monopoly and regulatory constraints to rapid agricultural growth

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.


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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

Government’s (or the leadership’s) 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 country’s 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. International Trade Regulations: Health and Safety Protection

2.a. Imports of Seeds 2.b. Imports of Pesticides

3. Market-Constraining Barriers to Entry into Enterprise

3.a. International Trade of Rice 3.b. Minimum Access Volume System 3.c. Seed Certification 3.d. Banana Hectarage Limit 3.e. Carabao Slaughter Ban 3.f. Port Services 3.g. Shipping Services 3.h. Air transport Services 3.i. Bank Branching 3.j. Telecommunications Services 3.k. Coconut Tree Cutting Ban 3.l. Farm-to-Market Roads

4. Price Controls 4.a. Minimum Export Prices of Desiccated Coconut 4.b. Sugar Restitution Act

5. Controls on Banking and Finance 5.a. Agri-Agra Loan Law 5.b. Sugar Restitution Act 5.c. Crop Insurance 5.d. Bank Branching 5.e. Gross Receipts Tax

6. Controls on Land Use 6.a. Comprehensive Agrarian Reform Program 6.b. Land Use Conversion 6.c. Mortgage or Sale of Land by CARL Beneficiaries

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Table 4

Monopoly Elements and Regulatory Constraints in Philippine Agriculture1

Regulations and Monopoly

Elements

Instrument/ Status

Declared Rationale and Intention

Effects/ Remarks

(References) 1. Internatio-

nal Trade of Rice

Presidential Decree 4 – Charter of the National Food Authority: Only the NFA may engage in international trade in rice. Rice import is subject to quantitative restrictions. NFA is initiating a limited experiment in auctioning off licenses to import about 75,000 MT of rice.

Only the state is capable of ensuring steady and adequate supply of staple at “affordable” prices to consumers and “adequate” returns to farmers.

Domestic rice prices relatively higher than in other countries, penalizing consumers. Due to less flexible government trade procedures, domestic rice prices have been more volatile. Foregone revenues due to tariff-free imports by NFA. Subsidies to NFA are a major drain on public funds. Spawned opportunities for corruption in rice marketing. Prospective violation on WTO commitment. (See ADB, Grains Sector Development Program Project, 1998)

2. Sugar Sharing (Planters and Millers) System

RA 809 (1954) mandates that millers and planters share sugar resulting from cane milling in a fixed ratio set by law.

“In the absence of contracts”, to set order in the system.

The fixed shares reduce incentives to modernize and increase efficiency, since any gains may have to be shared.

1 As of May 12, 1999. Listing by V. Bruce J. Tolentino for the Foundation for Economic Freedom.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 3. Sugar

Marketing Executive Order 18 (1986) and RA 8187 – Agricultural Tariffication Act: The Sugar Regulatory Administra-tion classifies sugar into categories: export, domestic use, reserve, etc. Releases from warehouses into the domestic market subject to SRA approval. Ongoing limited auction under EO 87 (1999) is restricted to qualified entrants, and a “conversion fee”/ minimum price designed to protect domestic planters. SRA also collects various other liens and fees.

Historically, to take advantage of, and to share the gains among domestic players, of the US sugar quota. Currently, to protect incomes of domestic sugar farmers by keeping domestic prices well above the “dumped” (as claimed by local producers) international levels.

High domestic prices of sugar, benefiting selected producers but penalizing consumers and producers/ food processors (mostly small and medium-scale enterprises) of sugar-containing exports and products. Requires clarification of legality of SRA actions. Opens opportunities for corruption. Violates WTO commitments. (See Tolentino, Dissecting the Domestic Price of Sugar, 1999; and ADB Final Report of TA 2733-PHI, 1999)

4. Minimum Access Volume System

RA 8187: sets import quota system on selected agricultural commodities (corn, sugar, beef, chicken, pork). “In-quota” imports by qualified importers are levied substantially lower tariffs – relative to “out-quota” rate. Also, access to in-quota imports limited to “qualified “ entrants. Sugar sector representatives have achieved a dedicated MAV system.

