural processed products, raw materials, and inputs decreased over time (Table 6). The five top imported agricultural com-imodities are wheat, dairy products, feeding stuff (soybean meal, meat and fish meal, etc.) rice, and fertilizers. The relatively high value of rice imports is observed only in the late 1990's, and similarly for sugar. The slow growth of corn imports, an important feed ingredient, is inconsistent with the extremely rapid expansion in imports of other feeding stuff, relatively high growth of the livestock and poultry industry, and the negative growth rate in domestic production of com. This could be explained, however, by the substitution of wheat and other higher cost grains for feeds due to the highly restrictive import policy on corn, relative to these other cereal grains. Agricultural exports basically stagnated during the 1990's. The more than doubling of agricultural exports in the 1970's was due mainly to the world commodity boom which was not sustained, causing their sharp drop in the 1980's. The 1970's also witnessed the expansion of exports of non-traditional products, namely bananas, pineapple, and fishery products. It should be noted that these exports also leveled off by the 1990's. Over the last 30 years, the composition of agricultural exports changed markedly (Table 7). Although coconut products continue to be the top foreign exchange earner, its share decreased from nearly 70% in 1970, to less than 40% by the end of the 1990's. The contribution of sugar to agricultural exports, which was second only to coconut in the 1970's (30%), is now only 5%. Export value of bananas alone has been about twice that of sugar, while fruits and vegetables as a group account for more than 20% of agricultural exports. Fishery products also contribute nearly as much, though earnings from shrimp exports have decreased significantly since the mid-1990's as a result of disease infestation and lower world prices. The composition of agricultural exports also shifted away from primary products which constituted around 80% in 1970 towards greater proportions of processed products (50%) and agricultural raw materials (10%) by the late 1990's (Table 8). Exports of coconut Annex 5 Page 6 of 18 products ceased to be mainly in copra form, in favor of coconut oil. Exports of canned and preserved fish, fruits, and vegetable products also expanded. Rates of Protection Declining competitive advantage of the sector is likewise evident from the increasing trends in agricultural protection among the major import-competing commodities (Table 9). Nominal protection rates based on comparison of domestic and border prices averaged closed to 70% for rice ,more than 80% for corn, and nearly 90% for sugar, in contrast to the low rates of the 1970's. In fact, average rates of effective rates of protection between agriculture and manufacturing has narrowed (Table 10). During the 1970's and 1980's, estimates of effective rates of protection of the manufacturing sector ranged from 44% to 79%, much higher than those for agriculture which ranged from 5% to 9% (Tan 1979: Medalla et al 1995). By the mid-1990's, the average rates of protection for agriculture was about equal to manufacturing (Manasan 1996) as tariffs for manufactured products including agricultural inputs declined, NPR for import competing agricultural products, increased, and the share of exportable agricultural commodities to the sector's value added decreased. Trade Openness It is likewise consistent with the apparent decrease in the measure of agriculture's trade openness (i.e., imports plus exports as ratio to gross value added) mainly due to the slow growth exports. Table 11 and Figure 5 shows that while agriculture was relatively more open than the rest of the economy back in 1970, the reverse was true by the 1990's. This was due not so much by the reduction of import ratio to gross value added as these increased for both agriculture and non-agriculture sectors, but caused by the decreasing ratio of exports for agriculture as this ratio rose steadily for the rest of the economy. It should be emphasized that the value of exports of manufactured products include an increasing share of imported (or low value added ratio) such as in electronics or garments. Nonetheless, degree of trade openness for non-agriculture would likely be greater even after appropriate adjustments are made. The declining trend in agriculture's trade openness in the 1970's and 1980's was slowly rising in the 1990's; however, rate of increase in the import ratio continue to be higher than its export ratio. It should be emphasized that increasing price protection lowers incentives for the production of exportable commodities relative to all non-tradeables and relative to the highly protected agricultural commodities competing with scarce land and capital resources. Ironically also, imports of sugar, rice, and corn have grown significantly in recent years despite increasing trade protection. Growth of Productivity Whether and to what extent the declining trend in the competitive advantage of agriculture will be reversed and sustained depends critically on the rate of productivity growth. The set of policies and expenditure programs identified in the MTPDP includes key elements for increasing productivity and overall efficiency in the sector, i.e., and incentive structure that promotes efficient allocation of resources, expenditure program that provides adequate public goods and support services, property rights and other institutional structure that allows efficient operation of output, land, and other markets, and a bureaucracy and governance that is transparent, predictable, accountable, and participatory. Thus, analyzing the trends and patterns of productivity growth is a key task in monitoring and evaluating the performance of the program. Annex 5 Page 7 of 18 Ideally, growth of productivity should be measured by the trends in total factor productivity at an aggregate level and by commodity. Total factor productivity relates the growth of output to the growth of total inputs including not only labor and land, but also other capital (machine, animal, trees, etc.) and current inputs (fertilizer, agricultural chemicals, feeds, etc.). To the extent that the measures of inputs include the changes in their quality such as the improvements in labor quality due to higher levels of education or those for machineries due to new technologies embodied in them, trends in total factor productivity will reflect the impact of disembodied technological innovations and/or management changes. Otherwise, these represent the effect of all other factors not accounted for by the changes in the quantities of the various inputs, or the "residual", often called a "measure of ignorance". A number of theoretical and empirical or measurement problems are encountered in the estimation of total factor productivity. And while the aggregation problems (and the underlying assumption about the form of production function) and other theoretical issues (such as the nature of technical change, role of changing quality of inputs) have been addressed more satisfactorily in the literature, limitations in data availability have continued to hamper the accurate estimation of total factor productivity trends in Philippine agriculture. The data problems may be grouped into three: a) lack of time series data on a number of important inputs such as farm machineries, animal feeds, agricultural chemicals, veterinary medicines, fishing boats and others; b) lack of information necessary to estimate the actual input used (in flow terms) from available data that are typically reported in stock terms such as labor, land, trees, animals, etc.; c) lack of disaggregated input data used by agricultural commodity. Even the data on agricultural employment cannot be disaggregated among crops, livestock and poultry, fishery, and forestry. If TFP cannot be computed among these four broad categories of agricultural output, errors arising from aggregation problems are more serious because of substantial differences in the nature of the production function expected across these commodity groups. Nonetheless, there have been several studies that estimated total factor productivity indices for Philippine agriculture (David and Barker 1979; Paris 1971; David, Barker, and Palacpac 1987; Cabanilla et al 1998). It should be noted that the earlier estimates benefitted from a number of studies that enabled the estimation of labor and fixed capital inputs in flow terms. Because no recent studies have documented the patterns of labor use and Jand rental in production of various agricultural commodities, nor characterized the utilization of fixed capital, no attempt was made to estimate TFP in this paper. TFP estimates in Cabanilla, et al study used many of the same assumptions about labor utilization and other variables adopted in earlier studies conducted almost three decades ago, which are clearly not applicable to more recent period. Until more recent data on rate of labor utilization, inventory of fixed capital, and other inputs by major commodity groups become available, this paper will have to rely on parial productivity indicators, i.e., labor and land productivity or the ratio of agricultural value added or production to number of labor employed and land area, respectively. These are incomplete measures of productivity growth because changes in labor productivity may not solely indicate the effects of improvements in technology nor management but also increases in capital and/or land use per worker. And so would changes in land productivity be affected by increases in labor and/or capital use per hectare. Annex 5 Page 8 of 18 Labor and Land Productivity The apparent loss in competitive advantage is consistent with the observed trends in productivity indicators. Table 12 shows the growth rates in gross value added in agriculture (including only crops and livestock), labor employment in agriculture, and cultivated and crop area; and the latter variables are depicted in Fig. 6. As has been pointed out earlier, the slow growth in agriculture since the 1980's has been due largely to the poor performance of the crops sub-sector, as growth rates in livestock and poultry were relatively high. The rapid growth of livestock and poultry over the past two decades reflects the impact of increasing demand as well as improved management and introduction of new technologies embedded in imported breeds, veterinary medicines, and feed ingredients. The growth rate in the number of workers employed in agriculture between 1980- 1998 was about equal to the population growth rate. Somewhat surprising is the higher growth rate of cultivated area than crop area since the 1980's. Apparently, the rapid deforestation in the 1960's and 1970's has lowered the cost of opening new land for cultivation vs intensifying land use through irrigation expansion and/or double cropping or that longer duration of crops have become more profitable than shorter duration ones. But note that data on cultivated land was based on census years, the latest which was in 1991 thus date beyond and within census years are extrapolations and inter-polations, respectively. The growth rates in partial productivity measures for the agriculture and crops sectors are reported in Table 13 and portrayed in Fig. 7. Both labor and land productivities were increasing up to the late 1970's. Whereas labor productivity for agriculture as a whole recovered after dropping sharply in the early 1980's, it remained at the lower level for the crop sub-sector. Land productivity as measured by the trends in gross value added per cultivated area (or physical land measure) also stagnated during the recent period, though it recovered somewhat in terms of land productivity per crop area. It appears that growth in productivity occurred primarily in the livestock and poultry sector, where international technology transfer and greater scale of operations and other management-related innovations increased production efficiencies significantly. Although it was not possible to derive a measure of total factor productivity, it is possible to infer its trends from partial productivity indicators. The use of non-farm inputs- chemical fertilizers, and pesticides, farm machineries and other equipment have been observed to increase at a higher rate than traditional inputs of labor and land. Thus, the stagnation of labor and land productivity for the crop sector would most likely reflect a similar pattern in terms of total factor productivity. Land Productivity by Crop The limited growth of labor and land productivity in the crop sector may not have been experienced uniformly across commodities. Because of the lack of comrnodity-specific labor data, however, only the trend in land productivity measure by crop can be examined in this section. And since annual data on land use is available only in terms of crop area (harvested area), yield per hectare is the concept used which does not consider the effect of increased cropping intensity as part of land productivity growth. In the case of tree crops, trends in yield per tree were also computed. Annex 5 Page 9 of 18 Table 14 presents the average annual growth rate in production, area, yield, and the relative contributions of area expansion and yield increase to production growth of major crops from 1960-1998. In the case of rice and corn, the analysis has been disaggregated by season and production environment. Consistently, growth rates of both area and yields were lower in the 1980's and 1990's compared to previous periods. It should be noted that the figures for the later period may be somewhat lower than for the whole decade, because the recovery from the El Nino in 1999 have not been covered. The high world commodity prices and thus greater incentives for exportable crops such as coconut and sugar increased not only area, but yields as well. However in general, yields of these traditional exportable crops, including abaca were stagnating or even declining almost throughout the post-war period, as no major technological change was observed in the production of these commodities. Relatively high growth rate in yield can be observed in rice, corn, and non-traditional exports such as bananas, mangoes, and pineapple. Adoption of modern rice varieties, increased fertilizer use, irrigation expansion largely explains yield growth in rice, though that growth seems to have leveled off in the 1990's. Growth in yields in corn has been due mainly to the spread of hybrid corn and to a lesser extent to improvements in open-pollinated varieties; but the continued high growth rate in 1990's was caused partly by the concentration of production in more favorable areas as the decline in crop area occurred primarily in marginal areas in Visayas and Mindanao where corn is grown as a substinence crop. For bananas and pineapple, yield growth were initiated in the large plantations with access to international know how and gradually spread also to small-holder farms. The introduction of chemical spraying to induce flowering is the main factor that induced area expansion and yield growth in the mango industry. Key Indicators of Agricultural Performance below outlines the key indicators proposed to monitor the impact of the MTPDP on the economic performance of agriculture. It should be emphasized that greater financial support must be allocated to generate the basic data necessary for the computation of total factor productivity indices at an aggregate level and by major commodities. Such a data base must also be adequate to analyze the sources of productivity growth to separate the effects of the MTPDP from the other market factors affecting productivity growth. Annex 5 Page 10 of 18 Table 15 Proposed Key Indicators of Agricultural Performance Key Issues Strategic Intervention Suggested Indicators Institution Remarks Declining competitive Public investments in growth- Growth rates at aggregate level and NEDA Due to wide annual fluctuation of advantage/ stagnating enhancing public goods and services, by major commodities agricultural production, average growth productivity particularly R & D and extension, a) gross value added/ rates must be estimated using regression irrigation, etc. production analysis or computed on 5-year moving b) total factor productivity average c) labor productivity d) land productivity or yield Measure of revealed competitive Requires improvement in data advantage trade openness, and price NEDA availability and quality, particularly for protection. total factor productivity measurement and for proper attribution to the MTPDP Limited diversification Reducing dispersion of agricultural Ratio of non-traditional commodities NEDA Computed based on nominal and real protection across commodities (and fisheries livestock and poultry) terms. to total GVA Greater public support for market infrastructure, market development, Measure of dispersion (e.g., CV) of R&D and extension activities for non- agricultural protection across NEDA traditional commodities commodities Annex 5 Page 11 of 18 200- 150 100 - Td 50 Tw \/ 1960 1980 Figure 1. Trends in the real world (Tw) and domestic (Td) agriculture/non-agriculture tenns of trade, 1960-1999 Annex 5 Page 12 of 18 1960=100 1960=100 500 500 Fishery - 400 400 - -. - . GVA 300 ~~~~~~~~~~Crops 300 20020 Liestock and poultry 100 100 \ Forestry 1960 198019098 Figure 2. Trends in real gross value added in agriculture, 1960 - 1999 (3 year moving average). * GVA includes fishery and forestry Annex 5 Page 13 of 18 1980400 1980400 350 350 300 300- 250 250 - Chicken Goat Hog/ 200 200- _ Jt /\ ~~Carabao / , 150- 15 ~l0- v - */ Chicken egg 100 - 100 -K' _Duckegg . |- . . Duck 50 -50- 0* 0- 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998P 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998P Figure 3. Trend in the production of livestock and poultry, 1980-1998. Annex 5 Page 14 of 18 1980=100 1980=100 400 2000 - 1800 350 - 1600 300 1400 Aquaculture Aquaculture 250 1200 200 Commercial 1000 800 150 Comnercial -. 600 Municipal 00Municipal 50 0~~~~~~~~~~~~~~~~~~~~~~0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998p 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998p Quantity EV Figure 4. Trend in the quantity and value of Philippine fishery production, 1980-1998 Annex 5 Page 15 of 18 100 90 80 70 Total 60 50 40 ,_." 30 1 * _ , 4 Agriculture 40 1 4 1970 1975 1980 1985 1990 1995 1998 Figure 5. Trends in degree of trade openness of the Philippine and its agricultural economy (exports + imports / GiDP). Annex 5 Page 16 of 18 1960=400 1960=400 % 300 300 350 Cropping intensity 300 250 250 250 200 200 200 150 - 150 Labor/cultivated area . - - ~ ~ ~~~~~~ ~Crop area (c) ,. h,--- ; s loo - -- ~~ Cultivated area (p) 100 Labor/crop area 100 50 50 50 1960 1965 1970 1975 1980 1985 1990 1995 1999 1960 1965 1970 1975 1980 1985 1990 19951999 Figure 6. Trends in agricultural labor, cultivated land, crop area, cropping intensity, and the ratio of labor to land input, 1960-1999. Annex 5 Page 17 of 18 Agriculture Crops 1960=O00 1960=400 250 - 250 - Land ( c) productivity ,. 200 - , 200 Land (p) productivity Land (c) productivity Land (p)productivity 150- 150 00 - p>Laborproductivity Laborproductivity 100 100 50 50 1960 1980 1960 1980 Figure 7. Trends in labor and land [cultivated area (p); crop area ( c)] productivity for the crop and agriculture (crops and livestock incl. poultry) sector, 1960-1999. /~~~~~~~~~~~~~~~~~~~~~~ Annex 5 Page 18 of 18 References Israel, Danilo C. 1999. "Research and Development in the Philippine Fisheries Sector", PIDS Discussion Paper Series No. 99-17, June 1999. Cabanilla, Liborio S., E. Dumayas, R. Calderon, M.C. Umali, 1998. "Future Sources of Productivity and Growth in the Philippine Agriculture", Institute of Stategic Planning and Policy Studies, UPLB. Paunlagin, MM, L.S. Cabanilla, R. Calderon, M.G. Umali. 1998. "Indicators of an Efficient, Sustainable, and Equitable Growth in the Agriculture Sector", Institute of Stategic Planning and Policy Studies, UPLB. David, Cristina C., and R. Baker. 1979. "Agricultural Growth in the Philippines, 1948-1971", in Agricultural Growth in Japan, Taiwan, Korea, and the Philippines, University of Hawaii Press. David Cristina C., R Barker, and A. Palacpac. 1987. "Philippines" in "Agricultural Productivity Measurement and Analysis : Asian Agriculture, Tokyo,Japan: Asian Productivity Organization. David, Cristina C. 1999. "Constraints to Food Security: The Philippine Case", Paper presented at the Ministerial Roundtable on "Beyond the Asian Crisis: Sustainable Agricultural Development and Poverty Alleviation in the Next Millenium", FAO, Bangkok, June 1999. Paris,T.B. 1971. "Output, Impacts, and Productivity of Philippine Agriculture, 1948-1967", Unpublish MS thesis, University of the Philippines. Table 1. Average growth rates of agriculture gross value added, gross domestic product, and agricultural exports in selected South and Southeast Asia countries (%). 1970-80 1980-90 1990-97 Agricultural Agricultural Agricultural Agricultural Agricultural Agricultural gross value export gross value export gross value export' added added added Philippines 4.9 14.6 1.0 -4.6 1.8 6.4 (6.0) (1.8) (2.4) Indonesia 2.0 20.0 4.9 4.7 3.3 13.3 Malaysia 6.5 19.3 3.8 3.1 2.0 11.5 Thailand 4.2 21.2 3.9 4.9 2.9 7.9 China 2.7 13.1 5.6 2.7 0.2 India 1.8 14.6 3.2 0.8 2.8 10.8 Pakistan 3.0 13.8 4.3 3.2 3.6 -4.0 Nepal 0.8 -2.9 2.7 0.7 2.1 2.0 Bangladesh 1.4 2.6 1.9 -1.5 1.7 -1.6 Sri Lanka 1.8 9.7 2.1 0.03 2.4 -4.1 a - data refers to 1990-1996. * figures in parenthesis refers to gross value added in agriculture less forestry. Source of basic data: ADB Key Indicators Table 2. Growth rates of gross value added (at constant prices) of crops including palay, corn, coconut, sugar, banana, other crops, livestock, poultry, fishery, and forestry, 1960-1999 (%) Overall Crops Livestock & Poultry Fishery Forestry Total Total Palay Corn Coconut Sugar Banana Other Total Livestock Poultry crops 1960-70 4.2 3.8 4.5 5.3 2.3 4.8 5.5 3.6 3.2 3.1 3.7 6.9 5.1 1970-80 3.9 6.3 4.7 5.9 4.9 2.9 15.6 9.5 3.0 0.5 9.2 4.5 -4.4 1980-90 1.0 1.6 2.7 3.5 -4.9 -5.3 -3.0 1.1 4.7 4.9 4.4 2.4 -7.0 1990-99 1.4 1.9 1.5 -1.4 -0.9 0.6 1.8 1.5 4.9 4.4 5.6 1.4 -21.7 1990-91 1.4 2.9 4.0 1.3 -4.0 27.2 -0.3 2.7 2.1 1.2 3.4 4.0 -35.4 1991-92 0.4 0.6 -5.6 -0.8 0.3 4.8 3.6 0.4 5.1 0.8 10.9 1.2 -11.5 1992-93 2.1 2.9 3.3 3.9 0.2 7.9 0.3 0.9 5.3 4.7 6.2 1.4 -16.5 1993-94 2.6 3.4 11.7 -5.8 0.1 1.3 1.4 1.9 3.8 4.8 2.6 1.1 -15.0 1994-95 0.8 1.7 0.0 -8.7 8.0 -25.6 -1.0 5.0 5.2 5.2 5.3 2.0 -48.6 1995-96 3.8 4.2 7.1 0.6 -6.6 21.3 7.2 2.2 8.7 6.6 11.3 1.3 24.3 1996-97 2.9 4.2 -0.1 4.4 5.7 0.4 6.5 6.2 6.0 5.3 6.8 0.0 -41.4 1997-98 -6.6 -8.3 -24.1 -11.8 -13.1 -13.8 -5.8 -5.8 2.1 4.1 -0.3 1.2 -19.3 1998-99 6.6 7.8 37.8 19.9 -7.4 22.7 6.7 -4.5 2.9 4.7 0.9 2.5 -16.7 * growth rates were derived using regression. Table 3a. Distribution of gross value added in agriculture of palay, com, coconut, sugar, banana, other crops, livestock, poultry, fishery, and forestry, (based on current prices) 1980-1999 (%). Crops Livestock and Poultry Year Total Palay Corn Coconut Sugarcane Banana Other Total 'Livestock Poultry Fishery Forestry Crops 1980 60 12 5 8 4 3 28 13 8 5 17 11 1981 56 12 5 7 4 2 25 13 8 6 19 12 1982 56 12 5 6 5 2 26 14 8 6 20 10 1983 54 12 5 9 4 3 22 13 8 6 22 11 1984 57 12 5 15 4 3 17 15 9 5 18 11 1985 60 17 7 8 3 3 22 13 8 5 20 7 1986 56 15 6 5 2 3 25 14 9 5 23 7 1987 57 14 7 7 3 3 25 14 9 5 20 8 1988 56 14 7 7 2 3 23 16 10 6 20 7 1989 58 16 8 6 3 2 24 18 12 6 18 6 1990 58 16 7 6 3 2 23 20 13 7 18 4 1991 57 15 6 6 4 3 24 22 14 8 19 3 1992 56 13 7 7 3 3 23 23 14 9 18 2 1993 57 14 6 6 3 3 25 22 13 9 19 2 1994 59 14 5 7 3 3 26 21 13 9 19 1 1995 62 16 6 7 3 3 27 19 12 7 18 1 1996 63 18 5 6 3 3 27 21 13 8 15 1 1997 61 17 5 5 3 3 27 23 14 8 16 1 1998 59 14 5 7 3 3 27 24 15 9 17 1 1999 62 17 5 7 4 3 27 22 14 8 16 0 Source: 1995 & past Philippine Statistical Yearbook, NSCB Table 3b. Distribution of gross value added in agriculture of palay, corn, coconut, sugar, banana, other crops, livestock, poultry, fishery, and forestry, (based on constant prices) 1980-1999 (%). Crops Livestock and Poultry Year Total Palay Corn Coconut Sugarcane Banana Other Total Livestock Poultry Fishery Forestry Crops 1980 59 14 6 9 4 3 24 12 7 5 16 13 1981 57 14 6 8 4 3 23 13 8 5 18 12 1982 58 15 6 8 4 3 23 13 8 6 19 10 1983 55 14 6 8 3 3 22 14 8 6 21 10 1984 56 15 6 9 4 3 19 14 9 6 21 8 1985 60 17 7 8 3 3 22 13 8 5 20 7 1986 58 17 7 8 2 3 21 14 9 5 21 7 1987 55 16 7 7 2 3 21 15 9 5 21 9 1988 57 16 7 6 2 2 24 17 10 7 19 8 1989 57 17 7 5 3 2 24 18 11 7 19 6 1990 56 16 7 5 2 2 24 19 11 8 20 5 1991 57 17 7 4 3 2 24 19 II 8 21 3 1992 56 16 7 4 3 2 24 20 11 9 21 3 1993 56 16 7 4 3 2 24 21 11 9 21 2 1994 57 17 7 4 3 2 24 21 12 9 20 2 1995 57 17 6 4 2 2 25 22 12 10 21 1 1996 56 18 6 4 3 2 24 23 12 10 20 1 1997 57 17 6 4 3 2 25 23 13 11 19 1 1998 53 14 6 4 3 2 25 26 14 12 21 1 1999 55 18 6 3 3 2 23 25 14 11 20 0 Source: 1998 & past Philippine Statistical Yearbook, NSCB Table 4. Trends in revealed comparative advantage in agriculture and selected major agricultural exports.a Agricultureb Coconut Sugarc Banana Pineapple Pineapple (canned) (fresh) 1960 3.0 - - 1965 2.7 131.8 15.3 1970 2.6 145.0 21.4 1975 3.8 211.2 22.0 29.3 - 1980 2.9 224.1 12.1 30.4 82.2 48.9 1985 2.4 212.3 7.6 31.2 91.6 59.7 1990 1.6 212.4 3.8 23.4 70.2 54.6 1995 1.1 153.5 2.0 14.1 41.5 23.6 1997 1.0 98.7 1.5 9.3 38.1 15.5 ' Esi:mated as the ratio of the share of a commodity group in a country's exports to that commodity group's share of world exports. bIncludes fisheries. ' Note that sugar has been historically exported to the US typically at a premium price (i.e., higher than world prices). Hence a value greater than unity in this case does not reveal comparative advantage. However, the sharp declining trend may still be interpreted as a rapid deterioration in comparative advantage. Except for 1960 and 1997, all are 3-year averages centered at year shown. Source of basic data: FAO Trade Yearbook Table 5. Agriculture's share in total imports and exports and ratio of agricultural imports to exports, 1960-1998 (%).a Ag. share to total Ag. Imports Imports Exports Ag. Exports 1960 19 64 31 1965 21 63 36 1970 14 44 34 1975 10 54 26 1980 8 35 31 1985 9 26 46 1990 10 15 96 1995 9 11 126 1996 9.0 8.8 159 1997 8 8 161 1998 10 7 151 a Agricultural imports include imported non-agricultural inputs such as agricultural chemicals, machineries and fertilizers. Source: FAO Trade Yearbook Table 6. Philippine agricultural imports 1970-1998, (S million CIF). Description 1970 1975 1980 1985 1990 1995 1996 1997 1998 Total 229.9 615.3 985.6 819.7 1,764.4 3,029.4 3,501.1 3,604.6 3,229.6 Primaryagricultural comrnmodities 51.3 210.8 351.0 359.0 800.7 1,394.2 1,803.8 1,738.4 1,877.3 (22.3) (34.3) (35.6) (43.8) (45.4) (46.0) (51.5) (48.2) (58.1) Live animals oth than animals - 0.5 3.6 4.1 17.3 88.2 85.0 103.9 76.1 Meat of bovine animals, fresh/chilledlfroze 2.4 10.7 12.9 4.1 23.5 65.3 85.8 108.3 70.9 Fish, fresh (live/dead), chilled/frozen - - 1.4 50.2 66.3 77.4 79.3 62.0 Wheat (inc spelt) & melin,unmilled 36.2 105.1 179.6 118.8 260.4 409.6 430.3 485.1 286.9 Rice . 