Philippines - Promoting Equitable Rural Growth

Report No. 17979-PH Philippines Promoting Equitable Rural Growth May 29, 1998 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region H Document of the World Bank  CURRENCY EQUIVALENT (as of May 1998) Currency Unit = Peso (P) US$1.00 = P 39.0 FISCAL YEAR January 1 - Dcember 31 ABBREVIATIONS AND ACRONYMS ARB - Agrarian Reform Beneficiaries BIPP - Bukidnon Industrial Plantation Project CARL - Comprehensive Agrarian Reform Law CARP - Comprehensive Agrarian Reform Program DA - Department of Agriculture DAR - Department of Agrarian Reform DENR - Department of Environment and Natural Resources DILG - Department of Interior and Local Government DOST - Department of Science and Technology DPWH - Department of Public Works and Highways IA - Irrigators' Association IRA - Internal Revenue Allotments KPA - Key Production Area LBP - Land Bank of the Philippines LGC - Local Government Code LGU - Local Government Unit MDF - Municipal Development Fund MTADP - Medium-Term Agricultural Development Plan MTPDP - Medium-Term Philippine Development Plan NEDA - National Economic and Development Authority NFA - National Food Authority NGO - Non-Government Organization O&M - Operations and Maintenance PCARRD - Philippines Council for Agriculture, Forestry and Natural Resources Research and Development PHILRICE - Philippines Rice Research Institute PO - Peoples' Organization SRA - Social Reform Agenda WTO - World Trade Organization Vice President : Jean-Michel Severino, EAP Country Director : Vinay Bhargava, EACPF Sector Manager : Geoffrey Fox, EASRD Task Team Leader : Syed Husain, EASRD  PHILIPPINES PROMOTING EQUITABLE RURAL GROWTH CONTENTS Page No. FOREWORD EXECUTIVE SUMMARY .............................................i 1. BACKGROUND TO AGRICULTURAL SECTOR GROWTH AND RURAL POVERTY ......................................... .1 A. INTRODUCTION ..........................................1 B. RECENT AGRICULTURE SECTOR PERFORMANCE .................................................4 C. OUTLINE OF RURAL POVERTY .....................................................5 D. LINKAGE BETWEEN GROWTH AND RURAL POVERTY .......................................... 9 E. KEY ISSUES FOR RURAL POVERTY ALLEVIATION ................................................ 12 Sluggish Agriculture Sector Growth .................................................... 13 Labor and Employment in the Rural Sector .............................................. 14 Depleting Natural Resource Base .................................................... 16 Technology Issues .................................................... 16 Institutional Issues .................................................... 17 F. MEDIUM TERM PHILIPPINE DEVELOPMENT PLAN (1993-1998) .19 2. POLICY FRAMEWORK ............................................................. 21 A. FOOD SECURITY AND OTHER POLICIES FOR AGRICULTURAL PRODUCTS AND INPUTS ............................................................. 21 B. WATER RESOURCES POLICY ............................................................................ 32 C. LAND POLICY ............................................................................ 34 Land Ownership ............................................................................ 34 Land Tenure Issues in the Uplands and Pricing of User Rights ............... 42 Land Use ............................................................................ 43 D. FISHERIES AND COASTAL RESOURCES MANAGEMENT POLICY .. 44 3. RURAL GROWTH AND POVERTY ALLEVIATION PROGRAMS ................. 47 A. OVERVIEW ............................................................................ 47 B. ACCELERATING GROWTH IN LOWLAND AGRICULTURE ...................................... 48 Potential Sources of Growth and Increased Rural Incomes ....................... 50 Medium Term Agricultural Development Plan (MTADP) ........................ 55 Expansion of Irrigated Agriculture ............................................................ 58 Agrarian Reformn Communities (ARCs) .................................................... 62 C. NATURAL RESOURCES MANAGEMENT AND UPLANDS AGRICULTURE ................ 63 Protection of Forest Resources .................................................................. 64 Sustainable Development of the Uplands .................................................. 66 D. FISHERIES AND COASTAL RESOURCES MANAGEMENT ....................................... 74 E. RURAL INFRASTRUCTURE ............................................................................ 76 F. AGRICULTURAL RESEARCH AND EXTENSION ...................................................... 79  Agricultural Research .............................................................. 79 Agricultural Extension ............................................................. 81 G. RURAL NON-FARM AND AGRO-INDUSTRIAL DEVELOPMENT .............................. 84 4. MAKING INSTITUTIONS MORE RESPONSIVE . ............................... 90 A. THE LGC AND THE CHANGING ROLE OF GOVERNMENT ................................... 90 B. ROLES OF NGAS AND LGUs IN RURAL DEVELOPMENT .................................... 91 LGU Capacity Building ............................................................. 95 C. ROLE OF NGOs 1N RURAL DEVELOPMENT ........................................................ 96 5. FINANCING OF RURAL DEVELOPMENT ..................................... 99 A. SECTORAL PUBLIC EXPENDITURE LEVEL AND COMPOSITION ............................ 99 Past and Present Levels ............................................................. 99 Past and Present Composition ............................................................. 101 B. PERENNIAL CROPS FINANCING ............................................................. 103 C. FINANCING OF LGU PROGAMS ............................................................. 105 D. RURAL FINANCIAL INTERMEDIATION ............................................................. 109 6. A RURAL DEVELOPMENT STRATEGY ................................................. 113 A. GENERAL ............................................................. 113 B. KEY ELEMENTS OF THE STRATEGY ............................................................. 115 Sector Policy Environment ................................................ ............. 115 Broad Based Rural Growth ............................................................. 116 Role Of Women ............................................................. 121 Poverty Targeting ............................................................. 122 Institutional and Financing Arrangements ............................................... 128 Areas for Further Study ............................................................. 129 ANNEX: The Consultation Process in June 1997 and Summary of. 131 Comments Made During Consultation on the May 30,1997 Draft References ................................... 160 List of Background Documents to this Strategy ................................... 161  Philippines at a glance 4/8/98 Lower- POVERTY and SOCIAL East middle- Philippines Asia Income Development diamond Population mid-1996 (millions) 70.0 1,726 1,125 GNP per capita 1996 (US$) 1190 890 1,750 Life expectancy GNP 1996 (billions US$) 83.3 1,542 1,967 Average annual growth, 1990-96 Population (%) 2.2 1.3 1.4 Labor force (%J 2.7 1.3 1.8 GNP Gross Most recent estimate (latestyearavailable since 1989) per a enroilment Poverty: headcount index (% of population) 54 Urban populabon (% of total population) 54 31 56 Life expectancy at birth (years) 66 68 67 Infant mortality (per ,000 live birhls) 39 40 41 Child malnutrition (% of children under 5) 30 ,. .. Access to safe water Access to safe water (% of population) 85 77 Illiteracy (% of population age 15+) 5 17 Grossprimaryenrollment (%ofschool-agepopulation) 111 117 104 - Philippines Male 110 120 105 Lower-middle-income group Female 111 116 101 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1995 1996 Economic rstlOs* GDP (billions US$) 15.0 30.7 74.2 83.8 Gross domestic investmenVGDP 30.9 15.3 22.2 24.2 Exports of goods and services/GDP 21.0 24.0 36.4 42.0 Openness of economy Gross domestic savings/GDP 24.8 17.4 14.4 14.4 Gross national savings/GDP 26.6 15.9 17.8 19.7 Current account balancelGDP -6.2 -0.1 -4.4 -4.7 Interest payments/GDP 0.8 3.1 2.6 2.1 Savings Investment Total debVGDP 27.8 86.6 53.2 49.2 Svn Total debtservicetexports 14.4 31.6 16.5 14.4 Present value of debt/GDP .. Present value of debVexports .. Indebtedness 1975-85 1986-96 1995 1996 199745 (average annual growth) GDP 3.0 3.1 4.8 5.7 ,, Philippines GNP per capita 0.3 1.5 2.6 4.7 ,, Lower-middle-income group Exports of goods and services 7.6 8.8 12.0 20.3 _ STRUCTURE of the ECONOMY 1976 1985 1995 1996 Growth rates of output and Investment (%) (% of GDP) Agriculture 30.3 24.6 21.6 21.4 20 Industry 34.6 35.1 32.1 31.7 10 Manufacturing 25.7 25.2 23.0 22.6 0- Services 35.0 40.4 46.3 46.9 093 94 95 9 -10 Private consumption 64.5 75.0 74.2 73.9 *20 V General govemment consumption 10.7 7.6 11.4 11.7 Imports of goods and services 27.1 21.9 44.2 51.7 GDI -OGDP 1975-85 1986-96 1995 1996 Growth rates of exports and Imports (%) (average annual growth) Agficulture 2.2 1.8 0.8 3.0 25 Industry 2.6 3.2 7.0 6.3 20- Manufacturing 1.8 3.1 6.8 5.6 15. Services 3.8 3.8 5.0 6.5 10 Private consumption 3.3 3.9 8.5 5.3 s General govemment consumption 0.4 4.2 5.4 5.2 0 \ Gross domestc investment -0.4 6.7 3.0 15.6 .- 92 93 94 95 98 Imports of goods and services 3.9 12.0 16.0 21.1 E Gross nabonal product 2.7 3.8 5.0 6.9 Expo Imports Note: 1996 data are preliminary estmates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.  Philippines PRICES and GOVERNMENT FINANCE Domestic prices 1975 1985 1995 1996 Inflation (%) (% change) 20 Consumer prices 6.8 23.1 8.1 8.4 15W& Implicdt GDP deflator 9.3 17.6 7.5 9.0 10 Government finance 5 (% o GDP) 0: Current revenue .. 12.1 18.9 18.7 91 92 93 94 95 9s Current budget balance .. 2.4 3.8 - GDP def. -O--CPI Overall surplus/deficit .. -2.0 0.6 0.3 TRADE 1975 1985 1995 1996 Export and Import levels (mill. US$) (millions US$) Total exports (fob) .. 4,629 17,447 20,543 35,0GO Coconut oil .. 347 826 571 30,000 Sugar .. 185 66 136 25,000 Manufactures .. 2,539 13,868 17,106 20,000 Total imports (cif) .. 5,111 26,391 31,885 15,000 F n K K F Food .. 256 1,204 1,578 iaoo Fuel and energy .. 1,452 2,461 3,008 000 Capital goods .. 769 8,029 10,472 5000 Export price index (1987=100) 81 124 124 g 9 92 93 94 95 96 Import price index (1987=100) .. 63 124 126 | Exports an Imports Terms of trade (1987=100) .. 127 100 99 BALANCE of PAYMENTS (millions US$) 1975 1985 1995 1996 Current account balance to GDP ratio (%) Exports of goods and services 3,000 6,864 21,978 27,627 0 -I Imports of goods and services 4,116 5,961 33,329 41,371 ! 910 92 3 94 95 9 Resource balance -1,116 903 -11,351 -13,744 tU Net income -126 -1,317 7,172 9,241 .2 9 |I{ Net current transfers 318 379 882 589 |3 Current account balance, -4 before official capital transfers -923 -35 -3,297 -3,914 Financing items (net) 912 867 3,928 8,021 |= Changes in net reserves 11 -832 -631 -4,107 .1 Memo: -- Reserves including gold (mill. US$) 1,458 1,098 7,762 11,745 Conversion rate (local/US$) 7.2 18.6 25.7 26.2 EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1995 1996 F (millions US$) Composition of total debt, 1996 (mill. USS) Total debt outstanding and disbursed 4,171 26,637 39,446 41,214 IBRD 238 2,420 5,002 4,666 IDA 17 84 183 193 A: 4666 G: 7969 B: 193 Total debt service 457 2,534 5,337 5,778 C: 405 IBRD 26 285 789 766 IDA 0 1 3 3 D:3079 Composition of net resource flows Official grants 72 139 276 246 Official creditors 185 360 -626 -310 / Private creditors 348 796 1,141 1,859 E: 12085 Foreign direct investment 98 12 1,478 1,408 F:12817 Portfolio equity 0 0 1,961 1,333 World Bank program Commitments 114 104 168 528 A-IBRD E-Bilateral Disbursements 94 276 402 457 B - IDA 0 - Other multilateral F - Private Principal repayments 12 110 415 426 C-IMF G-Short-termr Netflows 82 166 -13 31 1 - I Interest payments 14 176 377 343 Net transfers 68 -10 -390 -312 Development Economics  FOREWORD The sluggish agricultural growth during most of the 1980's and the first half of the 1990's, and the continued existence of significant levels of poverty in the Philippines are major concerns of the Government. As a response to these concerns, and building upon the work already done within the country on the subject, the World Bank undertook a study during 1995 for outlining "A Strategy to Fight Poverty", which confirmed that poverty in the Philippines is largely rural. Recognizing the central role of the agriculture and natural resources sub-sectors within the rural economy, this report covers a broad set of topics related to improving the management of these key subsectors, with a view to outlining a broad based program of growth and poverty alleviation in the rural areas of the country. While fully acknowledging that access to health, education and other social services is an important element of any strategy for rural poverty alleviation, this report does not deal with this aspect, as it is expected to be covered by another Unit in the Bank which deals with social sectors. The report is the outcome of a close collaboration between the Government of the Philippines and the Bank, and draws upon the analysis and conclusions from various pieces of excellent work already available within the country, as well as the various economic and sector reports produced by the Bank. The report is not tied to any structural or sectoral adjustment loan from the Bank to the Government of the Philippines. It was undertaken simply to have an independent review of the issues in rural growth and poverty alleviation, to develop some strategic proposals to address these issues, to promote a debate on the proposals within the Government agencies and the civil society at large, and thus to clarify both for the Government and the Bank the feasible and desirable interventions required to promote rural growth and poverty alleviation. The study was financed entirely by the Bank from its own resources and using Trust Funds it administers. The work was carried out under the overall direction of a Government Interagency Steering Committee led by Mr. Dante Canlas, Deputy Director General, National Economic and Development Authority (NEDA); and comprising Undersecretary Cecilia Soriano, Department of Finance (DOF); Undersecretary Emilia T. Boncodin, Department of Budget and Management (DBM); Undersecretary Delfin Ganapin Jr., Department of Environment and Natural Resources (DENR); Undersecretary Jose Noel Olano, Department of Agrarian Reform (DAR); Assistant Secretary Marinela Castillo, Department of Agriculture (DA); and Director Josephina Esguerra, NEDA. An Interagency Technical Working Group, established by the Government to work directly with the the Bank's team members, included Director Cristeta Francisco, DBM; Ms. Narcisa Umali, NEDA; Mr. Rafael Camat, DENR; Ms. Celerina Afable and Mr. Bert Rillera, DAR; and Ms. Cecilia Astilla and Mr. Roberto Villa, DA. Initial discussions on the scope and coverage of the study were carried out between the Government and the Bank in October 1995, and the field work involving Government officials, and Filipino and international experts was initiated in February 1996. The first draft of the report was produced in August 1996 for review of the Interagency Steering Committe.  