monopoly and regulatory constraints to rapid agricultural growth

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  • Economic Policy Agenda Series No. 8

    Monopoly and Regulatory Constraints to

    Rapid Agricultural Growth and Sustainable

    Food Security in the Philippines

    Foundation for Economic Freedom, Inc.

  • Foundation for Economic Freedom, Inc.

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  • Foundation for Economic Freedom, Inc.

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    Monopoly and Regulatory Constraints to Rapid Agricultural Growth and Sustainable Food Security in the Philippines1

    V. Bruce J. Tolentino, Ph. D.2

    Introduction

    The performance of the agriculture sector of the Philippines over the past two

    decades (1980s and 1990s) has been lackluster, at best. While the vigorous growth and

    diversity of the agriculture sectors of most of its neighbors in Asia explain a significant

    proportion of their overall economic dynamism, Philippine agriculture has stagnated. The

    agriculture sector has barely been able to meet the food needs of the population, as well as

    unable to provide the inputs to high value-added and export-oriented food processing.

    Objective

    This paper attempts a scan, an exploration of part of the explanation for the

    stagnation of the Philippines agriculture sector. The exploration is in terms of a summary

    overview of those regulations that have contributed to creation of monopoly elements and

    regulatory constraints in the sector, resulting in very poor growth. The scan reveals a

    landscape of governance that is characterized by monopoly elements and regulatory

    constraints that induce monopolistic behavior and situations in agricultural production,

    services and food supplies. These market-constraining factors, combined with others,

    suppress the rapid agricultural growth and inhibit sustainable food security in the

    Philippines. It should be emphasized that many of the elements found in the scan are not

    new3. Most of these have shackled the economy for several decades. It is clear that much

    1Presented on May 12, 1999 under the auspices of the Foundation for Economic Freedom, Philippine

    Exporters Confederation and the Trade and Investment Policy Analysis and Advocacy Support Project. 2Consultant, Department of Agriculture. 3Many of these elements were already identified as early as 1985-1986, particularly in such works as the

    so-called Green Book Philippine Institute for Development Studies and the Center for Policy and Development Studies, Agenda for Recovery and Growth of the Agricultural Sector, 1986.

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    work still needs to be done to free the sector, to enable agricultural markets to serve as the

    prime mover and foundation of rapid, sustained growth of the economy as a whole.

    The paper proceeds as follows: in the first section some remarks on the appropriate

    role of government in managing a market-led economy are briefly stated. Then some data

    on the recent performance of the Philippine agriculture sector are shown. The results of the

    scan of regulations and monopoly elements is then enumerated, followed by two brief

    expositions of the results of government provision and policy: (a) that of government

    investment in infrastructure, particularly irrigation, and (b) that of the regulations currently in

    force in the sugar industry.

    1. The Appropriate Role of Government in Agricultural Development

    Indeed, the Government has an important role to play in agricultural and economic

    development. Government fulfills its role by providing basic goods and services, and

    formulating and enforcing the rules by which all stakeholders participate in the economy.

    When the government fails to provide public goods and essential services, or is unable to

    enact and enforce appropriate rules of behavior and contracting, the pace of development is

    slowed, and society, or at least some of its members are unable to access any gains from

    economic activity.

    The Government must select its tools and instruments carefully, so that there is

    consistency between its intentions and policy achievements. Furthermore, the manner and

    intensity by which the government distributes and allocates public goods and services

    reflects its priorities and its preferences among sub-groups in the population. The

    Governments (or the leaderships) priorities and preferences are also revealed in the effects

    and outcomes of the implementation of laws, rules and regulations.

    International economic experience has confirmed that the decision of the Filipino

    people to rely on a market-based economy is correct as enshrined in the Philippine

    Constitution of 1987. Therefore the fundamental role of the government is to ensure that

    market mechanisms work as best as possible so that resources are utilized for optimum

    productivity as well as maximum benefit of all Filipinos.

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    2. The Recent Record of Philippine Agricultural Development

    There is unanimity among analysts and informed observers that the record of

    Philippine agriculture since the 1980s has been poor.4 Table 1 compares the average growth rates of agricultural gross value added and agricultural exports of selected countries.