39.7 - 123.4 127.7 82.7 308.9 230.0 646.6 Maite (not incl sweet corn), unmilled - 17.9 44.7 38.2 58.2 38.2 99.7 63.7 87.4 Fruit&nuts (not inci oil nuts) fresh/dried~ 1.9 2.1 4.2 0.6 21.2 52.6 66.3 69.7 45.1 Sugar,molasses&honey - - 3.5 3.3 8.8 176.8 279.9 72.2 137.0 Feeding stuff for animals 9.7 30.7 95.5 56.0 199.9 313.4 230.3 365.8 323.1 Oil seeds & oleaginous fruits for extraction - - 3.5 6.7 18.2 58.9 85.2 90.9 82.3 Others 0.6 4.0 3.5 2.4 15.1 42.2 54.9 69.5 59.7 Processed agricultural products 111.9 208.6 324.8 211.1 564.9 984.0 1,030.8 1,152.7 862.8 (48.7) (33.9) (33.0) (25.8) (32.0) (32.5) (29.4) (32.0) (26.7) Dairy products 45.6 63.1 123.4 78.8 266.4 438.3 405.0 444.1 313.1 Cereal, flour, fruits' starch/ vegetable prepr 7.0 23.9 31.9 26.7 83.3 74.5 87.3 87.2 67.0 Coffee, tea, cocoa, spices& manufactures 2.7 7.6 28.2 10.8 23.1 55.8 53.6 84.9 69.8 Miscellaneousedibleproducts&preptn 2.1 2.0 1.7 1.8 14.3 125.0 161.4 176.8 144.2 Other 54.4 112.0 139.5 93.0 177.9 290.4 323.5 359.7 268.7 Agricultural raw materials 33.0 71.5 94.6 104.7 166.8 271.8 245.7 288.9 200.6 (14.3) (11.6) (9.6) (12.8) (9.5) (9.0) (7.0) (8.0) (6.21) Tobacco & tobacco manufactures 8.3 19.7 37.8 67.6 67.3 123.0 73.7 145.1 110.1 Cotton 21.5 40.8 46.6 26.8 79.6 116.7 143.5 113.7 66.7 Others 3.2 11.0 10.2 10.3 19.8 32.0 28.5 30.1 23.9 Agricultural inputs 33.7 124.4 215.2 144.9 232.0 379.5 420.8 424.8 289.0 (14.7) (20.2) (21.8) (17.7) (13.2) (12.5) (12.0) (11.8) (8.9) Fertilizers 10.2 51.7 153.7 118.3 152.3 227.9 228.0 269.1 201.7 Chemical materials & products 4.8 12.3 12.4 17.6 41.1 38.0 50.0 48.9 30.9 Machinery for particular industries (Agri) 18.8 60.4 49.1 9.0 38.7 113.6 142.8 106.9 56.4 Note: dash (-) is less than $ 1 million. Figures in parenthesis are percent shares to total Table 7. Philippine agricultural exports by conmmodity groups, 1970-1998 (S million FOB). Commodity description 1970 1975 1980 1985 1990 1995 1996 1997 1998 Total 884.2 1,294.5 2,119.7 1,300.3 1,626.8 2,395.5 2,196.7 2,234.5 2,143.9 Coconut products 605.9 466.8 813.3 467.4 499.8 994.6 732.9 843.1 836.4 (68.5) (36.1) (38.4) (36.0) (30.7) (41.5) (33.4) (37.7) (39.0) Copra 476.0 172.3 47.3 - 20.5 12.9 1.4 2.6 1.4 Coconut oil 97.6 230.3 566.8 347.4 360.7 826.1 570.6 673.4 705.7 Dessicated cocconut 18.1 30.4 116.0 75.7 60.7 68.2 84.9 88.3 72.8 Copra meal/cake 14.1 33.3 81.4 35.5 54.0 66.9 56.3 52.5 35.5 Othercoconutproducts 0.1 0.4 1.8 8.9 3.9 20.5 19.7 26.3 21.0 Sugarandsugarproducts 198.4 616.2 658.7 189.1 142.3 88.8 157.7 115.7 114.0 (22.4) (47.6) (31.1) (14.5) (8.7) (3.7) (7.2) (5.2) (5.3) Centrifugal 186.1 580.7 557.3 144.9 110.5 65.9 136.2 82.7 80.0 Molasses 10.3 33.9 32.9 16.4 22.0 7.4 3.3 15.0 19.2 Others 1.9 1.6 68.6 27.9 9.7 15.5 18.2 18.0 14.9 Fiuits and vegetables 34.8 123.7 250.4 277.0 358.6 507.7 538.9 514.8 492.4 (3.9) (9.6) (11.8) (21.3) (22.0) (21.2) (24.5) (23.0) (23.0) Pineapple 26.1 42.2 107.4 127.6 142.3 140.0 156.3 149.5 140.4 Bananas 6.0 73.1 120.4 124.4 149.3 244.2 258.5 240.4 235.8 Mango products 1.1 1.8 7.1 8.8 18.8 47.8 44.4 45.1 46.1 Vegetables 0.5 1.2 2.0 4.3 10.7 33.8 35.3 32.3 28.1 Others 1.1 5.3 13.4 11.9 37.6 41.8 44.4 47.4 42.1 Fishery 2.6 16.6 138.1 148.5 395.3 501.9 436.6 435.2 444.8 (0.3) (1.3) (6.5) (11.4) (24.3) (21.0) (19.9) (19.5) (20.7) Fish products, esp. tuna 1.1 8.3 109.1 72.5 134.4 201.9 209.2 207.4 240.6 Shrimps & prawns products 1.5 7.1 21.2 64.5 223.2 220.5 155.5 130.9 132.2 Other crustaceans & aquatic products 0.0 1.2 7.8 11.6 37.7 79.6 71.9 96.9 72.0 Others 42.6 71.3 259.2 218.2 230.8 302.5 330.6 325.7 256.4 (4.8) (5.5) (12.2) (16.8) (14.2) (12.6) (15.1) (14.6) (12.0) Crudeanimal&vegmaterial 2.9 6.2 15.8 24.6 62.2 93.7 104.5 109.0 71.8 Tobacco 14.2 34.6 30.2 28.4 49.0 27.9 37.5 40.0 30.3 Coffee, tea,cocoa, spices & coffee subs. 0.5 4.5 65.4 81.3 29.6 31.2 30.0 28.3 25.9 Cereal & cereal preparations 0.5 0.9 79.6 5.6 10.2 24.8 23.2 38.2 24.2 Abaca and other fibers 16.3 15.9 32.5 31.2 22.2 24.1 24.9 18.9 29.1 Crude rubber 1.4 0.7 8.5 9.9 11.8 27.8 33.8 25.1 14.3 Other 6.9 8.3 27.2 37.1 45.9 73.0 76.6 66.1 60.9 Note: Figures in parenthesis are percent shares to total Table 9. Trends in nominal protection rates of major agricultural commodities, 1970-1998 (%).a 1970-79 1980-84 1985-89 1990-94 1995c 1996c 1997c 1998c Rice -4 -13 16 19 63 91 82 34 Corn 24 26 67 76 104 54 96 72 Sugarb 5 42 154 81 91 93 66 99 Pork 6 -9 43 31 44 na na na Chicken 34 46 39 74 84 na na na a NPR is the percentage difference between domestic wholesale price and border price covered by the official exchange rate. The border price is an FOB export unit value for exportable products and the world price adjusted by 15% as a measure of CIF import unit value for importable products. In the case of pork and chicken, the CIF import value of Singapore was used. b Weighted average of NPR on sugar exported to the US (ratio of export unit value to the US to the border) price and NPR on sugar for domestic use (ratio of domestic wholesale price to border price). Border price is the FOB world price of sugar adjusted by 15% to obtain the CIF price. c Imports of rice, sugar, and recently corn, did not pay either the in-quota on out-quota tariffs, except for imports of sugar in late 1998, which paid out-quota tariffs. Source of data: World Bank National Statistics Office Table 8. Philippine agricultural exports 1970-1998 (S million FOB). Description 1970 1975 1980 1985 1990 1995 1996 1997 1998 Total 884.2 1,294.5 2,119.7 1,300.3 1,626.8 2,395.5 2,196.7 2,234.5 2,143.9 Primary commnodities 724.6 951.8 1,242.8 572.5 806.0 988.4 981.4 914.7 886.9 (81.9) (73.5) (58.6) (44.0) (49.5) (41.3) (44.7) (40.9) (41.4) Fish,fresh(live/dead),chilled/frozen 0.9 6.8 747 23.3 35.8 84.6 72.8 66.5 104.7 Crustaceans, molluscs & aquatic products 1.5 8.3 28.4 74.7 256.7 291.0 219.6 221.0 198.1 Fruit&nuts,fresh/dried 25.1 107.5 249.7 218.9 258.2 368.8 393.8 379.9 360.7 Fruit & vegetables juices, unfermented 4.2 5.5 14.9 21.6 32.3 43.2 47.2 48.0 50.2 Sugars,molasses&honey 198.3 614.6 656.9 185.2 133.8 74.6 140.1 98.7 99.6 Feeding stufffor animals 17.7 34.1 85.3 37.9 56.8 80.3 72.2 64.4 45.1 Others 476.9 174.9 132.9 11.0 32.4 45.9 35.7 36.2 28.5 Processed products 123.9 285.0 790.0 633.5 675.8 1,234.9 1,015.4 1,127.0 1,120.9 (14.0) (22.0) (37.3) (48.7) (41.5) (51.6) (46.2) (50.4) (52.3) Fish, dried, salted/in brine; smoked - 0.5 4.3 1.3 1.3 2.1 2.6 3.8 3.0 Fishery products, prepared/preserved - 0.9 30.7 49.2 101.5 124.3 141.6 143.9 139.0 Fruit,preserved&preparations 23.0 39.9 100.2 109.0 121.1 135.6 154.1 149.9 134.2 Coffee, tea, cocoa, spices & manufactures 0.5 4.5 65.4 81.3 29.6 31.2 30.0 28.3 25.9 Vegetable fats & oils 97.7 230.7 567.5 348.4 362.2 826.5 570.7 673.6 706.8 Others 2.5 8.4 21.9 44.3 60.1 115.1 116.3 127.5 111.9 Raw materials 35.7 57.7 86.9 94.2 145.1 172.2 199.9 192.8 136.2 (4.0) (4.5) (4.1) (7.2) (8.9) (7.2) (9.1) (8.6) (6.4) Tobacco & tobacco manufacturers 14.2 34.6 30.2 28.4 49.0 27.9 37.5 40.0 30.3 Naturalrubber&similarnaturalgums 1.4 0.7 8.5 9.9 11.8 27.8 33.8 25.1 14.3 Vegtextl fibers, notspun, waste 16.3 15.8 31.5 31.1 21.8 22.6 23.6 18.5 19.7 Crude animal & vegmaterial 2.9 6.2 15.8 24.6 62.2 93.7 104.5 109.0 71.8 Others 1.0 - 0.8 - - - - - - Note: dash (-) is less than $ 1 million. Figures in parentheses are percent shares to total Source: National Statistics Office Table 10. Estimated effective protection rates by major sectors (%). Agriculture, Fishery, and Manufacturing All Sectors Forestry Tan 1974 9.0 44.0 36.0 Medalla et al. 1983 10.3 79.2 52.8 1985 9.2 74.1 49.3 1986 5.0 61.2 39.8 1988 5.2 55.5 36.3 Manasan (preliminary) 1993-95 24.4 29.1 26.7 (28.1) 2000 19.1 19.2 18.4 (25.9) Source: Tan, Norma A. 1979. "The Structure of Protection and Resource Flows in the Philippines," in Bautista, R. M., et al. Industrial Promotion Policies in the Philippines Philippine Institute for Development Studies, Makati City. Medalla, Erlinda, et al. 1995. Catcbing Up with Asia's Tigers. Philippine Institute for Development Studies, Makati City. Manasan, Rosario G. and R.G. Querubin. 1997. "Assessment of Tariff Reform in the 1990s", PIDS Discussion Paper No. 97-10, Philippine Institute for Development Studies, Makati City. Note: Figures in parenthesis refers to crops and livestock only. Table 11. Trends in total and agricultural exports and imports and gross domestic product and measure of trade opennness. Trade (S Million) GDP Trade openess (%) Year Imports Exports Total (S million) (1) (2) (3) (4) (1/4) (2/4) (3/4) Total economy 1970 1,286 1,142 2,428 6,684 19 17 36 1975 3,776 2,292 6,069 14,890 25 15 41 1980 8,295 5,751 14,046 32,457 26 18 43 1985 5,445 4,589 10,034 30,730 18 15 33 1990 13,042 8,186 21,228 44,313 29 18 48 1991 12,856 8,840 21,695 45,531 28 19 48 1992 15,464 9,824 25,289 52,982 29 19 48 1993 18,768 11,375 30,143 54,368 35 21 55 1994 22,638 13,483 36,121 63,884 35 21 57 1995 28,487 17,447 45,935 75,349 38 23 61 1996 34,701 20,543 55,244 82,898 42 25 67 1997 38,581 25,228 63,809 82,190 47 31 78 1998 31,530 29,496 61,026 65,226 48 45 94 Agriculture 1970 230 884 1,114 1,994 12 44 56 1975 615 1,295 1,910 4,551 14 28 42 1980 986 2,120 3,105 8,152 12 26 38 1985 820 1,300 2,120 7,069 12 18 30 1990 1,764 1,627 3,391 11,397 15 14 30 1991 1,451 1,733 3,184 9,315 16 19 34 1992 1,797 1,779 3,576 11,296 16 16 32 1993 1,872 1,849 3,720 11,540 16 16 32 1994 2,403 1,988 4,391 13,877 17 14 32 1995 3,029 2,395 5,425 16,184 19 15 34 1996 3,501 2,197 5,698 17,887 20 12 32 1997 3,605 2,235 5,839 15,268 24 15 38 1998 3,230 2,144 5,374 10,948 29 20 49 Table 12. Growth rates of gross value added of agriculture (crops and livestock and poultb and crops, agricultural employment, cultivated land, and crop area (%). GVA (crops, livestock and poultry) Labor Land Total Crops Livestock Cultivated Crop & poultry 1960-70 6.4 7.3 4.1 2.4 0.1 1.7 1970-80 4.5 5.1 0.7 3.1 3.3 3.2 1980-90 0.7 -0.6 4.3 2.0 1.8 0.4 1990-99 1.1 0.9 1.9 1.0 1.7 -0.7 1960-65 5.6 5.6 5.6 2.4 0.1 1.4 1965-70 7.2 9.0 2.6 2.4 0.1 2.1 1970-75 7.3 9.2 0.6 2.4 3.0 4.0 1975-80 1.7 1.2 0.8 3.8 3.6 2.4 1980-85 -1.6 -2.7 0.0 3.9 1.9 0.7 1985-90 3.0 1.4 8.8 0.2 1.7 0.2 1990-95 3.3 3.6 2.4 2.1 1.7 -0.5 1995-99 -1.5 -2.3 1.2 -0.4 1.5 -1.1 Table 13. Growth rates of labor and land productivity of the agriculture (crops and livestock including poultry), and crop sectors (%) Agriculture Crops Labor Land Labor Land Cultivated Crop Cultivated Crop 1960-70 3.9 6.3 4.6 4.8 7.2 5.5 1970-80 1.4 1.1 1.3 2.1 1.7 1.9 1980-90 -1.4 -1.1 0.2 -2.7 -2.4 -1.1 1990-99 0.1 -0.5 -2.6 -0.1 -0.7 1.7 1960-65 3.1 5.5 4.1 3.1 5.5 4.1 1965-70 4.7 7.1 5.0 6.5 8.9 6.8 1970-75 4.8 4.1 3.2 6.6 5.9 5.0 1975-80 -1.8 -1.8 -0.6 -2.3 -2.3 -1.1 1980-85 -5.4 -3.5 -2.3 -6.5 -4.5 -3.4 1985-90 2.8 1.2 2.8 1.2 -0.3 1.3 1990-95 1.2 1.5 3.8 1.4 1.8 4.1 1995-99 -1.1 -3.0 -10.0 -1.9 -3.8 -1.3 Table 14. Growth rates of palay production, area, and yield by crop (%). 1960-70 1970-80 1980-1990 1990-1998 Total Palay Production 3.3 4.8 2.2 0.5 Area 0.4 1.1 0.1 0.7 (12.1) (23.3) (4.5) (140.0) Yield 2.8 3.4 2.0 -0.2 (84.8) (70.8) (90.9) (-40.0) First Semester Irrigated Production 4.3 5.5 3.2 1.1 Area 2.4 1.4 1.8 2 (55.8) (25.5) (56.3) (181.8) Yield 1.9 4.0 1.3 -0.9 (44.2) (72.7) (40.6) (-81.8) Rainfed & Lowland Production 4.1 3.0 -0.7 -2.5 Area -0.6 -0.001 -3.1 -14 (-14.6) (-0.03) (-442.9) (-56.0) Yield 4.7 3.0 2.4 -1.2 (114.6) (100.0) (342.9) (-48.0) Second Semester Irrigated Production 16.7 6.4 4.3 2.2 Area 9.3 1.3 3.2 2.3 (55.7) (20.3) (74A4) (104.5) Yield 6.8 5.1 1.0 -0.1 (40.7) (79.7) (23.3) (-4.5) Rainfed & Lowland Production 16.8 4.9 -0.2 1.6 Area 10.1 2.9 -1.2 -2.7 (60.1) (59.2) (-600.0) (-168.8) Yield 5.9 2.0 1.0 -0.04 (35.1) (40.8) (500.0) (-2.5) Note: figures in parenthesis are ratio to production by environment. * growth rates were derived using regression. Table 14 continued. Growth rates of production, area, and yield of major crops, 1960-1998 (%) 1960-1970 1970-1980 1980-1990 1990-1998 Corn Production 4.8 5.0 4.7 -2.5 Area 2.2 2.9 1.7 -5.4 (48) (65) (33) (-178) Yield 2.5 2.0 2.9 3.0 (50) (34) (67) (102) First crop Production 4.1 3.3 Area 1.4 -4.1 (34) (-124) Yield 2.7 7.7 (66) (233) Second crop Production 5.1 -5.1 Area 2.2 -6.0 (43) (-118) Yield 2.9 1.0 (57) (20) * growth rates were derived using regression. Table 14 continued. Growth rates of production, area, and yield of major crops, 1960-1998 (%) 1960-1970 1970-1980 1980-1990 1990-1998 Palay Production 3.8 4.2 2.0 -1.3 Area 0.8 0.8 -0.2 -0.9 (22) (19) (-9) (72) Yield 2.8 3.3 2.3 -0.4 (74) (80) (114) (29) Irrigated First crop Production 3.5 4.5 3.4 -0.2 Area 1.4 1.1 1.8 0.6 (40) (24) (53) (-300) Yield 2.1 3.3 1.6 -0.8 (60) (73) (47) (400) Second crop Production 18.8 5.7 4.2 0.3 Area 8.7 1.2 3.4 0.7 (46) (21) (81) (233) Yield 9.3 4.5 0.8 -0.4 (49) (79) (19) (-133) Rainfed First crop Production 8.4 2 -1 -3.3 Area -0.1 -0.4 -3.6 -2.5 (-1) (-20) (360) (76) Yield 8.6 2.4 2.7 -0.8 (102) (120) (-270) (24) Second crop Production 18.1 5.8 -1.3 -0.8 Area 7.6 3.2 -2 -4.8 (42) (55) (154) (600) Yield 9.6 2.6 0.6 -1.3 (53) (45) (-46) (163) Note: figures in parenthesis are ratio to production by environment. * growth rates were derived using compound interest rates. Table 14 continued. Growth rates of production, area, and yield of major crops, 1960-1998 (%) 1960-1970 1970-1980 1980-1990 1990-1998 Coconut Production 3.5 25.7 -1.1 -0.3 Area 6.3 5.0 0.3 0.30 (180) (19) (27) (100) Trees 3.90 4.30 -1.4 -2.1 (111) (17) (-127) (-700) Yield (per ha) -2.7 19.7 -1.4 -0.6 (-77) (77) (-127) (-200) Yield (per tree) -0.4 20.5 0.3 -3.2 (-11) (80) (27) (-1,067) Sugar Production 2.6 2.2 -2.9 -1.4 Area 5.6 1.5 -6.9 4.1 (215) (68) (-238) (293) Yield -2.8 0.70 -4.4 -5.4 (-108) (32) (-152) (-386) Banana Production 8.9 18.0 -2.7 2.4 Area 1.4 3.2 0.4 1.2 (16) (18) (15) (50) Trees -0.1 1.6 - - (-4) (67) Yield(perha) 7.4 14.3 -3.1 1.1 (83) (79) (-115) (46) Yield (per tree) 3.2 -4.5 - - ~~~~~(- 1l9) (-188) Mango Production 9.5 12.7 -0.8 13.7 Area -0.5 -1.5 3.4 8.4 (-5) (-12) (425) (61) Trees 2.1 8.1 - (263) (59) Yield(perha) 10.1 14.5 -4.1 4.8 (106) (114) (-513) (35) Yield (per tree) 0.6 -0.2 - - (75) (-1) Table 14 continued. Growth rates of production, area, and yield of major crops, 1960-1998 (%) 1960-1970 1970-1980 1980-1990 1990-1998 Pineapple Production 7.4 14.4 2.1 4.6 Area 3.4 8.6 -0.1 -5.1 (46) (60) (-5) (- I1) Yield 3.8 5.2 2.2 10.0 (51) (36) (105) (217) Coffee Production 4.3 12.4 0.2 -2.5 Area 3.6 6.8 3.6 -0.1 (84) (55) (1,800) (2) Trees 5.1 -2.0 - (2,550) (-80) Yield (per ha) 0.7 5.3 -3.3 -2.1 (16) (43) (-1,650) (84) Yield (per tree) -1.3 -5.5 - - (-650) (-220) Abaca Production -0.4 3.0 -6.4 1.8 Area -0.9 3.8 -4.9 0.9 (-225) (127) (-77) (50) Yield 0.5 -0.5 -1.6 1.2 (125) (-17) (-25) (67) Tobacco Production -0.9 2.4 -0.9 -4.8 Area -1.3 -2.5 -0.5 -6.0 (-144) (-104) (-56) (-125) Yield 0.5 5.1 -0.5 1.1 (56) (213) (-56) (23) * growth rates were derived using regression. ANNEX 6 MONITORING AND ASSESSING PERFORMANCE IN RURAL POVERTY REDUCTION By: Prof. Arci Balisacan, University of the Philippines TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................2 INTRODUCTION.4 Rural Poverty Trends ........................................ .............. 5 The Problem with Existing Rural Poverty Indicators .6 TOWARD A POVERTY MONITORING AND INDICATOR SYSTEM FOR THE RURAL SECTOR .............................................. 13 TABLE 1: RURAL POVERTY ESTIMATES BASED ON OFFICIAL MEASUREMENT PRACTICE ........................................ 19 TABLE 2: RURAL AREAS AND URBANIZATION ................................................................ 20 TABLE 3: RURAL POVERTY ESTIMATES BASED ON TwO APPROACHES ................................................................ 21 TABLE 4: REGIONAL PROFILE, 1997 ................................................................ 22 TABLE 5: PROVINCES WITH HIGHEST AND LOWEST ................................................................ 23 POVERTY INCIDENCE ................................................................ 23 10 PROVINCES WITH HIGHEST INCIDENCE (ASCENDING ORDER) .............................................................. 23 "Ends" Measures ............... ,24 Benchmark Poverty Indicators, by Province .............................. 25 EASTERN VISAYAS .............................. 28 WESTERN MINDANAO .............................. 28 NORTHERN MINDANAO .............................. 28 SOUTrHERN MINDANAO .............................. 29 CENTRAL MINDANAO .............................. 29 CAR ............... 29 ARMM ............................... 0 CARAGA ...............................30 Figure 1 ............................... 32 / Rural Poverty Indicators/8 Feb 2000 Annex 6 Page 2 of 32 EXECUTIVE SUMMARY Poverty estimates based on official measurement practice suggest that rural poverty is not only alarmingly high - with one-half of the rural population deemed poor - but also seemingly unresponsive to overall economic growth. The figures indicate that the relatively high GDP growth during 1994-97 hardly trickled to the rural poor. Indeed these estimates suggest that their number in fact increased from 18.0 million in 1994 to 19.5 million in 1997. The Estrada Administration recognizes the imperative of bringing broad-based rural development to win the war against poverty. But whether or not it succeeds in winning this war depends largely on its political commitment to mobilize resources and to reform institutions and policies for equitable growth and rural development. At present, a credible monitoring system linking policies and programs with rural welfare outcomes is not in place. Such a system requires a clear understanding of (i) economic and institutional constraints to broad-based rural development, (ii) policies and programs needed to effectively address these constraints, and (iii) household responses, especially by the poor, to these policies and programs. By implication, it also involves access to good analysis and reliable, current, and transparent data. The current practice of generating "rural performance" indicators is technically flawed as to be useful in informing actual achievements (or failures) in the war against poverty. The first problem has to do with the shifting of "rural areas" over time, thereby systematically creating a downward bias on rural performance indicators. The second pertains to spatial (and intertemporal) inconsistency in published poverty profiles. The physical area of the "rural sector" is, almost by definition, shifting over time. As population grows and/or economic activity expands, an initially rural area will sooner or later be classified as urban. While this may not pose a problem in measuring, say, urbanization trends, it tends to create a systematic downward bias on rural performance indicators, including rural poverty, employment, and household income. Assuming that the main yardstick against which outcomes of national government policy are judged is the reduction of absolute poverty, it is imperative that the poverty measurement and monitoring system can track well the changes in absolute poverty over time and across administrative areas of the country. The present system falls short of this requirement. Its dependence on poverty norms that are quite sensitive to spatial differences - and to changes over time - in overall living standards, as well as on current household income as a broad proxy for household welfare, makes it unsuitable for either national poverty monitoring or assessing comparative performance across regions or areas of the country . The poverty lines need to be anchored on the consistency feature of a poverty norm. For a broad measure of household welfare, consumption expenditure is preferable to income from both conceptual and empirical grounds. The current (official) practice may, however, still be appropriate for local poverty monitoring, especially in a decentralized governance regime. In this regime, LGUs define their own poverty standards, given their development priorities and general living conditions. Annex 6 Page 3 of 32 Conventional money-based indicators of rural welfare outcomes need to be complemented by non-money indicators, since there is usually no guarantee that an improvement in the former, including the preferred expenditure-based poverty measures suggested in this paper, will always mean an improvement in the latter. The choice of indicators has to be guided by a clear understanding of the objective of monitoring, as well as fiscal constraint. In this regard, rural welfare indicators should not be equated with indicators of government agency performance. The former are independent of the structure of government organization and authority and their evolution do not depend exclusively on government action (or inaction). High on the list of indicators of rural welfare outcomes should be: (1) expenditure-based poverty incidence; (2) education - functional literacy rates, primary and high-school enrolment rates; (3) health and nutrition - infant mortality rate, child malnutrition rate, proportion of households with access to safe water, proportion of households with access to health care; (4) rural nonfarm income - share of rural nonfarm income in total household income; and (5) food expenditure - share of food in total household expenditure. The current statistical system supports the generation of these indicators for each province of the country. An effective monitoring and evaluation system focused on rural welfare outcomes has to be incentive-compatible, i.e., the agents (government agencies) acting in behalf of the principal (society) find that it is in their interest to advance the interest of the principal. This requires, among other things, that agents responsible for program implementation should not be at the same time the monitors of rural welfare indicators. The National Anti-Poverty Commission (NAPC) is mandated to coordinate and monitor poverty alleviation programs. NAPC's functions should be sharpened to take a major role in devising an appropriate national poverty monitoring system, coordinating the monitoring and evaluation systems of the various agencies vis-a-vis welfare outcome indicators, and overseeing the generation and reporting of information on poverty concerns. Unfortunately, NAPC's current capacity to perform the above tasks is rather weak. Capacity building for the Commission must be a high priority. Annex 6 Page 4 of 32 INTRODUCTION Despite rapid urbanization in recent years, poverty in the Philippines is still a largely rural phenomenon. Nearly two-thirds of the poor live in rural areas, with the large majority of them dependent on agriculture for employment and income. Even poverty in urban areas is partly a spillover effect of destitution in rural areas. Extreme deprivation in rural areas, especially in marginal, resource-poor lands, pushes many rural poor to search for "greener pasture" in urban areas. Poverty, in combination with insecure property rights, also causes resource degradation through channels involving household decisions on fertility and production techniques. The govermment recognizes the imperative of bringing broad-based rural development to win the war against poverty. The Medium-Term Philippine Development Plan 1999-2004 identifies the main elements of development strategies required to spur growth and sustainable development in rural areas. The Plan, for example, envisions an aggressive delivery of basic social development services, removal of policy and regulatory distortions inhibiting resource allocation efficiency and equitable outcomes, sustained development of rural infrastructure, improvement in governance, and macroeconomic stability. In particular, the Plan notes: "The roots of the poverty problem are multi-dimensional but a large part of it can be traced to the low productivity of the agricultural sector which remains the primary source of income for the poor.... The key challenge is to accelerate the improvement of agricultural productivity and to increase non-farm incomes in rural areas.... [But] confronting the poverty problem also requires that government be pragmatic in its use of resources. In essence, these means the greater allocation of national budget for basic social services such as health and nutrition, education and training, housing and social welfare, all of which should be efficiently designed to reach the poor" (p. 1-2; emphasis ours). Consistent with its GDP growth targets (averaging 4.7-5.3 percent a year in the medium term), the Government expects poverty incidence (i.e., the proportion of total families deemed poor) to fall from 32 percent in 1997 to 25-28 percent by 2004.1 Key to achieving this target is output growth rooted on efficiency and competitiveness, particularly in agriculture where productivity growth in recent years is dismally low by both national and international standards. Unfortunately, the Plan does not provide a breakdown of poverty targets between urban and rural areas. It is thus not possible to link directly rural programs and policies advocated in i Given that the East Asian economic crisis and the El Nino phenomenon resulted in virtually zero output growth and higher unemployment and inflation rates in 1998, poverty incidence could have increased in that year (see, e.g., Balisacan's [1999] assessment based on available data). Hence, even assuming that the Plan's average growth target for the medium term will be achieved, poverty incidence at the end of the Estrada administration is expected to be higher than its 25-28 percent target, unless the benefits of growth shall substantially favor the poor groups in society. Critical to this argument, however, is whether the official practice to poverty comparison over time, as well as across space (regions, provinces, urban vs. rural areas), is itself not misleading. Indeed, as argued in this paper, such is the case for Philippine data on poverty. Annex 6 Page 5 of 32 the Plan with changes in the living standard of the rural population. At the same time, the current practice of generating "rural performance" indicators is, as argued below, technically flawed as to be useful in informing these targets. Whether or not the government succeeds in (even partially) winning the war against poverty depends largely on political commitment to mobilize resources and reform institutions and policies for broad-based rural development. Yet, a credible monitoring system linking policies and programs with outcomes vis-a-vis poverty reduction objectives is not in place. Such a system requires a clear understanding of (i) economic and institutional constraints to broad- based rural development, (ii) policies and programs needed to effectively address these constraints, and (iii) household responses, especially by the poor, to these policies and programs. By implication, it also involves access to good analysis and reliable, current, and transparent data. Official data on rural poverty have not helped much in informing the discussion on the growth-poverty-inequality nexus in the Philippines. As elaborated elsewhere (Balisacan 1999), the official approach to assessing poverty appears incapable of tracking the full impact of economic (rural) growth on absolute poverty. This is so since the official approach to poverty comparison tends to systematically underestimate (overestimate) the reduction (increase) in absolute poverty in economically more progressive (backward) regions, provinces, or sectors, or during periods when the overall rural economy is expanding (contracting). Moreover, changes in the rural-urban classification of geographic areas in the course of urbanization tends to obscure the full impact of rural growth on rural performance indicators (Balisacan 1994). The main aim of this paper is threefold: (i) to construct comparable indices of rural poverty over time and across geographic areas; (ii) to assess current practice in poverty monitoring; and (iii) to propose a minimal set of priority indicators, which have strategic importance in promoting broad-based growth and poverty reduction, for rural poverty monitoring. Rural Poverty Trends It would be instructive to start the assessment with a construction of rural poverty profile based on current official practice in poverty measurement. In brief, the practice entails estimating minimum income levels - i.e., sufficient to meet a nutritional norm and other basic needs - for urban and rural areas in each region. A household with an annual income, adjusted for family size, below the relevant threshold, is deemed poor. Table I shows poverty indicators for rural areas and for the agricultural sector from the mid-1980s to the 1990s. The main source of data is the triennially conducted Family Income and Expenditures Survey by the National Statistics Office. The estimates suggest that the incidence of rural poverty during the period fell very sluggishly - from 56 percent in 1985 to 51 percent in 1997. Moreover, the number of the poor increased during the period - from 18.7 million to 19.5 million. They remain to account for about 70 percent of the total number of poor people in the country. Annex 6 Page 6 of 32 However, as discussed below, rural poverty estimates for the 1980s are not strictly comparable with those for the 1990s. Changes in rural/urban classifications during the period tend to create a downward bias in usual indicators of rural development performance. Focusing on the roughly comparable estimates for the 1990s, one finds an even more disturbing picture: the contribution of rural poverty rose significantly from about 61 percent in 1991 to 66 percent in 1994 and 72 percent in 1997. Thus, at near end of the decade, about three in every four poor individuals in the country come from rural areas. Another disturbing observation is that the relatively high GDP growth during 1994-97 hardly changed rural poverty. The estimates suggest that in fact the total number of rural poor increased from 18.0 million to 19.5 million. In contrast, as shown in Balisacan (1999), poverty reduction was quite substantial in urban areas, where for instance poverty incidence went down by 13.5 percentage points from 1991 to 1997 as compared to the 3.6 percentage points reduction in rural areas. Roughly the same pattem is observed for the agricultural sector. Poverty incidence in the sector fell only slightly between 1985 and 1997. In terms of the absolute number of poor, reductions were achieved in the period 1985 to 1988, and 1994 to 1997. Not surprisingly, these were periods when the agricultural sector achieved significant output growth. From 1985 to 1988 and from 1994 to 1997, the sector grew at a rate of 3.4 percent and 2.5 annually, respectively. On the other hand, from 1988 to 1991 and from 1991 to 1994, the sector grew only 1.6 percent and 1.7 percent annually, respectively. The Problem with Existing Rural Poverty Indicators The usual indicators of spatial and intertemporal rural performance, including rural poverty and income distribution, are technically flawed, for at least two reasons. The first has to do with the shifting of "rural areas" over time, thereby systematically creating a downward bias on rural performance indicators. The second pertains to spatial inconsistency in published poverty profiles. The Missing "Rural" in Rural Development The definition of "urban areas" in the Family Income and Expenditures Survey (FIES), the main source of data for intertemporal rural household indicators, has changed substantially over the years. In the 1961 FEIS, urban areas included Metropolitan Manila (Manila and adjacent cities and municipalities), chartered cities and provincial capitals, and all town centers of municipalities. The 1965 FIES added population density as a criterion, qualifying all town centers of municipalities with a population density of at least 500 persons per square kilometer as well as villages contiguous to these centers and having at least 2,500 inhabitants, as urban areas. Since 1971, any district, regardless of population density, with at least six establishments Annex 6 Page 7 of 32 (commercial, manufacturing, recreational and/or personal services), can also qualify as an urban area. More importantly, the physical area of the "rural sector" is, almost by definition, shifting over time. As population grows and/or economic activity expands, an initially rural area will sooner or later be classified as urban. While this may not pose a problem in measuring, say, urbanization trends, it tends to create a systematic downward bias on rural performance indicators. Suppose that rapid agricultural growth in some regions leads to a similarly rapid expansion of nonfarm employment and incomes. This induces urbanization, thereby reducing the physical size of "rural areas." Since household incomes rise faster in urbanizing areas than in non-urbanizing areas, poverty incidence in geographically expanding urban areas tends to fall relative to that in contracting rural areas. This is particularly so if there are constraints to the movement of labor from the slow to the rapidly growing areas, or if there are considerable lags to such movement. Thus, although the growth stimulus is initially rural-based, the gains in poverty reduction are registered as urban-based. The data reported in, say, population censuses, would then seem to suggest that rural development programs, even if they spur rural income growth and reduce rural poverty, do not matter much. The reclassification of physical areas over time has also an important implication on rural-urban migration stories. High urban population growth in less developed countries is, for example, commonly attributed to rapid rural-urban migration. Data on rural-urban migration have been based mainly on published population censuses. If reclassification of physical areas is the one largely driving the commonly observed high-urban-population growth, then the rural- urban migration story in the development literature is vastly