To meet WTO commitment to allow access at lower tariffs of particular commodities.

Qualifications for importers provide windfall gains and quasi-monopoly for producers or experienced importers who obtain MAV licenses. Creates opportunities for corruption in licensing. High out-quota rates raise domestic food prices and penalize consumers and food processors. May be inconsistent with the spirit of commitments to the WTO.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 5. Tariff Rates

and Effective Protection Rate

RA 8187, various EOs, Tariff and Customs Code: the agriculture sector is now more protected than other sectors, reversing historical situation.

To protect farmers and maintain food security.

Rice and other basic commodities insulated from international competition. Reduced incentives for improvements in productivity. Rent-seeking behavior to maintain protection, particularly for favored producers. More expensive food for domestic consumers. Inputs to food processing more costly [See Manasan (1998) and David (1998)].

6. Import of Fish Products

RA 8450: Fisheries Code of 1998 prescribes quantitative restrictions on fish imports, decided upon by the Bureau of Fisheries and Aquatic Resources.

To protect domestic fisherfolk.

Reduced access to fisheries products for domestic consumption as food or input to canning and feed. Any protection to fisherfolk temporary and environmentally unsustainable. Violates WTO commitments.

7. Export Ban on Bangus Fry

PD: No exports of bangus fry without permit from the BFAR.

To maintain national capacity and competitiveness in bangus production.

Is obsolete and did not work. Many other countries (i.e. Taiwan, Thailand) now produce bangus. Key to competitiveness in productivity, not in control of fry supply. Stagnant productivity has reduced domestic supplies and raised prices for bangus consumers.

8. Land Transport Equipment

EO: Department of Trade and Industry/ Board of Investments restrictions on imports of trucks, buses and utility vehicles and spare parts.

To protect domestic car/ bus/ truck manufacturers.

Induces high transport costs, high post-harvest losses, large disparity between farm cost and retail prices, penalizing farmers, all vehicle users and consumers.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 9. Regulation

of Pesticide Imports

EO: No imports of banned pesticides, monitored by the Fertilizer and Pesticide Authority.

To protect farmers and population from toxic chemicals.

Encourages use of approved (less toxic) pesticides and more sustainable (more environmentally friendly) pest management practices.

10. Fiber Exports

EO: Fiber Industry Development Authority requires export clearance and fees prior to fiber exports.

To maintain quality of exports.

Increases international price of fiber exports, thus reduced export volume and incomes. Reduces number of fiber farmers and producers with access to international market.

11. Regulation of Pesticide Imports

EO: No imports of banned pesticides, monitored by the Fertilizer and Pesticide Authority.

To protect farmers and population from toxic chemicals.

Encourages use of approved (less toxic) pesticides and more sustainable (more environmentally friendly) pest management practices.

12. Imports of Seeds

RA 7308 (1992): National Seed Act mandates very stringent seed import clearance rules. Rules under review with ongoing Plant Varieties legislation.

Protect domestic market for local seed producers.

Much lower diversity in domestic varieties. Constrained access by farmers to competitive and more productive international technology and new/ improved varieties. Foregone benefits to consumers due to lower productivity and cheaper products. Violates WTO commitments.

13. Seed Certifica-tion

Department of Agriculture/ Bureau of Plant Industry, Land Bank of the Philippines, Rural Banks: certified seed required for participation in productivity programs.

Ensure use of “good” seed. Quality of “certified” seed generally questionable. Local monopolies of seed growers with access to certification system have been created. Seed growers find guaranteed market (at administratively set prices) of their produce in the DA and other government programs.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 14. Fiber

Export Clearance

EO: Fiber Industry Development Authority requires export clearance and fees prior to fiber exports.

To maintain quality of exports.