After review by the Committee members in the later part of 1996, a revised draft was produced in January 1997. After a further review by the Committee members, a revised draft for wider discussion was produced on May 30, 1997. That draft was reviewed by members of the civil society during two consultation meetings in Manila and one in Davao City in June 1997. Written comments were also invited. A detailed description of the consultation process and a summary of the oral and written comments received are annexed to this report. The details of discussions at the three meetings and all written comments have also been compiled in a separate volume, which is available on request. Given the need to consolidate and consider the extensive comments made during consultations, finalization of this report was considerably delayed. The final report incorporates many of the suggestions made during the consultations, although some comments inevitably could not be incorporated either because they required additional study for which resources were not available, or the Bank disagreed with them. The manner in which the comments have been treated in the report is detailed in Section D of the Annex. Due to the delay in finalizing the report, some of the data in the report is no longer up- to-date. Updating would have required a major extra effort for which resources were not available. However, a quick review of the report showed that the recommendations were not affected by the slightly outdated data. Moreover, two important events that took place after the consultations in June 1997 - the East Asian financial turmoil, and enactment of the Agriculture and Fisheries Modernization Act on December 22, 1997 - have also not reduced the report's relevance. The steep depreciation of the Peso since July 1997 reinforces the report's recommendation for reform of agricultural tariffs, although the fiscal sqeeze renders the public investment recommendations of the report unfeasible for the time being. The approach of the Agriculture and Fisheries Modernization Act of 1997, particularly to food security (quoted in detail in para. 2.3 of the main report), agricultural support services, public investment (quoted in para. 5.6 of the main report), and rural financial intermediation, is also entirely consistent with this report's recommendations. The report was prepared by Rahul Raturi and Syed Husain, with the assistance of Herman Cesar (Bank staff), and was based on the conributions by Shamima Khan, Shobha Shetty (Bank Staff), K. Selvavinayagam (FAO/World Bank Cooperative Program), Arsenio Balisacan, Richard Broadwith, Richard Chisholm, Rey Crystal, Cristina David, Rolando Dy, Piedad Geron, David Lugg, and Aurora Tolentino, Roberto Calingo, Napoleon Navarro, Enrico Garde, and Danilo A. Songco from the Philippine Business for Social Progress, Center for Community Services and Caucus of Development NGO Networks (consultants). Mmes. Leonora Gonzales and Maria Theresa Quinones from the Bank Resident Mission in Manila managed the consultation process, under the overall guidance and leadership of Mr. Vinay Bhargava, Country Director, Philippines. The Annex on the Consultation Process and Summary of Comments was prepared by Ms. Lourdes Adriano, who was one of the participants of the consultation meeting in Davao City on June 26, 1997. Assistance in preparing the document was given by Ms. Brenda Phillips.  EXECUTIVE SUMMARY 1. Rural development programs embrace a wide range and mix of activities in rural areas, including those to raise agricultural production and productivity, improve health and nutrition, expand education and training, provide better infrastructure (such as roads, irrigation and drainage, housing, electricity, water supply, solid waste disposal, etc.), promote industry and economic services, develop institutions and organizations, and improve natural resource management and environmental protection. The objectives of rural development, which encompass sustainable improved productivity, increased employment and thus higher incomes, and improved availability of food, shelter, and economic and social services in rural areas, therefore, extend beyond the objectives of any particular sector. Although the access to social services is an extremely important part of rural development, this report, as explained in the Foreword, does not deal with the social sectors, and focuses mainly on agriculture and natural resources sectors, which presently dominate the rural economy. About half of the Philippine population is rural, of which 64 percent is involved in agriculture. This sector accounts for about a quarter of the country's GDP, half of the employed work force, and a fifth of total export earnings. In high-performing Asian countries, there has been a strong positive correlation between the rate of growth of the agriculture sector and the growth experienced in the non-agriculture sector. This linkage has been weak in the Philippines, since the performance of the agricultural sector has been sluggish and uneven since the early 1980's. Excluding forestry, which has been declining consistently since the 1970's, the rate of growth of agriculture decelerated from 5.8 percent per annum in the 1970-80 period to 2.1 percent p.a. during 1980-89 and 2.2 percent p.a. during 1990-94. Several factors accounted for this deceleration: an overall downward trend in international commodity prices of the country's traditional export crops, continuous deterioration of intersectoral terms of trade, macro-economic constraints, a series of natural calamities, and a near completion of the green revolution by the early 1980's. These factors, coupled with the Government's budgetary constraints, led to a serious under-investment in the sector, which, in turn, was reflected inter alia in inadequate infrastructure and support services. Low growth in the agricultural sector compared to the growth in rural labor force of 2.5 percent p.a. during 1985-90 and 3.1 percent p.a. during 1991-95, and limited employment opportunities in non-farm activities, have resulted in high underemployment (21 percent) in the rural economy and high rural poverty incidence (50 percent). The rural poor account for over two-thirds of the poor in the country. 2. In its Medium-Term Philippine Development Plan (MTPDP, 1993-98), the Government has targeted a reduction in overall poverty incidence (estimated at about 36 percent in 1994) to 30 percent by the end of the Plan period in 1998. To reach this goal, per capita income needs to grow by an average of 3.8 percent each year from 1996 to 1998. This can be achieved even if the revised projected low-scenario GDP growth rate over 1996-98 of 6.9 percent p.a. materializes. However, this will partly depend on the performance of the agriculture sector which was disappointing in 1994 and 1995 (growth rate of 1.7 percent p.a. compared to the projected low-scenario MTPDP average of 2.3  - 11 - percent p.a.), although the growth rate improved in 1996 and 1997 to 3.1 and 2.8 per cent, respectively, including forestry, and 3.5 and 2.9 per cent, respectively, excluding forestry. 3. The major strategic challenges facing the Government in the rural sector are: (a) to ensure sustained growth of agriculture by making it internationally more competitive; (b) reduce rural poverty; (c) improve natural resource management and environmental protection; and (d) make the devolution process started by the Local Government Code (LGC) of 1991 more effective. To help the Government address these challenges, the report analyses the agricultural sector policy framework, investment programs for rural growth and poverty alleviation, the institutional framework, financing of rural development, and poverty targeting, and makes recommendations. The Government has already taken several significant initiatives in the recent past to address the strategic challenges by outlining/implementing action plans. Policy Framework 4. Over the past decade, the Government has implemented a broad-ranging program of economic reforms, including liberalization of the agricultural sector. These reforms have largely reversed the bias against agriculture, and laid the basis for a more labor- intensive, broad-based growth. However, some existing policies still distort incentives, constrain private investments, penalize consumers unduly, and lead to misallocation of resources in agriculture. Policies relating particularly to food security in staple crops (rice and corn), sugar, water resources, and land, need focused attention to ensure an efficient, globally-competitive agricultural sector, and environmentally-sustainable rural growth. The Agriculture and Fisheries Modernization Act, enacted on December 22, 1997, appropriately emphasises the country's food security objective to be met "either through local production or importation, or both", and highlights the principles of "comparative advantage" and "market-oriented policies to encourage farmers to shift to more profitable crops". 5. Rice Policy. The need for rice policy changes have been succinctly presented in an Action Plan of the Department of Agriculture (DA-July 1996). The Plan realistically acknowledges that, in the short to medium term, the Philippines will most likely continue to depend on rice imports for about 5 percent of its requirement, and that appropriate measures are, therefore, essential to ease the importation process and diffuse the perceived negative implication of rice importation for national food security. The Plan candidly acknowledges that the current food security strategy, which is based on quantitative restrictions on imports and exports of food grains, and a "buy-high policy for palay (paddy)" coupled with a "sell-low price for rice" of the National Food Authority (NFA), is costly to society. Only 10 percent of the rice farming population and less than 3 percent of the rice consumers are estimated to have benefited from the NFA subsidies. Moreover, the strategy is highly vulnerable to the shortcomings of the institutional bureaucracy, which was apparent during the rice shortage problem in 1995. The Plan document, therefore, proposes an alternative food security strategy based on:  - ill - (a) lifting quantitative import restriction on rice and replacing it with tariff protection; (b) removing NFA monopoly to export and import rice; and (c) allowing rice exports any time. Although the Philippines sought for and was given exemption of rice from the World Trade Organization (WTO) agreement, and the Philippines is, therefore, not required to consider the liberalization measures proposed above before the year 2004, their earlier voluntary implementation would be a major strategic change in the right direction. It should be clarified that the above proposals only seek to transfer the responsibility for imports and exports to the private sector, and thus ensure automaticity to the system, compared to the cumbersome bureaucratic processes which exacerbated the 1995 rice crisis. By replacing the quantitative restrictions on rice imports with tariffs, the protection level can theoretically be still the same (depending on the tariff level decided), although the protection level will become explicit rather than implicit. 6. Corn and Livestock Sector Policy. There are two types of corn being produced in the country, white and yellow. The former is a staple food for about 20 per cent of the population, mainly in the Visayas islands, and is also used as an input to the corn starch industry. Yellow corn is now the main type of corn grown in the country, and is mainly used as an ingredient in producing feeds. It is the single most important input into the hog and poultry sub-sectors, which have a significant potential for contributing to agricultural sector growth. At least half of the agricultural sector's growth in the recent past is attributable to the performance of the corn-hog-poultry sub-sector. Many white corn producers in Mindanao have shifted to yellow corn production. The resulting tight supply and high price of white corn has penalised the low-income consumers and adversely affected the corn starch producers. The latter are also affected inter alia by competition from foreign producers of corn starch due to lower tariffs (the tariff rate for corn starch is currently 20 per cent, compared to 80 per cent for out-quota tariff for corn). On the other hand, the high price of yellow corn resulting from protection has hindered the international competitiveness of the poultry and hog industries. The trade policy for corn, therefore, deserves a serious review. Quantitative restrictions on corn imports have been lifted in line with the country's commitment to the WTO and replaced by tariffs. However, the Government opted to set tariffs at the maximum allowable levels under the WTO (100 percent for corn, sugar, garlic, onions, potatoes, pork, and poultry), which is higher than the implicit tariff (80 percent) estimated for corn, sugar and chicken in the early 1990's. This protection level is likely to exacerbate inefficiencies in resource allocation in agriculture, and would unduly penalize consumers. * The shift from quantitative restrictions to tariffs should not, at the very least, lead to greater protection or distortions in price incentives. The DA's Action Plan (July 1996) proposes that the ideal tariff protection structure for the corn and livestock sector to ensure international competitiveness is a set of fixed, low, and close-to-uniform tariff rates (5-10 percent). It also proposes that corn and other feed grains (wheat, rye, barley, and oats) should have a uniform low tariff rate, as  -iv - this will assure livestock producers of adequate feed grain supply all year round (corn output is highly seasonal, while the demand, mainly by feed millers, is fairly stable throughout the year). The above proposals are now even more relevant as the steep depreciation of the Peso since July 1997 has already made imports extremely expensive, and further protection of corn (or, for that matter, other agricultural commodities) through high tariffs is questionable. The reduction in tariffs should carefully take into account the interrelationships of the two types of corn and their upstream industries so as to minimise the possible adverse effects of distorted incentives for one against the other. Although, with the steep depreciation of the exchange rate since July 1997 mentioned above, reduction of tariffs may not lead to a lower domestic price of corn, it is still important to examine the necessity of undertaking a special program for corn farmers, particularly in upland areas with a high poverty incidence, to help these farmers adjust, if necessary, to other crops, livestock, etc., and thus reduce adjustment costs. 