exaggerated. Table 2 shows rural and urban population counts based on published population censuses (hereafter referred to as Census Report). It also presents population estimates forfixed physical rural and urban areas. The estimation involves reclassifying geographic areas in the various population censuses according to their urban-rural classification used in the 1970 census of population. Estimates show that rural areas had a population share of 69 percent in 1960, 68 percent in 1970, 66 percent in 1980, and 64 percent in 1990. In contrast, the Census Report shows the population share of rural areas was 70 percent in 1960, 68 percent in 1970, 63 percent in 1980, and 51 percent in 1990. Clearly, for the country as a whole, it is reclassification of physical areas, not physical movement of population from rural to urban areas, that mainly accounts for the growing share of urban areas in total population. The reclassification problem has a particularly important implication on the comparability of rural poverty indicators in the 1980s and 1 990s. In an earlier article, Balisacan (1993) demonstrated that the failure to take account of the "shifting of physical areas" arising from reclassification of villages would distort the overall picture on the actual performance of rural areas from the late 1980s to the early 1990s. The sampling frame for the 1985 and 1988 FEES was based on the 1980 population census, while that for the 1991 FIES was based on the 1990 census. Both censuses applied the same set of criteria in classifying villages into "urban" and "rural" areas. A large number of initially rural areas in 1980 became urban areas in 1990 when they were found to satisfy the criteria for urban areas. This reclassification, in addition to net migration from rural to urban areas, reduced the population share of FIES rural areas from 62 percent in 1988 to 50 percent in 1991. In contrast, the estimated rural population share based on fixed physical areas was virtually the same - 64 percent - during the same period. Annex 6 Page 8 of 32 (a) Reconstruction of Rural Poverty Indicators2 Too often, disagreements and controversies in program assessments have their roots in disparate assumptions about policy objectives. It is, for example, often tacitly assumed that the sole objective of public policy is to reduce poverty, whereas a typical public program has a multiplicity of objectives. Even when poverty alleviation is the sole objective, it is often difficult to reach a consensus on what precisely this should be. Should poverty, for example, be seen as a failure to secure income sufficient to meet basic needs, or as a lack of certain basic capabilities such as avoiding hunger and illiteracy? Is the prime objective of policy to reduce absolute poverty, or is it to reduce economic inequality? Needless to say, judgement on the relative efficiency of different policies depends crucially on the sharpness with which the policy objective is defined. Thus, the first step in any assessment of poverty measurement and monitoring is to define clearly the welfare objective against which outcomes are judged. Perhaps the most controversial issue in poverty measurement and monitoring pertains to the construction of a poverty norn against which a person is deemed either poor or not-poor. The official approach to constructing such norm and assessing poverty is, for example, argued to be deficient in tracking the full impact of economic growth on absolute poverty. As elaborated below, this is so since the poverty lines applied for various regions, areas, and years imply different levels of living standards, tending to systematically underestimate (overestimate) the reduction (increase) in absolute poverty in economically more progressive (backward) regions, provinces or sectors, or during periods when the overall economy is expanding (contracting). When the objective of poverty measurement is to inform policy choices for reducing absolute poverty, a desirable feature of a poverty line is that it should not depend on the subgroup to which the person with that standard of living belongs (Ravallion 1994). Put differently, poverty lines constructed for various subgroups must be fixed in terms of a given living standard. Thus, two persons deemed to have exactly the same standard of living in all relevant aspects but located in different regions or provinces would have to be treated as either both poor or both nonpoor. The poverty lines are then said to be consistent; they imply the same command over basic consumption needs. On the other hand, when the objective is to have a purely descriptive assessment of poverty by various subgroups of the population, it may be desirable to have a poverty line (i.e., a chosen basic-needs bundle) reflecting local perceptions of what constitutes poverty in each group. Cast differently, the poverty line may need to conform with the living conditions and amenities which are customary in the subgroup to which the households belong (often referred to as participation standard). Since the poverty line in each subgroup reflects that subgroup's overall living standard, any subgroup differences in poverty lines, after making allowance for subgroup cost-of-living differences, should reflect differences in living standards of the various population subgroups. Thus, poverty assessment appealing to this notion of poverty lines yields relative poverty considerations. 2 This section has drawn largely from Balisacan (1999). Annex 6 Page 9 of 32 From a policy viewpoint, the two concepts of poverty have different implications for the choice of poverty-reduction programs. Redistribution programs (e.g., social welfare payments, asset redistribution) characterize a development policy focused on reducing relative poverty. Economic growth alone may not help much in reducing this type of poverty. On the other hand, absolute poverty reduction may require no less than overall expansion of employment opportunities sustained over a long period of time. In this case, development policy anchored on poverty reduction has to focus on creating a favorable environment for sustained employment growth (e.g., investment in infrastructure and human capital). The two concepts have also important bearing for poverty monitoring. For example, for monitoring progress in national poverty reduction, or for assessing comparative performance in poverty reduction across regions, provinces or areas, it may make more sense to fix the poverty line to a certain standard of living, regardless of the differences in living standards across areas or regions and over time. On the other hand, in a decentralized governance structure, where local government units (LGUs) take an active role in poverty alleviation, poverty monitoring may also have a local dimension: It may be sensible to let the poverty line conform with the LGU's living conditions and amenities. Each LGU, in a sense, may be made responsible in defining a poverty standard that it can comfortably associate itself with, given its perception of "minimum basic needs." The official approach to constructing poverty lines starts with the construction of representative food menus for urban and rural areas of each region of the country. The menus, prepared by the Food and Nutrition Research Institute, consider local consumption patterns and satisfy a minimum nutritional requirement of 2,000 calories per person per day and 80 to 100 percent of recommended daily allowance for vitamins and minerals. The menus for 1985 were based on FNRI's 1982 Food Consumption Survey, while those for 1988 were on the 1987 Food Consumption Survey. Menus for 1991 and 1994 were the same as those for 1988. Evaluated at local prices, the menus form the food poverty thresholds.3 The Family Income and Expenditures Survey (FIES) is then utilized to determine the average expenditure share of households whose incomes fall within a ten percent band around the food threshold. This share is used in deriving the total poverty line from the food threshold. By construction, the official methodology tends to yield poverty lines that are not consistent, that is, the standard of living implied by the poverty lines varies for each of the regions as well as over time. It is well known that as household incomes rise, consumption of cheap sources of calories tends to decline as consumers shift to higher quality and more varied- but not necessarily more nutritious-food sources. Put differently, the income elasticity of demand for calories is typically much lower than that for food as a group.4 The shift is invariably associated with improvement in standard of living. Hence, since the official methodology starts with the local consumption pattern in the construction of food threshold for the urban/rural area of each region of the country, estimates of food thresholds tend to be higher for the economically more progressive regions (areas) than for the economically backward regions (areas). Moreover, since consumption patterns prevailing in various years inform the construction of food thresholds, estimates of food thresholds also tend to rise with improvement in overall living standards (as what may happen during episodes of economic growth). In short, the food poverty 3 It should be noted that the food menus have not been validated by any of the statistical agencies. 4 See, for example, Bouis and Haddad (1992) and Subramanian and Deaton (1996). Annex 6 Page 10 of 32 lines employed for the various regions and years are not comparable since they imply different levels of living standards. They cannot be therefore suitable for either national poverty monitoring or assessing comparative performance across regions or areas of the country, even more so if the policy objective is to reduce absolute poverty. The official approach to estimating the nonfood component of the poverty line utilizes the consumption patterns of households within the ten percentile of the food threshold in the income distribution. The average food share for these households is derived and used to divide the food threshold to arrive at the poverty line. This procedure carries over the inconsistency problem inherent in the estimation of the food threshold. Since the food thresholds reflect the consumption patterns (and hence overall living standards) prevailing in each region, as well as in rural/urban areas within each region, the average food share is expected to be lower in progressive areas or regions of the country than in backward areas or regions. It is well known that food share correlates well, albeit not perfectly, with standard of living. That is, for two households with ditferent food shares, the one with the higher food share tends to have lower standard of living, regardless of their demographic differences (Deaton and Muellbauer, 1980). Thus, by construction, the nonfood component of the poverty lines in economically progressive regions/areas also implies higher level of living standard than that for the economically backward regions/areas. Suppose instead that the spatial poverty lines conform to the consistency feature for a poverty norm, e.g., adjusting the all-Philippines expenditure cutoff for cost-of-living differences across regions or areas but not for differences in general living conditions and amenities across regions or areas. This paper uses such lines (hereafter referred to as "consistent CBN" poverty lines, since the derivation is akin to the familiar "Cost of Basic Needs" approach). The derivation requires (i) setting a bundle of food in each province which is the average consumption of a reference group fixed nationally in terms of their expenditure, (ii) adjusting this bundle to satisfy the minimum nutritional requirement of 2,000 calories per person per day, (iii) valuing the adjusted bundle at consumer prices prevailing in each province, and (iv) estimating the non-food spending of the reference households in the neighborhood of the point where total spending equals the food threshold. The approach does not require that the same bundle of goods be used in each province; rather it requires that the bundle is typical of those within a pre-determined interval of total consumption expenditure fixed nationally. Put differently, the approach fixes the standard of living used for provincial comparison but not the composition of goods used in each province. Differences in composition may arise as a result of spatial differences in relative prices faced by households. Details of the approach and its implementation, as well as poverty line estimates for the country's 78 provinces, are given in Balisacan (1999). By no means is it suggested that the above approach is the only way to construct consistent poverty lines. There are other, albeit even more arbitrary, approaches. For example, one can fix the poverty line simply as, say, half of the mean (or median) income for the entire population and then adjust it for cost-of-living differences between regions or areas (and for inflation for poverty comparison over time). This is the common practice employed in European countries when the interest is to monitor or compare poverty performance across countries, across states or regions within a country, or over time. Serious work on poverty comparison in developing countries also follow this track.S The World Bank (1990, 1996) approach to See, for example, Kakwani (1993), Huppi and Ravallion (1991), and Grootaert (1995). Annex 6 Page 11 of 32 quantifying trends in absolute poverty across developing countries also imposes the consistency feature of a poverty norm, using $1.00 per capita per day (at 1985 purchasing power parity) as the absolute poverty line.6 In contrast, in developed countries where the policy issue is intimately related with inequality in living standards rather than with absolute poverty, the common practice is to set the poverty line as a certain proportion of mean/median income/expenditure.7 Note that the objective of this exercise is not to derive an alternative estimate of the level of national poverty, but rather to come up with a practical approach to constructing poverty lines that can be used for consistently ranking (absolute) poverty status across provinces, regions, or socio-economic groups, as well as for monitoring performance in absolute poverty reduction over the medium term (say, 5-10 years). The underlying assumption of the exercise is that the main objective of development policy is to reduce absolute poverty across space and over time. A poverty indicator and monitoring system must therefore have to be capable of adequately capturing comparative performance in terms of the changes over time, or differences across space, in absolute poverty. Another measurement practice that has influenced the outcomes of poverty comparison has to do with the choice of a broad indicator of a household's standard of living. The official approach to poverty assessment uses current household income. However, as elaborated elsewhere (Balisacan 1999), from both conceptual and practical grounds, consumption is preferred to income as a broad indicator of a person's living standard. Standard arguments in microeconomic theory suggest that welfare level is determined by "life-cycle" or "permanent" income. Since current consumption is a good approximation of this income, current consumption can be justified as a better measure of current welfare. From a practical viewpoint, the difficulty of acquiring accurate information proves to be more severe for income than for consumption (Deaton 1997; Ravallion and Chen 1997). For example, one has to undertake multiple household visits or use recall data to obtain a reasonably accurate estimate of annual income, given that such estimate is required for a satisfactory measure of individual welfare, whereas one has to rely only on consumption over, say, the previous few weeks to get a satisfactory measure of individual welfare. Moreover, households may understate their incomes to avoid future problems with tax agencies - a quite common practice among self-employed professionals. The difficulty also extends to imputing "incomes" of households which consume part of their production, such as the case for a large majority of the farming population. In short, measurement errors could be expected to be greater for income than for consumption. Thus, this paper uses current consumption for gauging household living standard. The contrast in the conclusion drawn from a poverty profile of urban and rural areas is apparent in Table 3. Poverty incidence estimates based on the official approach (OA) suggest that rural poverty hardly changed between 1994 and 1997, while those based on the preferred approach (PA) suggest that it did - and substantially, from 45 percent to 37 percent.8 The two other poverty measures suggest the same conclusion. The reduction indicated by the preferred 6 The use of purchasing power parity (PPP) rates, instead of official exchange rates, takes care of intercountry differences in cost of living. 7 See, for example, Buhmann et al. (1988), Smeeding et al.(1993), and de Vos and Zaidi (1997). 8 Rural poverty indicators constructed from the FIES for the 1980s are not comparable with those for the 1990s owing to the urban-rural reclassification problem noted above. However, interyear comparison within a decade is valid since the sampling frame and the rural-urban classification of geographic areas are common for these years. Annex 6 Page 12 of 32 approach for the 1985-88 and 1991-94 pairs is also greater than that suggested by the official approach.9 The official approach to poverty measurement also provides a remarkably different picture of the regional poverty profile from that given by our preferred approach. As shown in Table 4, only in 4 of the 15 regions are the ranks identical for both PA and official estimates of poverty incidence. In some cases, the two approaches provide substantially different poverty ranks. For example, if the regions are arranged in ascending order of poverty incidence, official estimates would show that Central Visayas is the 5th least poor region, but the PA estimates would indicate that this region is the 5th poorest in the country. On the other hand, official estimates show that CAR is ranked 11th (i.e., one of the 5 poorest regions), but the PA estimates indicate that the region is just a step away from being one of the 5 least-poor regions. On the whole, the rank correlation between the PA estimates and official estimates is 0.69 for the incidence index and 0.54 for the depth index. Ranking inconsistency also hounds the provincial profile. This is seen in Table 5 which lists the 10 poorest and the 10 richest provinces based on incidence estimates. Only 4 of the 10 poorest provinces based on PA estimates appear in the list of 10 poorest provinces based on official estimates. The match is significantly better for the other end of the poverty spectrum, i.e., top 10 provinces with lowest poverty incidence. Here, only 3 of the 10 provinces characterized as least poor based on official estimates do not come from the list based on PA estimates. The above estimates thus show that what is known about the spatial profile of poverty is not quite robust. Put differently, given that the policy objective is reduction of absolute poverty, the practice of using official estimates of regional poverty to inform policy decisions vis-a-vis geographic allocation of public investments stands on shaky ground. In summary, assuming that the main yardstick against which outcomes of national government policy are judged is the reduction of absolute poverty, it is imperative that the poverty measurement and monitoring system can track well the changes in absolute poverty over time and across administrative areas of the country. The present system falls short of this requirement. Its dependence on current household income as a broad proxy for household welfare, as well as on poverty norms that are quite sensitive to spatial differences - and to changes over time - in overall living standards, makes it incapable of capturing properly the progress made in absolute-poverty reduction. The poverty lines need to be anchored on the consistency feature of a poverty norm. Indeed, for a cross section of developing countries where the main policy concern is the reduction of absolute poverty, poverty lines are not sensitive to changes in living standards (Ravallion 1994). The economic history of the now-developed countries shows that it is only in the later stage of development that the poverty lines become sensitive to the distribution of living standards in the society, i.e., the policy concern increasingly shifts from absolute poverty to relative poverty. For national poverty monitoring in the Philippines, the preferred approach-or modifications of it-is recommended. However, as 9 Balisacan (1999) has shown that, for 1994-97, roughly four-fifths of the difference in the two estimates come from the difference in the choice of welfare indicator; the remaining one-fourth comes from the difference in the construction of poverty standard. The choice of welfare indicator mattered so much since income and expenditure evolved differently across the income distribution during the period of interest. For the bottom 30 percent of the population, the rates of increase in real consumption expenditure (our indicator of living standard) are about twice higher than those in real income (the official indicator) between 1994 and 1997. Annex 6 Page 13 of 32 discussed in Balisacan et al. (1998), the current (official) methodology may still be appropriate for local poverty monitoring, especially in a decentralized governance regime. In this regime, LGUs define their own poverty standards, given their development priorities and general living conditions. 4. TOWARD A POVERTY MONITORING AND INDICATOR SYSTEM FOR THE RURAL SECTOR' 0 Key to the effectiveness of an anti-poverty program is an adequate understanding of the poverty profile, the limits of - and scope for - public action to address them, and household responses to these actions. Figure 1 illustrates how public programs and policies affect rural households and ultimately rural welfare outcomes. Public policies may provide enabling (and even disabling) conditions that affect household decisions on labor supply, fertility, etc. Investment in irrigation facilities, for example, may allow farmers to shift to modem cropping patterns and technologies, thereby raising farm productivity and household incomes, enhancing household's capacity to invest in human capital, and possibly affecting fertility decisions. Conventional indicators of rural welfare outcomes can be classified into two groups. One group pertains to "ends" indicators; these refer to "functionings" - the various living conditions which can or cannot be achieved - and "capabilities" - the ability to achieve them (Sen 1985). Included in this group are longevity, health and nutrition, and literacy indicators." The other group can be described as "meso" indicators; these refer to conduit mechanisms that transfer the effects of household's command over resources (as given by its full income from income-earning activities and from transfers, both public and private) to functionings and capabilities in the rural sector. This group includes indicators of rural employment, rural nonfarm income, and food expenditure share.12 In rural development literature, success in rural poverty alleviation is associated with the diversification of rural employment and income (Reardon et al. 2000; FAO 1999; Otsuka 1998). The tendency of food share in total household expenditure to fall as rural household income increases (i.e., Engel effect) is also a well known "stylized fact" of successful rural development. The effect of rural employment and income on functionings and capabilities (ends) may be enhanced (or blunted) by public policies on social services, notably health and nutrition, education, and family planning services. Improvement in efficiency and equity outcomes vis-a- vis provision of these services is expected to enhance the attainment of "ends." For this reason, '1 Parts of the material used in this section are liberally drawn from Balisacan et al. (1998; 2000), although tailored to focus on rural poverty monitoring. " Note though that health, nutrition, and education may be considered both as "means" to an end and an end by themselves. An example of "composite" ends-indicator is the human development index (HDI) regularly reported by the UNDP and, in the Philippines, by the Philippine Human Development Network. 12 Alternatively, these indicators mnay be referred to also as means-based measures, which refer to both privately earned incomes and social services available to the household. They usually do not suffice as comprehensive measures of well-being simply because they do not capture household dynamics (i.e., intra-household allocation) and, in practice, they capture only privately earned incomes and transfers (and exclude household benefits from public provision of social services). The use of the term "meso" only serves to emphasize that the indicators are intermediate rural welfare outcomes. Annex 6 Page 14 of 32 indicators of access to social services at the rural sector level are, in Figure 1, also treated as meso indicators. The most common practice of describing rural welfare outcome is via monetary measures - the use of current income or expenditure. In fact, as discussed above, the official procedure is to ascertain a minimum level of income for a given geographic area sufficient to meet nutritional and other basic needs. A household is deemed poor if its income, adjusted for household size, is below this minimum. The preferred approach described above, on the other hand, uses a similar procedure except that the poverty norm employed to separate the poor from the nonpoor is fixed in terms of a given living standard, regardless of geographic location, and that it uses current expenditure as a broad measure of economic well-being. The expenditure-based poverty indicators, though not strictly ends indicators, intersects both short-term and long-term aspects of poverty. As pointed out earlier, household consumption expenditure is better than current income as a broad indicator of current welfare and at least as good as income in indicating long-term welfare level. An effective poverty measurement and monitoring system - including the choice of an appropriate indicator, the definition of the standard of living for identifying the poor, and the procedure to aggregate the inforrmation on the poor - requires an explicit specification of the welfare objective of public policy. For the rest of this section, it is assumed that the objective of poverty measurement and monitoring is to inform policy and program choices for addressing either one or both types of poverty concerns, i.e., short-run poverty (which has to do with temporary fall in individual/household welfare owing to adverse shocks, such as drought) and long-run poverty (which has to do with the lack of human capabilities for achieving food and other basic needs; growth of the rural economy may mediate the achievement of these capabilities and hence "break the cycle of poverty"). As noted above, the long-term concern is to "break the cycle of poverty," while the short- term concern is to protect those vulnerable to shocks and transient distress, as well as to monitor the progress or means toward long-term outcomes. Unfortunately, the current monitoring/statistical system is incapable of discriminating between chronic (long-term) and transient (short-term) poverty. In particular, the system is unable to identify which groups are in fact vulnerable to macroeconomic shocks. In contrast to poverty, which has to do with current standard of living, vulnerability pertains to changes in socio-economic status. Ideally, one needs panel data to understand more fully such phenomena as vulnerability and long-term dynamics. It remains a challenge for the statistical system to provide such data. In the absence of direct measures of vulnerability on household welfare, proximate determinants of vulnerability, particularly changes in food prices and in employment status, may suffice. It is known that if food prices rise during a macroeconomic shock, or in response to the elimination of price subsidies to restore balance in government budget, the poor are likely to be disproportionately hurt in the short term. Poor households in agriculture may also be hurt, even if they themselves produce food (and hence may benefit from food price increases). This will be so if they are net buyers of food, as demonstrated in Balisacan's (1995) simulation of the short term impact of devaluation on household welfare. Opportunities for consumption smoothing when such shock occurs are likely to be much more limited in rural areas, where credit and insurance markets are highly imperfect or nonexistent, than in urban areas. Annex 6 Page 15 of 32 Indicators of rural welfare, including human poverty outcomes, should be distinguished from indicators of government agency performance. Conceptually, the former are independent of the structure of government organization and authority and do not indicate how lines of responsibility across the administrative structure are drawn. The latter establish link between administrative efficiency, on the one hand, and national and sectoral performance, on the other. The list of "outcome" indicators proposed below has to do only with the former, i.e., rural welfare at the national/sub-national level. Poverty monitoring system under a devolved regime must reflect the fact that development objectives and priorities are usually not uniform across geopolitical units. The challenge is to determine institutionally efficient arrangements, given these objectives and constraints. For instance, it may suffice for the "center" (national agency) to develop a small number of indicators that can signal the presence of socio-economic problems in sub-national units (LGUs) or groups (economic sectors, income classes, etc.). The "lower" levels of government can build on the core set, adding indicators to suit their own specific priorities and imposing local standards and other considerations. In addition, it may turn out that long-term indicators are more useful at the national and regional levels, while short-term, means/operational measures are more important to the provincial level and below. In any case, given diverse priorities among private and