Increases international price of fiber exports, thus reduced export volume and incomes. Reduces number of fiber farmers and producers with access to international market.

15. Coconut Tree Cutting Ban

RA 8048 (1997): Philippine Coconut Authority requires permits prior to cutting of coconut trees.

To maintain stock of productive coconut trees.

Reduces income alternatives for coconut farmers. Reduces supply and increases prices of lumber for construction. May constrain replanting.

16. Banana Hectarage Limit

Letter of Instruction 790: Limits the total land planted to bananas to 26,000 hectares.

To control the production of bananas and to limit the number of planters, and maintain international prices.

Reduces entry and competition among banana producers. Has induced investors to open plantations in Indonesia and other countries instead.

17. Carabao Slaughter Ban

RA : No slaughter of carabaos without permit.

To maintain stock of work animals.

Widely ignored and not enforced. Reduces supply of carabeef, and raises meat prices for consumers and food processors. Reduces incentive to raise carabaos for meat.

18. Farm-to-Market Roads

RA (Annual) – General Appropriations Act: Investment – status: Philippines has relatively good road density, but up to 80% of roads are gravel and poorly-maintained. Furthermore, existing road networks not matched with major production and market areas.

Misplaced public investment allocation and priorities.

Restricts marketing choices of farmers. Constrains options for marketing by producers, reduces competition among traders by creating local monopolies of traders. Does not serve major agriculture markets, leading to high transport costs, high post-harvest losses, and large disparity between farm cost and retail prices, penalizing farmers and consumers. (DPWH, 1997; Halcrow and NEDA, 1997).

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Elements

Instrument/ Status


Effects/ Remarks

(References) 19. Port

Services RA: Public Service Law/ Philippine Ports Authority restrictions on provision of arrastre and stevedoring services, as well as taxes on private ports. Organized labor resisting reforms.

To protect labor, to protect domestic investors in port services.

Some recent improvement, but still much liberalization necessary. Discourages improvements in bulk handling. Causes time costs due to delays, induces high shipping costs, high post-harvest losses, large disparity between farm cost and retail prices, penalizing farmers and consumers.

20. Shipping Services

RA/ EO: Maritime Industry Authority restrictions on shipping rates and tariffs and competition among carriers, including foreign carriers.

To protect domestic investors in port services.

Much recent improvement, but still more openness desirable. Constrains options for marketing by producers, reduces competition among shippers. Causes time costs due to delays, induces high shipping costs, high post-harvest losses, large disparity between farm cost and retail prices, penalizing farmers and consumers.

21. Air transport Services

RA/ EO: Department of Transport and Communications/ Air Transport Office restrictions on entry and expansion, especially on “open skies”.

To protect domestic investors in air transport services

Much recent improvement, but still more openness desirable. Reduces air transport options for producers – particularly for high-priced, perishable products and induces high shipping costs, high post-harvest losses, large disparity between farm cost and retail prices, penalizing farmers and consumers.

22. Telecom-munica-tions Services

RA/ EO DOTC/ National Telecommunications Commission restrictions on entry and expansion

To protect domestic investors in telecommunications.

Much recent improvement, but still more openness desirable. Constrains options for marketing by producers, reduces competition among traders. Induces high marketing costs, high post-harvest losses, large disparity between farm cost and retail prices, penalizing farmers and consumers.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 23. Minimum

Export Price for Desiccated Coconuts

EO: Mandates minimum prices for Philippine exports of desiccated coconut, subject to PCA monitoring, control and clearance.

To maintain quality of Philippine DCN exports, to maintain Philippines’ market share.

Quality differential not obvious to market. Ignored and not enforced. Reduced competitiveness of Philippine exports vis-a-vis Sri Lankan DCN. Reduced export incomes.

24. Sugar Restitution Act

RA 7202 (1994): requires that interest rates on sugar loans provided between 1974 to 1985 be limited to 12% and any excess over 12% be condoned or refunded to the borrowers.

