Impact of Subsidies on Market Competition in the Philippine Agriculture and Manufacturing Sectors

Abstract

Subsidies have been historically used to support firms and industries deemed important to the economy. One of the justifications for using subsidies is to address market failures. When markets do not exist or there are fewer and dominant players, government support can play a critical role in directly providing incentives that can encourage new players to join the market, which in turn may or may not disadvantage other firms. This study examines the impact of subsidies on market competition in the Philippine agriculture and manufacturing sectors. We apply measures of market concentration and power; complement these with panel econometric regression analyses using the 2010–2015 Philippine Statistics Authority (PSA) data on business and industry. We show that there may be highly concentrated agriculture and manufacturing subsectors which are subsidized despite likely exhibiting non-competitive nature. And through “forward orthogonal deviations” (FOD) generalized method of moments (GMM) approach, results show that highly concentrated subsectors may not sufficiently exhibit non-competitive behavior. Our findings also indicate that subsidies appear to have lagged effects in both sectors. Government support given to the government-owned and controlled corporations (GOCCs) leads to market power in the agriculture sector.