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Small is not beautiful


If you ask agricultural economists what’s wrong with Philippine agriculture, they will cite the following causes: a.) overconcentration of the agriculture budget toward a low-value commodity, rice; b.) failure to integrate with international supply chains and to enjoy the benefits of international trade, again due to protectionism and obsession with self-sufficiency in all agricultural commodities; c.) a meagre agricultural budget; d.) lack of public goods, from farm to market roads to research and development, in the agricultural sector; and, e.) historical policy bias against agriculture, from overvalued exchange rates to protectionism for strategic industries, such as shipping and ports, which raises the cost of transporting rural produce to the market.

However, they will also tell you that the single biggest structural problem of agriculture is land fragmentation. The average farmland size has been falling due to CARP (Comprehensive Agrarian Reform Program), rapid population growth, and the death of farm owner-beneficiaries, which causes the already small farms to be subdivided among multiple heirs. The average farm size has been falling from 3.5 hectares in the 1960s to 1.2 hectares in 2012, for which the latest figures are available. It’s not unreasonable to assume that the average land size is less than a hectare today.

So what, you say? Isn’t small beautiful?

Perhaps not to the small farmer himself, who is unable to raise the productivity of his land and therefore remains shackled to poverty. For urban-based armchair do-gooders and bleeding-heart activists, anything big is bad, and automatically, exploitative. On the contrary, bigness is good if it raises productivity, because individual and community prosperity depends on productivity.

My friend and fellow columnist, National Scientist Dr. Raul Fabella and I have been saying for the past 20 or more years that the restrictions imposed on agrarian reform land in particular, and the rural land market in general, have a deleterious effect on agricultural productivity. Simply put, presently, efficient farmers can’t buy out or even rent, from inefficient ones.

Recent international economic literature is backing up our conclusions.

Canadian economists Diego Restuccia and Tasso Adamopoulos in an April 2019 publication in the prestigious National Bureau of Economic Research, titled “Land Reform and Productivity: A Quantitative Analysis with Microdata,” concluded that the 1988 Comprehensive Agrarian Reform Program (CARP) caused average land size to fall by 37% and farm productivity by 17%. In other words, CARP made farmers poorer.

Comes now another recent study by Keijiro Otsuka, a professor from the Graduate School of Economics of Kobe University, a member of the Japanese Academy of Sciences, renowned agricultural economist, and a former Chairman of the Board of Trustees of the International Rice Research Institute.

His January 2021 study is titled “Changing Relationship between Farm Size and Productivity and its Implications for Philippine Agriculture.”

According to Otsuka, the observed inverse relationship (IR) between farm size and productivity, i.e., small farms are more efficient than large farms, holds true only when wage rates are low, and labor-intensive farming methods are adopted. In high wage countries, where farm sizes are large and mechanization takes place, the opposite is true: there’s a positive relationship between farm size and productivity. On the other hand, a U-shaped relationship occurs where small and large farms co-exist.

However, where wage rates are rising and mechanization (use of power tillers and combine harvesters) is taking place, as observed in a study of Central Luzon farmers, there’s a positive relationship between farm size and productivity.

He warns that because small farm sizes are the norm in Southeast Asia and even in Japan, where average farm size is three hectares, compared to the average of 100 hectares or more in Europe, over time, agriculture will lose its comparative advantage in Asia, food production will fall, and from self-sufficiency, the region will see food shortages and rising imports, as can be seen presently in the Philippines.

According to Otsuka, “the decrease in farm size is particularly pronounced in the Philippines partly because of rapid population growth and partly because of the failure of growth of non-farm sectors, which can absorb rural labor. If this trend in farm size reduction continues and the economy sustains a fairly high growth rate, the agricultural sector’s inefficiency can be a major constraint to further economic growth.”