    The Philippines compares quite poorly, despite a slight recovery after the entry of President

    Corazon Aquino in 1986 and the administration of President Fidel Ramos from 1992-1998.

    While in the 1970s the Philippines ranked second (to Malaysia) in the rate of growth of agriculture GVA among the countries listed, in the 1980s it was in the last place (even below Bangladesh!). So far, in the current decade the Philippines has barely attained the

    world average rate of agricultural GVA growth.

    Table 1

    Average Growth Rates of Agriculture Gross Value Added (GVA) and Agricultural Exports of Selected Countries (in %)

    1970-1980 1980-1990 1990-1997 Agri GVA Agri Exports Agri GVA Agri Exports Agri GVA Agri Exports** Philippines 4.9 14.6 1.0 -4.6 1.9 3.2 Indonesia 2.0 20.0 4.9 4.7 2.8 6.8 Malaysia 6.5 19.3 3.8 3.1 1.9 2.4 Thailand 4.2 21.2 3.9 4.9 3.6 3.6 India 1.8 14.6 3.2 0.8 3.0 2.8 Pakistan 3.0 13.8 4.3 3.2 3.8 -5.4 Nepal 0.8 -2.9 2.7 0.7 0.4 8.4 Bangladesh 1.4 2.6 1.9 -1.5 1.7 -2.9 Sri Lanka 1.8 9.7 2.1 0.0 1.5 -8.1 China 5.9 4.4* Vietnam 4.3 5.2* Average, Mid-Income Countries

    3.5 2.3*

    World Average 2.8 1.8* Note: *1990-1997 **1990-1994 only Sources: World Bank and David (1998)

    4See for example, World Bank (1998), David (1998), PIDS (1999), Tolentino (1999) and Dy, et al. (1999).

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    The Philippines comparative record in per capita production of food and agricultural

    products underlines its relatively poor performance in the race between population and food

    supplies. Table 2 below shows the indices of per capita output in food and agriculture of selected countries. Among these countries, only the Philippines shows a drop in per capita output between 1980 and 1985. Despite growth between 1985 and 1995, the Philippines

    was still unable to return to the level of 1980!

    Table 2

    Indices of Per Capita Output, Selected Countries (1980=100)

    Food Production Agricultural Production 1985 1995 1985 1995

    Indonesia 112 128 112 129 Malaysia 103 120 111 151 Philippines 87 93 86 93 Thailand 107 107 106 103 Vietnam 118 143 117 141 China 109 128 107 128

    Source: David (1998)

    While the performance of the agriculture sector has been poor, it remains to be a vital

    part of the economy. At least 21% of the countrys Gross Domestic Product is contributed

    by primary agriculture. Agriculture-based manufacturing and services contribute another

    50% of GDP. Therefore, as much as 71% of the Philippines GDP is contributed by

    agribusiness (Bathrick, 1998)! This finding buttresses the need to pay attention to

    agriculture and agribusiness as the foundation for national growth.

    3. The Scan of Regulations and Monopoly Elements in Philippine Agriculture

    The core of the paper is summarized in Table 4, which lists the elements and regulations considered inducing monopolies and monopolistic situations.

    The elements in Table 4 are classified in Table 3 (next page) according to their principal purposes as follows: (a) limitations on international trade to limit competition,

    specially in the domestic market (b) limitations on international trade to protect domestic

    health and safety, (c) barriers to entry, (d) price controls, (e) controls on banking and

    finance, and (f) controls on land use.

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    Each row in Table 4 provides information on the regulatory instrument or factor that leads to the monopolistic situation, as well as a thumbnail assessment of the actual effects

    of the regulation.

    Table 3

    Classification of Regulations and Monopoly Elements in Philippine Agriculture

    Categories Specific Regulation or Monopoly Element 1. International Trade Regulations:

    Competition-Limiting 1.a. International Trade of Rice 1.b. Sugar Marketing 1.c. Minimum Access Volume System 1.d. Tariff Rates and Effective Protection Rate 1.e. Imports of Seeds 1.f. Import of Fish Products 1.g. Imports of Pesticides 1.h. Bangus Fry Export Ban 1.i. Land Transport Equipment 1.j. Fiber Export Clearance

    2. Internatio