public stakeholders and the enormous information requirement, it is only necessary that all institutions are able to obtain required data. Replications of data may even be necessary to ensure the integrity of the entire system. A central unit would then be tasked to mobilize data from the many sources. Given the above considerations, Table 6 describes a minimal list of priority indicators for regular monitoring of rural poverty at the national and sub-national levels. The list takes into account available data, ensuring that the suggested indicators are supported by the existing statistical system (i.e., fiscal constraint is binding). Table 7 provides benchmark information on some key "meso" and "ends" indicators, given the most recent data, for each province. Note that since some of the outcome indicators pertain only to rural households, care must be exercised in comparing them with future estimates based on census-defined "rural areas." As discussed above, urban/rural reclassification in the course of urbanization tends to systematically create a downward bias on usual indicators of rural perforrmance. Table 8 shows the correlation of the traditional aggregate measure of well-being - poverty incidence - with other outcome measures and with the meso indicators. What is obvious is that while poverty incidence correlates well with most of the other measures, for some others, such as for the malnutrition rate and the proportion of households without access to safe water, almost no relationship is discernible. This means that for a truly credible rural poverty monitoring system, it is not enough for the government to rely on traditional measures: It should also look at the other (outcome and meso) measures to complement the traditional ones. 5. Assignment Issues and Problems As pointed out earlier, indicators of rural welfare outcomes should not be equated to indicators of government agency performance. Conceptually, the former are independent of the structure of governnent and their evolution do not depend exclusively on government action (or inaction). Annex 6 Page 16 of 32 An effective monitoring and evaluation (M/E) system focused on rural welfare outcomes has to be incentive-compatible, i.e., the agents (government agencies) acting in behalf of the principal (society) find that it is in their interest to advance the interest of the principal. This requires, among other things, that agents responsible for program implementation should not be at the same time the monitors of program outcomes vis-a-vis rural welfare indicators. The Department of Agriculture, for example, should not be responsible for generating and reporting information on rural welfare outcomes proposed in this paper. The need to have a separate body to monitor poverty-alleviation programs (PAPs), including those designed for rural areas, has long been felt. In line with this, Republic Act 8245 (otherwise known as the Social Reform and Poverty Alleviation Act) was enacted, leading to the creation of the National Anti-Poverty Commission (NAPC). The Commission is mandated to coordinate and monitor poverty alleviation programs (PAPs). To carry out the mandate, NAPC is tasked to coordinate with different national government agencies, local government agencies, and the private sector in the full implementation of PAPs; coordinate with local government units in the formulation of PAPs; and oversee, monitor, and recommend measures ensuring effective formulation, implementation, and evaluation of policies, programs and resource allocation. As a coordinating body, NAPC has as its members the heads of selected line agencies (Departments of Agrarian Reform, Agriculture, Labor and Employrnent, Social Welfare and Development, Health, Education and Culture, and Environment and Natural Resources), staff/oversight agencies (Departments of Budget and Management, Interior and Local Government, Finance, and NEDA), and basic sector representatives (farmers, fisherfolk, urban poor, indigenous people, women, and so forth). But how should NAPC relate to the current poverty M/E institutions, particularly the other oversight government agencies (such as the NEDA)? NAPC's powers and functions do not have to conflict with (or duplicate) the organization of and assignments within the national poverty M/E system. The NEDA spearheads the formulation of the national development plan, which serves as the framework for the design of national anti-poverty program.13 On the other hand, NAPC, in consultation with other national government agencies devises the appropriate national poverty monitoring system, coordinates the M/E systems of the various agencies vis-a- vis welfare outcome indicators (including those proposed in this paper for rural areas), and oversees the generation and reporting of information on poverty concerns.14 In addition, to the extent that LGUs take a greater role in the implementation of anti-poverty programs, NAPC could provide (i) a "menu" of high-priority anti-poverty programs and projects from which the LGUs can select, (ii) technical assistance to LGUs in project development and capacity building, and (iii) fund augmentation for LGUs undertaking projects with poverty alleviation objectives. A major problem, however, is that NAPC's capacity to perfortn the above tasks, particularly M/E of national welfare outcome indicators is rather weak. Capacity building within the Commission must be a high priority. 13 The Plan includes, among other things, the targets and strategies relating to the goal of poverty alleviation. 14 The inter-agency Technical Working Group on Poverty Statistics presently oversees the generation and reporting of information on poverty statistics. At the very least, the active participation of NAPC in this technical woTking group is a minimum requirement for an efficient poverty monitoring system. Annex 6 Page 17 of 32 REFERENCES Balisacan, Arsenio M. 1993. "Agricultural Growth and Rural Performance: A Philippine Perspective." Journal of Philippine Development, 20 (Second Semester): 289-317. Balisacan, Arsenio M. 1994. Poverty, Urbanization, and Development Policy: A Philippine Perspective. Quezon City: University of the Philippines Press. Balisacan, Arsenio M. 1995. "Anatomy of Poverty during Adjustment: The Case of the Philippines." Economic Development and Cultural Change, 44 (October): 33-62. Balisacan, Arsenio M. 1999. Poverty Profile in the Philippines: An Update and Reexamination of Evidence in the Wake of the Asian Crisis. Report prepared for the World Bank. Balisacan, Arsenio M., Ruperto P. Alonzo, Toby C. Monsod, Geoffrey M. Ducanes, and P. Jude Esguerra. 1998. Conceptual Framework for the Development of an Integrated Poverty Monitoring and Indicator System. Pasig City: National Economic and Development Authority. Report prepared in support of the UNDP-assisted project Strengthening Institutional Mechanisms for Convergence of Poverty Alleviation Efforts. Balisacan, Arsenio M., Rosemarie G. Edillon, Alex B. Brillantes, and Dante B. Canlas. 2000. Final Report prepared for the National Economic and Development Authority in support of the UNDP-assisted Project: Strengthening Institutional Mechanisms for Convergence of Poverty Alleviation Efforts. Buhmann, Brigitte, Lee Rainwater, Guenter Scbmauss, and Timothy Smeeding. 1988. "Equivalence Scales, Well-Being, Inequality, and Poverty: Sensitivity Estimates across Ten Countries using the Luxembourg Income Study Database." Review of Income and Wealth 34:115-142. Deaton, Angus. 1997. The Analysis of Household Surveys: A Microeconometric Approach to Development Policy. Baltimore: Johns Hopkins University Press, for the World Bank. Deaton, Angus and John Muellbauer. 1980. Economics and Consumer Behavior. Cambridge: Cambridge University Press. FAO [Food and Agriculture Organization]. 1999. Poverty Alleviation and Food Security in Asia: Lessons and Challenges. Bangkok: FAO Regional Office for Asia and the Pacific. Otsuka, Keijiro. 1998. "Rural Industrialization in East Asia." In Y. Hayami and M. Aoki (eds.), The Institutional Foundation of East Asian Economic Development. London: Macmillan. Ravallion, Martin. 1994. Poverty Comparisons. Chur: Switzerland: Harwood Academic Publishers. Kakwani, Nanak. 1993. "Poverty and Economic Growth Application to C8te d'Ivoire." Review of Income and Wealth 39 (June): 121-139. Annex 6 Page 18 of 32 Ravallion, Martin, and Shaohua Chen. 1997. "What Can New Survey Data Tell Us about Recent Changes in Distribution and Poverty?" World Bank Economic Review, 11 (May): 357- 282. Reardon, T., J.E. Edwards, K. Stamoulis, P. Lanjouw, and A.M. Balisacan. 2000. "Effects of Nonfarm Employment on Rural Income Inequality in Developing Countries: An Investment Perspective," Journal of Agricultural Economics (forthcoming). Subramanian, Shankar, and Angus Deaton. 1996. "The Demand for Food and Calories." Journal of Political Economy, 104:133-162. Annex 6 Page 19 of 32 TABLE 1 RURAL POVERTY ESTIMATES BASED ON OFFICIAL MEASUREMENT PRACTICE 1985 1988 1991 1994 1997 Rural Incidence 56.4 52.3 55.0 53.1 51.4 No. of poor persons 18,74 18,118 17,346 17,98 19,59 (in thousands) 4 8 1 Share in total poverty 70.25 71.37 60.75 65.72 72.19 Agriculture (urban and rural) Incidence 63.7 61.7 63.7 62.0 60.3 No. of poorpersons 16,34 15,552 17,910 18,10 17,56 (in thousands) 4 3 1 Share in total poverty 61.29 61.67 62.72 66.15 64.73 Note: Official methodology uses region-specific poverty lines, differentiated by urban and rural areas, and current current income as a broad measure of household standard of living. Rural poverty estimates for the 1980s are not comparable with those for the 1990s (see text). Source: Author's estimates based on Family Income and Expenditures Survey (NSO, various years). Annex 6 Page 20 of 32 TABLE 2 RURAL AREASAND URBANIZATION 1960 1970 1980 1990 1. Total Population (in million) 27.09 36.66 48.10 60.69 % change per year - 3.01 2.71 2.33 2. Proportion which Is Rural Census report 70.20 68.17 62.49 51.16 Fixed rural areas* 68.55 68.17 66.35 64.16 3. Proportion Which Is Urban Census report 29.80 31.83 37.51 48.84 Fixed rural areas 31.45 31.83 33.65 35.84 4. Rural Population Growth Census report - 2.74 1.84 0.32 Fixed rural areas - 2.98 2.44 1.99 5. Tempo of urbanizationt Census report - 0.95 2.51 4.64 Fixed rural areas - 0.80 0.83 0.97 *Based on 1970 urban-rural classification of villages. tUrban-rural growth difference. Source: National Statistics Office, Integrated Census of the Population, various years. Annex 6 Page 21 of 32 TABLE 3 RURAL POVERTYESTIMATESBASED ON TwoAPPROACHES Official approach* Preferred approach** Incidence Depth Severity Incidence Depth Severity 1. Trend 1985 56.4 20.1 9.4 53.1 17.8 8.0 1988 52.3 17.8 8.0 45.7 14.0 5.9 1991 55.0 19.0 8.7 48.6 15.6 6.8 1994 53.1 18.2 8.3 45.4 13.0 5.2 1997 51.4 18.0 8.3 36.9 9.8 3.6 2. Percentage-point reduction 1985-88 -4.1 -2.3 -1.4 -7.4 -3.8 -2.1 1991-94 -1.9 -0.8 -0.4 -3.2 -2.6 -1.6 1994-97 -1.7 -0.2 0.0 -8.5 -3.2 -1.6 3. % contribution of Rural sector in Total Poverty 1985 70.3 72.4 73.4 79.5 82.8 84.8 1988 71.4 73.3 74.3 82.3 85.7 87.6 1991 60.8 61.7 61.9 70.7 73.3 74.5 1994 65.7 67.5 68.3 71.1 74.9 77.3 1997 72.2 75.6 77.5 77.4 80.5 82.4 *Based on official poverty lines and on current income as indicator of living standard. **Based on fixed level-of-living poverty lines and on consumption expenditure as indicator of living standard (see Balisacan 1999). Source: Author's estimates. Annex 6 Page 22 of 32 TABLE 4 REGIONAL PROFILE, 1997 Incidence Depth Preferred Official Re- Preferred Official Re- approach ranking* approach ranking* Metro Manila 3.5 8.7 0 0.6 1.7 0 Ilocos 20.8 44.3 2 4.0 15.0 3 Cagayan 30.1 37.9 -5 7.5 10.8 -4 Central Luzon 13.2 19.4 0 2.5 4.8 0 Southern Luzon 19.6 30.2 0 4.5 9.2 -2 Bicol 45.6 57.8 1 12.6 20.4 0 Western Visayas 21.8 47.8 4 4.7 16.1 3 Central Visayas 35.2 39.1 -6 10.3 13.2 -7 Eastern Visayas 50.6 45.4 -5 16.0 15.8 -5 Western 35.2 48.7 -4 8.2 16.6 -3 Mindanao Northern 29.9 54.7 4 7.6 20.8 5 Mindanao Southern 27.8 44.6 0 7.1 16.0 1 Mindanao Central Mindanao 33.1 55.9 3 9.2 22.5 4 CAR 22.1 49.7 5 4.4 19.1 7 ARMM 50.5 63.1 1 15.1 19.6 -2 *Official rank less consistent approach rank, where rank is from I (least poor region) to 15 (poorest region). Source: Author's estimates. Annex 6 Page 23 of 32 TABLE 5 PROVINCES WITH HIGHEST AND LOWEST POVERTY INCIDENCE Preferred Rank Official Rank in Approach Approach Preferred Approach 4. A. 10 PROVINCES WITH HIGHEST INCIDENCE (ASCENDING ORDER) Sorsogon 69 Mt. Province 42 Tawi-Tawi 70 North Cotabato 63 N. Samar 71 Lanao del Sur 61 W. Samar 72 E. Samar 77 * Biliran 73 Agusan del Sur 54 Siquijor 74 Ifugao 41 Romblon 75 Abra 25 Masbate 76 Sulu 78 * E. Samar 77 Masbate 76 * Sulu 78 Romblon 75 * Metro Manila 1 Metro Manila 1 * Pampanga 2 Cavite 6 * Bataan 3 Batanes 24 Laguna 4 Rizal 9 * Ilocos Norte 5 Bulacan 7 * Cavite 6 Pampanga 2 * Bulacan 7 Bataan 3 * Nueva Viscaya 8 Laguna 4 * Rizal 9 Batangas 15 Ilocos Sur 10 Zambales 11 *Also included in the 10-province Preferred Approach list. Source: Author's estimates based on the 1997 Family Income and Expenditures Survey. Annex 6 Page 24 of 32 Table 6: Rural Poverty: Priority List of Rural Poverty Indicators Poverty Concern/ Information Frequenc Content/Description & Source Level of sub-national aggregation Priority Component System Purpose "Ends" Measures Poverty Family Triennial, Family income and NSO Provincial (since 1994), sectoral incidence, depth, & Income and since expenditures, sources of severity Expenditures 1985 incomes, spending Survey patterns; benchmark (FIES) infornation for CPI Annual Annual Family income and NSO Provincial (since 1998) Poverty (except expenditures; access Indicator FIES indicators to basic needs Survey years), and social services; (APIS) since employment status of 1998 household members Education (i) Functional FLEMMS Data on functional NSO Regional literacy literacy, education, and mass media exposure (ii) Primary & HS enrolment rate Infant mortality Health Info Annual Data on DOH Sectoral System mortality/morbidity from notifiable diseases, nutrition status & deficiencies, health services & sanitation Malnutrition National ce every Nutrition status, food FNRI Regional prevalence Nutrition years adequacy, nutrition Survey deficiencies, and related socio-economic information Measures Rural employment ISH-Labor Quarterly Data on the employed/ NSO Regional Force Suvey unemployed, and on other (LFS) relevant characteristics of household Rural nonfarm FIES Triennial, See FIES above NSO Provincial (since 1994) income (as % of ince 1985 total HH income) Food expenditure FIES riennial, See FIES above NSO Provincial (since 1994) (as % of total HH ince 1985 expenditure) Access to safe water FIES, APIS Annual, See FIES/APIS above NSO Provincial ince 1997 Access to health FIES, APIS Annual, See FIES/APIS above NSO Provincial care kince 1997 / Annex 6 Page 25 of 32 Table 7 Benchmark Poverty Indicators, by Province % of households Nonfarm Poverty incidence* Education Under-5 Malnutrition w/out access to income (% of Food Province Total Rural Functional Primary and mortality rate Electrici Safe total HH ratio (1997) only literacy secondary rate (1995) (underweigh ty water income) (Rural HHs, (1997) (1994) enrolment t) (1998) (1998) (1998) (Rural HHs, rate (1997) 1997) 1997) 0 (a) NC 3.5 - 92.4 91.7 38.5 7.1 1.3 11.9 - R 5 1 6. ILOCOS Ilocos Norte 8.3 9.7 84.7 85.2 63.8 9.1 7.2 7.0 71.2 50.3 Ilocos Sur 13.3 15.3 83.3 90.3 65.6 9.3 15.9 10.8 69.7 49.8 LaUnion 22.6 28.4 87.4 87.5 60.5 11.1 29.0 15.0 72.3 51.6 Pangasinan 25.2 31.4 87.4 90.6 60.67 9.5 25.0 10.5 77.2 52.9 2 7. CAGAYAN Batanes 21.7 19.0 92.7 84.7 78.4 1.5 9.3 4.7 80.5 42.1 Cagayan 31.7 31.8 86.7 85.3 80.8 11.4 39.3 15.8 59.4 55.5 Isabela 36.1 39.2 89.5 87.1 72.3 9.2 25.7 13.6 57.9 52.1 Nueva Viscaya 10.8 8.4 78.2 85.8 70.7 6.8 35.6 3.2 60.9 53.9 Quirino 18.5 21.2 80.1 86.0 82.3 11.9 37.5 0.0 51.8 54.4 / Annex 6 Page 26 of 32 8 3 9. CENTRAL LUZON Bataan 7.0 4.5 88.7 90.7 56.4 4.9 9.8 6.0 81.3 48.2 Bulacan 10.1 14.2 90.6 92.2 43.1 5.1 1.3 9.1 83.5 44.5 Nueva Ecija 26.7 29.4 92.4 84.3 59.2 7.5 12.8 18.5 57.6 52.4 Pampanga 5.8 7.8 79.2 85.8 46.4 6.6 1.3 30.4 84.3 52.6 Tarlac 15.4 17.7 82.2 86.3 58.6 11.9 15.7 3.1 75.9 54.6 Zamnbales 13.8 16.9 81.7 90.0 60.3 12.6 16.1 2.4 79.1 55.4 D 4 11. SOUTHERN LUZON Aurora 19.2 21.7 84.2 87.8 77.0 10.7 18.3 15.8 61.0 55.4 Batangas 17.4 19.8 90.4 93.8 54.0 5.8 5.9 8.8 83.3 41.9 Cavite 9.1 13.4 92.8 87.8 42.6 3.1 2.3 4.2 81.2 47.0 Laguna 8.2 17.9 86.1 93.0 47.0 7.0 4.6 2.3 87.0 51.3 Marinduque 38.2 40.9 91.3 91.3 73.6 11.2 49.2 5.7 85.0 53.1 Mindoro 17.3 24.1 83.1 80.3 78.8 9.9 51.9 0.7 41.3 52.4 Occidental Mindoro Oriental 32.8 33.4 91.5 86.2 75.9 8.0 56.3 12.9 69.2 47.1 Palawan 26.1 30.3 77.4 83.5 81.2 10.3 46.2 20.6 52.2 54.0 Quezon 30.3 40.3 87.3 82.9 67.6 8.3 23.6 15.5 72.2 48.1 Rizal 12.3 28.5 89.2 88.6 48.9 9.4 6.7 14.3 81.9 54.3 Romblon 61.5 66.5 85.9 86.2 80.3 8.5 52.4 15.7 71.5 57.8 Annex 6 Page 27 of 32 5 5 13. BICOL Albay 49.8 56.4 82.3 84.3 74.8 4.9 33.0 35.2 79.0 50.9 Camarines Norte 39.5 43.5 90.0 77.8 88.0 11.4 34.1 1.0 83.4 48.4 Camarines Sur 35.1 43.4 86.0 86.3 78.1 9.3 33.7 1.8 54.7 60.1 Catanduanes 29.6 35.1 87.0 83.0 85.3 10.0 36.7 8.0 70.7 51.0 Masbate 64.9 71.5 75.2 80.7 92.5 14.9 75.9 0.2 54.6 56.8 Sorsogon 50.3 55.0 79.4 86.9 84.0 11.3 32.6 13.4 65.3 57.6 X 6 15. WESTERN VISAYAS Aklan 32.8 41.0 83.0 74.3 86.1 14.2 19.1 18.8 75.6 47.1 Antique 23.5 27.4 78.5 84.0 83.6 18.6 58.5 1.4 65.0 50.9 Capiz 26.0 29.7 76.5 85.8 80.4 11.8 48.2 15.7 63.6 48.4 Guimaras 17.5 19.8 73.6 63.9 10.6 72.2 77.5 61.5 55.1 Iloilo 22.0 26.6 83.6 85.5 68.1 12.9 35.4 7.4 75.8 47.4 Negros Occid. 18.8 23.2 78.3 85.0 72.1 14.0 41.4 24.3 48.0 55.0 .Z 7 17. CENTRAL VISAYAS Bohol 43.0 46.4 84.9 80.8 74.9 7.6 46.1 7.5 73.4 53.1 Cebu 31.8 53.9 84.9 83.4 58.3 8.6 26.9 23.2 82.8 58.0 Negros Orient. 35.1 40.3 73.8 73.6 75.3 7.8 58.7 16.8 57.6 55.0 Anner 6 Page 28 of 32 Siquijor 57.5 62.8 86.3 77.4 84.0 5.6 61.3 6.9 76.8 55.1 B 8 19. EASTERN VISAYAS Biliran 57.0 62.6 79.5 82.6 6.1 33.5 6.6 49.8 62.0 E. Samar 70.9 84.9 86.3 90.7 95.1 8.6 61.2 13.8 47.9 62.8 Leyte 41.9 49.7 79.5 75.9 81.7 9.6 46.8 23.8 63.2 57.7 N. Sanar 55.0 61.8 73.6 80.3 96.1 12.7 58.8 9.1 62.5 58.3 S. Leyte 45.9 47.2 86.4 80.1 90.3 16.8 43.8 1.8 66.3 55.7 W. Samar 55.1 61.8 76.4 76.1 97.4 11.9 49.1 0.9 61.1 59.5 2 9 21. WESTERN MINDANAO Basilan 30.2 33.3 48.1 69.5 86.2 49.4 19.0 53.4 50.3 Z. del Norte 44.2 49.4 74.5 76.0 83.1 9.8 49.9 5.2 67.7 48.7 Z. del Sur 31.9 40.5 77.2 76A4 78.6 12.7 45.2 2.1 67.0 49.9 22. 23. NORTHERN 0 MINDANAO Bukidnon 23.1 26.0 83.2 67.3 77.5 7.9 52.9 4.6 47.9 49.7 Camiguin 33.6 36.1 85.9 73.8 75.5 4.7 46.2 0.0 74.4 53.3 Mis. Occid. 37.1 44.1 84.8 73.8 73.7 6.3 31.8 0.6 64.1 53.0 Mis. Orient. 22.9 39.5 84.5 76.0 65.3 7.3 19.0 3.2 79.2 52.5 Annex 6 Page 29 of 32 24. 25. SOUTHERN I MINDANAO Davao del Norte 26.2 28.2 85.5 73.8 80.2 9.2 39.4 4.6 57.4 51.9 Davao del Sur 21.6 32.0 68.8 77.3 64.5 7.5 25.8 12.8 66.2 51.2 Davao Oriental 40.2 47.1 74.6 70.4 82.8 6.1 44.1 16.9 51.3 53.5 Sarangani 38.1 39.7 83.6 73.3 13.0 49.0 15.7 51.6 55.7 South Cotobato 25.4 39.7 73.6 72.0 70.5 14.5 22.7 4.2 59.2 56.1 26. 27. CENTRAL 2 MINDANAO Lanao del Norte 32.9 38.4 73.4 69.6 74.8 5.6 34.6 6.8 77.0 49.2 NorthCotobato 42.7 45.9 72.8 81.5 71.7 14.1 40.9 9.2 62.1 54.1 SultanKudarat 21.6 25.8 78.6 83.7 81.7 11.1 41.5 6.4 44.4 52.5 28. 29. CAR 4 Abra 22.0 26.5 90.1 93.4 83.1 13.1 27.0 6.7 62.5 59.0 Apayao 19.7 21.2 70.4 87.6 91.5 7.5 70.2 15.0 55.1 53.2 Benguet 19.7 31.9 83.9 90.9 59.6 3.0 25.7 1.8 67.6 53.5 Ifugao 31.3 34.2 51.1 76.2 93.0 6.2 72.3 13.5 68.7 46.0 Kalinga 16.3 18.0 70.4 87.3 91.5 16.6 53.1 0.0 58.5 49.9 Mt. Province 31.4 31.4 81.1 99.1 90.0 4.8 31.9 31.5 72.4 50.2 / Annex 6 Page 30 of 32 30. 31. ARMM 5 Lanao del Sur 40.8 42.1 72.8 78.8 101.8 7.4 52.5 2.9 47.6 53.6 Maguindanao 24.0 28.1 68.7 51.7 85.0 10.7 62.3 27.2 40.5 60.1 Sulu 87.5 91.4 57.7 43.5 92.1 8.9 80.3 17.9 38.5 59.2 Tawi-Tawi 52.1 50.7 52.7 67.5 85.5 10.4 71.9 0.4 51.8 52.0 32. 33. CARAGA 6 Agusan del Norte 32.3 42.7 88.2 77.4 81.3 8.3 32.5 0.9 75.9 55.0 Agusan del Sur 36.3 41.9 71.8 73.3 83.5 8.8 50.0 4.2 55.0 51.2 Surigao del Norte 43.0 45.6 81.6 76.3 79.9 12.3 40.9 14.5 55.1 58.3 Surigao del Sur 36.4 47.8 82.4 77.5 84.6 10.0 37.8 13.0 65.9 49.8 PHILIPPINES 25.0 36.9 83.4 83.5 66.8 9.2 27.7 10.3 67.2 52.1 *Based on fixed poverty norm and consumption expenditure adjusted for provincial cost-of-living differences (see Balisacan 1999. Annex 6 Page 31 of 32 Table 8 i. Correlations Coefficients Correlation with total poverty Correlation with rural poverty incidence incidence Coefficient Two-tailed Coefficient Two-tailed significance significance Functional literacy -0.27 0.01 -0.21 0.06 Primary and secondary -0.42 0.00 -0.39 0.00 enrolment rate Under-5 mortality rate 0.66 0.00 0.55 0.00 Malnutrition rate 0.12 0.30 0.10 0.37 Proportion of 0.62 0.00 0.53 0.00 households w/o electricity Proportion of -0.02 0.88 -0.02 0.88 households w/o safe water Rural nonfarm income -0.33 0.00 -0.27 0.02 as a proportion of total income Rural food expenditure 0.48 0.00 0.52 0.00 ratio Annex 6 Page 32 of 32 Figure 1 Rural Welfare Outcomes Conditioning Factors Rural Welfare Outcomes * Investment Infrastructure Household Decisions "Meso" Indicators Land investm ent and ................................................................... agraran relations Rural employment "Ends" Indicators Technology and HH eamed income Rural nonfarm Information income * Poverty (Incidence, Food expenditure Depth, Sevenity) TaPrice policy _ __ _ . share (Engel effect) * Literacy (Functional; * Tax policy ........................Primary & Secondary * Trade policy *Access to Social Enrollment Rate) * Monetary/credit policy Net transfers lerA ces Health & Nutrition * Commodity/subsectoral _ policy (public + private) ....................... ................ (Infant Mortality; * Extemal environment Public health Malnutrition International shocks Nutrition Prevalence) Natural conditions . Education (weather conditions, etc.) Rural Poverty Indicators/8 Feb 2000 ANNEX 7 ENHANCING FOOD SECURITY IN THE PHILIPPINES By: Dr. Ramon Clarete, Team Leader, AGILE Group TABLE OF CONTENTS Executive Summary ...................................................... 2 Introduction ...................................................... 4 Food Security Concerns ...................................................... 4 Food Security Defined ...................................................... 4 Scope ...................................................... 4 Extent of Local Sourcing ...................................................... 8 Program Design and the NFA ...................................................... 10 Key Improvements for Enhanced Food Security ...................................................... 12 Stabilizing Rice Prices Without the Use of Buffer Stocks ...................................................... 12 Public rice buffer stocks as insurance for contingent failure of the scheme ....................................... 16 Rice contingent fund for extraordinary situations ...................................................... 17 Food Security Versus Rice Self-Sufficiency ...................................................... 18 Targeting Rice Subsidies ...................................................... 19 Refor nul ating Assistance to Farmers ...................................................... 20 Public Expenditures for Agricultural Development ...................................................... 20 Decentralizing Agriculture Sector Infrastructure Development Services ........................................... 20 Encouraging Technological Innovation ...................................................... 22 Agricultural Special Safeguards and Measures Against Unfair Trade ................................................ 22 SPS Measures Documentation and Harmonization ...................................................... 23 Phasedown of Statutory Tariffs on Imported Agricultural Inputs ...................................................... 23 Privatizing the NFA's Proprietary Functions ...................................................... 23 Monitoring Progress of the Proposed Reforms ...................................................... 24 Interim Key Results Areas and Indicators ...................................................... 24 Rice Price Stabilization ...................................................... 24 Intemationally Competitive Agriculture (also a long-term issue) ...................................................... 25 Targeted Rice Subsidies to the Poor ...................................................... 25 Fiscal Assistance to the NFA Reduced ...................................................... 26 Long-Term Key Results Areas and Indicators ...................................................... 26 Rice Price Stabilization ...................................................... 26 Fiscal Assistance to the NFA Reduced ...................................................... 27 Table 5.1: Interim Key Result Areas, Indicators and Agencies .................................................. 29 Table 5.2: Long-Term Key Result Areas, Indicators and Agencies ............................. .............. 32 References ...................................................... 35 Annex 7 Page 2 of 35 Executive Summary This paper outlines a framework for improving the food security situation in the Philippines, develops a system for monitoring progress in this effort, and suggests arrangements for the implementation of the system. Improved food security is among the top priority goals of the current Philippine Medium Term Development Plan. In support of this objective, the paper discusses the key concerns related to food security. In response to the concerns, it then identifies strategic directions for enhancing food security and the key result indicators for monitoring the food security situation. A concluding section lays down the institutional aspects for implementing the suggested food security strategy. Food security may be defined as the access of the population to food supplies on a year-round basis and at stable market prices. The paper takes up three policy concems critical in any food security program, namely: the scope of any food security program, the meaning of price stability, and the extent of local sourcing of food items. The paper suggests that the government focus on rice alone in its food security program. There are three considerations behind the recommendation, namely: calorie-intensity of rice, its lack of substitutes due to the existing preference for rice of the population and continuing restrictions imposed by the government on rice and its substitutes, and high proportion of rice expenditure in household budgets in the country. A second concern, price stability is attained if market prices of rice fluctuate within a given range expected by the population. The paper discusses both intra-period and inter-period variability in rice prices. In the former case, the instability is measured in terms of the deviation of market prices from their moving average. About 80 % of the intra-period variability observations from 1980 to 1998 fall within plus and minus 5% of the average price. In the latter case, inter-period variability refers to the rate of change of the annual average market price. The same data of rice prices suggest that a change of the annual average rice prices up to 10% in absolute terms is normal. Both these observations were used in designing a price stabilization program for rice without the need for publicly held buffer stocks. The expressed food security policy of the govermment of aiming for rice self-sufficiency (taken to the extreme during the National Food Summit held in August 1998 when provinces were urged to become "self sufficient" in rice production) is not only infeasible but also undesirable. Despite the relatively high level of public resources currently allocated to the rice industry, the country's rice output has grown since the '80s at the annual rate of 2.41%, while rice use has increased by about a percent higher each year. As a result, the country has been importing rice in increasing proportion to total use particularly in the second half of the '90s. Fully reversing this trend requires not only a substantial amnount of public expenditures and management in the rice industry but also a high level of trade protection that reduces the industry's competitiveness and makes rice less affordable to the population. Any improvement of the current food policy regime has to involve changes in the charter of the government's food policy regulator and trading company, the National Food Authority (NFA). Indeed, the country's food security policy is embodied in Presidential Decree No. 4, as amended, that is also known as the NFA Charter. Enacted in 1972, this law merged the regulatory powers of the defunct Rice and Com Board and the proprietary functions of the National Rice Corporation and gave this to the National Food Authority (then called the National Grains Authority). A government corporation tasked Annex 7 Page 3 of 35 by its Charter to "buy [palay from farmers] high and sell [rice to consumers] low" in the name of food security, the NFA receives the following backing from its owner, namely: an annual budgetary support, equity infusions, full financial guarantees for its commercial papers, and the import monopoly for rice. The current food security program has avoidable fiscal burden. Since 1986, the NFA's net operating loss had fluctuated from nearly PHP 387 million in 1990 to over PHP 2.3 billion in 1992. It was only in 1996, when it imported rice, that it posted a net operating profit of PHP 1.2 billion. Not only are financial losses incurred, the current regime can be made more effective in attaining the goals of stabilizing rice prices, providing rice consumption subsidies to the poor, and ensuring competitive returns to palay farmers. In order to improve the design of the country's food security program, the following reforms are proposed: * limiting food security interventions to rice; * separation of the NFA's regulatory and proprietary functions; * a stabilization program for rice prices within a band adjusting the level of imports for this purpose, not with publicly-held buffer stocks but with appropriate rice import policies; * implementation of a targeted [rather than general] rice subsidy program for the poor; and * reformulation of the government assistance to rice farmers