7. Sugar and Other Policies. There are at least three other sets of policies hindering growth in the sector. First, the very high protection of sugar hurts not only the consuming households (who pay about twice as much as world price), but also the food processing industry, which accounts for 40 and 20 percent of manufacturing value-added and employment, respectively, and has export potential. Historically, access to the lucrative US sugar quota and high protection of the domestic sugar industry may have reinforced the colonial legacy of a high concentration of landholding in sugar areas (the Gini coefficient for landholding distribution in sugarcane in 1991 was the highest for any crop at 0.81, compared to the national average of 0.57; the average farm size in sugarcane was also the highest at 7.2 ha, compared to the national average of 2.2 ha). The protection level for sugar should be reduced (the need for this is reinforced by the steep depreciation of the Peso mentioned in para. 6 bullet above). Moreover, the continuing access to the US premium market requires an efficient procedure for distributing the rents among growers and millers. The sugar sharing arrangements among growers and millers should also be modified. A Presidential Task Force on the Sugar Industry has recently been created to review the various issues related to the sugar industry and make recommendations. Second, the banana hectarage limitation law, which prevents new entrants in the export banana industry, should be abolished (banana is the fifth most important crop in terms of harvested area). The DA is undertaking a re- examination of the law with a view to proposing its abolition. Third, the unintended bias in the value-added tax (VAT) structure against the agro-processing sector should be removed. Since agricultural products are exempted from the VAT, the tax base applicable to agro-processing industries is larger as the cost of agricultural raw material inputs is added to the value-added. In effect, the agro-processing industry pays a higher VAT rate compared to other manufacturing industries. This could be corrected by allowing the deduction of the cost of agricultural raw materials together with the value- added in the computation of the tax base of the agro-processing industry.  8. Water Resources Policy. A comprehensive water resources policy framework is needed to inter alia reconcile the growing conflict in demand for water from various sectors, a conflict which will affect the rural sector most adversely, since irrigation, which accounts for over 80 percent of water demand in the country, is likely to be discriminated against in any conflict with domestic water supply. * The formulation of a water resources policy should include inter alia preparation of a national water resources plan, and institutional strengthening of the National Water Resources Board (NWRB). * The Government rightly decided in early 1997 that the NWRB, the water regulatory body, should not continue to be under the Department of Public Works and Highways (DPWH), a water user, and should be transferred to another body. The interim decision was to attach NWRB to the Office of the President. However, in the mean time, a Presidential Task Force on Water Resources Development and Management was established. The Task Force commissioned a study, as a result of which a bill for the creation of a Water Resources Authority of the Philippines (WRAP) was drafted and submitted to the Congress. The bill is still under review by the Congress. Unless the WRAP is established, longer-term alternatives for the strengthening of NWRB and its attachment to an appropriate authority would have to be considered to ensure effective water resources management (a preliminary analysis of the alternatives was undertaken by consultants during preparation of the action plan for reforms relating to NWRB under the Water Resources Development Project). An agency to consider for the long term in this regard is the Department of Environment and Natural Resources (DENR), to facilitate integration of water resources management, which is NWRB's responsibility, with watershed and water quality management, which is DENR's responsibility. 9. Land Policy. There are issues relating to land ownership, land tenure in the uplands, and land use. The main program to transform land ownership is the Comprehensive Agrarian Reform Program (CARP), which was launched in 1987 and was expected to be completed by 1998. Progress on land acquisition and distribution under CARP has been slow, due to inadequate funding and administrative problems of surveying, land valuation, and opposition of landlords. As of December 1996, only 4.3 million ha or 53 percent of the revised target of 8.2 million ha (original target 10.3 million ha) had been transferred to the agrarian reform beneficiaries (ARBs). These are mostly public lands and some voluntarily-offered private lands. Potentially the most contentious and costly component of the program is the redistribution of private lands above 5 ha (totalling 1.5 million ha), and virtually all of it (94 per cent) remains to be implemented. Available evidence suggests that the slow land acquisition and distribution under CARP has significantly increased uncertainties and reduced private investments in the rural sector. Since the Government is now the only buyer and seller of a large chunk of agricultural land subject to agrarian reform in the country, the agricultural land market is distorted, and the collateral value of agricultural land has been adversely affected, thus  - V1- further reducing the already inadequate access to formal credit in rural areas. An expeditious completion of land acquisition and distribution under CARP is necessary to end the uncertainties in the rural sector. Considering the huge funding requirements for landowner compensation (which could range from Peso 60-100 billion), and the demands on administrative resources, the DAR now projects land acquisition and distribution under CARP to be completed in year 2004. The Government is committed to implementing the agrarian reform program. However, it needs to come up with a doable/fundable program, given the uncertainties related to funds availability. In line with this, Government is already exploring various mechanisms to reduce the costs of land acquisition, and to generate funds from various tax schemes. Since the CARP offers a significant opportunity to achieve a more egalitarian agricultural land distribution, but, at the same time, the opportunity costs of slow implementation are high for the rural sector, it is recommended that efforts to find workable alternatives (which reduce, to the extent possible, the financial and social costs of the program, and the economic costs resulting from uncertainty) be intensified, and the following be given due consideration: * Redistribution of holdings above 24 ha should be completed as soon as resource availability (constrained by the East Asian financial turmoil) improves; * For holdings of 24 ha and below, which constitute the rural middle and lower-middle class, and where resistance to compulsory acquisition is likely to be the strongest, leading to social tensions, innovative alternatives should be considered. One alternative to consider and study further is adoption of a process of market-assisted land reform for this holding category, complemented by the introduction of a progressive land tax for holdings above, say, 5 ha (details of the proposal are in para. 2.35 of the main report); * Funding for the program would need to be committed by the Government to ensure speedy implementation, drawing upon resources from the regular General Appropriations Act (GAA), as well as from the Asset Privatization Trust, the Presidential Commission on Good Government, and reflows into the Agrarian Reform Fund. The above funding sources could be supplemented by the introduction of land-related taxes. * The implementation of some of the above measures would require amendments to the existing Comprehensive Agrarian Reform Law (one amendment to CARP enacted on February 23, 1998 authorized appropriations not exceeding PesoSO billion until the year 2008 from the Agrarian Reform Fund). 10. The issues of land tenure in the uplands and pricing of user rights are complex. Efficient and sustainable governance of the natural resource and environmental sector requires a well-defined and stable system of user rights, and the appropriate pricing (or taxing) of user (or pollution) rights. With the shift towards more equitable distribution of access to public resources, new property and user right arrangements have  - vii - been developed by the DENR. The search for new, appropriate tenurial instruments for the uplands should continue, and should also be extended to pasture lands and fisheries. Automatic renewal of leases on a no-objection basis and ensuring collateral value should be considered for these new instruments (see further para. 15(b)). The identification, recognition and protection of the rights of indigenous peoples to their ancestral domains/lands should receive a high priority (detailed discussion of indigenous peoples issues is in the main report paras. 6.19-6.24). The country has a long way to go in achieving appropriate pricing of user rights to include the environmental cost in estimating the economic rent associated with the use of natural resources. While forest charges have increased sharply since the late 1980's, rental fees for pasture grazing and public fishponds continue to be at their historical low levels. Underpricing of user rights has not only accelerated exploitation, but also limited Government revenues which could have been used for better enforcement of regulations and rehabilitation. The DENR is now in the process of undertaking various studies on market-based instruments to help promote sustainable development of environment and natural resources (ENR), and help generate internal resources for ENR-related undertakings. These studies include: (i) valuation of watershed resources under community-managed forests; (ii) updating of basis for rents and fees of Government lands; (iii) enhancement of Environmental Guarantee Fund Guidelines through the development of a framework for impact valuation; (iv) rental assessment of grazing lands; and (v) formulation of fees for access to and sustainable use of resources in protected areas. These studies are in various stages of development, and DENR expects general policy frameworks and detailed estimates and guidelines based on these studies to be issued by the end of 1997. Under the National Protected Areas System (NIPAS) Law, an Integrated Protected Areas Fund (IPAF) has already been created to facilitate the sustained financing of the NIPAS. Under this, a Protected Area Sub-Fund is maintained by the Protected Areas Management Board. The Sub-Fund receives 75 per cent of the total IPAF, and this can be used to maintain the site. However, there is a need to prepare local communities to manage and access these funds. With respect to environmental management, the use of tax instruments, such as pollution charges, should be initiated as soon as the ongoing studies are completed. 11. Legislation (the proposed National Land Use Act) is being considered by the Congress for instituting a comprehensive land use policy to provide for a rational allocation, utilization, management and development of the country's land resources, including air and water resources, to ensure their optimum use consistent with the principle of sustainable development. This is an important proposal for the long term environmentally-sustainable development. However, its implementation is likely to pose a difficult challenge to the Government. Adequate consultation and participation of local communities in the preparation of land use plans under the proposed Act should be ensured, so that these plans are consistent with community-based resource management, which is increasingly being used as the development approach in the rural areas. Perhaps the most complex issue in land use policy relates to watersheds. A satisfactory model for the responsible use of watersheds, particularly the critical ones, has not yet been found. The proposed Act requires the Local Government Units (LGU's), with the assistance of  - viii - the DENR, DA, and other concerned government agencies, to identify and delineate watershed areas that need to be reforested and/or withdrawn from other uses. In order to support the above, there is a need for a study to prioritize critical watersheds and formulate a strategy to manage them. The study should be given a high priority and its findings and recommendations should be used to formulate a rational watershed management policy (see further para. 15 (d)). Investment Programs for Rural Growth and Poverty Alleviation 12. The mediocre performance of the agricultural sector since the early 1980's and the relatively high level of rural poverty are, in a large measure, the result of inadequate private and public investment in rural areas and sub-optimal composition of public investment, particularly insufficient investment in the basic foundations of growth, such as rural infrastructure (mainly roads and irrigation), agricultural research, and human resource development. The impact of many individual projects and programs has also been less and their costs higher than expected, due to deficiencies in design, inappropriate technologies, inadequate implementation capacity, and lack of effective participation of local communities, People's Organizations (POs), Non-Governmental Organizations (NGOs) and business firms and groups. Based on available evidence in the Philippines and the experience of high performing Asian economies, public expenditure on the country's agriculture sector would need to be increased (see further para. 20). However, different development approaches would be needed for the lowland and upland areas of the country, recognizing the fundamental differences in the characteristics of their natural resource base (this also applies to fisheries and coastal resources management, which have not been specifically discussed in this report). It is important to note that despite the differences in lowlands and uplands, there is an emerging paradigm of rural development in the country, which is increasingly community-based, with the active involvement of the LGUs, POs and NGOs. As a result, there is a growing convergence of approaches, strategies and programs pursued by the three principal national agencies involved in rural development: DA, DENR and the Department of Agrarian Reform (DAR), although this convergence is not yet fully reflected in the institutional responsibilities for rural development in the country (see para. 19). 