Human Side Of Economics
By Bernardo M. Villegas
It might not have been a direct intention of President Ferdinand Marcos, Jr. when he decided to appoint Vice-President Sara Duterte to be the Secretary of Education and himself as the Secretary of Agriculture. It is serendipity, however, that the two highest officials of the land are responsible for the two most important sectors of society that contribute most to sustainable and inclusive growth, i.e., food security and education. Not only that. The two are so intertwined and interconnected — as the members of the Philippine Business for Education (PBEd) highlighted in a recent seminar about the interconnectedness between the poor quality of Philippine basic education and the state of malnutrition of children, as was pointed out in the first article of this series. The Philippines has the worst state of malnutrition in the ASEAN. It having the worst learning poverty rate is not a coincidence.
Here, I can only cite the most perceptive discussion of this interconnectedness between food security and the state of basic education by Dr. Cielito Habito in a column in the Inquirer (Aug. 9, 2022). No one else can better discuss this issue than Dr. Habito, who has undergraduate training in agricultural sciences from UP Los Baños and a Ph.D. in economics from Harvard University. He was the NEDA (National Economic and Development Authority) Director General during the Administration of the late Fidel V. Ramos.
He cites the scientific fact that 90% of a human’s brain development happens by age five. A chronically malnourished child who is stunted at age five will no longer be able to achieve his/her full physical and mental potential, and is irreversibly damaged for life. The very high rate of malnutrition among our children explains to a great extent why our country ranked lowest among all 10 ASEAN countries in average IQ in a cross-country assessment in the early 2000s. In the 2018 Program for International Student Assessment, the Philippines ranked at the bottom in reading comprehension and second to the bottom in science and mathematics among 79 participating countries. More recently, the World Bank announced the latest country assessments on learning poverty, which measures the percentage of children who cannot read and understand simple text by age 10. The Philippines got a high 90.9%, far above Indonesia’s 52.8%, Malaysia’s 42%, Thailand’s 23.4% and Vietnam’s 18.1%, and Singapore’s 2.8%.
This interconnectedness between food security and the quality of basic education should be a frequent matter of consultation between the two departments headed by the President and the Vice-President. As Dr. Habito recommends, school feeding programs are important, but making sure pregnant and lactating mothers are able to eat well is even more critical and urgent. All LGUs should study closely the very successful 1,000 days program for feeding mothers and newborn babies that was implemented in the province of Quezon during the term of Governor Jay Suarez, assisted by his wife who was a member of the House of Representatives.
Now that we have assessed the nature of the problem of the low productivity of our agriculture sector and the consequent lack of food security, what does the Transition Report of former Secretary William Dar and his team give as the causes of the poor performance of the Philippine Agriculture, Fisheries and Forestry (AFF) sector? The first reason given, with which I fully concur, is the very limited vision of successive previous leaderships of the Department of Agriculture (DA) who were fixated on farming and forgot that agribusiness consists not only of farm production but also includes the whole value chain of post-harvest, infrastructures, logistics, warehousing, cold storage, processing, and all the way to the so-called last mile to the consumers. The DA had a spending bias in the provision of input subsidies and support services which accounted for 93.2% of the total budget from 1999 to 2020. Except for some of the connectivity infrastructure (e.g., farm to market roads), public support for the economic segments of the agro-based value chains (such as the midstream, downstream, and the upstream segments) that could have significantly contributed to the modernization of the agribusiness value chains, were given scant attention. For instance, in 2015, the share of agricultural research and development (R&D) expenditure to agricultural gross value added (GVA) was only a measly 0.25% in the Philippines in contrast with Malaysia (1.14%) and Thailand (1.45%).
The second major reason for the underdevelopment of our agricultural sector is summarized in the pithy remark of Dr. Habito in his column on the interconnectedness of the food and education crises:
“Our overly protective (rather than nurturing and enabling) agricultural policies, which pushed food prices higher than they need to be, ultimately led to the poor’s food insecurity, malnutrition, and poor education outcomes, hence perpetuating their poverty.”