from the recurrent price supports to a package of assistance including an appropriate trade protection and public expenditures intended to increase productivity, reduce market transactions costs and facilitate domestic and intemational trade. Public expenditures for improving agriculture infrastructures and developing basic technology remain to be an important gap in this area. The paper suggests that one important problem preventing a sustained increase in productive public spending for agricultural development is the absorptive capacity of the Department of Agriculture. To alleviate this problem, a partnership with the local govemment units is essential. There is scope for further improving rice productivity through appropriate rice productivity programs. Nevertheless, at some point in time, with continuing growth in both population and per capita income, the country is bound to hit the limits imposed by land-its most constraining factor. When land scarcity becomes the constraining factor in increasing rice productivity, the government will tend to increasingly rely on trade protection or regulations on the use of farmlands to attain self-sufficiency. These interventions embody a more expensive strategy for food security in the Philippines than what is proposed in this paper. The key result areas and tasks required for attaining the proposed reforms are spelled out in the paper. Among the key government agencies identified as having the main responsibility for attaining these results is the National Rice Board, which is proposed to absorb the regulatory functions of the National Food Authority. With the other reforms in place and working, the government can then divest the proprietary assets of the NFA for their best value to finance the adjustment to an enhanced food security policy regime and/or retire part of the debts of the corporation. Annex 7 Page 4 of 35 Enhancing and Monitoring Food Security in the Philippines Ramon L. Clarete' Introduction This paper aims to identify the elements of an improved food security strategy, develop a system for monitoring food security, and to suggest arrangements for the implementation of the monitoring system. The first section discusses the key food security issues, assesses the performance of the rice industry, and analyzes the current food security program of the govemment. The second section develops a policy framework for enhancing the food security situation in the Philippines. The third section develops the set of indicators to monitor progress and proposes institutional arrangements for implementing the suggested framework. Food Security Concerns Food Security Defined There are two competing views of food security in the Philippines. One view, and this is what the government adopts, equates food security of the entire country as self-sufficiency in its staple food requirement, which for the Philippines would be rice and, to a limited extent, corn grits. In its Food Summit report in 1996, the government emphasized "the need to ensure self-sufficiency in rice and white com for human consumption." Self-sufficiency, in turn was defined as "the availability of enough food sourced from domestic production." This self-sufficiency policy was carried to the extreme by the current administration when, during the National Food Summit in August 1998, the national government urged provincial local governments to lead the effort for individual provinces to be "self sufficient" in rice production.' Referred to at times as advocating for food self-reliance instead of food self-sufficiency, the other view defines food security as a situation where the population has access to food supplies, regardless of source, on a year-round basis and at stable market prices. Food security at the sub-national level, i.e., regional or even household levels, depends upon income levels and the efficiency of the marketing system to quickly correct for supply and demand imbalances in local markets. Fairly integrated and functioning local food markets, good access to international food markets, as well as stable and growing per capita income are required to achieve food security. Three concerns proceed from this self-reliance view of food security, namely: scope of food security program, meaning offood price stability, and extent of local sourcing of staple food items. Scope What ought to be the coverage of the government's food security program? Until the current administration under President Estrada, the food security program of the Philippine government had covered only rice and white corn grits, the latter being the staple food among some residents in Southern The author is the Chief of Party of the AGILE program in the Philippines and is a Professor of Economics of the University of the Philippines. The AGILE is a USAID-financed program of technical assistance to various departments and regulatory agencies of the Government of the Philippines in the area of economic policy reforms. The author has benefited from the AGILE policy study entitled "Strategic Reorganization of the National Food Authority for the New Millennium" and the assistance of Ms. Carmnencita Balbosa in writing the paper. 'The quotations come from the respective reports released by the Department of Agriculture on the two food policy summits in 1996 and 1998. Annex 7 Page 5 of 35 Philippines.' With the NFA's rolling stores selling basic consumer goods to depressed urban areas, the scope of the current food security program is expanded to a few other basic necessities like coffee, milk and sugar. Whether or not a food item be placed within the purview of the government's food security policy depends upon the following factors: calorie-intensity of the food item, lack of substitutes due to existing preferences of the population, and high proportion of expenditure on the food item to total household budget. As the subsequent discussion will explain, only rice ought to be covered by the food security program of the Philippine government. Those food items that tend to be intensive in calories have the potential of involving the largest segment of the population and triggering a food crisis. Bouis (1991) suggests a tiered demand structure for food. At lower levels of per capita income, the food demand takes the form of calorie-intensive foods such as cereals. As incomes rise, the diet is increasingly diversified into alternative sources of calories as well as into sources of other nutrients. Further increases in per capita income translate to a demand not only for diversity but for taste as well. Given the low per capita incomes in the country, and consequently, the relatively high demand for calories, a disruption in the supply of rice is critical to the overall food security situation. While low per capita incomes play a great role in prioritizing food-related concerns, the extent of substitutability among competing sources of calories or nutrients can further limit the scope for any food security program. Any shortage, for instance, in a meat product, e.g. beef, is ordinarily compensated with supplies of other meats or protein-intensive food items, preventing the problem from becoming a major food security concern. In the early 1970s, the Philippines experienced two food crises other than rice: sugar and cooking oil. Despite the fact that these two food items are sources of calories, they turned out to be a food security concem because these food items are preferred for very specific uses and substitutes were not readily available.3 As such, there is limited scope of making up for lapses in supply in these items. Besides specificity in use, preferences of consumers also restrict the scope of substitutability among food items. Food-specific preferences limit the scope of substitution in the short run. For instance, rice is preferred to potatoes or wheat in the Philippines. In the South, a substantial number of residents would rather consume white corn grits instead of rice. In the long run, preferences can change. Recently, the consumption of wheat in the country has been rising. In the short run, however, shortages in essential items may create economic and political problems. Changes in preferences and advances in technology widen the scope of substitutability among food items and facilitate changes in preferences. As these become increasingly substitutable with each other, even calorie-intensive items become less of a food security concern. The availability of other calorie-intensive food products is an important determinant of shifts in preferences and reduction in specificity in use and policy improvements facilitate such shifts. A more liberal set of import policies for wheat and potato seeds has increasingly made wheat and potato available to the population. This, in turn, has developed preferences of the population for these calorie- intensive food items away from rice and corn grits. Similarly, the substitutes of coconut-based cooking oil are increasingly available in the market with reduced tariff protection and with recent palm oil plantations in the country. Advances in technology in the transport of high fructose substitutes of cane 2 In 1996 however, then-President Rarnos ordered the NFA to procure sugar to defend its price. Sugar prices in 1996 declined sharply because of speculative imports of sugar by the private sector in anticipation of higher import duties. The absence of substitutes in the local market was because the Philippines has been an exporter of coconut oil that processed into cooking oil as well as cane sugar in the 1970s. Annex 7 Page 6 of 35 sugar from producing countries would make such substitutes available and in turn reduce the likelihood of making sugar an important food security concern. There is one other point about substitutability and this contributes to the case why not even corn may qualify to be an important food item in the government's food security program. While there are Cebuano-speaking Filipinos in the South who prefer white com grits, lapses in the supply of white corn can be met with rice. Accordingly, there cannot be a domestic crisis in white corn for as long as there is none in rice, even if imports were restricted. Unfortunately, the reverse is not true in the Philippines. Shortfalls in rice supply while rice imports remain restricted cannot be met with white corn supply due to both preferences and inadequate supply of white corn grits. Because of limited demand for sugar and cooking oil relative to that for rice, rising prices of the former that accompany shortages do not induce a substantive reallocation of household expenditures as much as one if prices of rice go up. Hence, a consideration distinguishing rice from other food items that are sources of calories and have low cross-elasticity of substitution is the high proportion accounted for by expenditures for these food items to the total household budget. In developing countries, prince increases in food staples whose price elasticity of demand is low and account for a big share in household budgets tend to induce shifts in aggregate expenditure (Islam and Thomas, 1996). In the Philippines, residents spend about 17 % of their respective household budgets on cereals. For the poor, this proportion is higher, reaching at least a quarter of their household expenditures. Since the share of rice in the household budget is relatively large, price increases lead to a substantial reallocation of aggregate expenditures to these food items and away from other expenditure items. The large share of rice in household budgets in the Philippines in turn has implications on inflation. Increases in rice prices in 1995 prompted workers to ask for higher nominal wages. Expectedly, as rice prices go up the average level of inflation rises as well. Kanbur (1984) further notes that declines in prices of food staples with high share of household budgets are not followed with reduction in nominal wages, sustaining price increases. Fluctuations of rice prices cause variable inflation and thus reduce prospects for investment and economic growth (Dawe and Timmer, 1991). Price Stability As with any other market prices, those of food are observed to follow a random path through time, responding to the changes in key fundamentals including the demand and supply of food. In most cases, these random realizations of food prices do not create economic and political problems to society. For obvious reasons, governments work to keep the fluctuations of food prices from creating adverse spillovers. Attaining this objective requires food prices to be stable, i.e. a state where food prices deviate within an acceptable range from the food price that the population expects. In stabilizing food prices, one needs to consider both intra-year and inter-year variations of prices. The former refers to variations are seasonal in nature while the latter set of variations capture the random occurrences of abnormal shocks to the food economy including occurrences of drought or other natural calamities affecting food production. Intra-year variations tend to be predictable while inter year variations are not (Islam and Thomas, 1993). One measure of intra-year price instability is the percentage deviation of monthly wholesale prices from their 3-month moving average. Figure I illustrates this measure for rice prices in the Philippines. The peaks approaching five percent are roughly spaced a year apart to reflect the normal increases in rice prices during the lean third quarter of the year. It is also observed in the Figure that the declines of rice prices are likewise spaced to depict the harvest months of the year, or during the last quarter of a given Annex 7 Page 7 of 35 year. Over 90 % of these deviations fall within plus and minus 5% of the average (see Table 1 below). It is interesting to note that the observations in 1995 exceeding 5% depict the food insecurity that the country experienced in that year. The accepted range for wholesale rice prices to deviate from their expected price in a given period may be between plus and minus 5%. It is equally interesting to point out that despite the supply shortages arising from the drought in 1997 and 1998, rice prices tended to be closer to average because of adequate quantities of imported rice during these years. Figure 1. Percent Deviations of Monthly Wholesale Rice Prices from Their 3-Month 15.00% Moving Average: Philippines, 1990-1999 10.00% 5.00% 0.00% 5O>b, I? / S ;> 4 C'D 0 Co ; o GXJi rs cowX cw e -5.00% - - -- Year/Month Source of Basic Data: Bureau of Agricultural Statistics The other type of price instability is inter-year variability of annual wholesale prices as shown in Figure 2 for the period from 1990 to 1999. On average, the change in yearly prices is less than 10%. The increase of annual prices between 1994 and 1995 was about 25 percent, reflecting an extreme occurrence of inter- Figure 2. Annual Rice Wholesale Prices: Philippines, 1990-1999 20.00 -_. 17.00 -y =1.0261x t 6.72zU .' 14.00 ____ o 11.00 8.00 5.00 CO co CD CD CO C ( O O C Year '(DO Co <o , O co cO co CO Co 0 t') ( .5. Cal 0) -4 co co Source of Basic Data: Bureau of Agricultural Statistics year price instability. It is important to note that despite the El Nino weather phenomenon in 1997 and 1998, annual wholesale prices of rice either declined or increased moderately, reflecting the role of imported rice stocks in offsetting local supply shortages for rice. Annex 7 Page 8 of 35 Table I shows the frequency distribution of changes in monthly wholesale rice prices from 1990 to 1999. The percentage deviations of monthly prices from their 3-month moving average typically fall between minus 5% and plus 5%. Over 90 % of the observations fall in these categories. The three observations for intra-year price variations belonging to the categories exceeding plus five percent occurred in 1995. As for inter-year variations, the monthly wholesale prices are compared with their respective levels a year ago. About 67 % of observed annual changes in monthly prices fall within minus and plus 10%. Table 1. Frequency Distribution of Changes In Monthly Wholesale Rice Prices: 1990-1999 Intra-Year: Deviations from 3- Inter-year: Deviations from Month Movina Averaae Previous Year Number of Cumubtive Number of Cumulative Observations Percentage Observations Percentage Up to -15% 0 0.00% 0 0.00% Greater than -15% and up to -10% 0 0.00%h 4 4.08% Greaterthan -10% and up to -5% 2 1.71% 10 10.20% Greater than -5% and upto 0% 41 35.04% 14 14.29% Greater than 0% and up to 5% 71 60.68% 23 23.47% Greater than 5% and up to 10% 2 1.71% 19 19.39% Greater than 10% and up to 15% 1 0.85% 16 16.33% Greater than 15% and up to 20% 0 0.00% 8 8.16% Greater than 20% and up to 30% 0 0.00% 4 4.08% Total 117 100.00%O 98 100.00% Source of Basic Data: Bureau of Agricultural Statistics Accordingly the range of percentage changes in annual target prices across years be confined to between minus and plus 10%. Extent of Local Sourcing The government's policy has been to source the country's rice requirements locally and Figure 3. Percentage Share of Anmual Imported Rice to Anual Total Supply 1980- 1998 to import rice only when it is 10.00% _ clearly necessary. This "import-as-a-last-resort" policy aims to keep the 8.00% 1991-1994 1.42% country's rice consumers less vulnerable to 6.00%- international market disruptions. Equally 400% important, another argument often provided in favor of / / self-sufficiency is that, in a developing country like the Philippines, the bulk of the 0.00% Coco ,0 to wco (a co (a (wwa 0 0 (a a(a(w a a Year X 0 0) X 0) 0) (0 0 w ( ( lo ( CD ( (a 0 ouc .) o Cf 0B D a t 0 Buea of A C)) 0S ti si Source of Basic Data. Bureau of Agicuttural Statistics Annex 7 Page 9 of 35 population depends on rice production activities for their income. Thus, the claim is that opening the local rice market to foreign competition threatens to deprive the majority of the population with their source of income. Figure 3 illustrates the share of imported rice to the total supply of rice in the country from 1980 to 1998. Until 1996, rice imports accounted for no more than 6%. A pattern of increasing import penetration in the local rice market has become evident since. After the 1995 rice crisis, the policy shifted to ensuring that domestic shortages are avoided, especially with the drought in 1997 and 1998. Table 2. Estimated Rice Supply and Demand: 1980-1998 in '000 metric tons Net lnventory Total Total Feed Seed -Year Change Imports Output Supply Demand Food Use Exports Use Use 1980 239 0 5,001 5,240 5,240 4,532 213 213 282 1981 35 0 5,173 5,208 5,208 4,649 83 220 256 1982 -255 0 5,449 5,194 5,194 4,711 0 232 251 1983 375 0 4,770 5,145 5,145 4,673 40 203 229 1984 344 191 5,120 5,655 5,655 5,200 1 218 237 1985 -607 541 5,759 5,692 5,692 5,200 0 245 248 1986 -263 6 6,047 5,791 5,791 5,274 0 257 260 1987 442 0 5,586 6,028 6,028 5,436 111 237 244 1988 57 181 5,868 6,107 6,107 5,603 0 249 255 1989 48 220 6,184 6,452 6,452 5,911 16 263 262 1990 -430 622 6,094 6,286 6,286 5,779 0 259 249 1991 -218 0 6,324 6,106 6,106 5,571 10 269 257 1992 426 1 5,972 6,399 6,399 5,876 30 254 240 1993 250 210 6,170 6,630 6,630 6,121 0 262 246 1994 -58 0 6,892 6,834 6,834 6,268 0 293 274 1995 -237 241 7,161 7,164 7.164 6,573 0 304 287 1996 -893 891 7,351 7,349 7,349 6,743 0 313 293 1997 -174 700 7,408 7,933 7,933 7,324 0 315 293 1998 -1,202 2.120 7,434 8,352 8,352 7,701 43 316 293 Source of Basic Data: Bureau of Agricultural Statistics Figure 4. Trends In Rice Output and Use: 1980-1998 9.000 8,500 8.000 C 7,500 . 7,000 = 6.500 6,000 0 4,500 - Rice Output - Rice Use 4,000 (0 (0 co a) (0 (0 (0 (0 (0 a) (0 (0 (0 (0 (0 (0 (0 (0 (0 m C? m C O CO CO CO CO (0 (0 (0 (0 (0 (0 (0 (0 (0 o -. r . C ve -4 C ( a - M W vN (A a 4 CO Year Annex 7 Page 10 of 35 Rice output has grown since 1980 at the rate of 2.41% per year. Two-thirds of the growth in rice production is explained by the increase in rice yields, which grew at the rate of about 1.58%. The rest is explained by increases in area harvested, the average growth of which is less than 1% for the same period. Table 2 and Figure 4 show the trends in rice output and use. Rice use has increased at the rate of 3.4% per year, 1% higher than the growth of rice output. Rice is used mainly for food, while seed and feed uses are respectively proportional to area harvested and rice output. Rice consumption for rice is estimated as the residual after deducting from total supply the seed and feed uses and the estimates for end-of-period inventories. In contrast, local production estimates are made using data from surveys conducted by the Bureau of Agricultural Statistics. Food uses of rice therefore tend to be highly correlated with rice supply. If supply goes down either due to a decline in production or importation, food use declines as well. Since estimates of food use are derived as a residual, determinants of per capita rice food consumption will therefore include rice output and the price of rice as well. Variations in per capita income contribute little to explaining the level of rice food consumption in the country. Per capita consumption declines by 2.36 kilograms for every one peso increase in the wholesale price of rice. Program Design and the NFA The country's food security program is embodied in Presidential Decree No. 4, as amended by several laws over a quarter of a century.' Not only did it provide the vision for the government's food security program, P.D. 4 also created the National Grains Authority (now the National Food Authority) to implement the program. I At the core of this vision is the self-sufficiency policy of the government: food security is attained with the country producing the food requirement of its population. P.D. No. 4 was issued at a time when the government had been implementing a program to increase the productivity of the country's rice and corn farms. The relative success of the rice program created the problem of disposing at a reasonable profit the output of the country's rice farmers. The NFA procured rice and corn at prices supported by the government. The productivity gains were more than adequate: the Philippines exported rice in the 1970s. The price supports for rice and corn and NFA's program for improving the post harvest system for grains combine to making rice and corn a profitable undertaking for the country's largest agricultural industries: rice and corn. Public investments to establish a network of storage and post-harvest facilities were made. The NFA charter assigned as well to the NFA additional mandate: to stabilize and subsidize rice prices for the benefit of rice consumers. PD 4 as amended defines the current food security program of the Philippine government. It provides the following mandates to the NFA: a) to stabilize year-round rice prices, b) to make rice become affordable for the country's population, and c) to ensure that palay prices provide rice farmers a reasonable level of income. These mandates are reflected in the policy configuration involving the palay procurement price and rice release price policies of the NFA. PD 4 likewise merged the regulatory and proprietary functions required to carry out these mandates in the NFA, making it a very powerful player in the market. As a government corporation, the NFA receives budgetary support and is allowed to issue commercial papers with full financial guarantees from the national government. Besides these, the NFA is likewise granted an import monopoly for rice. Tasked to carry out the food security program, the NFA is both a regulator and a corporation engaged in grains trading. As such it has four functions: trading, regulatory, developmental, and corporate. Trading 4The amending laws include: PDs 699,1485, and 1770 and EO 1028. The NGA charter essentially combined the trading functions of the Rice and Com Administration (RCA), a govemment-owned corporation in the grains trading business, and the regulatory powers of the Rice and Com Board (RICOB). Annex 7 Page 11 of 35 functions are those aimed at influencing the volume and flow of trade, including peripheral or ancillary functions that make the NFA a direct player in the market-as a buyer and seller of goods and services. Regulatory functions include those that are aimed at putting order in, or organizing the functioning of, the market, its players, and the food industry as a whole. Developmental functions are those geared towards the advancement and adoption of knowledge in areas that directly or indirectly concern the food industry. Corporate functions include those that are inherent to the form of the organization as organized by law (in this case, a government corporation), or are incidental to its existence, and are therefore aimed at supporting the major functions. Empirical work on this policy area indicates that despite the resources put into the activities of the NFA, implementation of the food security program can still be substantially improved. Rice prices are unstable (Balisacan, Clarete and Cortes, 1990). On average (1986-1996), farm prices of palay were lower by 8 percent of farm prices than if market rice wholesale prices would have been fully transmitted to palay prices (Clarete, Fabre, et.al, 1992). Direct involvement of the NFA in the rice trading system crowds out private sector investments and slows down the process of market integration (Umali, 1990). The general food price subsidy employed by the NFA allows for a substantially high leakage of the benefits to the nonpoor. Only 50 percent of the subsidies may have reached the poor, representing 0.2 percent of their income (Balisacan, 1995; Subbarao et al., 199]. Since 1980, rice prices deviated from their mean levels by at least five percent in 17 out of 100 cases. At the peak of the rice crisis in 1995, monthly market prices deviated from a six-month moving average by at least 25 percent. Other occurrences of abnormally high fluctuation occurred in 1984 and 1989. The apparent policy inconsistencies in the design have caused financial losses for the NFA. Since 1986, NFA's net operating loss had fluctuated from nearly PHP 387 million in 1990 to over PHP 2.3 billion in 1992. It was only in 1996 when the NFA imported rice that it posted a net operating profit of PHP1.2 billion (Clarete, Villapando, et.al.; 1998). A recent work (Roumasset, 1999)6 points out that the NFA's pricing policies have not prevented the general public from paying relatively high rice prices and farmers from receiving less than the trade protection implied by current policies. A recent study by the AGILE program (AGILE, 2000) attempts to quantify the losses to society of the current program. It uses a partial equilibrium model of the rice market rice in the Philippines to estimate the residual inefficiencies of the NFA reorganization options. Five components of rice market inefficiencies were defined and estimated based on the model: foregone tariff revenues, consumer surcharges, producer losses, excess burden for consumers, and excess burden for producers. Table 3 reproduces AGILE estimates of program cost. Table 3. Estimated Cost of NFA's Rice Price and Import Policies in the The government forgoes (in billion pesos) revenues amounting to Pa Cost Item 1996 1997 1998 Averaae 3.72 billion a year by Forecone Tariff Revenues 4.32 3.25 3.58 3.72 restricting rice importation Consumer Surcharmes 6.44 8.87 4.70 6.67 to the NFA. If permits to Producer Losses 3.44 4.51 3.05 3.67 import rice were auctioned Excess Burden for Consumer 7.63 4.54 0.55 4.24 to the private sector, the Excess Burden for Producer 9.41 3.91 0.07 4.47 government would have Total 31.24 25.08 11.95 22.77 earned revenues. Source of Data: See AGILE. 