13. Lowland Development Programs. Significant potential for growth exists in the production of rice, corn, coconuts, livestock, and, to some extent, fisheries. The DA's Medium-Term Agricultural Development Plan (MTADP, 1993-98) is the major over- arching public program for the lowlands, although uplands are not explicitly excluded from the program. The MTADP comprises four programs: the Grains Production Enhancement Program (GPEP), the Medium-Term Livestock Development Program (MTLDP), the Key Commercial Crops Development Program (KCCDP), and the Fisheries Management Development Program (FMDP). Coconuts, sugar, tobacco and fiber crops are not part of the commercial crops program, since they are the responsibility of specialized DA agencies. The emphasis of the program has so far been on grains, particularly rice. While the MTADP's targets are ambitious, its underlying strategy based on comparative advantage (identification of Key Production Areas for each of the  - ix - four programs) is appropriate. The plan correctly identifies the key investment programs and support services which need to be pursued for realizing higher growth in the agricultural sector. These include programs aimed at the provision of irrigation, production credit, improved seeds and planting materials, fertilizers, and strengthened agricultural support services. Complementary investments are proposed in rural infrastructure (in particular, farm-to-market roads) and post-harvest technology. However, the implementation of MTADP has suffered due to inadequate budgetary allocations, weaknesses in the implementing agencies, lack of involvement of the major stakeholders (LGUs, NGOs, POs, business leaders and groups, and local communities), and technical constraints to realizing projected higher yields of rice and corn. (a) While the budgetary allocations to the MTADP should be substantially increased, the program itself needs adjustments in area targets, and approach to crop diversification and livestock development (detailed in the main report para. 3.23). These adjustments should be made in consultation with the LGUs, and, to the extent possible, with the NGOs, POs and local communities. The revised MTADP should incorporate the DA's Action Plan of July 1996. (b) The KCCDP, if suitably adjusted, is potentially a very significant program to promote on-farm diversification in upland areas (apart from lowlands, which are the KCCDP's main focus now), using an integrated farming systems approach, and thus have a significant poverty alleviation impact. The enlargement of KCCDP's scope is necessary in view of the fact that considerable diversification in lowland areas has already occurred: the share of crops other than the traditional paddy, corn, coconut and sugarcane, increased from about 11 percent of the gross value-added in agriculture in 1970 to about 24 percent in 1995, and further diversification in lowland areas, particularly rice areas, is likely to be slow. A major positive implication of the KCCDP implementation in upland areas would be that the DA would start playing the needed role for agricultural development of those upland areas which are environmentally not critical and could be reclassified as Alienable and Disposable (see further para. 15(a)). (c) Irrigation development would continue in the foreseeable future to be an important instrument for promoting agricultural growth and food security, and alleviating rural poverty. With the steep real decline in public irrigation expenditures over much of the 1980's and early 1990's, areas brought under irrigation declined from an average of 25,000 ha p.a. in the 1980's to less than 10,000 ha in recent years. This should be reversed. An annual target of about 25,000 ha of new irrigated area generated through public sector programs is feasible and affordable. This should be generated mostly through communal and other small-scale irrigation schemes, which require lower investments but yield faster returns. Low-lift pump and shallow tubewell facilities have not proved viable in the public sector; the DA should support private sector development of these facilities. For the expansion of communal irrigation, the major issue of LGU non-involvement has to be addressed. So far, despite devolution of communal irrigation, NIA has continued to handle these  x - schemes. The priority placed by LGUs on communal irrigation is unclear. If the national government considers communal and other small-scale. irrigation a significant element in the rural growth and poverty alleviation program, as it should, a system of matching grants (see paras. 23-24) may have to be instituted to motivate the LGUs to accord a higher priority to this program (see further para. 19(c)). For the national irrigation schemes (NIS), the program to turn over the operation and maintenance of improved laterals and sub-laterals in larger NIS to the Irrigator's Associations (lAs) should be continued, and should be supplemented by a program of complete turnover of smaller improved NIS to the IAs. (d) Among the crops not included in the MTADP, coconut has a significant growth potential, which could be tapped through a program of replanting senile trees, fertilization of mature, low-yielding palms, and intercropping. This program is currently being undertaken through the Small Coconut Farms Development Project. The program should be continued after the completion of the project, considering the importance of the coconut industry to the country, the favorable world market and price prospects for coconut products, and high poverty incidence among coconut farmers (75 per cent). 14. The Agrarian Reform Communities (ARC) program, being implemented by the DAR, is treated here as a lowland development program, although uplands are not explicitly excluded from the program. The original target of DAR was to establish about 1,000 ARCs (each consisting of one or more barangays where at least 50 percent of households are headed by ARBs) over 1994-98, covering one million ARB families and with a projected expenditure of Peso 20 billion (Peso 20,000 per family) for support services and infrastructure. Virtually every province in the country was projected to have at least one ARC. As of March 1996, about 700 ARCs had been established. They, however, covered only about 223,000 ARB families. The ARB families per ARC at this stage are, therefore, much fewer than originally anticipated, but are likely to increase as the agrarian reform program progresses. The ARCs at present cover less than 10 percent of the poor rural households in the country (assuming that every ARB is poor, which is not always the case). The ARC program is, therefore, relatively small, but not insignificant for rural poverty alleviation. The program includes communal irrigation, rural roads, water supply, agricultural extension and training, community development, livelihood provision, and credit from the Land Bank of the Philippines (LBP). The program is similar to other demand-driven integrated rural development programs being undertaken in the rural areas, except that it is targeted to a section of the rural population, the ARBs, most of whom are below the poverty line. The ARC program should continue as a targeted poverty alleviation program, and appropriate cost-sharing arrangements with the LGUs should be implemented. 15. Upland Development Programs. The improved management of the critical natural resource base in the upland areas is a major development challenge for the country, and has important implications for ensuring the sustainability of broad-based rural growth, and for rural poverty alleviation. The key issues are the following: (i) old  - xi - growth forests in the Philippines have been reduced from about 10 million ha in 1950 to about 0.8 million ha today, underlining the need for forest protection and reforestation; and (ii) the uplands, which account for at least one-third of the rural population, often pursuing low input shifting agriculture, have many of the most severely degraded areas and also the highest poverty incidence in the country. Many programs and projects relating to forest protection, reforestation, and improvement of upland farming systems have been undertaken, principally by the DENR. All of these have usually included provision of infrastructure, livelihood activities, community organizing, training and research and extension activities. These programs have had a limited impact so far. Considering the enormity of the task in upland areas, prioritization of interventions and a clear strategy are needed: (a) While nearly 50 percent of the country's land area is designated as forest land (above 18 percent slope), only a small part of public lands have tree resources now worth protecting, the major part having been converted to open grassland or degraded forest. The current confusion of sloping land and forests is not only misleading, but serves to stretch the resources of DENR (which has the overall responsibility for forest management) over a wide area which is beyond its capability to manage. Consequently: (i) the areas to be protected should be clearly defined, and adequate resources allocated for their protection; (ii) LGUs, POs, NGOs and local communities should be fully involved in protection activities, following the exarnple of the Multi-Sectoral Forest Protection Committees, which were established in some areas a few years ago; and (iii) lands suitable for agriculture and environmentally not critical, even if they exceed 18 percent slope, should be reclassified as Alienable and Disposable (A&D), subject to conservation-oriented land use restrictions. Availability of appropriate land use plans (at community, watershed or municipality level), and demonstration of effective implementation of sustainable farning techniques over a period of, say, five years, could be the basis for the reclassification. (b) For reforestation, the community-based approach being followed now (in contrast to the earlier contract reforestation), is appropriate. However, the rate of reforestation under the community-based approach, averaging 15,000 ha per year, has been low. It is necessary to increase the rate by encouraging private sector involvement, possibly based on a nucleus estate concept, as successfully demonstrated by the Bukidnon Industrial Plantation Project (BIPP). One issue for the private sector is the tenure instrument: existing 25-year leases are generally inappropriate for crops with a requirement of perhaps 30 to 35 years for two rotations. Automatic renewal of the 25-year lease on a no-objection basis should, therefore, be considered as an option to promote private investment in reforestation. (c) For sustainable development of the uplands - a massive task (involving 4-5 million ha) - a prioritization process is essential. Lessons from projects such as the Low-Income Upland Communities Project in Mindoro island indicate that communities in remote areas are generally poorly organized and difficult to mobilize, making community nurseries, labor-intensive agro-forestry, and  - xii - community-based reforestation interventions impractical and costly to implement at the outset. Consequently: (i) interventions in remote areas should initially concentrate on community organizing, and providing road access and essential social services (such as water supply), and possibly minor interventions, such as animal dispersal and small home gardens, with implementation largely coordinated by contracted NGOs; (ii) in the better areas of lower slope, and areas with access to existing roads and markets for products such as fruit and timber, the focus should be on promoting private sector investment, possibly pursuing contract growing and a nucleus estate approach (such as the BIPP model) so as to bring in smallholders into the program (the DA's KCCDP should also be very relevant in these areas); and (iii) for the middle ground, that is, areas with moderate slopes and/or with usable roads which can be improved to provide access to prospective markets, and with better-established communities than those found in remote areas, a long-term program of community-based resource management, including award of appropriate tenure, should be implemented. For the last category in particular, a farming systems approach needs to be adopted, aimed at reducing soil erosion, improving soil fertility through natural and inorganic fertilizers, and better integrating livestock systems. Although greater emphasis needs to be placed on upland farming systems research (which, together with natural resources research, currently accounts for about 8 percent of the total sectoral research budget), technologies are available (such as multi-storey cropping, consisting of annual and perennial crops, which should be promoted rather than the currently-used Sloping Agricultural Lands Technology, which has high labor requirements, and does not fully compensate for reduction in cropping area with yield increases). It is important to note that, due to the loss of vegetative cover and erosion, soils in the uplands are suffering both NPK and micro-nutrient deficiencies. Micro-nutrient problems can be easily diagnosed, and minimal outlays to make up the deficiencies can significantly increase the yields of both annual and perennial crops and farmer cash flows. What is needed is the completion of mapping of these problem soils, and the inclusion of soils-related technical support in ongoing and proposed programs and projects. (d) Critical watersheds represent a complex case. By virtue of Presidential Proclamation, DENR is mandated to ensure that no land-use activity occurs in these areas. The problem with this approach is that emphasis has been placed on actual or potential downstream effects, neglecting the existing population, tenure and land use in the watersheds. Tenure award is forbidden, but without it, responsible use may be impossible. At the same time, given the slopes of critical watersheds (by definition, 60 percent of the area is above 50 percent slope), conventional subsistence agriculture is not sustainable. An appropriate policy for managing critical watersheds would need to be evolved as a high priority (para. 11). (e) As emphasized in the Rio Declaration, indigenous peoples and other local communities have a vital role in natural resource and environmental management because of their unique knowledge and traditional practices, and efforts must,  - xiii - therefore, be made to ensure their active participation in the formulation and implementation of national resource management policies, laws, and programs that may affect them. 16. Rural Infrastructure. Efforts to increase production and alleviate poverty in the rural areas will never be effective without substantial investment in rural infrastructure. While the deficiencies vary by geographic area and by sector, there is considerable evidence of the lack of sufficient roads, water supply/sanitation facilities and small scale irrigation in rural communities. Moreover, where infrastructure has been provided under an extensive list of government programs and door initiatives over the last decade, much of it has deteriorated substantially, often to the point of disuse. While such investments appear simple from an engineering perspective and relatively low cost, experience in the Philippines, as elsewhere, has revealed that the provision of rural infrastructure can be complex from an institutional standpoint and costly in terms of administration and supervision. A rethinking on how best to plan, design and implement rural infrastructure investments is required and the present