To indemnify sugar producers who borrowed during the Marcos regime – particularly the high-interest period of the early 1980s.

Further dissuades banks from lending to sugar and agriculture. Raises rates for all other borrowers since banks will pass on cost of restitution to other borrowers.

25. Agri-Agra Loan Law

Presidential Decree 717: Requires that the loan portfolios of all banks be composed of at least 15% for agriculture (15%) and agrarian reform (10%) projects. Several more schemes for alternative compliance being proposed, including the “Erap Bonds”.

To ensure loan supplies for agriculture and agrarian reform projects.

Widespread non-compliance or alternative compliance by banks. Very difficult to enforce. Does not deal with the root of the problem – the lack of creditworthy agriculture and agrarian reform projects.

26. Crop Insurance

PD: Requires that all bank loans for rice and corn production be insured with the Philippine Crop Insurance Corporation.

To indemnify farmers and banks against losses suffered in calamities.

Creates insurance market exclusively served by PCIC. Protects banks more than borrowers. Raises cost of loans, since premiums are loaded onto loan interest rates. Premium share of government drawn from taxpayers.

27. Gross Receipts Tax

PD: 20% tax on bank deposit interest earnings collected by banks for the government

To raise revenue. Reduces incentives to save in banks.

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Elements

Instrument/ Status


Effects/ Remarks

(References) 28. Compre-

hensive Agrarian Reform Program

RA 6657 – the Comprehensive Agrarian Reform Law (1987). Uncertainties and inefficiencies in implementation.

To reduce poverty and improve equity in ownership of assets.

Sharply reduced collateral and market value of agricultural land, thus reducing benefits to ARBs and investments in agriculture and agribusiness. Created many opportunities for corruption.

29. Land Use Conversion

RA 6657 and RA 8435 – the Agriculture and Fisheries Modernization Act of 1998: Department of Agrarian Reform and DA restrictions and procedures and taxes on land use conversion.

To maintain stock of productive agricultural land and protect gains of CARL beneficiaries.


30. Mortgage or sale of land by CARL Beneficia-ries

RA 6657 (CARL) and DAR restrictions and procedures and clearances on land mortgages and sale.

To maintain CARL benefits exclusively for CARL beneficiaries.



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4. Two Cases of Government Provision and Regulation

From the scan of regulations and monopoly elements in Tables 3 and 4 we pick out

two cases that illustrate the effects of government provision and regulation. The case of rice

supply invites thinking on the relationship between public investment and agricultural

productivity. The case of sugar focuses on the effects of supply policies and the domestic

price of sugar.

The Role of Government in Public Investment: Rice Production.

Contrary to popular perception, the Philippines’ production of the staple commodity –

rice - has continued, on the average, to grow over the period 1980 to 1998, but at a rate too

slow to cope with rapid population growth and increasing consumption5 (Figure 1). The

annual volatility of rice production has dominated public perceptions and understanding of

the rice problem, compounding the issue by underlining short-term, quick-fix yet

unsustainable solutions, such as greater subsidies to the National Food Authority.

Figure 1

Palay Production, 1980-1998in million metric tons

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998*

The above picture (Figure 1) of the Philippines’ record in rice production should be

examined against the country’s record in public investment in agriculture. Figure 2 below


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shows the Philippine public investments in agriculture from 1965 to 1995. The Philippines

was one of the early adopters/ adapters of the “green revolution’ of the 1970s and early

1980s. During this period the administration of President Ferdinand Marcos adopted the

slogan of “rice and roads” as a political anthem, and allocated major portions of the public

budget into the agriculture sector. This is seen in Figure 2, below, where Government

expenditures in agriculture (Ga) are plotted in real terms and Government expenditures in

agriculture are shown as a ratio of agriculture gross value added (Ga/GVA). Such

expenditure and the ratio rose sharply during the early years of Martial Law (1972-1983),

peaking in 1979.

