An intellectual giant on Philippine agribusiness: The lack of strong institutions

(Part 5)

The country that religiously followed the advice given 10 years ago in a McKinsey Report is Vietnam, which has done wonders with its agricultural sector during the last decade or so, thus leaving the Philippines behind in both economic growth and poverty eradication.

The McKinsey Report in 2012 opined that in Vietnam’s drive to become a key player in the global agricultural stage, its rural sectors needed to develop greater expertise and more technical training to produce higher-quality products that can command higher prices. Upon joining the World Trade Organization, the Vietnamese government agencies, with some support from NGOs, started in earnest to teach producers the intricacies of good agricultural practices so that they could compete more effectively in the world markets. They did this so well in the coffee sector that today Vietnam has become the second largest exporter of high-quality coffee in the world, supplanting Colombia as number two to Brazil. Now there are ongoing efforts to replicate this feat in the export of seafood products through the creation of a more comprehensive and modern infrastructure to certify the sustainability and safety of its aquaculture products. It is hoped that now that our new Secretary of Agriculture is first and foremost an expert in the fisheries sector, we can compete with Vietnam in becoming a world power in the export of seafood products.

The lessons learned from our neighboring ASEAN countries have generated two different sets of policy conclusions according to the late Dr. Rolly Dy. The main difference between these two contrasting views lies in the timing and pace of economic transition to a higher level of productivity of the agricultural sector.

The first focuses on the primordial importance of the small farmer. According to this view, there should be increased investment of the Government in agriculture and rural development. This will involve strong state support for major inputs, marketing services, infrastructure development, and democratic processes of land reform. Price and market incentives will have to be in place.

There should be an emphasis on efforts to improve the productivity of staple crops that are not internationally traded but consumed mostly by the poor and traded domestically. As research and development into these crops attract little private sector support, there will be a need for public funding. In addition, research needs to take greater account of differing natural resource endowments, more focused and more region specific.

The alternative view would stress the need to achieve the best outcome for the poor from fast changing trends. Initiatives should focus on commercial production of non-staple cash crops, particularly those with strong links to the non-farm sector, as the latter will provide jobs for the rural poor. Also, there must be access to the markets of developed countries for more processed and high-quality products. The rural poor can be best assisted by improving their access to basic services (health and education) to enhance their human condition and their social mobility.

In today’s circumstances in which agricultural and rural development are intricately intertwined, it is necessary to combine the small-holder approach and the corporate farming model. The State should take greater responsibility for assisting the small farmers to increase their productivity and income. The private sector can assume responsibility in investing in commercial or corporate farming as well as in the service and manufacturing phases of agribusiness. Agribusiness goes much beyond farming. Agriculture does not thrive in a vacuum. In the process of development, its links with industry and services deepen and widen. The farm sector purchases machinery, fertilizer, insecticide, etc. Agricultural raw materials are processed or manufactured into higher value goods. To bring these two major economic sectors into dynamic mode, services such as transport, storage, finance, and trade are critical, not to mention scientific and technical research and development. One study found that while farming accounts for about 11% of GDP, the whole agribusiness value chain comprises 25% to 30%.

One final word from Rolly. The backwardness of Philippine agriculture can be attributed to the lack of strong institutions.

In this regard, he quotes the famous book of Professors Acemuglo and Robinson (2012) titled Why Nations Fail: “It is man-made political and economic institutions that underlie economic success (or lack of it). Korea, taking just one of their fascinating examples, is a remarkably homogenous nation, yet the people of North Korea are among the poorest on earth while their brothers and sisters in South Korea are among the richest. The South forged a society that created incentives, rewarded innovation, and allowed everyone to participate in economic opportunities. The economic success thus spurred was sustained because the government became accountable and responsive to citizens and the great mass of people. Sadly, the people of the north have endured decades of famine, political repression, and very different economic institutions — with no end in sight. The difference between the Koreas is due to the politics that created these completely different institutional trajectories.”

He then cited one example of institution building that was dear to his heart because he had an opportunity to work for it. As Dr. Fermin D. Adriano reported in his eulogy, Rolly had the opportunity during his stint at the World Bank (1979-1983) to work on the Malaysian government’s agricultural projects called the Federal Land Consolidation and Rehabilitation Authority (FELCRA) and the Federal Land Development Authority (FELDA). The World Bank extended financial assistance to these development projects and appointed Rolly as its project team leader.

As Rolly declared in his Magisterial Lecture, in these two institutions, centralized management schemes had been in existence in Malaysia starting 1956 with FELDA developing new land for tree crops like rubber and oil palm for the landless. Farmers own a portion of the land or share after loan repayment. They receive dividends or wages. This was followed in 1966 by FELCRA which consolidates small holdings into plantation size to achieve economies of scale. The landowners receive dividends in proportion to the size of the land they contributed to the estate and, in addition, they are paid wages if they work on the estate. FELDA and FELCRA have been major agencies in the eradication of poverty in Malaysia.

As Dr. Adriano wrote, by the 1990s, more than 267,000 hectares were consolidated by FELCRA, benefiting around 91,000 small farmers. On the other hand, FELDA helped around 112,000 settlers in the cultivation of more than 450,000 hectares of land. No wonder Malaysia was the first Southeast Asian country to bring down its poverty incidence to zero.

I resolve that in memory of Rolly, I will work with the enlightened investors in agribusiness such as Lionheart Farms, First Metro Agribusiness Ventures, Benguet Corp., DMCI Corp. and a few others to finally attain the dream of Rolly: to see hundreds of hectares of agricultural land in the Philippines consolidated in corporate farms that will cultivate coconut and other tree crops. This type of green revolution has already begun. The BBM Administration has the unique opportunity to be the one to launch and sustain it for the good of millions of the rural poor. I hope we can convince the management of the Maharlika Investment Corp. to invest in these large-scale agribusiness ventures.

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.

bernardo.villegas@uap.asia