decentralization policy offers both an opportunity and a challenge. Among the issues and recommendations are the following: . The first step has been taken by making local governments and communities responsible for determining their needs and taking responsibility for allocating their resources accordingly. Beneficiaries will determine their preferences for spending on roads or water or other types of rural infrastructure. Traditionally such needs and related expenditures were determined generally by national agencies on a sectoral basis rather than across sectors and were supply driven by the source of funds. * Developing local planning capacity has been initiated over the years, particularly for irrigation through Irrigators' Associations and for rural water supply through Barangay Water Supply Associations. No similar approach has been followed for rural roads. Local planning and management could be helped by focusing on a local cross-sectoral approach and organization. * Infrastructure investments represent "lumpy" capital outlays and, though appearing to be small in rural areas, can still be difficult to finance simply through the Internal Revenue Allotment (IRA) for the LGUs. Furthermore, rural access to capital markets is constrained by the communities' limited credit-wothiness. As a result, rural communities will not be able to finance such investments or will depend on various external sources of funds which are normally earmarked for a particular sector. Financing needs to be provided on a multi-sectoral basis in order not to distort decision-making at the local level. * Experience in water supply and irrigation has confirmed the importance of the communities' participation in the capital outlay either in cash or in kind to ensure local commitment and ownership. The shares may vary depending on the level of social/environmental externalities and income. Present practice in Philippines,  - xiv - however, varies by program, by national sponsoring agency and by donor and will need to be made consistent across the board to avoid distortions and inequities. * Local responsibility for planning, design and implementation is a first step in ensuring sustainability, but the persistent issue of poor maintenance will require a combination of additional measures. The first requirement is to ensure sufficient funding for operation and maintenance and that this funding comes from the beneficiaries. Local communities will need help in estimating such costs as well as developing appropriate systems for collection and expenditures. Political incentives, however, often weigh against such allocations, and other measures will be needed to ensure maintenance which offer rewards to those communities which do maintain their infrastructure and limit access to future funds to those that do not. * The role of the national agencies must change from that of a provider to that of a facilitator which offers technical support and monitoring. Appropriate funding incentives would be required. Moreover, there is a need for clarity in the roles across agencies whereas at the moment there are a multiplicity of agencies building rural roads and other infrastructure. The Government has begun to address this situation but will need to review and monitor the effectiveness of current arrangements for improving investment decisions, design, implementation and maintenance, and for the transfer of technology to LGUs. * Finally, donor programs need to be reviewed within the context of the various principles set forth above. Consideration should be given to channelling resources through a fund which is applied in a consistent manner and which does not distort local decision-making. In addition, the need for geographic concentration of donor effort to ensure attention to implementation and technology transfer rather than national programs as well as multi-sectoral funding rather than single-sector funding should be considered. 17. Agricultural Research and Extension. A strong research-extension system is important for increasing agricultural productivity and facilitating on-farm diversification. The system has had significant constraints, which, unfortunately, were exacerbated by devolution: the devolved extension services have become largely ineffective (devolution created 75 provincial, and more than 1,350 city and municipal agricultural extension services from one national extension service), and linkages of extension with research (which remains largely under the Philippine Council for Agriculture, Forestry and Natural Resources Research and Development (PCARRD) and the DA) have been virtually severed. Imbalances in the budgetary allocation between research and extension and across commodity groups, and in distribution of scientific manpower across agencies also militate against effective research and extension. In South and Southeast Asia, the country has one of the lowest research expenditure ratio to gross value-added in agriculture (about 0.3 percent, compared to a generally-accepted target of 1 percent), but has one of the highest levels for extension budget and manpower resources. Another  - xv - issue, which constrains research coordination and effectiveness, is the inadequate information on the extent of research activities being undertaken by the private sector. * Although annual public expenditures on agricultural research should be increased (the Agriculture and Fisheries Modernization Act of 1997 stipulates that the budget for agriculture and fisheries research and development shall be at least one per cent of the gross value added of agriculture by year 2001), it is important first to assess whether the research system is appropriately structured and responsive to the emerging priorities in the agricultural sector and to farmers' needs. A major priority is farming systems and resource management in the uplands. Others are irrigation and water management technologies, and livestock production systems. Thus rationalization of the network of research facilities and expenditures, or, in other words, institutional changes and shifts of resources within the agricultural research system, may be necessary before an across-the-board increase in public research expenditures. The rationalization process should include a review of the medium-term research and development plan for agriculture and natural resources developed by the Department of Science and Technology, so that appropriate action plans are developed. * The linkages between the PCARRD system and the research under the DA on the one hand, and the private sector on the other, appear to be very weak. Efforts should be made to evolve an institutional mechanism to promote greater participation of the private sector in the research system. This also applies to extension, in which innovative approaches involving the private sector or privatization of public extension are being tried in many developing countries. * In the new environment of devolution, where the role of the LGUs in the delivery of many rural services is greatly expanded, innovative institutional mechanisms are needed for research-extension linkage and participation of LGUs and local communities in setting of research and extension agenda. In this regard, consideration should be given to establishing provincial Trust Funds to finance contract research by public and private institutions (including POs, business firms and groups, and NGOs) on topics of high priority to local communities. Moreover, to overcome the void in responsibility created by devolution for formulating an extension strategy and policy, developing extension methodologies, coordination, information exchange, etc., at the Regional and national levels, establishment of a small National Extension Unit in the DA or renaming its Bureau of Agricultural Research as the Bureau of Agricultural Research and Extension could be considered. The DA's Action Plan goes a step further by proposing that technical supervision of agricultural extension services should be restored to the DA to synchronize national and local agricultural programs, while administrative supervision and control should remain with the LGUs. This dual control and supervision is unlikely to work as a general arrangement; however, it could be applied under a Memorandum of Agreement between the DA and the LGUs for specific, time-bound programs, such as those under the MTADP.  - xvi - 18. Rural Non-Farm and Agro-Industrial Development. A rural development strategy in the Philippines can not be based only on agricultural growth: it is unlikely to overcome the high levels of poverty. Rapid growth of both agriculture and the non-farm sector is required. Rapid rural non-farm growth can inter alia help to absorb rural labor force growth; provide a safety net for landless and marginal farmers and agricultural laborers; provide employment opportunities for women outside agricultural labor; and provide a source of household income that can help counteract the inequalities in rural income distribution resulting from skewed land ownership. Learning from the East Asian experience, the primary strategy for promoting the rural non-farm sector in the Philippines should be to, in addition to facilitating agricultural growth: (a) provide improved physical infrastructure in roads and inter-island transport, rural markets, rural electricity, and communications; (b) provide improved financial intermediation, particularly a greatly expanded micro-enterprise credit, preferably through NGOs; and (c) strengthen local government institutions that can ensure the availability of infrastructure and other supporting facilities, generate essential information needed to seek out investors, and facilitate the growth of effective small farmer cooperatives. A secondary strategy would be to create, in partnership with NGOs and the private sector, an enabling environment for private-sector led rural industry (including provision of producer services, such as skill development, and engineering, marketing, and other organizational assistance, for small and medium-scale rural enterprises) and for stronger linkages to agriculture (in the form of processing and trading of agricultural products and inputs). The Government's National Framework for Regional Development (NEDA, December 1993) appropriately emphasizes industrial dispersal away from Metro Manila. The industrial dispersal is to be realized through large Regional Industrial Centers and a nucleus of small common service facilities (CSFs), where the Government will provide off-site infrastructure. The CSFs can play a significant role in inducing agricultural modernization and commercialization by providing (principally through the private sector) post-harvest and processing facilities. They can also be conduits for extension services, retail distribution of farm inputs and rural credit, and serve as the convergence point for the marketing of produce. The MTADP and ARC programs could be dovetailed with the CSF program. Institutional Framework 19. The current institutional framework for rural development in the country falls far short of that required for efficient design of policies and programs, and delivery of support services, and for the emerging paradigm of community-based approaches (para. 12). A clarification and rationalization of the respective roles of the three most important national agencies involved in rural development (DA, DAR and DENR) vis-a-vis LGUs, NGOs, POs and local communities, is needed, as well as strengthening of these institutions (revamping of agricultural research and extension was discussed in para. 17). (a) As has been outlined in the report, a variety of programs are required for supporting rural development, including those related to infrastructure  - xvii - development (irrigation, rural roads, water supply, etc.), agricultural support services (research, extension, etc.), provision of credit, community organizing in support of community-based development initiatives, etc. In order that programs which provide for investments in these areas have the desired impact on rural growth, it is important that their provision is planned for in a coordinated manner, and that there is a consistent, unified approach taken in such planning. Under the existing institutional arrangements, there is overlapping and fragmentation of responsibilities which militate against coordinated planning for rural development initiatives (for example, the MTADP being pursued by the DA, the ARC program being pursued by the DAR, and the upland resource management programs being implemented by the DENR). In the context of the Government's on going work on streamlining the bureaucracy, and given the fact that with devolution, the responsibility for many of these programs now lies with the LGUs (with the national government agencies increasingly expected to take on a technical support and backstopping function), there is a need to rationalize the respective roles and responsibilities of DA, DENR and DAR. Moreover, the DA should seriously review the fragmentation and overlapping of roles and functions, and the commodity-based structure, of its various bureaus and attached agencies, and consider their streamlining in the light of the liberalized market environment in the country and further liberalization resulting from membership in WTO and other organizations, and the decentralized environment resulting from the LGC. Priority should be on abolition/merger of some units and attached agencies, or their transfer to other Departments, and termination of all direct and indirect lending by the DA (see further para. 26). (b) The DENR should gradually withdraw from its implementation role in favor of LGUs to become a policy-making, planning, coordinating, regulatory, monitoring and research agency for natural resources and the environment, with continued responsibility for developing various tenure instruments for the uplands. It should retain the overall supervision and coordination role for management of critical watersheds, coastal resources, and mangrove areas; land use planning for forest lands; reclassification of alienable and disposable lands of the public domain; and protection of forests, parks, bio-diversity, etc. However, the implementation of these should be through bodies which have representation of LGUs, NGOs, POs and local communities, such as the Watershed Management Councils, Multi-Sectoral Forest Protection Committees, and Protected Areas Management Boards. Efforts should be made to gradually replicate these bodies throughout the country. (c) Under the LGC, virtually all activities in rural development (significant exceptions being research and national irrigation schemes) were devolved to the LGUs. However, due to the inadequate financing and implementing capacity of most local governments, the delivery and quality of the devolved services have been seriously affected. As a result, the role of LGUs, which is potentially a major one in rural growth, poverty alleviation, and natural resource  - xviii - management, has been at best marginal since devolution. If devolution is to succeed, a major effort would be required for institutional strengthening of the LGUs, including enhancing the mechanisms for the effective interface of national government agencies and LGUs. From the sectoral perspective, agricultural extension, natural resource management and environmental protection, and barangay/rural roads construction and maintenance capability would need to be upgraded. These are best done through a TA component in donor-supported or locally-funded projects. For communal irrigation, the issue is more complicated since the relevant NIA staff have not been absorbed by the LGUs, and there is no indication that they will ever be absorbed (para. 13(c)). In the short-to-medium- term, a practical option for the LGUs would be to contract out the planning and construction of communal irrigation schemes and organizing of the Irrigator's Associations to NIA. The major issue in expanding the role of the LGUs in rural growth, poverty alleviation and natural resource management is the financing of local government development programs, and evolution of a framework which will provide LGUs with more direct access to or greater involvement in the programming and utilization of official development assistance, and facilitate more equitable and consistent cost-sharing and lending arrangements (see paras. 