Figure 2

Public Investment in Agriculture, 1965-1995

Source: David, 1998

The decline of the Marcos Presidency since the early 1980s and his eventual

downfall in 1986 saw the sharp fall in agricultural investments. The entry of President

Aquino saw a brief recovery of total agriculture expenditures. President Fidel Ramos

presided over another recovery in total agricultural expenditures; a trend that has continued

to the present, but unfortunately has not yet attained the peak achieved in 1980.

5In fact, the relative costliness of domestic rice has helped fuel the rapid growth in the consumption of

alternative foods, such as wheat in the form of pasta and bread, mostly marketed as fast-food products.


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It should be noted that it was during the period of major growth in agriculture

expenditures in the 1970s that the country achieved a modest surplus in rice production in

the late 1970s and early 1980s. At face value, it seems easy to conclude that the relatively

greater levels of investment in agriculture enabled the achievement of rice self-sufficiency.

The recovery of aggregate agriculture expenditures since the mid-1990s ought to be

heartening, yet on closer examination, the current distribution of agricultural investments is

cause for concern. Figure 3 on the next page shows that while total agriculture expenditures

have been on the rise, these have been less on productive infrastructure and research (such

as irrigation, roads and technology), and more on price support and equity payments (such

as NFA subsidies and payments to former landowners under the agrarian reform program).

Irrigation development and road building dominated agriculture investments in the 1970s. In

contrast, agriculture expenditures in the 1990s have been dominated by subsidies for the

operational losses suffered by NFA in “buying high” from farmers and “selling low” to

consumers; and by compensation payments to landowners under RA 6657, the

Comprehensive Agrarian Reform Law (CARL). Furthermore, substantial proportions of the

already limited investments made in irrigation were focussed on pumps and other equipment

related to shallow tubewells and small impounding facilities, both of which could have been

invested into by the farmers themselves instead of government.

In this paper it is not proposed that investments in irrigation and roads of the same

nature as was done in the 1970s be targeted. What is emphasized is that a similar order of

proportion and magnitude of investment be enabled, subject to appropriate economic

analysis and follow-up maintenance. These long-term investments will yield the greatest

long-term benefits for the agriculture/ rural sector and the economy as a whole.


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Figure 3

Allocation of Public Investments in Agriculture, 1965-1995

Source: David, 1998

Government Regulation in the Sugar Industry

The Sugar Regulatory Administration (SRA) controls the flow of sugar into the

domestic market. This is despite the enactment of Republic Act 8178 - the Agricultural

Tariffication Act in 1996, which removed any remaining quantitative import restrictions on

agricultural products. Under RA 8178, importers may bring in any commodity (except rice)

without limit, subject only to health and safety regulations and tariffs. However, RA 8178

failed to specifically and explicitly repeal Executive Order 18 (1986) which created the SRA

and from which it draws its regulatory powers.6 The SRA’s regulation of sugar supply is

exercised through its control of warehouses and sugar quedans, and in the allocation of the

country’s sugar supply into categories of use: “A” sugar is destined to fill the country’s US

sugar quota. “B” is for the domestic market. “C” is reserve sugar; “D” sugar is for the world

market; and “E” sugar is to be processed into food products for export. Imported sugar is

first classified as “C” sugar, then later on converted to “B” or other categories of sugar upon


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the judgement of the SRA. Sugar may only be withdrawn from the SRA-monitored

warehouses upon the issuance of a release order by the SRA. The SRA’s decisions on

releases are generally based on their assessments of the levels of supplies required to

maintain domestic prices well above international prices, in order to protect the domestic

sugar producers7.