2000. Table 4.16 Alternatively, if rice imports were liberalized subject to import taxes, tariff revenues 6 This is a report commissioned by the AGILE program which provided technical assistance to the NFA for exploring options for reorganizing the NFA. AGILE is financed out of a grant made by the US Agency for Intemational Development to the Philippine govemnment. Annex 7 Page 12 of 35 would accrue to the government. Currently, the NFA, that is the sole importer of rice in the country, receives a deferment on tariff payments to the government from its rice importation. About 3.7 billion pesos are lost each year by rice consumers under the current program. This loss represents the penalties borne by consumers under segmented rice marketing system and less transparant import regime - conditions giving rise to imperfect competition in the Philippine rice market. On a per unit basis, the penalty is measured by the excess of the actual price of rice resulting from the NFA's intervention and import policies over the equilibrium price of rice under a more integrated rice marketing system and a tariffs-only import regime. In addition, consumers forgo an excess burden, i.e. losses due to the policy of protecting rice producers, amounting to I 4.24 billion each year. Rice farmers are also penalized by the current NFA intervention system: P 3.67 billion in the form of losses due to the lower farmgate prices they are receiving-they could have received higher farmgate prices without the NFA's price interventions, plus P 4.47 billion in excess burden, representing the value of their overproduction (and consequently lower farm income) because of trade protection. From 1995-1998, on a yearly basis, the total of all these estimated rice market inefficiencies ranged from P 11.95 billion to P 31.24 billion. On average, the total loss amounts to P 31.24 billion a year. Key Improvements for Enhanced Food Security In order to improve the design of the country's food security program, the following policy improvements are proposed: * limit food security interventions to rice; * stabilize rice prices within a band adjusting the level of imports for this purpose; * implement a separate targeted rice safety net program for the poor; * separate the NFA's regulatory functions from the proprietary ones; and * focus government assistance to rice farmers from recurrent price supports to a package of an appropriate trade protection and public expenditures intended to increase productivity, reduce market transactions cost and trade facilitation. Limiting the program to just rice was discussed in the earlier part of this paper. The following discussion focuses on the last three proposed reforms. Stabilizing Rice Prices Without the Use of Buffer Stocks A typical scheme for stabilizing prices in developing countries including the Philippines combines the use of domestic buffer stocks and trade policies. Dampening the impact of production variations on prices requires offsetting changes in domestic stocks or trade (Bigman, 1982; Pinckney, 1988). Instead of relying on domestic buffer stocks, trade is used to keep domestic rice prices within an acceptable band of prices. While stock piling is recognized as effective in smoothing intra-year price variations (Islam and Thomas, 1996), such is done by the private rather than public sector. The potential role of public buffer stocks under this regime is discussed below. The proposal requires approving and implementing an appropriate enabling order that will set the government rice price stabilization policy for regularly milled rice (RMR) within a range of prices consistent with a targeted domestic price band. Under the proposed scheme, upward deviations of market prices from the price band will be corrected with appropriate changes in trade implemented through a Annex 7 Page 13 of 35 scheme of flexible import tariff and subsidy and in-quota rice imports which will be expanded as and when required. The price band will primarily be determined by a target wholesale price of rice, to be calculated using the world price of rice and a socially acceptable tariff protection for the rice farmers. This is in contrast to the current practice of using domestic cost factors to establish the target price. What might be an initial tariff protection is the annual implicit tariff protection on rice production, although government will have to make a decision on the tariff rate that balances the interests of producers and consumers. Based on our computations, the average implicit tariff protection over the last five years is close to 50% (see Table 4). The data used for domestic market prices is that for Metro Manila. Hence, the target price is the world price of rice in local currency - adjusted for the cost of freight, insurance, and transport cost from the port to the first warehouse - plus the implicit protection rate of 50%. Through the years, this tariff rate may have to be gradually reduced to get the rice market more integrated and competitive with the larger world rice market. Table 4. Estimated Annual Imolicit Tariff Protection on Rice Production: 1995-1999 Rice Price / Cost Unit 1995 1996 1997 1998 19991 Average Average Peso Exchange Rates2 $/mt 25.71 26.22 29.47 40.89 38.95 32.25 World Price3 $/mt 290.00 271.50 267.00 274.00 238.20 268.14 Freight, Insurance (Bangkok to Mnl) 4 S/mt 49.04 45.91 45.15 46.33 40.28 45.34 Cost Insurance Freight $/mt 339.04 317.41 312.15 320.33 278.48 313.48 Cost Insurance Freight (in Pesos) P/mt 8,716.70 8,322.52 9,199.06 13,098.45 10,846.80 10,036.71 Plus: Manila Port Handling5 P/mt 116.70 111.42 123.15 175.36 145.21 134.37 Landed Cost P/mt 8,833.40 8,433.94 9,322.22 13,273.81 10,992.01 10,171.07 Plus : Transportation to First Warehouse5 P/mt 129.80 129.80 129.80 207.68 233.00 166.02 Storage Cost 5 P/mt 264.00 264.00 400.00 163.70 152.23 248.79 Handling Cost 5 P/mt 48.40 48.40 44.00 44.00 40.00 44.96 In Situ Warehouse Cost P/mt 9,275.60 8,876.14 9,896.02 13,689.19 11,417.24 10,630.84 In Situ Warehouse Cost P/kg 9.28 8.88 9.90 13.69 11.42 10.63 Average Metro Manila Wholesale Prices P/kg 13.93 16.07 15.31 15.68 16.26 15.45 Implicit Tariff % 50.18 81.05 54.71 14.54 42.42 48.58 Sources: 1Cost data for 1999 is taken from the survey of private sectors 2 Based on Reference Exchange Rate Bulletin, Treasury, BSP (1999 data is based on average exchange rate from Jan to Nov) 3Based on FAO Food Outlook, (April 1999 Issue) Market News (WTO), Thai Rice 35% broken, WR, milled, indicative survey pri fob, Bangkok (1999 data is based on Jan to May average price) 4 Based on 1999 percentage of Freight and Insurance to World Price = 0.1691016 5a Based on 1999 percentage of Manila Port Handling Cost to Landed Cost = 0.0133875 5 NFA 6BAS, 1999 data is based from average wholesale price from Jan to Nov The upper and lower limits of the price band will ensure that wholesale rice prices within the band are tolerable or acceptable to the buying public, such that they do not have to deal with any substantial reallocation of their household resources. Based on an analysis of the percentage deviation of monthly domestic wholesale rice prices from their three-month moving average from 1989-1998 shown in Table 1, the limits of the band may be set at + 5% from the target price. The width of the band is set such that Annex 7 Page 14 of 35 market prices can fluctuate around the target price without causing a substantial reallocation of household budgets. Imports are computed at the start of any calendar year to ensure that the equilibrium rice price settles within the price band. Permits to bring the imported rice stocks into the country are auctioned off to private sector importers and the utilization of such permits is monitored. In order to reduce inter-period variability of rice prices, statutory tariffs on imported rice may be adjusted to compensate for sharp fluctuations of world prices of rice or of the relative value of the local currency relative to major foreign currencies. The target price will go up and down depending on the world price of rice and the exchange rate. Changes in the target price, when deemed too abrupt or too steep, may exceed the expectations of the millions of households in the country, prompting them to voice out their dissatisfaction in ways that would destabilize the entire economy. This can be illustrated by the 40% increase in the target price that could have materialized between 1997 and 1998 as a result of the Asian crisis-a situation that would ESTNATEVWMOtESA RICE PRICE BONO AFTER TARFF ADJUST?ENTS AND OBSERVED (UARTEYWHOXSALE PRICES OF RICE IN MEM OMANLA, 199to 199 bI Pesos Per Klogrm 22.00 - Upper boundarLy price 20.00 - Lower boundary price ___ _ -Average whdoesale price in MM U -A4justed Target pice / 18.00 Unacrjusted Target Price a,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~d C-16.00 0 14.00~~~~~~~~~~~~~0 12.00 . Source of Data: BAS for obseeaW prices arxrrable 3 10.00 95-Q1 956Q2 95-03 9504 96-Q1 96-02 96-Q3 96-4 97-Q1 97-02 97-03 97-04 98-01 98-02 98-Q3 98-04 99-41 99-02 YeardQuarter have pushed wholesale prices upwards by about f 5/kg of rice (see Figure 5). The same result is also observed in 1995, although to a lesser degree, because of the governnent's reluctance to import rice in that year. Table I above gives useful information how target prices may be adjusted from year to year in a way tolerated by the population. The monthly wholesale prices are compared with their respective levels a year ago. About 67 % of observed annual changes in monthly prices fall within minus and plus 10%. All these observations falling within the + 10 percent range are likely to be tolerated. The observations corresponding to the period when the country was in the midst of a rice shortage crisis were outside this range. Annex 7 Page 15 of 35 Box 1. Key Features of the Proposed Pnrce Stabilization Scheme for Rice A Price Stabilization Scheme for Rice Let * p R stands for the wholesale domestc price of rice; * pF stands for the farmgate price of palay; * pw stands for the world price of rice delivered to the first warehouse; * p T stands for the target wholesale rice of price; and * Xr stands for the socially acceptable tariff protection rate for rice producers. The proposed price band for pR is a range of wholesale prices of rice deemed acceptable to the population since these prices do not require a substantive reallocation of household budgets. The band is a set of wholesale domestic rice prices such that P (1- a) S pR S pT (11+ a). a is the highest proportionate deviation in absolute terms of pR from the target price, pT, and defines the upper and lower limits of the price band. The magnitude, 2aPT , is the width of the band. The target price, pT, will be pegged to the world price of rice, Pw, i.e., pT= PW (1+ r). This linkage is designed to take advantage of the relabvely more stable nature of world rice prices, even if the Philippine rice farmers are already provided with continued trade protection by govemment policy. t will be chosen taking into consideration the risk of a disruption in the world rice market, the relative ease of access by the rice consuming public to rice substitutes, and the size of the adjustment costs that will be bome by the rice farmers in shifting to other means of livelihood. The estimated implicit tariff protection for rice is 50 percent. Hence, the target price is the border price of rice adjusted for the implicit tariff protection margin, i.e., pT =PW (1.5) The target price is evaluated each year. Annual variations of the target price are restricted to + or - ten percent. The width of the price band depends on the estimated value of a , which is calculated to be 5percent based on the percent deviation of monthly domestic wholesale prices of rice from their respective three-month moving average. The price band, being a range of prices that the populabon will 'tolerate' will, thus, have a width equal to 2a pT, The Role of Imports in Defendinq the Price Band Defending the targeted price band will be the primary responsibility of the proposed Nabonal Rice Board (NRB) which will be tasked with determining the appropriate volume of rice imports required. Rather than maintain rice buffer stocks, the NRB will enable transparent and bmely rice imports by the private sector. S(PR; iL ) is the local supply function of rice and 1t is a set of exogenous factors including the random influence of the weather on local production. D(PR; E) is the aggregate local demand functon for rice. This equation primarily covers food demand, but also includes demand for seeds, feeds, and exports, if any. E is a set of exogenous factors affecting consumption of rice including prices of substitutes, income, and population. Stabilizing rice prices means ensuring that the market clearing domestic rice prices are within the price band. If the supply curve shifts upward resulting in the equilibrium domestic rice price rising above the upper limit of the price band, the corresponding amount of rice must be imported causing a reducton in the price of rice to a level within the band. Thus, if M is the amount of imports and pT is an equilibrium price within the price band, then M = D(PT; TS(P; E Source: Clarete (1999), "Designing A Rice Price Stabilization Scheme in the Philippines Without Buffer Stocking," AGILE. Annex 7 Page 16 of 35 To keep the annual changes of the target prices within the acceptable range, the statutory tariff protection on in-quota imports may be adjusted. The changes in world prices, the exchange rate, or the cost of items that are related to do the bringing of the imported stock into the country may have to be offset with changes in applied tariffs. The features of the proposed changes to the price stabilization scheme have to be borne in mind when the government negotiates with its principal rice supplying contracting parties in the WTO.' Figure 5 shows the estimated price band for 1995 to 1998 with both the adjusted and unadjusted target prices of rice. The adjustment allows the economy to avoid the 1998 price peak, and enables it to catch up with the 1999 prices. The rule-of-thumb of keeping annual target price changes within the appropriate range of + 10 percent allows the economy to avoid temporary price peaks and gradually catch up with long-term increases or decreases in prices. Between 1996 and 1999, for instance, an upward trend in rice prices can be observed. The recommended adjustment process enables a smooth transition to higher rice prices of domestic rice prices. Public rice buffer stocks as insurancefor contingent failure of the scheme Concerns are raised that the proposed scheme without using domestic buffer stocks may not be effective in dealing with market failures. These problems include inadequate data on rice production, consumption and inventories as well as and arising from this the failure of private sector holders of import licenses to bring in the rice import stocks required to stabilize prices within the band. If and when any of these problems occur, there is little time to bring in imports into the country and thus a rice shortage is realized as in 1995. The likelihood that any of these problems shall occur is high considering the politicized nature of making rice import decisions. Responses to these concerns may include continuing the effort of improving the government's capability of gathering relevant rice statistics and analyzing these. More importantly, an important feature of the proposed changes to the price stabilization scheme is to lay down a process of how, who and when to decide on rice imports. Once this process had been subjected to public discussion and adopted as amended in any of these consultative meetings, the implementation of such ought to be free of recurrent debate on whether the statistics or the analysis thereof is correct. If the government commits a mistake while following the procedure, then the mistake may be dealt with appropriately on an ex-post instead of an ex-ante basis. A good example to cite is the experience of the country in 1995. The mistake was made and the government decided that there was adequate rice production and decided not to import rice. At the same time, domestic rice procurement was low in 1994 such that buffer stocks were critically low. By the second quarter of 1995, rice prices sharply increased. The government reversed itself and decided to import rice but it was too late. Because of problems like the one in 1995, proponents for public buffer stocks argue that an appropriate level of rice stocks would have spared the country the cost of rice price instability in 1995.S Public buffer stocks viewed in this way become necessary in light of the data and analytical capability of government and the interaction this has on the wider political process surrounding the issue of rice imports. They Another extraordinary situation is when world prices decline and/or the exchange rate appreciates by a magnitude such as to decrease the annual target price by more than ten percent. Since world prices are unusually low and/or the currency is strong, import tariffs may have to be increased to keep inter-year changes of the target price for rice at no lower than minus ten percent. This feature has to be also considered when the govemment negotiates with the WTO for the tariffication of its rice import quantitative restriction. The proponents include the NEDA Director General, Secretary Felipe Medalla, and Senator Serge Osmena Ill. Annex 7 Page 17 of 35 serve as an insurance against the contingent failure of the proposed price band scheme that is implemented with rice trade on an annual basis. As such, the volume ought to equal the rice consumption of the population for a period of time while rice imports are ordered and delivered to the country multiplied by the probability that the contingency occurs. With a perfectly risk-averse country that would likely set this probability to unity, the contingent buffer stocks would be the rice consumption of the country during the import lag. While the important role for public buffer stocks for contingent failure of the proposed stabilization scheme with trade is recognized, creating a government corporation for managing such stocks is unnecessary. An alternative way to put the scheme into operation is to engage the services of a company to maintain the appropriate level of stocks. Concerns are raised that such a company may be unreliable to comply with the terms of the contract that it is legally obliged to comply. While a breach of contract is possible, it does not warrant having a government corporation. Clearly one can think of similar situations as in defense-related services or procurement involving important national concerns, yet the govermment trusts private companies to do good business with itself. Rice contingent fundfor extraordinary situationis Ad hoc interventions may be resorted to, to cope with extraordinary situations, including a bumper crop of palay, natural calamities, or any other events that disrupt temporarily the natural operations of the rice market in the country. The discussion above focuses on the features of the price band mechanism under ordinary situations. One such situation is having an unusually large rice harvest causing the average annual price of locally grown rice to fall by more than ten percent. If local production of rice increases higher than normal, the government would have to increase demand for rice in order to avoid a destabilizing drop in rice prices. The added demand could then be exported with government assistance out of a rice contingency fund to avoid rice price instability induced by an extraordinary harvest in a non-typical year. Another extraordinary situation involves the disruption of the ordinary flow of rice to and from these markets as a result of natural causes. Typhoons, floods, earthquakes, volcanic eruption, and other natural calamities may cause temporary disruption of the private market activities of rice businesses in these areas. The government presently has a system for coping with calamity situations. The National Disaster Coordinating Council in coordination with the local government units in affected areas has the capability to respond to problems induced by natural calamities. There may however be emergency situations disrupting the ordinary rice trade that the NDCC may not regard as a natural calamity situation. The residents in these affected areas become vulnerable to temporary increases in rice prices as the marketing infrastructure is rendered impaired because of natural causes. Since the NDCC would not recommend to the President that these areas be declared in the state of natural calamity, the government may have to prepare for such emergency situations and directly intervene to keep rice prices from going up unnecessarily. A rice contingency fund may have to be created that the govermment may tap in responding to such area-specific emergency situations. The intervention to cope with this extraordinary situation however may be carried out by a private trading company engaged for this purpose. The point of this reform is that the government does not need to institutionalize a procurement capacity or a distribution capacity for dealing with problems that do not happen every year. An ad hoc problem may be addressed with an ad hoc intervention. In this way, the government is able to keep down the cost of stabilizing rice prices in the country. Annex 7 Page 18 of 35 Food Security Versus Rice Self-Sufficiency As mentioned earlier, the government imports rice only when it is absolutely necessary to insulate the country from any international rice market disruption as well as to provide income to the bulk of the rural population that derives income from rice production activities. Underlying this argument, of course, is that a majority of the Philippine rice producers have limited or zero access to alternative means of livelihood. The argument that rice farmers have limited or zero access to altemative means of income highlights the important role that high market transactions costs play in rural development. High market transactions costs for agricultural products tend to drive the bulk of the population to produce their basic food requirements. Transaction costs associated with purchasing or selling a good typically cannot be passed on to the market and are usually borne by the farmers. If these costs are high, own-food production can become optimal for rice producers. For as long as such costs remain high, it will be true that rice farmers will have little option for shifting to other uses of their land. This is because selling cash crops can be unprofitable due to the existing high market transaction costs. Without efforts to reduce such transaction costs through investments in rural infrastructure such as roads, the government finds itself in a vicious cycle. With the existing high transaction costs, the rural farmers become engaged in largely subsistent food production activities. The government is then pressured to support such activities through food productivity programs. Such programs, in turn, provide the farmers with signals to remain in the government's food productivity programs, reinforcing the government dependency situation and the notion that that there are hardly any income generating alternatives for the rice farmers. In addition to food productivity programs, the government uses trade policy to attain its rice self- sufficiency goal. Imports have been regulated in a manner that caused minimum adjustments to the rice farmers. In the case of rice, the Philippines continues to impose QRs on rice imports, and grants the import monopoly to the state-owned NFA. There is still scope for further improving rice productivity through appropriate programs. Nevertheless, at some point in time, with continuing growth in both population and per capita income, the country is bound to hit the limits imposed by land-its most constraining factor. Competition from other uses of farmlands will bid land prices up and agricultural lands may be reallocated to higher value crops or non- agricultural uses. Relative land scarcity is beginning to affect the relative prices of rice here in the Philippines, unlike in Thailand or Vietnam. Although there is a high likelihood that improved rice technology will be introduced in the future, land rents can escalate to the point where the benefits from the introduction of better technology can be neutralized. Government productivity programs would then be increasingly viewed as programs that merely offset the diminishing returns in grains production, rather than attain self-sufficiency. When land scarcity becomes the constraining factor in increasing rice productivity, the government will tend to increasingly rely on trade protection or regulations on the use of farmlands to attain self- sufficiency. Trade protection or regulations on the use of farmlands will increase prices of food grains at the expense of consumers. This situation will, of course, induce additional production, thus achieving the self-sufficiency targets in rice. But this is a more expensive strategy with increased efficiency costs being shouldered by rice consumers. Annex 7 Page 19 of 35 Rather than wait for the time when food prices have to increase to cope up with the rising costs of production primarily from land scarcity, it will in the long-run be better to liberalize rice imports for attaining food security. While the concern about a possible disruption in the international rice market is valid, this is unlikely. Besides there are ways to address the problem of a market disruption in rice trade other than through a policy of self-sufficiency. Private sector rice storage has to be encouraged. The government can also facilitate substitution away from rice to other calorie sources, including root crops, wheat, and corn. When the rice market is disrupted and the country is unprepared with substitutes, the uncertainties that the population must confront are unnecessarily increased. Targeting Rice Subsidies Providing safety nets to the poor will always be a critical feature of development policies, particularly for a developing economy like the Philippines which must pursue structural and macroeconomic adjustmnent reforms in order to achieve a more sustained pace of growth. However, as Balisacan (1995) has argued, a tight budgetary situation such as the one confronting the Philippines today does not allow for a generous amount of food subsidies. This calls for a more targeted approach to providing food subsidies, in contrast to the general consumer subsidies currently implemented by the NFA. A separate program to target rice subsidies for the poor will have to be designed, funded and implemented. Another feature of the program must be the provision of assistance to disadvantaged regional markets in order to reduce price disparities arising from transport cost differentials. Effective ways ought to be developed for identifying beneficiaries and for developing the appropriate mechanism of delivering the assistance to the beneficiaries of the program. A related problem is about market imperfection particularly related to the differences in access of regional rice markets to marketing infrastructure. With poor level of marketing infrastructure, the rice market in a specific area may gain access to rice at substantially higher prices than more market-contestable markets. The higher prices may either be the result of higher marketing costs and/or monopoly rents. It is even a possibility that some regional markets may not be serviced at all by private sector for fear that the government regulates rice prices at levels comparable to those in the rest of the country for political reasons. An appropriate response may require subsidizing transportation of rice into these isolated areas. It is important to confine such interventions to deserving areas and to keep the implementation of such programs cost effective. The danger here is to expand the scope of direct market intervention in the form of subsidizing transport costs to cover non-deserving areas. As in the poverty-reducing program above, further studies ought to be undertaken to identify such areas and to determine a cost-effective modality for implementing these programs. Annex 7 Page 20 of 35 Reformulating Assistance to Farrners While the price support program is perceived to be beneficial, at least to a segment of the farming sector, a package of assistance consisting of an appropriate level of trade protection and public expenditures in agriculture will actually present a more enduring way of increasing the farm incomes of more farmers. Price supports are recurrent outlays, providing income only in the current period to farmers to offset inefficiencies emanating from the system, e.g. lack of marketing infrastructure. Moreover, only those rice farmers located in the neighborhood of NFA warehouses could have sold palay to the NFA and thus received the price-based assistance. Based on recent local procurement expenditures of the NFA, this number may go down to even less than three percent of the target population. A better assistance program ought to focus on reducing systemic inefficiencies in the market through capital outlays in production and marketing infrastructure as well as technology development. Public Expenditures for Agricultural Development The Agriculture and Fisheries Modernization Act (AFMA) has benefited from over a year of studies done by a congressional body tasked to package a set of measures and investments to prepare the country's agriculture and fisheries sectors for global competition. Among the important measures enacted by the AFMA are: a budgetary allocation to ensure funding for agriculture R&D projects, extension, irrigation and other infrastructure; the issuance of guidelines for the devolution of communal irrigation systems to LGUs; guidelines on simplified public bidding of irrigation projects; phased removal of directed credit programs; and the creation of a council to coordinate R&D and extension effort in the country. The efforts to provide funds for modemizing the agriculture and fisheries sector follow similar initiatives expressing concem over the plight of the country's agricultural producers. On account of the country's accession to the World Trade Organization, the national govermment had set aside significant amounts of resources for the development of the country's agriculture. The grains sector has been the prime beneficiary of this recent policy attention on agriculture. Budgetary resources for the sector increased from PHP 0.54 billion in 1993 to over four billion pesos in 1997. The passage of the AFMA in 1998 promises substantially more development resources to modemize the sector. One major problem that has emerged in agricultural development planning in the country concerns the absorptive capacity of the Department of Agriculture of agricultural development resources. While a case can be made for expanding the size of DA's field operations in order to process more quickly these funds, a better option is involving the LGUs in the process of identifying and implementing development projects in the grains sector. With LGUs, incremental benefits should be expected from the faster turnaround time for projects; so should improvements in project need identification. This point of decentralizing public expenditures for agricultural and rural development is elaborated below. Decentralizing Agriculture Sector Infrastructure Development Services Govemment decentralization has been a key program of the Government of the Philippines (GOP). In 1991, the GOP enacted a law devolving various govemmental functions, largely in the social services and infrastructure development sectors, to the local govemment units. Accompanying the devolution of these various responsibilities had been the institutionalization of internal revenue allotments to the LGUs by the national govemment. A total of 40 percent of the GOP's intemal tax revenues is allocated each year to the LGUs. With the decline in the share of intemational trade taxes, the LGUs account for an increasing share therefore of the total tax revenues of the national government. Annex 7 Page 21 of 35 It is increasingly perceived in the country that the devolution program has failed to provide most LGUs adequate resources and expertise with which to effectively assume formerly national government responsibilities. This lack of funds is exacerbated by the fact that even where national government funds are made available to augment local resources, these are exclusively channeled to a centrally packaged menu of programs that may differ from the identified needs and priorities of the LGUs. The LGUs therefore end up passively participating in nationally-funded projects. Agricultural development is one goal where the development priorities of both the national and local government units intersect. Many of the rural poor - the constituency of most LGUs -- depend upon agriculture and fisheries for their livelihood. On the other hand, food security and international competitiveness of the country's agriculture sector are overriding policy concerns of the national government that a more productive grains sector will help to address. Due to lack of funds and the decades-old practice of central development planning and