22-26). (d) The role of NGOs in government-sponsored rural development programs has expanded rapidly in the last few years. The Philippines is a notable example of partnership between the government and NGOs, which has greatly facilitated the implementation of various poverty alleviation, and natural resources management and environmental improvement projects. The challenge is to extend this partnership to the provinces which need help the most. The strength of NGOs lies in working with communities and ensuring that government programs conform to local conditions. The key roles being performed by the NGOs include the following: creating social/institutional innovations at the community level, and, in that context, facilitating the delivery of services for rural development; developing communities as stakeholders, rather than as mere recipients, in project planning and implementation, thus facilitating the sustainability of programs at the community level once they are completed; and initiating new approaches for program/project development at the community level, and directly contributing to local capability building. The role of the NGOs is likely to, and should, expand considerably in the future. However, several problems remain with most of the NGOs: lack of technical skills (particularly in forestry, coastal resources management, and credit delivery), limited financial resources, and inadequate capacity for documentation, and monitoring and evaluation, of their operations. On the Government side, the procedures for evaluating the capability and performance of NGOs are still evolving: although over 25,000 NGOs are known to be active in the country, little is known about the specialization and capability of most of them. Further, data gathered for this report indicate an unbalanced representation of NGOs in the country: some of the poorest municipalities and provinces have no or only a few NGOs, while the  - xix - others have a disproportionately high presence of NGOs. This is likely to be a significant constraint in targeting programs for the poorest municipalities. The framework for an expanded NGO involvement under the new paradigm of community-based rural development still needs to be evolved, and will require further study. Financing of Rural Development 20. Public Expenditures. Data on public expenditures on overall rural development are not available. For agriculture, the 1992-95 level of public expenditures (about Peso 20 billion) was inadequate to help the sector become an important source of growth, and make a significant contribution to poverty alleviation and sustainable resource management during the remaining part of the 1990's. From an average of 10 to 12 percent between 1976 and 1983, the share of government expenditures on agriculture (including livestock, fisheries, research and extension, price support, credit and input subsidies, agrarian reform, forestry and environment, and community development and rural roads) in total government expenditures declined to an average of 6 per cent over 1992-95. The recent decline in public expenditure has been accompanied by a real decline of 58 percent in lending for agriculture by the banking system over 1981-92. A recent study has concluded that the agricultural sector has continued to supply capital to the non-agricultural sector: while the Government spent more on agriculture than it gained from taxation of the sector in most years since the 1970's, the magnitude of Government-led inflows was too small to compensate for the capital outflows of the private sector. The trend of declining investment in agriculture must be reversed. While the needs in uplands, lowlands and coastal areas are massive, a doubling of public expenditures (capital outlay) on rural development (excluding the Agrarian Reform Fund) is recommended by 1998, considering the implementation capacity and affordability. This should, of course, be subject to the need for maintaining fiscal balance, but is in line with the Medium-Term Public Investment Plan (MTPIP, 1993-98), which envisages an increase in the agriculture sector's share in total MTPIP (excluding agrarian reform) from about 5.6 percent in 1993 to 10.1 percent in 1998. The major increases should be in barangay/rural roads, community-based upland resources management, and irrigation. The Agriculture and Fisheries Modernization Act of 1997 stipulates Peso 20 billion for the DA program in the first year of implementation of the Act, and at least Peso 17 billion in the next six years. For the first year, 30 per cent of the allocation is to be for irrigation; 10 per cent for post-harvest facilities; 10 per cent for other infrastructure, including farm-and-coast-to-market roads; and the rest for a variety of programs and activities. 21. Perennial Crops Financing. Serious shortage of long-term financing for planting or replanting of perennial crops remains a significant constraint on the development of these crops, and on crop diversification in general. The absence of a long-term financing arrangement for the hybrid coconut replanting program is an important case in point. Similar constraints exist for rubber (about 40% of the rubber area in Mindanao needs replanting), oil palm (there is potential for an outgrowers'  - xx - program in Mindanao), and line plantings of industrial trees (e.g. gmelina arborea, and eucalyptus deglupta) as well as fruit trees. These are vital raw materials for downstream agro-industries in rural areas. Commercial banks typically offer a three-year grace period for the repayment of loans for the above crops (Section 79 of the General Banking Act (RA 337) of 1949 provides for a maximum grace period of three years for loans, and even the High-Value Crops Law (RA 7900) of 1995 did not amend Section 79 of the General Banking Act). This is totally inadequate since these crops require a long gestation period. However, the Agriculture and Fisheries Modernization Act of 1997 stipulates that "agriculture and fisheries projects with a long gestation period shall be entitled to a longer grace period in repaying the loan based on the economic life of the project" (Section 24 of the Act). Given the political difficulties in establishing a new system of levies or cesses (the coconut levy scandal has not yet been forgotten), and the inability or unwillingness of banks to finance smallholder perennial crops, the issue is complex in the Philippines (as in many other developing countries). The revised MTADP (para.13 (a)) should devote serious attention to this issue and explore various options for the establishment of effective financing mechanisms for perennial crops. 22. Financing of LGU Programs. The under-investment by most LGUs in devolved rural development services over the last five years is a major issue. Although the share of LGUs in total revenues, that is, the Internal Revenue Allotment (IRA), has increased from Peso 22 billion (30 percent) in 1992 to Peso 56.6 billion (40 percent) in 1996, as provided for under the LGC, the allocation formula for the IRA has created winners and losers among the LGUs, with an unintended bias against the lesser endowed and rural provinces and municipalities. To carry out the needed development programs, the LGUs' development budget is mandated to be at least 20 percent of the IRA. However, given the insufficient IRA of poor rural LGUs in particular, there are virtually no significant rural development activities in these LGUs. Moreover, for a variety of reasons, the priorities of LGUs are not necessarily the same as those of the national government (NG). Channelling of additional resources from the NG for most of the devolved rural development activities is, therefore, essential. This could be done through either one or a combination of the following measures: absolute increases in IRA allocation, adjustments in inter-LGU allocations based on a revised formula, and additional grants and loans to the LGUs through the Municipal Development Fund (MDF) or a government financial institution (GFI) or both. The first two options have not been analyzed in this report. In any case, given the fact that the priorities of the NG may not always coincide with those of the LGUs, the first two options will not be adequate if the NG wants to ensure that the national priority programs are implemented by the LGUs. The third option will, therefore, remain important for a long time. This option raises the issues of appropriate financing policy (grant vs. loan), and institutional arrangements for delivery. 23. The financing policy of the Government is laid down in the Policy Framework for National Government Assistance for the Financing of Local Government Projects with Environmental and/or Social Objectives, adopted in May 1996 by the Investment Coordinating Committee (hereafter called the ICC guidelines). The guidelines stipulate  - xxi - that the continued involvement of the NG in selected devolved activities may be warranted where there are externalities (such as projects on reforestation and watershed management), economies of scale (such as in communal irrigation), or equity considerations (for relatively disadvantaged LGUs which can not provide the minimum level of basic services to their constituents). Under the above policy, assistance to LGUs will be provided in the forn of "matching, specific, and closed-ended grants", which will be "limited and temporary, performance-based, and targeted at specific groups of LGUs". The cost-sharing target between the NG and the LGUs is set at 50 percent; however, the share may be set on a graduated scale, based on the nature of the project (less NG grants for projects with revenue-raising possibilities for the LGU) and the economic class of LGUs (more NG grants to LGUs with higher investment needs relative to local resources). Investment proposals which do not satisfy the three criteria of externalities, economies of scale, and equity, will continue to be governed by the prevailing policy of channelling funds for devolved activities as loans to LGUs through either MDF or a GFI under relending terms to be determined by their respective policy-making bodies. 24. The ICC guidelines represent a major first step towards making the devolution process more effective. However, a couple of points may be worth considering: (i) externalities and economies of scale, wherever they exist, are not likely to disappear for a long time, and, therefore, the grant may not be "temporary"; and (ii) if externalities or economies of scale are relevant considerations in a particular case, they will be relevant regardless of whether a LGU is rich or poor, and, therefore, varying the NG share in this case could risk continued under investment by richer LGUs. Further refinements to the policy would be desirable over time. 25. As regards institutional arrangements, the ICC guidelines presently provide for the MDF and the GFIs to channel funds for devolved activities (para. 23). The issue which is currently under consideration and is the subject of two recently completed studies is the channelling of funds (grants and loans) for projects with social/environmental objectives to LGUs whose creditworthiness is insufficient to support access to GFIs without a substantial risk premium. The MDF provides an appropriate government response to this need by which to channel such funding to viable projects while managing the financial risk and providing assistance which should strengthen the fiscal performance of such LGUs. Since the rural communities are mainly in the poorer LGUs, investment in rural development depends on the effective establishment of the role and procedure of the MDF. The recommendation in this paper is to use the MDF to channel grant and loan funds to the rural communities for investments which are non-remunerative in a traditional sense. Debate over whether grant funds should be channelled through the MDF or national agencies should focus on the need to decentralize decision-making across sectors to the LGUs and to change the role of national line agencies from direct support to providers of technical services, technology transfer and technical oversight. 26. Another question which needs to be answered in establishing the role of the MDF in rural development finance, is how to provide the technical capacity for review and  - xxii - appraisal of investments. In order to avoid an untenable expansion of the MDF beyond its clear fiscal role, options which include the contracting of technical expertise from national line agencies, consultants or elsewhere should be considered and tested. 