The classification system was originally designed in the pre-WW2 era, when the

Philippines had preferential access to the U.S. sugar market, and when a great proportion of

Philippine sugar was exported to the U.S. The purpose of the system was to ensure that the

gains from exports to the high-priced U.S. market were distributed in a relatively equitable

manner among the players in the industry. Currently, however, only about seven (7%) of

Philippine sugar is exported to the U.S. Production of and area planted to sugar have also

declined over the past three decades. Imports have grown from insignificant amounts in the

1980s to as much as 500,000 MT expected in 1999-2000. With domestic sugar prices at an

average of double that of international prices, the classification system has evolved into a

mechanism to restrict domestic supply and maintain high domestic prices.

Figure 4 on the next page shows the large and growing gap between domestic and

international prices of sugar over the past two decades. The “world price” is London daily

spot price, FOB Europe, averaged over each year and expressed in kilos8. The resulting

price is considered the price faced by Philippine buyers who, if they desire to import, need to

purchase U.S. dollars in the domestic foreign exchange market in order to finance such

imports. The reference exchange rate reported by the Central Bank of the Philippines is

used to convert the U.S. dollar prices into Philippine pesos.9 The Philippine price is the

domestic wholesale price by 50-kilo bag (Lkg) in Metro Manila, as reported by the SRA.

6 The SRA’s regulatory powers have been since 1997 under challenge before the Supreme Court. The

SRA’s classification system was originated in 1934 with the Sugar Limitation Law. 7 The three-person SRA Board is the decision-making authority on Sugar Orders. The members of the

Board as the Secretary of Agriculture as Chair, and representatives of the sugar planters and sugar millers. There are no established mechanisms for the participation of consumers and users in the board.

8 Alternatively, the New York spot price can also be used. Any difference between the New York and London quotes is accounted for by fluctuations in exchange rates and any differentials between those of Pound Sterling and the U.S. Dollar. Both prices are quoted FOB stowed Caribbean Port.

9 Note that if the average selling price of dollars in terms of pesos were used, the peso-dollar exchange rate would be higher – i.e., more pesos required to purchase each dollar.


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Figure 4

Average Annual World and Philippine Prices of Refined Sugar, PhP/kg, 1975-1998

0.00

5.00

10.00

15.00

20.00

25.00

30.00

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

W orld W holesale

World

PhilippinesWholesale

Figure 4 shows that domestic prices have exceeded international prices

continuously since 1981, by more than 100 percent on the average. Domestic prices have

been double or more than world prices. The gap between domestic and international prices

has grown steadily over time. Both international and domestic prices have increased

steadily since the early 1980s, but domestic prices have increased at a faster rate. While on

the average international prices have increased by 1% each year since 1981, domestic

prices have grown by an average of 10% each year. In general, domestic prices have been

more volatile than the world price. During the period of the domestic “sugar price crisis” in

the latter semester of 1998, while the international price was relatively stable and even on a

downtrend, the domestic price of sugar was increasing. Finally, the domestic price of sugar

has been very sensitive to changes in the PhP:U.S.$ exchange rate.

The high and increasing Philippine price of sugar has provided domestic producers

and millers with the incentive to call for continued and even greater protection against

imports. The producers and millers have been very well organized in their representations

in policymaking and in Congress, in stark contrast to sugar consumers and users. While

consumers (including households, food processors, small and medium-scale food

manufacturers) far outnumber the producers and millers, they are not organized. Only the


19

largest consumers – such as the beverage and ice cream manufacturers, are able to

negotiate directly with the industry and have options to source directly from imports. Other

actual and potential users, including the nascent small and medium-scale food processors,

are forced to accept the high domestic price10.

The Continuing Need for Reform: Where to Begin?

The “laundry” or “shopping” list in Table 4 of the monopoly elements and regulations

leading to monopolistic situations in Philippine agriculture improves our knowledge and

understanding of what ails the agriculture sector. It is clear that the monopolistic elements

and regulations form a tangled web which have helped choke off growth and dynamism.

Yet any reform effort must deal with each item on the list, one at a time. Where should the

effort begin?