implementation, many LGUs are unable to put up the required public investments for the development of the grains sector in their respective localities. The few LGUs that are financially able to do so are biased against agriculture-related programs which they perceive as being more costly, having less per capita income impact and poor prospects for cost recovery, and generating smaller political benefits per peso investment than town centers or other highly visible projects. Developing closer DA-LGU linkages, therefore, will only partially solve the problem since there is no assurance that the DA will accede to LGU priorities, nor is there any binding commitment on the part of the LGU to adhere to national targets and objectives given that funds will still be controlled by the DA. Nevertheless, the establishment of a more effective coordination system between the DA and the LGUs can be an initial step in crafting a more formal and effective bottom-up planning and implementation arrangement. For this purpose, the regional field units (RFUs) of the DA will need special reorientation and training in planning and handling projects in closer coordination with the LGUs. The LGUs, in turn, will have to actively involve farmers and other local residents in the configuration of their plans and implementation of projects in order to generate mass support for the identified projects. The cost-sharing system will be a more ideal arrangement, if only for the fact that it will force the LGUs to attend to their agriculture-based constituents in exchange for funding support from the DA. This will ensure, for example, that the provision of extension services, maintenance of farm-to-market roads, and other critical responsibilities of the LGUs will be attended to. It will also ensure that programs will be more attuned to the needs of the locality, especially if these are selected and planned in consultation with farmers in the area. Target beneficiaries can, in turn, be asked to provide labor and other types of affordable counterparts, thus enhancing their support and commitment to the program and its implementors. This will, at the same time, make LGU officials more accountable to, and hopefully also more popular with, their constituents. Several modifications, however, may have to be introduced in the cost-sharing scheme in order to make these more palatable and accessible to the LGUs and ensure that benefits ultimately accrue to intended beneficiaries: oi MDF guidelines were originally designed for loans to the LGUs for income-generating projects. They may not be configured to handle grants or projects that have long gestation and payback periods that are common in agriculture. At present, the guidelines support a ceiling augmentation by central agencies of 50 % for irrigation and 0 % for roads. These ceilings may have to be increased and made progressive. The poorerst LGUs - the important target beneficiaries of an agricultural development Annex 7 Page 22 of 35 infrastructure program -- may only be able to provide up to at most 10 % of development costs as counterpart resources in cash or in kind. a As the DA lowers the counterpart investment required of poorer LGUs, it may need to invest in improving the latter's capacity to generate project proposals and develop comprehensive local development planning in their respective areas. An improved quality of such project proposals that can be funded in this decentralized program can substantially reduce the administration cost of the program. An LGUproject developmentfacilitation may need to be designed for this purpose. o A transparent project proposal evaluation system must also be devised by the DA to ensure that proposals are fairly and credibly assessed on the basis of pre-determined objectives, targets, and criteria. o The DA and particularly its RFUs must also establish effective project monitoring systems to ensure that co-financed projects are efficiently and effectively implemented and funds are used judiciously and properly. This could include a project monitoring scheme that will continually advise local residents of fund releases and timetables, thus making them aware and vigilant in monitoring projects. These initiatives are critical in the light of cynical remarks that the LGUs will be no better, and could be worse, than national government agencies in minimizing graft and corruption in the implementation of projects. Encouraging Technological Innovation The positive contribution to the development of the agriculture sector of improved technologies and infrastructure services cannot be overemphasized. In the pipeline for the grains industries are rice hybrid, single cross yellow com hybrids, BT corn, improved white corn varieties, integrated pest management, and balanced fertilization schemes. In order to accelerate the development and conumercialization of such technologies, two measures are proposed encouraging private sector investments in R&D. One measure institutionalizes intellectual property rights (IPR) protection involving plant varieties. Such a protection may need to be consistent with the country's contractual obligations under the WTO's Trade-Related Intellectual Property Rights (TRIPs) Agreement. This measure requires legislation changing the country's IPR legal system to include plant varieties. The other measure involves the issuance of transparent regulations governing the development and commercialization of transgenic materials. At present, the country suffers from a general lack of rules to govern the conduct of field trials of transgenic plant varieties. BT corn for example, having the potential of reducing the incidence of diseases without the use of agricultural chemicals, needs to be tested at the field level. Present regulations are overly conservative such that private sector firms that have the technology find the cost of conducting field trials too high. The more important set of regulations govern the commercialization of such transgenic varieties. Both sets of measures are meant to encourage the development and commercialization of transgenic materials without sacrificing scientifically necessary regulations to reduce risks. Agricultural Special Safeguards and Measures Against Unfair Trade Section 401 of the Tariff and Customs Code needs to be amended in order to allow the agriculture special safeguard provided for in Section 5 of the WTO agreement on agriculture. This safeguard allows the country to increase the applied tariff rate on the affected product by up to a third in case of an import Annex 7 Page 23 of 35 surge. The definition of the import surge, and how to use and when to lift the safeguards are described in the agreement. It is important that this triggering condition be adhered to closely in order for the Philippines to use this special safeguard, when it has to, without any legal problems in the WTO. Aside from the agriculture special safeguards, the government may have to legally enable WTO- consistent measures against unfair trade: anti-dumping and countervailing duties, and regular safeguards. Sections 301 and 302 of the Tariff Code provide for anti-dumping and countervailing duties, respectively. However, these provisions against unfair trade have never been used by the Philippines because these are not consistent with the GATT agreement. Using these would invite trading partners to question our use of these measures and may eventually lead to a dispute settlement complaint against the Philippines in the WTO. It is therefore important to adhere to the legal text of the WTO in these matters in order for the country's producers to be protected legally from unfair trade measures. The regular safeguard measures needs to be introduced into the country's legal system in a way that is consistent with the country's commitments in the WTO. SPS Measures Documnentation and Harmonization As earlier mentioned, the WTO agreement on agriculture requires that the country's SPS measures be made, at the very least, consistent with international standards. The standards for plants are defined in the Plant Variety Protection Convention (PVPC) which are maintained by the Food and Agriculture Organization (FAO). Those for animals and meats are maintained and updated by the International Office of Epizootics. The sanitary standards for processed food items are documented in the Codex Alimentarius and maintained by the FAO and the World Health Organization (WHO). At present, the country does not have a complete documentation of all its SPS measures. Moreover, government still has to determine if the country's SPS measures are in conformity with intemational standards. With these standards documented, local food manufacturers and farmers will be in a better position to produce internationally-competitive products in terms of quality. Phasedown of Statutory Tariffs on Imported Agricultural Inputs In 1999, President Estrada issued E.O. No. 133 temporarily reducing for five years the tariff rates on 200 tariff lines representing agricultural inputs. The move was to implement a provision in the Agriculture and Fisheries Modemization Act granting zero import duty privileges to the sector for five years. A tariff protection system must increase the efficiency of the agriculture sector. The fact that the GOP has continued to implement its unilateral tariff reform program (TRP) and the Individual Action Plan (IAP) under the APEC is a step in the right direction. Under this program, the tariff structure for agriculture's non-agricultural inputs will be reduced. By 2003, the country's tariff system will be in the range of 3 and 5 %. Particular focus should be applied on packaging materials, refrigeration units, as well as farm and transportation equipment. Lately, the polymers tariff protection was raised from 10 to 15 percent, reversing EO 264 and contradicting the government unilateral tariff reform program. It, moreover, will tend to increase the cost of packaging materials. Privatizing the NFA's Proprietary Functions To reduce the rice market inefficiencies and fiscal burden caused by its conflicting mandates, the NFA's proprietary functions should be fully privatized. Lessons learned from international experience indicate that the private sector can be relied upon for agricultural trading activities, even for commodities with food security implications (see Box 2). In contrast to recommendations made earlier that a new private trading corporation with 49 per cent government equity be established, the AGILE's proposal calls for the 100 percent privatization and the unrestricted sale of bundled NFA assets to the private sector. Annex 7 Page 24 of 35 Discussions with prospective private sector investors, particularly those groups currently involved in grains trading, suggest that a privatization scheme with the least government ownership and control of the assets or the corporation will be the most attractive and viable option. Concerns were expressed over the government being the minority shareholder in a private trading corporation. While selling 51 percent of the equity to private sector groups will provide them with the simply majority, the absolute majority required for major decisions in the company will still be 67 percent of the shareholders' votes. Even if the government share is reduced to 33 percent, private sector groups will continue to be wary of the high probability of government control and intervention in the company's business plans and operations. Factors such as promoting greater competition in the economy and maximizing the government's privatization proceeds contributed further to the decision to recommend the sale of bundled NFA's assets to the private sector. Selling all the assets to one group will not only require a significant amount of financing (i.e., acquiring 51 percent of the shares will entail paying at least i} 3 billion), it will also mean that monopolistic powers over the market will be transferred from the public to the private sectors. Dividing the assets into 6-10 bundles with no specifications from the government on how the assets will eventually be used will facilitate sale, maximize government proceeds, and address antimonopoly concerns. Monitoring Progress of the Proposed Reforms Interim Key Results Areas and Indicators Because of the strategic importance of rice in the Philippine economy, it may take some time before the suggested reforms are adopted and implemented. Hence, some indicators to measure the cost- effectiveness of the food security program in the interim are suggested. The strategies and indicators are presented in Table 5.1. Rice Price Stabilization To respond to emergencies, government is expected to maintain a buffer stock equivalent to 15 days of national consumption at any time of the year. The stock will be augmented to 30-day levels by July 1 of each year in order to stabilize prices during the lean season. The buffer stock is usually filled through the NFA's procurement during the main production season in December. Any stocks remaining from its distribution operation will be augmented by importation. However, there are definitely months and years (when there is enough domestic supply) where the NFA held stocks lower than the prescribed 15- and 30- day equivalent volumes. Thus, it may be useful to monitor the monthly level of buffer stocks maintained by the NFA vis-a-vis those held by the private sector, against the monthly wholesale and retail prices of rice. This will be helpful in gauging whether or not the government-held stocks really make a difference during local/national deficit situations. It is important to stress, however, that the NFA should be allowed to import only those volumes that are necessary to fill up stocks. The private sector should be allowed to bring in the remaining import requirements. This will help make a very important distinction between government and private responsibilities in rice storage and in the bridging of the supply-demand gap through importation, where the NFA's role is only incidental because of its monopoly privilege. The cost of procuring, storing and distributing the buffer stock should also be segregated from the other expense items in the NFA's accounts. This will result in a more definitive estimate of the cost of "insuring" against market failure. Annex 7 Page 25 of 35 The allocation of the residual rice import quota to private sector importers will also pave the way for reducing inefficiencies in transactions and transport associated with government contracts. This, in turn, will translate to lower prices for consumers and savings to taxpayers. Thus, it may be illuminating to compare the actual difference between the costs incurred by private importers and the NFA in importing rice. Internationally Competitive Agriculture (also a long-tern issue) Domestic rice prices are highly disparate because markets are fragmented. This is due to the underdeveloped state of market infrastructure, especially roads and communications. Useful indicators of improved integration would be farm-to-market density, the number of telephone units installed, and the extent of electrification. On the other hand, the disparity in prices across months is attributable to the seasonality of rice production. Since paddy production is heavily dependent on water, the dry season harvest is much smaller than the wet season harvest. Thus, irrigation services will be critical in steadying local supply throughout the year. This is quantified through an inventory of public and private sector investments in the construction, rehabilitation, and maintenance of irrigation facilities. However, once the limits of irrigated and irrigable land are reached, the only way to increase production would be to improve yields. Throughout the years, yields have been "revolutionized" through advances in technology. Such advances will be encouraged further with increased and appropriate government budgetary support, and the formulation of policies or regulations clarifying plant variety protection and transgenic product commercialization. Since trade restrictions work against competitiveness by insulating local products from foreign price pressure, it would be ideal to lower tariff rates on all products. However, if a uniformly low tariff is not yet politically feasible at this time, the government can probably start by reducing tariff rates on inputs to agricultural production, such as seeds and fertilizer as well as packaging materials and transport equipment. Thus, the tariff rates on these items should be monitored. Some sectors would argue that trade protection is necessary to counteract unfair trade practices such as dumping and subsidization. Yet such a defense can only be justified if it is focused on the specific trade problem and not cover all trade. Towards this goal, govemment should have in place laws and regulations on anti-dumping, countervailing and safeguard measures. Finally, while the Philippines has a competitive edge in producing most products, it cannot maximize its the export potential because of strict sanitary and phytosanitary regulations in some export markets. The development and formulation of health and safety standards for these products will facilitate access to key export markets. Targeted Rice Subsidies to the Poor In lieu of the general consumer price subsidy being implemented by the NFA, a rice subsidy scheme that is focused on lower-income families and very remote "missionary" areas may be more cost-effective. To determine the success of the program, the number of lower-income families benefitted as well as the number of missionary markets served should be checked. The budgetary support received by the program each year should also be monitored. Fiscal Assistance to the NFA Reduced Annex 7 Page 26 of 35 Moving NFA prices closer to market rates in the short-run will definitely result in reduced costs to government. It may be useful to track every year the amount of operational subsidies and equity infusions given to the NFA, as well as its outstanding commercial debts guaranteed by the national government. In preparation for the eventual sale of the NFA assets, non-core and special assets may already be disposed of in the interim. The proceeds from such sale as well as the level of the NFA debt that is retired will indicate how effective the pre-privatization stage has been. Long-Term Key Results Areas and Indicators Table 5.2 attempts to summarize the key result areas required for improving the food security policy prospects in the Philippines, the proposed indicators for monitoring progress in each of these areas, and the government agencies that may be responsible for attaining such key results in the long-run. Rice Price Stabilization One of the AGILE recommendations involve the creation of a National Rice Board that will assume those regulatory functions of the NFA which cannot be transferred to existing government agencies. Thus, the Board will be mandated to define and implement the rules and regulations for rice price stabilization and trade, until such time as the rice market is effectively liberalized. The Board will be headed by an inter-agency committee composed of members from the public and private sectors. The DA Secretary will serve as its Chairman, while the public sector members shall consist of representatives (with the rank of Under Secretary or its equivalent) from the DTI, DILG, NEDA, DSWD and DBM. Representatives from farmer-organizations, grains businesses and consumers are also proposed to be appointed as members of the Board. The DA, as mother agency, shall have authority over the NRB with respect to the review and approval of its plans, programs and budget, the assessment of its overall performance, and the supervision of its policy formulation function. However, decisions arising from the exercise of the regulatory powers of the Board shall not be subject for review by the DA, but are appealable in the courts ofjustice. The NRB will basically implement the proposed price band mechanism. This involves setting the national rice target price, estimating the correct volume of importation necessary to equate supply with demand at the target price, and allocating the import quota to the private sector. Since the exercise is quite data- intensive, the NRB has to fully coordinate with the Bureau of Agricultural Statistics. Their successful administration of the price band scheme will be reflected in the level of the target price and the actual monthly wholesale and retail prices of rice. At the end of the year, the NRB can also verify if the total domestic production, consumption and importation of rice for that year tally with the estimates of its supply-demand model. Finally, the utilization of the import quota by the private sector would give the government an indication of the correct volume of imports that is required in the country. For example, if the quotas become fully expended before the second quarter of the year, then the Board may have underestimated the amount of the supply-demand gap. While the price band mechanism directly impacts on consumer prices, it will also have an effect on farmgate prices. To the extent that the latter often settles at a level that is 50% of wholesale prices, then we should examine whether local prices would really be 50% of the national target price, plus the competitive estimate of transport and handling costs. Annex 7 Page 27 of 35 Several factors may cause national wholesale prices to go beyond the price band. Either world prices could shoot up, the exchange rate could depreciate sharply, or the actual local supply will fall short of the expected volume. In such cases, the NRB shall request the President to adjust the tariff rate on rice downwards in order to bring wholesale prices down to the target price. Another case involves an unusually large domestic harvest, causing farmgate prices to plunge. The NRB can tap into a contingency fund to offer assistance to local farmers. It is also possible that extraordinary situations in specific local markets could lead to severely high consumer prices, e.g., volcanic eruptions, flooding, etc. If an area has been declared a calamity area, then the National Disaster Coordinating Council (NDCC) should be allowed to do its work. However, if the cause of the problem does not yet warrant the involvement of the NDCC, i.e., a bridge has collapsed such that the area is cut off from its traditional rice suppliers, then the NRB should step in. In these circumstances, the NRB can access the contingency fund in order to engage the services of private traders in injecting rice supply in that area. Because of these interventions, it may be informative to track information on local rice production, world prices, exchange rates and regional farmgate prices. The extent of the utilization of NRB contingency fund as well as NDCC's expenditures on rice assistance would also indicate how costly the effort had been. Fiscal Assistance to the NFA Reduced Since the government trading operations in rice will not be necessary in the long-run, it is proposed that the assets of the NFA be sold in bundles and the proceeds from the sale be used to retire its obligations. Thus, from this point onwards, the financial cost of delivering food security would become more transparent and reflect more accurately govermment's capability to respond to the issue. Annex 7 Page 28 of 35 Table 5.1 Enhancing Food Security in the Philippines: Interim Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicator Responsibility Remarks The government maintains a buffer stock equal to 30-days of Level of buffer stocks held by Department of Agriculture- national consumption at the onset of the lean season each goveMment on a monthly Bureau of Agricultural Statistics year. The stocks are either sourced from domestic basis National Food Authority procurement or from importation. Budgetary outlay of government for maintaining the buffer stocks Wholesale and retail rice Department of Agriculture- prices Bureau of Agricultural Statistics Rice Price Stabilization In January of each year, the rice import quota is determined Wholesale and retail rice Department of Agriculture- Aside from addressing possible (based on the gap between local supply and demand, net of prices Bureau of Agricultural Statistics shortages, allocating the quota the NFA's requirements for buffer stocking) and auctioned Landed costs of rice imports mainly to the more efficient private off to private sector importers. by the NFA and the private importers will result In lower prices sector Importers for consumers. Utilization of auctioned rice National Food Authority import permits Department of Agriculture-MAV Secretariat Internationally Marketing costs for primary agricultural products reduced Farm-to-market mad density Department of Agriculture; The stress on roads is for a Competitive through improved roads and communications system Telephone density Local govemment units sector-neutral market Agriculture Eletrificatlon infrastructure. (also a long- Improved, and better access of farmers to, irrigation services Public and private sector Department of Agriculture; Local Irrigation facilities/services term issue) investments In the National Irrigation can be supplied by private sector construction, rehabilitation and Administration; Local providers, particuladly for maintenance of irrigation government units communal projects. Farmers may facilities enter into a contract with such providers where they pay irrigation service fees in the same way that road users pay for toll roads. Govemment can encourage such contracts to occur through regulations or laws (if needed) or technical assistance in project development particularly -_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _______________________ ________________________ from the N IA . Annex 7 Page 29 of 35 Table 5.1 Enhancing Food Security in the Philippines: Interim Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicator Responsibility Remarks Access of farmers to more and improved agricultural Amount appropriated for Congress; Department of The AFMA already provides that technologies broadened subsidizing basic agricultural Agriculture amounts be set aside for this technology development pp_ urose. Plant variety protection and Congress; Department of This is a commitment to the WTO registration bill enacted Agriculture under the TRIPs Agreement. Regulations Issued for the Department of Agriculture; With availability of such commercialization of Department of Science and technologies in other countries, transgenic agricultural Technology the prospect of accelerating products agricultural modemization is higher if farmers are provided better access to such Improved technologies. To address concems for bio-safety particularly from environmental groups, the review of existng field testing regulations for transgenic ______________________ _________ materials needs to be done. Regulations reviewed and Department of Agriculture; improvements adopted for the Department of Science and field testing of transgenic Technology agricultural products Reduced tariff rates on products used as inputs in Statutory tariff rates Department of Agriculture- The Philippines has unilaterally agriculture, including packaging materials and transportation Policy Analysis Service; NEDA committed to APEC a tariff policy equipment Tariff and Related Matters regime between 0-5% in 2003 Committee except for sensitive agricultural products. An Executive Order has yet to be issued to enable this. Agricultural products better safeguarded against dumping, Legislation enacted and Congress; Department of The proposed legislation include: subsidized agricultural exports, and import surges regulations issued for WTO- Agriculture; Tariff Commission General Safeguards Law and consistent anti-dumping, Agriculture Special Safeguards countervailing, and safeguards Law. Implementing rules and measures regulations are yet to be issued on these and the anti-dumping and countervailing laws. #\nnex 7 Page 30 of 35 Table 5.1 Enhancing Food Security in the Philippines: Interim Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicator Responsibility Remarks Enhanced capacity to export agri-based products International sanitary and Department of Agriculture - phytosanitary standards Bureau of Agriculture and adopted Fishery Product Standards, Bureau of Plant Industry, Bureau of Animal Industry, National Meat Inspection Commission, Bureau of Fisheries and Aquatic Resources Department of Health - Bureau of Food and Drugs A cost-effective scheme designed, adopted, and Number of lower-income Department of Agriculture- The NFA has piloted a small implemented to target rice subsidies for lower income families served Policy Analysis Service, program since 1997. The Subsidies to the groups. Number of missionary markets proposed Grains Sector Poor covered Development Program of the ADB (also a long- Amount appropriated each Department of Agriculture; lists this reform in the program's term issue) year for targeted rice subsidies NEDA Development Budget policy reform matrix. benefiting lower income Coordinating Committee; groups. Congress The NFA's procurement and release prices are made more Farmgate palay prices; Department of Agriculture- responsive to market prices. Local production costs, worid wholesale and retail rice prices Bureau of Agricultural Statistics Fiscal prices and movements in the exchange rate are factored into assistance the computation of these NFA prices. to the NFA Given the above results, fiscal subsidies to the NFA, and Amount of operational Department of Agriculture; reduced to ceilings for DOF-guaranteed commercial notes of the NFA subsidies to the NFA indicated Department of Finance; lower the reduced in the General Appropriations National Food Authority budgetary Act; ceiling in the financial deficit while guarantees granted by the ensuring Department of Finance ____ food Given the above results, non-core and special assets of the Proceeds from NFA asset Department of Finance; security NFA sold to partially retire its debts. sale; amount of NFA debt National Food Authority (also a long- retired term issue) Annex 7 Page 31 of 35 Table 5.2 Enhancing Food Security in the Philippines: Long-Term Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicators Responsibility Remarks In January of each year, rice import quota is determined and Target and market wholesale Department of Agriculture- Requires amendments to NFA auctioned to private sector importers to support