27. Rural Financial Intermediation. Effective rural financial intermediation must complement public investment programs to ensure sustainable rural development and poverty alleviation. Formal lending for agricultural production has declined significantly as a share of agricultural gross value-added and of total loans granted by the banking sector from about 19 and 8 percent, respectively, in the early 1980's to about 16 and 4 percent, respectively, in 1993. However, the problem for the agricultural credit institutions in the Philippines at the moment is more of identifying enough potential low- risk borrowers/activities, as well as devising a suitable credit delivery mechanism, rather than that of funds scarcity. One option to resolve this problem is to intensify efforts to enhance management and marketing capability of fanner organizations and cooperatives, which could avail of increasingly larger amounts of agricultural credit. The DA's Action Plan of July 1996 makes proposals for a sustainable agricultural and rural financial system, with emphasis on rural financial intermediation, and not simply on credit delivery. This is a welcome departure from the traditional Government approach to agricultural credit, which, in the words of the Action Plan, was characterized by: (i) inflexible, commodity-oriented credit programs; (ii) highly-subsidized and unsustainable credit; (iii) dependence on budgetary appropriations or foreign loans for funding; and (iv) neglect of rural deposit mobilization. Under the new approach, all financial intermediation activities will be concentrated in the LBP (wholesaling) and micro-finance institutions (retailing), and all direct and indirect lending programs for the agricultural sector by the DA line agencies such as the Agricultural Credit Policy Council, Quedan Corporation and NFA will be terminated. The resources of those agencies will be pooled and transferred to the LBP for efficient financial management. Interest rate on loans will be market-oriented. Further, loan guarantees to the banks under the Consolidated Agricultural Loan Fund will be terminated, and, instead, the DA will collaborate with the Philippine Crop Insurance Corporation in raising funds for crop and livestock insurance. These are all steps in the right direction, and assistance to the DA should be extended in implementing these new policies and programs. However, the Action Plan mentions only rural banks, cooperative rural banks, and credit cooperatives/credit unions as conduits. In reality, for micro-finance, as the term is normally understood, some NGOs may have higher comparative advantage than the rural banks, and this should be reflected in the Action Plan. Another issue that needs to be addressed in improving the flow of credit and investment to agriculture is the CARP-related uncertainty in land values and eventual ownership. Poverty Targeting 28. Past experience in the Philippines shows that agricultural and rural growth may not necessarily result in a rapid reduction in poverty. Since a rapid reduction in rural poverty in the next few years is a high priority for the Government, targeted poverty alleviation programs will be necessary. Both geographical targeting and targeting of  - xxiii - specific sections of the rural population will be required. For geographical targeting, the Government had originally selected 20 provinces under the Social Reform Agenda (SRA), but the scope has now been enlarged, and the SRA now covers all provinces of the country, with priority to be accorded to the 20 provinces earlier identified and all other fifth and sixth class municipalities nationwide. A section of the rural population - the ARBs - is being targeted under the ARC program of the DAR. Other sections - e.g. coconut farmers and fisherfolk, who have a high poverty incidence (75 and 77 percent, respectively) - of being targeted under the Small Coconut Farms Development Project and the Fisheries Resources Management Project, respectively. The critical issues of fisheries resource depletion and the persistently high poverty among the fisherfolk need to be addressed in any rural development strategy. The difficulties in implementing policy and institutional reform in the sector are discussed in detail in main report paras. 2.44-2.49, and lessons emerging from investments under the Fisheries Development Program (1990-94) in paras. 3.55-3.56. These lessons need to be taken into account in designing interventions in the sector, and the Fisheries Resource Management Project, which incorporates some of the lessons, deserves full commitment of the Government. In particular, since the lack of enforceable legal instruments has been a major constraint to implementation of policy and institutional reforms under the Fisheries Development Program, the enactment of the Fisheries Code in March 1998 is expected to be a major step forward. Broad-based programs like the MTADP (which is based on the principle of comparative advantage rather than poverty alleviation) will benefit many sections of the rural population with a high poverty incidence - particularly rice and corn farmers, who constitute the biggest group in rural areas (43 percent of all agricultural families, and contributing the same share to poverty among all agricultural households). The indigenous peoples, who are among the poorest and most disadvantaged social groups in the country, are rightly receiving concentrated attention under the SRA. In particular, the identification, recognition and protection of their rights to their ancestral domains should be specially provided for (further details on indigenous peoples' issues are in the main report paras. 6.19-6.24). Last, but not the least, the role of women must be recognised in any rural development strategy. Apart from provision of improved health, education and other social services for women, the rural development strategy should include formulation and implementation of targeted agricultural extension and training programs for women; a considerable expansion of micro credit for women; promoting gender awareness among agencies involved in rural development programs and projects so as to enhance the participation of women in the planning and implementation of these programs and projects; and concerted efforts to expand women's leadership role in rural institutions, such as Irrigators' Associations and other peoples' organizations. * By far the most difficult section of the rural population to reach through any rural development program is the landless worker group (rice, corn, sugarcane, coconut and other farm workers and forestry workers), with about 440,000 families (1985 data), poverty incidence ranging from 75 to 94 percent, and contribution of 12 percent to poverty among all agricultural households. The CARP will benefit some of these landless workers, but a large number will remain landless and poor. Perhaps  - xxiv - the best hope for this group is targeted education, health and nutrition programs. Formulation of an appropriate targeted program for this group needs serious attention. * Small, isolated islands (Sulu, Tawi-Tawi, Basilan, etc.) should be specially considered for geographical targeting of rural development programs (the three above are already included under SRA), since their linkages with growth centers are poor and the trickle-down is likely to be very slow. * The Cordillera Administrative Region should be a special case of geographical targeting (already included under SRA) of rural development programs due to its extremely high poverty incidence. * Indigenous peoples should be given a high priority in poverty targeting. - The ARC program should continue as a poverty alleviation program targeted at a specific section of the poor rural population - the ARBs (para. 14). - The Government has rightly recognized that targeting of the 20 provinces under the SRA is not sufficient for rural poverty alleviation (these provinces account for only 15 percent of the rural poor), and has extended geographical targeting beyond the 20 provinces. Rural development projects and programs should give due consideration to these targeted areas. - Food for Work (FFW) and livelihood creation programs can theoretically be important instruments for targeting. However, studies show that the FFW programs in the country have generally not served as an employer of last resort, nor addressed the problem of seasonal unemployment (extremely significant for landless workers), nor created assets that benefit the poor (such as schools), nor provided disaster relief. A revamping of these programs is needed. As for livelihood programs, there are currently 54 such programs being executed in the country. The programs are implemented through several government line agencies, government financial institutions, and government-owned and controlled corporations. Studies show that the overall experience has not been favorable. Incremental employment and income effects have been negligible, and default rates are high. Most programs have high administrative costs. There is a need to consolidate the various livelihood programs, sorting out the successful from the unsuccessful. It may also be useful to consider whether most of these programs should be brought under the umbrella of demand- driven, community-based rural development being undertaken in the country. For the more promising programs, such as the Grameen Bank Replication Program, a way has to be found to meet the high administrative costs in the initial years.  - xxv - Elements of the Recommended Strategy 29. In summary, a rural development strategy for the medium-term could principally include: * a reform of trade policy for agricultural commodities, and of sugar and other policies, along with an examination of the need for an adjustment program for marginal corn areas (paras. 5-7); * formulation of a comprehensive water resources policy framework (para. 8); * rationalization of land ownership policy through adjustments to the CARP (para. 9); development of appropriate tenurial instruments for the uplands and market-based instruments for improved management of environment and natural resources (para. 10); and formulation of a comprehensive land use policy, including watershed management (para. 11); * adjustments and refinement of the MTADP in consultation and collaboration with the LGUs, NGOs, POs and local communities (para. 13); * prioritization of interventions and a clear strategy for the uplands, including forest protection, reforestation, farm systems development, and watershed management (para. 15); * accelerated investment in rural infrastructure construction, rehabilitation and maintenance (paras. 13 (c) and 16); * rationalization and strengthening of agricultural research and extension (para. 17); * Rural non-farm and agro-industrial development (para. 18); - rationalization of the institutional framework, particularly rethinking of the roles of the DA, DAR and DENR; strengthening of LGUs; enhancing the mechanisms for the effective interface of national government agencies and LGUs; and expansion of NGO involvement (para. 19); * increased public expenditures on rural development (para. 20); establishment of effective financing mechanisms for perennial crops (para. 21); channelling of additional resources for devolved rural development activities (paras. 22-26); and strengthening of rural financial intermediation (para. 27); and * a mix of geographical targeting and targeting of specific sections of the rural population for poverty alleviation (para. 28). 30. To help implement the above strategy, further study is necessary on the required: (i) policy and program for managing critical watersheds; (ii) rationalization of the agricultural research and extension system; (iii) adjustment/reorientation of the roles of the DA, DAR and DENR; and (iv) framework for an expanded NGO involvement in rural development.  1. BACKGROUND TO AGRICULTURAL SECTOR GROWTH AND RURAL POVERTY A. INTRODUCTION 1.1 Rural development programs embrace a wide range and mix of activities in rural areas, including those to raise agricultural production and productivity, improve health and nutrition, expand education and training, provide better infrastructure (such as roads, irrigation and drainage, housing, electricity, water supply, solid waste disposal, etc.), promote industry and economic services, develop institutions and organizations, and improve natural resource management and environmental protection. The objectives of rural development, which encompass sustainable improved productivity, increased employment and thus higher incomes, and improved availability of food, shelter, and economic and social services in rural areas, therefore, extend beyond the objectives of any particular sector. This report, which does not deal with the social sectors, focuses on the issues of sluggish agricultural sector growth, the significant levels of rural poverty which prevail within the Philippines, and improved natural resources management. While the agriculture and natural resources sectors presently dominate the rural economy, and are the focus of this report, complementary initiatives are needed for intensifying the required social programs in, for example, education, health, nutrition, etc., which are essential for sustaining growth and alleviating poverty in the rural areas. 1.2 The Philippines has entered a critical phase in its development process. A turnaround in its economic performance in recent years provides the country an opportunity to look ahead into the future with a degree of optimism which has not been possible for a long time in its history. A strengthened economic structure, with significantly reduced macroeconomics distortions, rising private sector investments and exports, a reduction in external indebtedness, together with the more stable political environment, have contributed significantly to the increased levels of confidence and private perceptions of economic management. Consequently, the ongoing economic recovery holds better prospects of being sustained than at any time since the debt crisis of the 1980s. The challenge for the Government is to consolidate and further deepen the program of reforms which have been initiated, strengthen the outward orientation of the economy, and thereby break out of the pattern of growth witnessed in the 1980s, which was typified by episodes of rapid growth followed by periodic crises and periods of consolidation, a characteristic of the country's economic history since independence. In doing so, the Government clearly needs the active participation and partnership of the private sector. 1.3 However, while political stability and the pursuit of sound macro-economic policies have brought about a turnaround in economic growth, a legacy of the past uneven performance is the lack of significant progress in reducing the high incidence of poverty which has prevailed in the country. The proportion of the population living below the official poverty line has declined from 59 percent in 1961 to around 36 percent in 1994.  -2 - When compared to the accomplishments of its East Asian neighbors, the performance has been disappointing. Available data show that the incidence of poverty declined by around 0.7 percentage points annually in the Philippines during the 1970s and 1980s; in comparison, it declined by around 2 points annually in Indonesia and nearly 1.5 points annually in Thailand and Malaysia during roughly the same period'. As a result, the Philippines continues to lag behind its fast growing East Asian neighbors, in terms of both the absolute levels of poverty and the key indicators of social well being of its population. 1.4 This disappointing performance is the result of various factors, including continuing high population growth, and a failure of the economy as a whole to provide sufficient employment opportunities outside of agriculture. With additional employment opportunities created in the rural areas not keeping pace with the growth in labor force, migration from the rural areas has created additional burdens on the urban centers, and underscored the urgency of addressing rural poverty to stem rural-urban migration2. Consequently, the Government has put social reform, economic growth and poverty alleviation at the center of its development agenda, and indicated its resolve to move on it expeditiously. The two elements - pursuit of economic growth and social reform - are brought together in the Social Reform Agenda, which has been outlined by the Government in its bid to promote broad based human development within the country. In its Medium Term Philippine Development Plan, the Government has set itself a target of reducing the incidence of poverty from 39 percent in 1991 to 30 percent by the end of the Plan period in 1998. 