As a consequence of the misguided “self-sufficiency” policy of past DA Administrations, domestic agriculture producers remained relatively inefficient (especially compared to our ASEAN neighbors) by virtue of protectionist policies, such as tariff and non-tariff barriers that were not timebound. As can be inferred from the objections by some leaders of farmers to the Regional Comprehensive Economic Partnership (RCEP), there is a continuing clamor to shield the majority of agricultural commodities from global or international competition through Minimum Access Volume (MAV) mechanisms, high most favored nation (MFN) tariff rates, and other non-tariff barriers. With the absence of foreign competition, local agricultural producers (not only the small farmers) have little incentive to innovate and become more productive. This reminds me of the so-called “infant industries” in the last century that were pampered with so much protection that they never grew up and caused our industrialization efforts to fail.
The third cause of our lagging agricultural sector was the obsession of the DA with the impossible dream of rice self-sufficiency. This rice-centric policy impeded the growth and development of other agro-food value chains, in which we have greater comparative advantage in relation to our neighboring countries. Even if we exert our best efforts to improve the productivity of our rice farms, we will never be able to bring our costs of production lower than those of Thailand and Vietnam which have unlimited water sources because their rivers are like oceans. As an archipelago, water — which is the most crucial ingredient for rice production — will always be a scarce commodity in the Philippines.
Diversification of our agricultural produce — a must for expanding income sources in the rural areas and an impetus for robust agro-based value chain development — happened at turtle pace, rising minimally in the last two decades from 19.6% in 2000 to 20.6% in 2018 and 22.9% in 2019. This happened despite the promulgation of the High Value Crop Law way back in 1995. The slow growth of the production of high-value crops was in stark contrast with the robust improvement of similar crops, especially in Southeast Asia, where governments adopted a more outward-oriented policy of targeting the export markets, aligning local practices with global standards. As mentioned earlier, the classical example is the way the Vietnamese government helped their coffee producers catapult the country into becoming the second largest exporter of coffee in the world in a record time of just a decade.
The failure to diversify into high-value crops can be partly attributed to the obsession with rice self-sufficiency of past leaders. The heavy attention of the budget of the DA on rice had significant negative effects on the over-all performance of the AFF sector. Specifically, the lopsided focus on rice led to a neglect of potentially competitive agro-based value chains. A combination of trade and distortive domestic support policies were enforced in the rice value chains. Aside from trade restrictions, there were domestic support policies such as market price support and payments based on input subsidies. These distorted the inputs and outputs markets of other agro-based goods.
Approximately 50% of the banner program budget of the DA, on average, went to rice from 2009 to 2020. In fact, the imbalance of the DA budget in favor of rice is even higher when we take into account that the operational budgets of the National Irrigation Administration (NIA) and the Rice Competitiveness Enhance Fund are excluded from the Department’s rice banner program. The lack of competitiveness of the rice subsector slowed down significantly the agricultural transformation as it prevented labor from moving to more profitable agricultural commodities (including livestock) or to non-farm employment in the countryside or to urban employment.
Finally, another explanation for the underdevelopment of Philippine agriculture is the small average farm size in the country. This hinders the achievement of economies of scale and the attainment of efficient transfer and/or coordination of technology as well as of government intervention programs. Averaging about one hectare per farm, the fragmented structure of Philippine farming results in the absence of economies of scale and the limited vertical integration in the agro-food value chains (such as the contract growing arrangement) and the inadequate use of technology for farm production and primary post-harvest. Government interventions and/or regulations, such as capacity development, regulatory compliance such as on food safety, technology transfer, and delivery of other production and support extensions services are more efficiently coordinated and disseminated through organized groups such as farmers’ organizations, associations, or cooperatives. Unfortunately, successful farmers’ cooperatives and associations in the Philippines are the exceptions rather the rule.
(To be continued.)
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.