the current and retail rice prices National Rice Board; Bureau of Charter to decouple the NFA annual national rice consumption at the target wholesale Agricultural Statistics price set initially at 50% above first warehouse price of imported rice. Target price changes kept within plus or Local rice production; target Department of Agriculture- Requires amendments to NFA minus ten percent from immediately preceding level by national use of rice; target rice National Rice Board; Bureau of Charter to decouple the NFA appropriate adjustments in statutory in-quota tariff for rice. imports Agricultural Statistics Market wholesale rice prices fluctuate within plus and minus Utilization of auctioned rice Department of Agriculture- If permits are not utilized, there five percentage points around the target prce. import permits National Rice Board; Bureau of could be a shortage. The Agricultural Statistics assumption is that the WTO tariff binding commitment in rice allows Department of Finance-Bureau flexibility for varying applied in- Rice Price of Customs quota tariff rates. Stabilization Average palay price at the farm level is no less than fifty Regional farmgate prices of Department of Agriculture- Market farmgate palay prices on percent of target rice price. Regional palay farmgate prices palay National Rice Board; Bureau of average are half their may deviate from this average to the extent of competitive Agricultural Statistics corresponding rice wholesale marketing cost. prices. Extraordinary situations, including but not limited to bumper Local rice production; world Department of Agriculture- NDCC intervenes only after the harvests, sharp changes in world rice prices and/or currency prices; exchange rate; National Rice Board; Bureau of President makes an official value, area-specific natural calamities or temporary regional rice prices; regional Agricultural Statistics declaration that there is a disruptions in domestic trade in rice for any reason other farmgate prices; utilization of calamity. than natural calamities are appropriately dealt with using a rice contingency fund; NDCC National Disaster Coordinating flexible tariff policy or tapping the contingency fund of the expenditures related to rice Council National Rice Board. Natural calamities are addressed following existing procedures of the National Disaster Local govemment units Coordinating Council for responding to natural calamities. Internationally Marketing costs for primary agricultural products reduced Farm-to-market road density Department of Agriculture The stress on roads is for a Competitive through improved road system sector-neutral market Agriculture Local govemment units infrastructure. (also an interim issue) l Annex 7 Page 32 of 35 Table 5.2 Enhancing Food Security in the Philippines: Long-Term Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicators Responsibility Remarks Improved, and better access of farmers to, irrigation services Private sector investments in Department of Agriculture- Local irrigaton facilites/services irrigaton facilities including National Irrigation can be supplied by private sector maintenance thereof Administration providers, particularly for communal projects. Farmers may Local government units enter into a contract with such providers where they pay irrigation service fees in the same way that road users pay for toll roads. Govemment can encourage such contracts to occur through regulations or laws (if needed) or technical assistance in project development particularly from the NIA. Access of farmers to more and improved agricultural Amount appropriated for Congress The AFMA already provides that technologies broadened subsidizing basic agricultural amounts be set aside for this technology development Department of Agriculture ourpose. Plant variety protection and Congress This is a commitment to the WTO registration bill enacted under the TRIPs Agreement. Department of Agriculture ___ _ Regulations issued for the Department of Agriculture With availability of such commercialization of technologies In other countries, transgenic agricultural Department of Science and the prospect of accelerating products Technology agricultural modemzatbon is higher If farmers are provided better access to such improved technologies. To address concems for blo-safety particularly from environmental groups, the review of existing field testing regulations for transgenic ._______________________ ._______________________ materlals needs to be done. Regulations reviewed and Department of Agriculture Improvements adopted for the field testing of transgenic Department of Science and agricultural products Technology Annex 7 Page 33 of 35 Table 5.2 Enhancing Food Security in the Philippines: Long-Term Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicators Responsibility Remarks Reduced tariff rates on products used as inputs in Statutory tariff rates Department of Agriculture- The Philippines has unilaterally agriculture, including packaging materials and transportation Policy Analysis Service commiKted to APEC a tariff policy equipment regime between 0-5% in 2003 NEDA Tariff and Related except for sensitive agricultural Matters Committee products. An Executive Order has yet to be Issued to enable this. Agricultural products better safeguarded against dumping, Legislation enacted and Congress The proposed legislation include subsidized agricultural exports, and import surges regulations issued for WTO- the General Safeguards Law and consistent anti-dumping, Department of Agriculture Agriculture Special Safeguards countervailing, and safeguards Law. measures National Economic and Implementing rules and Development Authority -Tariff regulations are yet to issued on Commission these and the anti-dumping and countervailing laws. Enhanced capacity to export agri-based products Intemational sanitary and Department of Agriculture - This will also protect locally grown phytosanitary standards Bureau of Agriculture and crops and livestock from pests adopted Fishery Product Standards, and diseases that agricultural Bureau of Plant Industry, imports may introduce Into the Bureau of Animal Industry, country. National Meat Inspection Commission, Bureau of Fisheries and Aquatic Resources Department of Health - Bureau of Food and Drugs A cost-effective scheme designed, adopted, and Delivery scheme of targeted Department of Agriculture- The NFA has piloted a small implemented to target rice subsidies for lower income marketing assistance for Policy Analysis Service program since 1997. The groups. missionary local rice markets proposed Grains Sector Amount appropriated each Department of Agriculture Development Program of the ADB Targeted Rice year for targeted rice subsidies lists this reform in the program's Subsidies to the benefiting lower income NEDA Development Budget policy reform matrix. (also an interim groups. Coordinating Committee; issue) Congress Institution(s) set up to Department of Agriculture implement the targeted rice subsidies program. Department of Budget and . __________ _ ________ ___________ __________ ___________ _______ __ ___________ _______ _ M anagem entt Annex 7 Page 34 of 35 Table 5.2 Enhancing Food Security in the Philippines: Long-Term Key Result Areas, Indicators and Agencies Responsible for Result Areas Key Issue Priority Strategy/Key Result Area Suggested Indicators Responsibility Remarks Fiscal Given above results, remaining assets of the NFA sold to Assets sold; NFA debt retired Department of Agriculture assistance to finance the NFA restructuring and retire all of Its debts the NFA Department of Finance reduced to lower budgetary National Food Authority deficit while ensuring food security (also an interim issue) _ Annex 7 Page 35 of 35 References Arkadie, B., et al., 1991. "Study on Foodcrop Policies, The Philippines," Report to the Asian Development Bank and the Department of Agriculture. AYC Consultants, Inc., 1989. "A Grains Stabilization Policy Study," Report submitted to the USAID and the Department of Agriculture. Balisacan, A., R. L. Clarete and A.M. Cortez, 1992 "The Food Problem in the Philippines: Situation, Issues and Policy Options," Final Report submitted to the International Food Policy Research Institute, Massachusetts. Bigman, D., 1982, Coping with Hunger: Toward a system of food security and price stabilization. Cambridge, Mass., U.S.A.: Ballinger Bouis, Howarth, 1991, "Food Demand Elasticities by Income Group by Urban and Rural Populations for the Philippines." Washington, D.C.: International Food Policy Research Institute. Clarete R., 1999, "Designing A Rice Price Stabilization for Rice in the Philippines without the Use of Buffer Stocks," AGILE.. _,___ R. Fabre, C. Balbosa, and E. Castro, 1992, "Securing Food Security: Performance Assessment and Future Directions of the NFA." Report submitted to USAID and the Department of Agriculture (ASAP). and Gonzales, L., 1996. "Philippine Agriculture Policy and Planning Study." Report to the Asian Develoment Bank and the Department of Agriculture. , et al., 1998, "Grains Sector Development Program" Report to the Asian Development Bank and the Department of Agriculture (TA 2717-PHI). Dawe, D. and P. Timmer, 1991, Rice Price Stabilization: Contrasting Experiences in the Philippines and Indonesia Agricultural Policy Project II Research Report No. 339. Cambridge, Mass., U.S.A.: Harvard Institute for Intemational Development, Harvard University. Islam, N. and S. Thomas, 1996, Foodgrain Price Stabilization in Developing Countries: Issues and Experiences in Asia. Food Policy Review, 3, Washington, D.C.: Intemational Food Policy Research Institute. Kanbur, S.M.R., 1984, "How to Analyze Commodity Price Stabilization: A review Article". Oxford Economic Papers 36(3):336-453. Pinckney, T.C., 1988, Storage, trade and price policy underproduction instability: Maize in Kenya. Research Report 71. Washington, D.C: Intemational Food Policy Research Institute. Roumasset, James A. "Market Friendly Food Security: Altematives for Restructuring NFA," AGILE- USAID, December 1999. Umali, D. "The Structure and Price Performance of the Philippine Rice Marketing System." Standford University, Ph.D. Dissertation, 1990. ANNEX 8 AGRARIAN REFORM: ACCESS TO LAND AND ITS PRODUCTIVITY By: Richard Anson, Senior Rural Development Specialist, The World Bank TABLE OF CONTENTS Trends and Emerging Issues: ..................................................... 1 Emerging Priority Strategies ......................................................5 Proposed Indicators ......................................................6 Table 4: Key Indicators ......................................................7 Land Distribution Accomplishment (1972 to 1999) ....................................................8 Summary of Releases and Obligations Incurred (July 1987 - Dec. 1999) ..................................9 Annex 8 Page 2 of 10 AGRARLAN REFORM: AccESS TO LAND AND ITS PRODUCTIVITYI Trends and Emerain2 Issues: The MTPDP highlights 3 major thrust involving agrarian reform. All of these support the overarching goal of reducing rural poverty through expanding access to land by the poor/landless, while increasing their productivity and promoting social justice. The thrusts are: (a) Expediting the implementation of the CARP so that all remaining lands to be redistributed (both public and private ) in completed by 2004; (b) intensifying the provisions of support services and infrastructure to about 1000 ARCs; and (c) Broadening options for enhancing land access for non-CARP beneficiaries by taking measures that would improve the functioning of rural factor markets and thus help to implement alternative and more cost-effective strategies and programs. Notwithstanding large tracts of land redistributed (both public and private) after ten years of promulgating the CARP, progress is lagging well behind the original target of completing CARP by 1998. Moreover, the current Government's stated target to complete CARP by 2004 will require a doubling of its historical rate of about 160,000 has./year to about 322,000 has. Per year. Table 1 shows the status of GOP implementing the CARP between 1972-1999. During this period of 27 years, DAR redistributed only about: (a) 4.9 million has of land (public and private), or about 61% of the original CARP target of 8 million has (which is equivalent to a rate of about 165,000 has. Per year); (b) 2.99 million has of private lands or only about 68% of the original target of 4.3 million has. (which is equivalent to a rate of about 100,000 has. Per year); (c) 1.9 million has. Of public lands had been distributed, which is only 50% of the original target of about 3.7 million has. ( and equivalent to about 65,000 has. per year ). Given that GOPs current public land policies and strategies will limit severely the scope for redistributing large tracts of public lands, most of the remaining redistribution under CARP is expected to occur in the private lands, (and involve more contentious land owners). DAR has distributed almost all 'This section draws and synthesizes from several recent papers and empirical studies; particularly: (a) "The Philippine Comprehensive Agrarian Reform Program: Perspectives and Issues", paper presented by Undersecretary C. Navarro, DAR, at an International conference W/CARRD 20/20: Emerging Trends and Perspectives of Agrarian Reform in Asia, October 6 and 7, 1999; and (b) "Agrarian Reform in the Philippines: Past Impact and Future Challenges", by K. Deininger, P. Lara, M. Maertens, and A. Quisumbing, mimeo, Washington, D.C., December, 1999; and (c) various background notes/papers involving the CARP Impact Assessment Study, currently being carried as an independent study, under the overall supervision of DAR, and funded by several donors. Annex 8 Page 3 of 10 government-owned and public lands and was left with a balance of 1.4 million hectares of accessible private lands for distribution. Traditionally, there has been strong landowners' resistance. The removal from 1999 CARP budget of funds foe landowners' compensation has limited the area to be acquired and distributed. Under PD 27/EO 228 and RA 6657, landowners' compensation reached P24 billion as of mid 1999 covering 1.1 million hectares or only about 72% of the total private lands distributed (Table 2). Accordingly, redistributing the balance of about 1.4 million has. of private lands by 2004 implies that about 322,000 has of private lands will need to be redistributed each year ( and could require as much as Ph 20 B per year for land acquisition, assuming an average compensation price of PH 60,000 per ha. ); this require rate exceeds significantly the historical rate and the total land redistribution ( and available funding), it could take up to 17 additional years to complete the CARP. (a) Inadequate Funding: There is a lack of a sustainable source of financing, which makes the program dependent on political lobbying and congressional appropriations for public funds. During 1999, Congress curtailed to zero the Administration's proposed funding for land acquisition (about Ph 6 Billion), and for FY2000 Congress approved only Ph600 M for land acquisition (about 10% of the total requirements). Currently, there are negligible funding from private sources (or banks, except from Land Bank which is mandated to serve as a conduit for the Agrarian Reform Fund). In addition, there is a growing need for Government to finance support infrastructure and services to enable agrarian reform beneficiaries (about 2 million farm families) to increase their land productivity. The annual requirement are about Ph 8 Billion (figure to be confirmed), whereas GOP budget allocates only about 50% of the requirement ln 1998 and 1999. In short, the CARP is massively underfunded, if it is going to rely on public lands. (b) Landowner Resistance: there is continuing resistance from landowners, as they are insisting on receiving "fair market value" for their lands; often, the landowners expectation of fair market value greatly exceeds GOP's estimate (which is exercerbated by a distorted land market and the absence of an objective basis for lad valuation). With the LBP, in late 1999 the DAR however has issued guidelines increasing the valuation of sugar and rubber plantations by 35% and 25% per hectare, respectively. (c) Litigation Process: CARP is struggling to address the complex, time consuming, and litigious process of settling disputes over the coverage of lands, whereby the disputes often drag out in the court system for many years. (d) Deficient Modalities: there is concern that the current modalities are overly centralized to allow active participation by beneficiary rural communities, that there is a lack of adequate accountability and of support services need to realize the full productive potential. There is also a concern that by reducing access to land through rental and share cropping, the current CARL may effectively reduce access to land for the poor. Fifth, until recently, there has been an absence of monitoring and evaluation of the CARP, which has prevented it from being refined and improved based on experiences and lessons learned, to ensure it achieves its original objectives. Annex 8 Page 4 of 10 (e) Management Effectiveness: Variability in management effectiveness, weak coordination with various agencies (especially given need to support devolution to LGUs) especially in the implementation of the ARC program that provides many opportunities to enhance the benefits of past land redistribution, as well as to take a more integrated approach to future land reform. Preliminary Research Findings: The acceleration of CARP implementation will surely benefit many of the rural poor and landless households. Preliminary research results (by Deininger et al) support the view that land reform has had a significant impact n improving farmers' CARP program. Based on empirical results from a unique data set covering 5 villages in Central Luzon and Iloilo, these results include the following major findings: o Per capita consumption of beneficiaries from the 1972 land reform in 1998 was significantly higher (about 45%) than that of non-beneficiaries; o Econometric estimates using a number of different indicators confirm that: children of land reform beneficiaries have accumulated human capital faster than those from non- beneficiaries; rates of physical asset accumulation by land reform beneficiaries were significantly higher than those by non- beneficiaries; and land reform had longer terms effects through which land reform beneficiaries were able to improve their productivity and income more than non- beneficiaries in the 1985-98 period. While these result support that land reform can have a significant impact on reducing poverty, the data also suggest that the current way of implementing land reform may have a negative impact on the functioning of factor markets. Preliminary research results (ref. Deininger et al ) suggest that the functioning of land markets has worsened between 1985- 1998 and that CARP related land reform legislation and the association attenuation of land ownership rights decreased land owners' ability and willingness to rent out land to the landless, thereby reducing access to land for the vast majority of poor who did not benefit from the land reform program. Complementing the current emphasis on administrative reform with an approach that would rely on better functioning of land markets could help to increase the speed, the outreach, and the sustainability of land reform. Providing evidence on what has worked (and what not) in the past and thus helping to give directions on how such a policy might be practically implemented will be an important contribution of the onOgoing Impact Assessment Study (with the initial results due by the end-December, 2000). ARC Program: Also, DAR is currently implementing about 10 donor-funded projects which provide economic and social infrastructure (e.g., community organizing and skills development, facilitation in promoting viable livelihood/agricultural enterprises) to Agrarian Reform communities (with a target of about 1000 ARCs). These projects are at an early stage of implementation. Preliminary evaluations show that many of these programs are having substantial evaluation show that many of these programs are having substantial positive impacts on increasing household incomes. For example, (1 para. will be added which summarizes some recent household surveys carried out by FAO/TSARDD team, using farming system development approach). The implementation of many of the ARC programs are also facing various constraints, including limited budgetary allocations, variability in management effectiveness, weak coordination with various agencies (especially given need to support devolution to LGUs). Nonetheless, the ARC Annex 8 Page 5 of 10 program provides many opportunities to enhance the benefits of past land redistribution, as well as to take a more integrated approach to future land reform. Emerging Priority Strategies. Notwithstanding the need for further empirical research, the slow rate of implementing CARP and underlying constraints outlined above suggest the need for GOP to proactively intensify the implementation of the strategies outlined below. Most of these reflect DAR" innovative strategies and programs, but their operationalization are being hampered by the constraints outlined above (particularly public funding and past inertia). > Complement the current administrative approach with a demand-driven and community-based approach to land distribution that would empower beneficiaries and focus on generation of sustainable rural livelihood (rather than merely distribution of land). It is expected that NGO/POs would play an important role in supporting more decentralized approaches to land reform; l Take appropriate measures, such as the more effective collection of existing land taxes (and possibly introduce a reformed and progressive land tax structure) to replace bureaucratic and administrative pressure with economic incentives on the supply side of the land market. This would at the same time provide a strong incentive to increase the efficiency of land use, and to facilitate voluntary land purchase (through improving the effectiveness of existing modalities of "voluntary land transfer/direct payment scheme). Another dimension is to structure the land tax receipts such that LGUs could use these revenues to assist in financing land acquisition by poor communities on a mutually agreeable basis (to help support the demnand-driven strategy); o Promote an integrated approach where the beneficiary development activities are integrated with the land acquisition and distribution activities, right from the beginning. This will require intensive training and community organizing with the prospective beneficiaries as soon as they are identified, and before they actually receive the land. The lessons learned from the ARC program need to be duly acted upon, as well as ensuring that the ARC program takes a more integrated approach; o Promote the newly launched program (MAGSASAKA (acronym meaning "Partnership in Agrarian Development"), which promotes joint economic enterprises between the beneficiaries and investors, including former landowners, in order to generate or access the financial, technical and/or managerial resources that the beneficiaries need to be able to derive maximum benefit from their new lands. Under this program, the beneficiaries contribute the use of their land (not the land itself) to the partnership, while the co-investors contribute either capital, technical and/or managerial expertise, or all, to pursue an agribusiness enterprise to enhance the productivity of the land and incomes of the ARBs; o Promote greater land rental restrictions to help create opportunities for the poor to aces land through a rental arrangement, while also ensuring that the CARP guidelines are not compromised; Annex 8 Page 6 of 10 o Promote greater progress toward agricultural trade liberalization which would help reduce the price of land in general, and thereby make ;land more accessible to all, and ease the financial burdent of land acquisition under CARP. The above strategies need to be approached as an integrated package (with variants to be applied to different situations) of sequenced and prioritized innovations which could revitalize the implementation and development impact of CARP. This package would also address the MTPDP strategy of promoting options for enhancing land access for non- CARP beneficiaries, as the above strategies also involve alternative and more cost- effective strategies also involve alternative and more cost-effective strategies and programs. Currently, DAR is in the process of formulating various proposals to implement many of the above strategies , but progress toward their implementations appears to be lagging behind for various reasons. One of the innovations being pursued by DAR which embodies all of the above elements in the formulation of various pilots involving community-managed agrarian reform. This learning experience is needed before expanding it on a broader scale. Proposed Indicators To help focus greater attention on implementing one of the most important structural reforms, the following performance indicators are suggested to be used primarily by DAR in operationalizing and implementing its recent innovations: Annex 8 Page 7 of 10 Table 4: Agrarian Reform STRATEGIC PERFORMANCE PRIMARY OBJECTIVES INDICATORS RESPONSIBILITY 1) Expedite implementation * No. of Has. Redistributed * DAR (with support from of CARP based on and their prices (private regional offices). reformed/innovative and public lands); modalities. * Budgetary funds approved and released by GOP for land acquisition; * Land taxes collected and used for land acquisition; * % of has. Redistributed & no. of beneficiaries (based on the main modalities, with emphasis on voluntary transfer); * No.of length of time to litigate land disputes. 2) Provide strategic support * No. of ARCs supported * DAR (with support from infrastructure and services to (and reaching higher level independent surveys and enhance household incomes of social organization); analysts) and agricultural productivity. * No. of joint ventures, volume of investments; * Household income increases (compared to control groups) (P); * Issuance of individual CLOAs (no.) 3) Improve the functioning of * Number of landless and * DAR (with support from land rental markets and use poor being able to access independent syrveys and land reform as a means to land (P) analysts) facilitate increased land access * Extent of rental by the poor (and non-CARP transactions. beneficiaries). LAND DISTRIBUTION ACCOMPLISHMENT '-' P'rivate Agrictultural Lands anfd Non-Private Agricujltural Lands 1972 to 1999 Pltilippities YEAR] ACCOMPLISI-IMENT REGION 1TARGET TOTAL %__ PRIVATE AGRICULTURAL LANDS NON-PRIVATE AGRIC ULT[JRAL LANDS 21 OLT FGF' VOS VLT CA SUB-TOTAL GOL/KKK SET'VI 1LIS 1 SIUB-TO0 1A\L TOTAL 4,057,650 2,991,934 74 509,462 137,027 359,960 397,896 173,915 1,578,260 731,004 604,006 78,664 1,413,674 1 120,840 112,548 93 28,876 1,726 8,286 60,518 1,097 100,503 9,778 1,969 298 I ,045 II 293,398 284,524 97 75,871 8,153 26,823 26,877 10,830 148,554 88,132 43,274 4,564 135,970 CAR 102,648 69,112 67 1,175 508 489 14,243 46 16,461 52,651 0 0 52,651 III 555,944 329,849 59 182,536 4,357 17,005 20,562 13,934 238,394 24,277 11,412 55,766 91,455 IV 325,445 244,545 75 30,587 882 27,090 37,455 42,430 138,444 58,435 37,352 10,314 106,101 V 413,925 192,011 46 45,193 16,620 41,542 20,888 22,902 147,145 30,344 11,635 2,887 44,866 VI 426,037 252,856 59 34,631 58,129 56,878 18,477 15,095 183,210 50,271 19,375 0 69,646 VIl 245,535 89,002 36 16,590 787 18,487 2,291 10,916 49,071 34,612 5,319 0 39,931 Vill 302,376 262,557 87 18,281 6,226 18,003 10,580 6,598 59,688 123,837 78,417 615 202,869 IX 196,836 193,824 98 10,738 11,837 23,958 49,754 13,486 109,773 51,648 29,487 2,916 84,051 X 242,371 174,270 72 14,816 1,177 13,424 40,278 6,973 76,668 46,407 51,195 0 97,602 Xi 248,825 243,254 98 21,482 4,683 70,986 32,076 26,288 155,515 45,997 41,742 0 87,739 xli 552,166 373,350 68 22,266 20,011 18,138 43,772 110 104,297 14,977 253,864 212 269,053 CAR-AGA 170,232 6,420 1,931 18,851 20,125 3,210 50,537 99,638 18,965 1,092 119,695 1_/ Subjectfor v'alidalion 2 / Based on the Work and Fijiancial Plan AGRARIAN REFORM FUND SUMMARY OF RELEASES AND OBLIGATIONS INCURRED JULY 1987 - DECEMBER 1999 (IN MILLION PESOS) Agency;Parficularm 1987 1998 1989 1990 1991 1992 1993 1994 1995 19iS6 1997 1998 1999 GrNnd TotI NOT E S PARC-Approved Budget 1,412.000 5,727.000 2.267.000 3,567.000 7,413.000 5 406 000 2.B09 000 4,010.000 2,925 000 5,534.364 3,111.908 2,506 660 1,625 270 48.314.422 0 E5m5s 0blipatiorlO 5l.ainst AA el--sf.d w lMIt00 SARO (A/A) Released 595.790 0.000 080.060 1,64S.153 4,661.346 731.140 1,276.380 3.693 617 2,92S.2B0 4,616.786 3,111.199 2.4s2.749 1,579.61 28,605.310 agoIe 0lwd aCrOtatiotColeuioS & 0on repaymefh, Obligetions Incurred 170.029 680.944 1,355.684 921.936 1.010.352 2,454 523 1,674 115 2.064.765 2,354.632 3.095.590 2,617553 3,08.025 3.447.837 24,955.985 2, E.cess ow,atio"ns overe chaolaed og,a balcr- o' op- Unobligaf9d Allolment 425.761 ' (080.944) (479.624) 923.217 3,650.994 (1,723 3) ' (397.735) 1,829.052 570.648 1,521.106 493.646 l615.276) 1,014.480 6.532.012 NCA Released 595.790 0.000 429.4 70 2,301.750 2,t74570 988 770 1,501.670 2.600.000 443.160 4,257.136 2,71t.403 1.007.210 1.960.05C 20,983.990 0 P1,727 3 M obhl,ti LOM ,c o w d NCA UtlizedODisb.) 170.029 660.944 1,365.684 921.936 1,010.352 2.454 523 1,674.115 2,064.765 2.354.632 3,095.590 2,617.553 3,0986025 3.447.B37 24,955.985 DAR PARC-Approved Budget 129.000 1.097.000 2,422.000 2,663.000 2.739.000 1.601.000 1,366.000 1,407.261 2,1680.000 2.028.431 2.587.069 3.,54.557 4.209.881 27,784 199 I' Euc,ues P8175 56 M hich wrevrese.n v-e,o,. o 19se3. 1900 unboatIlaed alOrnOIPeI SARO (AIA) Released 106.993 703.971 1.073.915 1,351.766 2,739.753 1,266.795 1,566.729 1,430.531 1.978.355 2,052.347 2,547.995 3.295.985 3,699.209 23,714.344 Obligalions Incurred 62.456 418.449 799.927 1,049.251 1,754.1,67 1 .67.168 1,4896946 1,418 019 1.757.323 2.006.747 2,174.920 3,310.425 2.534.052 20,162.652 2The uno-l qa
World Bank Group · Working Paper
Philippines - rural development & natural resource management : trends, strategy implementation, and framework performance indicator system (Vol. 2 of 2) : Annexes
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