1.5 Poverty in the Philippines is predominantly a rural problem, with the rural poor making up nearly half of the rural population and accounting for nearly two-thirds of the poor in the country. Most of the rural poor are engaged in agricultural pursuits, with rice, corn and coconut farmers and fishermen comprising the majority. Consequently, a reduction in rural poverty will require increased farm productivity, particularly in the upland areas, where a large part of the rural population presently live; in addition, it will require increased development of rural non-farm production activities. The foundations for a rural growth and poverty alleviation program targeted at the small farmers, landless rural workers and artisanal fisherfolk, would inevitably rely on the following: * Reviving agriculture sector growth on a sustainable basis; * Supporting programs targeted at the uplands-based poor rural communities, most of whom seek a means of livelihood for themselves and their families by farming forest lands, often in an unsustainable manner; and World Bank (1996), Philippines - A Strategy to Fight Poverty, Washington D.C. 2 Between 1980 and 1993, the population of urban areas grew at an average annual rate of 4.8 percent, as compared with the population growth rate of 2.3 percent.  -3 - Increasing opportunities for non-farm sources of rural employment, and improving rural-urban linkages, recognizing that primary agricultural activities cannot continue to be the sole source for creating rural livelihood opportunities. In order to ensure that growth is environmentally sustainable, there is need for programs aimed at arresting the depletion of the natural resource base of the country, given the population pressure on the uplands, and the critical importance of these resources for sustaining growth in the future. 1.6 The existence of an enabling institutional environment is essential for realizing the potential for growth in the rural areas. The enactment of the Local Government Code (LGC) in 1991 is an important step taken by the Government for creating such an environment. However, institutional and technical capacities vary widely across local governments, invariably being less well developed in the poorer areas. Consequently, underpinning the efforts at rural poverty alleviation would be the implementation of measures targeted at facilitating and consolidating the program of devolution, and in particular, in better articulating the role of National Government Agencies (NGAs) in the new environment. In addition, the planning and implementation capacities of Local Government Units (LGUs), which are going to be central in managing such programs, will need strengthening. 1.7 Drawing upon the experience gained from the implementation of past policies and development programs, this report outlines a program of actions considered necessary for realizing the above outcomes. The remainder of this chapter provides an overview of recent agriculture sector performance, and of rural poverty as it presently exists (i.e. who and where are the rural poor). It also initiates the discussion, which is central to much of the discussion in the later chapters of the report, on why growth in the past has not had a more substantial impact on rural poverty. Historically, fairly rapid agriculture sector growth, particularly in the 1960s and 1970s, did not improve the standard of well-being of most of the rural poor. This chapter also outlines the medium-term economic and social objectives of the Government. 1.8 Chapter II reviews the existing macro and sector policy framework facing the rural sector, identifying the key remaining areas where distortions remain; and it sets out some of the key issues which will need to be tackled for generating more broad based growth in the rural economy. Chapter III reviews how effective the principal ongoing public investment programs have been in addressing rural poverty alleviation and the needs of the small farmer. It outlines the key issues, and accordingly proposes options for consideration by the Government in making adjustments to these programs, in order that they better meet the expectations for the future. Complementing this analysis, Chapter IV reviews the options for assuring the underlying enabling environment in the rural areas from an institutional perspective, and the need for measures targeted at strengthening the program of devolution and creating a more effective rural institutional capacity. It assesses the role of rural communities and non-government organizations (NGOs), in  -4 - ensuring that the targeted growth for the rural economy is indeed achieved. Chapter V discusses the issues in financing of rural development, including public expenditures, financing of LGU programs, and rural financial intermediation. Finally, Chapter VI summarizes the salient features of a strategy for the rural areas, based on the options and recommendations detailed in the earlier chapters of the report. B. RECENT AGRICULTURE SECTOR PERFORMANCE 1.9 While data on the contribution of the rural sector to the national economy are not available, the contribution of the agricultural sector is a good proxy: it accounts for about a quarter of the country's GDP (excluding agriculture-based industry, which accounts for over a tenth of GDP), half the employed work force, and a fifth of total export earnings. The experience of the high-perforning Asian economies has shown that there is a strong positive correlation between the rate of growth of the agriculture sector and the growth experienced in the non-agriculture sector. This linkage has been weak in the Philippines, since the performance of the agricultural sector has been sluggish and uneven since the early 1980s. Excluding forestry, which has been declining consistently since the 1970s, the rate of growth of agriculture decelerated from 5.8 percent per annum in the 1970-80 period to 2.1 percent p.a. during 1980-89 and 2.2 percent p.a. during 1990-94. As can be seen from Table 1.1, the sector grew at an average of 1.1 percent annually during the period 1990 to 1995, including the forestry sector. Paddy production, which was partially affected by the dry weather during the first half of 1995, did not register any growth; and corn production declined significantly, largely due to the decrease in harvested area. Average rainfed and irrigated paddy yields have remained largely unchanged since 1990, at around 2.1 tons per hectare and 3.3 tons per hectare, respectively. In the case of corn, average yields have gone up only slightly from around 1.3 t/ha in 1990 to 1.5 t/ha in 1995. Tablel.1 Agricultural Performance 1990-1995 1.10 The major growth rates (in percent) share in factors which slowed '90 '9 l92 '93 '94 '95 aver. GDP agricultural growth -- E ; ; 9Ofg after the 1970s were: Agctulte Fishey . -0.2 0.5 2.1 2.6 0.9 1.1 100 100 andFomstry 1.3 2.9 0- 6 2.9 3.- 1.7 2.2 76.3 79.5 an overall downward -ctre 1.3 2.9 0 . 2.9 5 1.7 2.2 76.3 79.5 trend in world PasY - - - --1.6 3.8 -5.8 3.7 11.7 0.0 1.8 15.5 16.3 Corn 7.3 :0i-23. -& 2.9. 11.4 -5.8 -8. -0.6 6.8 5.7 commodity prices Coconut 1. -4.3 1 .- 2 -0.5 O 0.1 8.0 0.9 4.4 4.3 which affected the Sugarcae -6.3 13.4, 4.0 22.1 1.3 -25.6 0.3 2.3 2.3 country's traditional Banan -7.4 -0.5 3.7_0.6 4.3 1.5 0;3 1.717 utys rdtoa . herCrops -1.7 -1.0 1.8 -3.:5 1.9 560 1.5 22.8 23.6 export crops, UvOstock 3~~.2: 1.2 0.8 4.7 4.8 5.2 3.3 10.5 11.5 deterioration of Poultr- 10.2- 3Z1 10.9 685 2.6 5.2 6.4 7.6 9.3 Arc. Services 8.2 1.7- 4.2 0.7 1-.5 3.6 3.3 4.8 5.0 intersectoral terms of - FIher 3.9"3.9 1.1 1.5 1.1 2.0 2.2 19.2 19.6 trade, a series of Faretrv ~~-21.0 -34.9 -12.2: -1.6 -15 -48.21 -25.69J 4.6 0.9naul clmies Source: NSCB (1995) as well as data from BAS and NEDA natual calamities, macro economic constraints, and the fact that the green revolution had been largely completed by the early  - 5 - 1980s. These factors led to a serious under-investment in the sector, which, in turn, was reflected inter alia in inadequate infrastructure and support services. While recognizing that the sector's performance is more prone than others to natural calamities, it is nevertheless also apparent that there is untapped potential for realizing higher and more sustained growth in agriculture. 1.11 Natural Resource Base. It is accepted that, together with agriculture sector growth, the better management of the environment, on which the long term sustainable development of the rural economy is dependent, is integral to a broad based program of rural poverty alleviation. At the same time, it is important to recognize that environmental and natural resource management issues are inextricably interwoven with the population and poverty problems. With population pressure, formerly stable shifting agriculture under long rotation has both intensified in forest areas and been overtaken as a source of environmental degradation by continuous cropping and fire in deforested lands, resulting in high soil erosion and a long term process of resource degradation and depletion. Old growth forests have been reduced from about 10 million hectares in 1950 to less than one million hectares today. Another three million hectares of scattered residual secondary hardwood forest remain in varying conditions. Many of these severely degraded forest lands are also some of the worst poverty-stricken areas of the country. C. OUTLINE OF RURAL POVERTY Table 1.2:Pver nidenin thedPhili 1.12 As indicated earlier and Poor HousehoSlds5 contldbutio t Povrty shown in Table 1.2 below, the .u large majority of the poor 5nd 5ov.rt4 3n 70ral ara, hr etem oerye continue to live in rural areas Tabe19 3: 52rynhPiipns19dt 43urth28e(around two thirds of the total 1=71 52 41 7 24n poor of the country), with most 198.49 32dependent on agriculture I.988.48 31 . ~~~~~~~~~~related activities for their .1991.39. 31. 47 ~~~~~livelihood. The 1994 Family em4p4l~'Incomes and Expendrecs Source: World Bank (1s996 NSCB 1995-b); Balisacan (1 993) Sr ey of t tat e poor account for 47 percent of rural households and 54 percent of individuals residing in rural areas (Table 1.3). Urban poverty too is partly a spillover of low household incomes and poverty in rural areas, where extreme poverty encourages migration to urban areas. Tablel.3: Poverty in the Philippines (1994 data) Furthermore, a large number of the houshold...i ciais urban poor reported in official rura uran ttalrura uran ttalpublications are actually also d~ce pore. 47.1242 ~.V 537 28. 41,3 dependent on agriculture and mingilud (mii.)3.021.5 4.5 18.1 983 2.74agriculture related activities for contibuIt~n 88% 34% 00%85% 5% 00% employment and income. In recent Soucre: NSCB (on basis of FIES) years, many of the initially rural areas  - 6 - have been classified as urban areas simply because of the rise in population density and/or in the number of establishments. However, unlike in other East Asian countries, the rapid urbanization in the Philippines has not been accompanied by either a respectable growth of per capita income or an economic transformation characterized by a shift of employment away from mainly low-productivity agriculture to high-productivity areas in industry and services. 1.13 The majority of the poor in the Philippines are involved in agriculture, with the severity of poverty greatest among the numerous landless and small farmers who make up a large part of the rural population (see Box 1.1 and Table 1.4). Preliminary data from the 1994 Family Incomes and Expenditures Survey (FIES) indicate that about 72 percent of the poor find a livelihood primarily from agriculture, representing an increase from the 67 percent share recorded in 1985. Of the rural households employed in agriculture, about 63 percent have incomes below the poverty line; in comparison, households employed in rural services and industry have a poverty incidence of 39 percent. * For the nation to make significant progress on alleviating poverty, it is clear that the strategy needs to focus on the agriculture based households. Box 1.: The Typical Poor Farmer The vast majority of the rural poor are engaged in farming. Typically, these include com and other crop farmers, coconut farmers and fishermen, primarily being lessees, tenants and small owner-cultivators; rice producers; and farm workers in sugarcane, rice, corn. coconut and forestry, who are among the poorest, principally representing the landless and those dependent on wage incomes as a means of livelihood. Their families are generally large, often with already have migrated to urban areas. The families are characterized by high levels of underemployment, inadequate more than 8 members, receiving support from one or more family members who access to or use of modem technology, and little access to social services, including health care and family planning services. For the large number of poor owner-cultivator farmers, farm size is small, and the farm is often locaed in unfavorable areas (eg. outside of irrigated areas). Their ability to improve their lot is substantially limited by their low incomes and little access to credit. Souree Balisacan, A (1993), "A cu Growth, Landlessness, Off-Farm Employment, and Rural Poverty in the Philippines". Economic Development and Cultural Change, Vol. 41, Nr. 3, pp. 533-562. Table 1.4: Poverty Incidence in Agriculture by Main Occupation of Household Head (1985 data) W ff U S~~~~~~~~~~~naie oi grotup inmU FiJseEry Nicwhe on{riutin t otai.fi Mani Occupation of Houehoi Head Totat number of fafi -fies t farni (headcount) poverty AA agrdatural families 3,962.3 100.0 72.9 100.0 - Rioefazmers 1,103.9 27.9 66.2 25.3 Corn farners 596.4 15.1 83.5 17.3 Sugweane farmne 19.4 0.5 60.7 0.4 Coconut farmers 360.9 9.1 7 5S 9.4 0otherfarmers 253.6 6.4 t9.9 7.o RL-e and comfarm wokerk 215.2 5.4 81.1 6.0 Sugarcane farm woiers 8 8.5 2.2 93.8 2.9 Coconutfafm worrkes 1.6 -1.6 783. 1.S Otherfamo woerkss 30.2 0.8 74.6 0.8 Otlwropanda nlmahusorndry 80.1 2.0 .51.4 1.4 Fotrworlkes- 46&6 1.2 82.6 1.3 Pishennen : - E. 515.4 - -- 13.0- 78.7 13.7 Oher ccupaIons. .5S90.5 . -.; # --; . . -.14. 64.7 12.6 I4ot. 5,. e ~.ts f h.dcoffat SI.x aia b8J* en a h~hi5yepovsOyh. Ihan: zrtbzet.. tha tx  -7 - 1.14 There are large Regional differences in rural poverty incidence, as evidenced by the preliminary data from the 1994 FIES (Table 1.5). Poverty is particularly widespread in the Cordillera Administrative Region (CAR) and in Bicol (Region V), where the incidence of poverty exceeds over 60 percent of the rural population; in virtually all of Mindanao, and in the Table 1.5: Regional Distribution of Rural Poverty 1985-1994 Western Visayas, it n.walpov,tymncklence ,eou nrngnkude ofruf..al. po4ity exceeds 50 percent. The jj985 1988 1991 1994 1985 1988 199 199 Regions of Mindanao 35.3 59.6m 6r.4 .- 1.9% 3.2% 3.8 (mostly northern and K t0}a42.6 3.0.. t 49.1 042 0S g rl 9.9 } 7.7 6.1% 6.eX0'