This paper provides intuitive, “thumbnail assessments” of the effects of each item in

the listing (Column 4 of Table 4). These assessments may be considered as preliminary

hypotheses subject to further analysis, including empirical testing and measurement. The list

may be considered as an agenda for further focussed analysis and subsequent legislation

and policy reform. Each row in Table 1 represents an opportunity for a separate and full

investigation, possibly leading to regulatory and policy reform.

A possible approach is to rank-order the commodities affected in the list by

contribution to agriculture gross value added, then to prioritize analysis and reform by the

significance of the contribution of the commodities. Not surprisingly, we can expect that

such an ordering will indicate that the regulations and monopoly elements affecting rice and

coconut will come first.

It may be surprising not to find sugar high on the list of priorities as ranked by

agriculture GVA. This is because the contributions of cane sugar as an agricultural product

and export commodity has steadily declined since the early 1980s. However, as a consumer

good and as an input to food processing and processed food exports, the importance of

10 The mechanism of imports of inputs at reduced tariffs via bonded warehouses is limited only to those

who have the scale and competence to use bonded warehouses and secure all the necessary paperwork in Mla.


20

sugar is potentially very high. It is because of this untapped potential that the reform of

sugar policies must take place.

Other elements are important because of their broad contributions to all sectors. The

most important of these elements is road infrastructure, particularly public investment in the

improvement and upgrading of farm-to-market roads, as well as major trade routes. There

do not seem to be much argument that roads are important, yet the priorities revealed in the

allocations made in the annual General Appropriations Act fail to reflect such agreement.

Work toward the allocation of greater proportions of total investments in roads that facilitate

agricultural marketing is in order.

Finally, analysis of the market-constraining issues enumerated in Table 4 raise

strategic concerns regarding timing and sequencing. For example, should the diminution

of tariff protection precede or follow the provision of support services such as domestic road

transport and technology dissemination? Given limited public resources, should

investments in major road arteries be prioritized over farm to market roads? It should be

noted that these timing and sequencing concerns encompass only those issues listed in this

paper. A more comprehensive treatment will require decisions across sectors, for example,

policy reforms in banking policy vs. liberalization in agriculture.

Concluding Remark

It is clear that the resolution of the issues that constrain agricultural markets in the

Philippines will not be easy. Many stakeholders are involved, and decisions will require

adjustment costs in the short-run so that economy-wide gains are achieved in the long run.

Open, continuing dialogue among the stakeholders must be a first step, followed by the

participatory formulation and implementation of adjustment mechanisms supportive of the

necessary reforms. The government will need to play to role of analyst, advocate, arbiter

and referee, all toward the goal of strengthening agricultural markets for the benefit of not

just a subsector or the few, but for all Filipinos.


21

Selected References

Asian Development Bank and SEA Consultants, “Final Report of Project TA 2733-PHI:

Institutional Capacity-Building for Policy Formulation, Planning, Monitoring and

Evaluation for the (Philippines) Agricultural Sector”, April 1999.

Asian Development Bank and Development Alternatives, Inc. “Philippines Grain Sector

Development Program Project”, March 1998.

Bathrick, David D. “Fostering Global Well-Being: A New Paradigm to Revitalize Agricultural

and Rural Development,” International Food Policy Research Institute, 1998.

David, Cristina C., “Towards an Efficient Path to Food Security: the Philippine Case,” Taipei

International Conference on East Asia Food Security Issues in the 21st Century, April

1998.

Dy, Rolando T., et al. “Overview of Philippine Agriculture,” March 1999.

Philippine Sugar Millers Association, Inc. Facts and Figures on Philippine Sugar (1991-

1995), PSMA, Makati.

World Bank, Philippines: Promoting Equitable Rural Growth, May 1998.

Tolentino, V. Bruce J., “Dissecting the Domestic Price of Sugar”, March 1999.

monopoly and regulatory constraints to rapid agricultural growth

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