Policy Reforms and Agricultural Development in the Philippines

Abstract

This article examines the character of agricultural development and the policy environment influencing the performance of the rural economy during the postwar period. It shows that, while domestic and global shocks could be blamed for the poor performance of agriculture and the slow decline of rural poverty in recent decades, they are hardly sufficient reasons. The more fundamental reasons have to be found in domestic policies directly and indirectly affecting agricultural structures and incentives, particularly market regulations and public investment biases against the rural sector. Moreover, contrary to common perception, growth-enhancing policy reforms in recent years, albeit largely incomplete, have favourably changed the economic environment facing the poor. Introduction It is well-known that agriculture's importance in output and employment declines in the course of development owing to the generally low income elasticity of agricultural commodities, particularly food, vis-a-vis manufactured goods and services, as well as to the rapid development of new farm technologies which lead to expanding food supplies per hectare and per worker. The smaller the land endowment per worker (and, hence, the lower the marginal product of farm labour), the earlier in the development process will be the growth in non-agricultural (typically industrial) activities. Moreover, the faster the technological progress in non-agricultural sectors relative to that in agriculture and the more rapid the accumulation of industrial capital, the quicker will be the decline in agriculture's comparative advantage and its share in the labour force. However, even for countries at similar stages of development, the variation in agricultural performance in inducing rural non-farm growth and, hence, in reducing rural poverty, is substantial. For example, rural supply response to agricultural growth appears to be weak in the Philippines, while it is quite strong in other countries (for example Indonesia and India). To a large extent, differences in prevailing agrarian structures, rural institutions and overall economic-policy environment determine the character of rural non-farm responses to agricultural growth; they also determine the subsequent pattern of agricultural growth and development. The postwar experience of Philippine agricultural development illustrates how misguided policies and institutional factors could constrain the responses of rural areas to the stimulus provided by agricultural growth, thereby stifling economic development. This article examines the character of agricultural development and the policy environment influencing the performance of the rural economy during the postwar period. The article first provides a brief background of the agricultural sector's performance. It then discusses the policy environment of agriculture, focusing on agricultural policy reforms in the 1980s and early 1990s; it examines the responses of rural household welfare to this environment and to boom-bust growth that characterized this period. Finally, it gives conclusions and policy implications. Agricultural Sector's Performance Agriculture continues to account for a sizeable proportion of total employment and, to a lesser extent, national income. Its share in total employment dropped only slightly from 59 per cent in the mid-1960s to 46 per cent in the early 1990s (Table 1). Its share in GDP declined from about 32 per cent to 23 per cent during the same period. These changes are in accord with the well-known stylized fact of development noted above. The slow drop of agriculture's share in total employment, together with the sluggish absorption of labour in the industrial sector, suggests that the large increments to the labour force over the last three decades were nominally employed in agriculture and in the informal services sector where self-employment is more common and wages more flexible. This process, however, limited the growth of labour productivity and real income in these sectors. …