In a note on the need to redesign land reform in the Philippines, he states that, “In the face of the changing relationship between farm size and productivity, it is critical to recognize the role of land rental markets in reallocating land from the less productive to the more productive farms. It should not be government law but the market that ought to determine the desirable allocation of land. The Philippines is no exception, and if the land market continues to be distorted, increasing large and serious inefficiencies will arise because of inefficient land resource allocation in this country.”

Otsuka doesn’t provide the details, but to my mind, this is why the land market in the Philippines is distorted:

First, the land market is distorted due to the land retention limit of five hectares. Successful farmers are prohibited from expanding via ownership of land beyond five hectares. If farmers aren’t allowed to expand, they have no incentive to mechanize and increase efficiency. Because of the restrictions in land transfer, inefficient farms will forever be inefficient farms, condemning its owner-cultivators to perpetual poverty.

Second, land misallocation is also due to a law that made share tenancy illegal. The law incentivized landowners to eject the peasants and be an owner-cultivator relying on hired labor. Share tenancy, however, is rational, enabling landless farmers to cultivate the land on a sharing basis, rather than on fixed rentals. Fixed rentals can be onerous and unjust in agriculture because of the vagaries of production due to weather disturbances or pestilence. Share tenancy used to be exploitative and feudal but that was when there was no labor scarcity and capitalist relations (industry and agribusiness) were absent.

Third, the Comprehensive Agrarian Reform Law (CARL) has put on so many restrictions on the rural land market and established an inefficient and corrupt Department of Agrarian Reform (DAR) to supervise these restrictions and overregulate the land market. CARL saddled the agrarian reform beneficiaries with debt, prohibited them from selling or renting the land without approval from DAR, and when they can sell, limited the market to those whom the DAR chooses they can sell to.

What do we do?

One is to remove the land retention limit of five hectares. Ideally, there should be no cap. The market should be allowed to determine what the most efficient size is. However, if there will be political resistance, especially from the Left and the politicians behind the Comprehensive Agrarian Reform Law, the upper limit can be set at 24 hectares, the old limit for homesteading in the 1935 and 1987 Constitutions. A progressive land tax can also be set to discourage large speculative land holdings.

Two is to increase land size by enabling a free and vigorous rural land rental market. It’s about time to separate land ownership from farm management if the lessees will be more efficient.

One idea is to condone the debt of agrarian reform beneficiaries. Why? Because of the total unpaid debt of agrarian reform beneficiaries, amounting to P65.9 billion, P58.7 billion or 89% remain unpaid. The unpaid debt covers 1,224,737 hectares of rich, fertile land that can’t be part of the rural land rental market because the rules prohibit the leasing of lands with unpaid debt. Of the 1.2 million hectares, some 780,759 hectares representing 44% of agrarian reform beneficiaries (ARBs) don’t even have LDIS/LAS (Land Distribution Information Sheet/Land Amortization Schedule), and therefore, the farmers can’t even begin to start paying off their debt. The 10-year period under which agrarian reform beneficiaries are prohibited from selling and renting out the land hasn’t even started yet!

One argument against debt condonation is the moral hazard argument. However, when it comes to tax amnesty, which benefits rich tax evaders, this argument isn’t raised by these critics. On the contrary, the moral argument can be raised on behalf of the farmers because all those restrictions imposed by the government degraded the value of their lands and have prevented them from paying their debt. As for that small number of farmers who have paid some of their debt, a reverse mortgage program in LANDBANK can be established for them.

The final reform is to remove DAR oversight of the rural land market. Make Certificate of Land Ownership Awards (CLOAs) and all lands acquired through agrarian reform laws fee simple titles. Instead, the Land Registration Authority, which has a computerized data of all land records, should monitor the ceiling of land ownership, if there will be one.

Let’s face it: the single biggest binding constraint to agricultural development is land fragmentation. The next administration must confront this fact, lest poor agricultural productivity and food insecurity act as a brake to our economic growth.

Small is not beautiful. It’s ugly, if associated with poverty.


Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).