Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4845-PH

COUNTRY SECTOR REPORT

PHILIPPINES

AGRICULTURE: ISSUES IN PRICING POLICY

(TWO VOLUMES COMBINED)

VOLUME I

EFFECTS AND ISSUES OF GOVERNMENT INTERVENTION

VOLUME II

ANNEXES

July 10, 1984

Projects Department, Agriculture Division IIEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed 'itiout World Bank authorization.

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CIJRRENCY EQUIVALENTS

Currency Unit = Peso (f)P 1.00 = US$0.07US$1.00 = P 14P 1,000,000 = US$71,429

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

CCSF - Consolidated Coconut Stabilization FundCIDF - Coconut Induetry Development FundCIIF - Coconut Industry Investment FundCOCOFUND - Coconut FundDRC - Domestic Resource CostsEPR - Effective Protection ]RatesFPA - Fertilizer and Pesticide AuthorityGOP - Government of the PhilippinesNASUTRA - National Sugar Trading CorporationNEPR - Net Effective Protec-tion RatesNFA - National Food AuthorityNPR Nominal Protection RatesOER - Official Exchange RatePCA - Philippine Coconut AuthorityPI-HILSUCOM - Philippine-Sugar Commission

PTA - Philippine Tobacco AuthorityPVTA - Philippine Virginia Tobacco AuthoritySER - Shadow Exchange RateIJNICOM - United Coconut oil Mills

FOR OFFICIAL USE ONLY

AGRICULTURE IN TRE PHILIPPINES: ISSUES IN PRICING POLICY

Volume I

Effects ar.d Issues of Government Intervention

Table of Contents

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Page No.

SlMMARY AND RECOMMENDATIONS ..... *... .... ..... CCe C *e * *v *, . i-v

Is INTRODUCTION ................ *,,...... 1

A. 'Preamble .. ....... ....... * IB. Objectives of Government Intervention , 2C. The Agricultural Sector t.3

II. CONCEPTS AND NETHODS OF ANALYSIS ....................... 4

A. Border Prices as Reference Points ....................... 4B. Nominal Protection Rate .... ....... 4C. Effective Protection Rate .. .. .. ... ... 5D. Net Effective Protection Rate .......................... 5E. The Winners and Losers of Government Intervention 6F. Domestic Resource Costs *.. *. * -C ...... O*e,* *, 6C. Limitations of the Ana l y s i s 7

UII. MAJOR INTERVENTIONS IN AGRICULTURE: THE PRESENT POSITION.... 8

Ai Macro Policy Instruments . . . . . . . . . . ......*..................... a. The Exchange Rate and the Trade Reeim e 92. Industrial Policy. ........ ......... 10

B. Product-Specific Interventions ................. 111. Ricie 112. Corn 133. Sugar. ..... . 134. Coconut .* 145. Wheat ........ ...... 156. Livestock ............. * 157. Fertilizers .... 168. Farm Mechanization 17

This report was prepared by a review mission which visited the Philippines inApril 1983; it draws heavily from the various studies of "The Impact of Econo-mic Policies on Agrl'culture," funded by the Philippine Institute of Develop-ment Studies and the Philippine Council for Agricultural Resources andResearch. The mission consisted of Wayne Ringlien (Mission Leader), MalcolmBale, Donald Mitchell, Peretz Ram (Bank) and Cristina David (Consultant).

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No.

IV. EFFECTS OF GOVERNMENT PRICE INTERVENTION IN AGRICULTURE...... 18

A. Nominal Protection of Agriculture ..... .................. 20B. Implicit Tariffs on A3ricultural Inputs ................. 22C. Effective Protection in Agriculture .... ................. 23D. Not LAfective Protection in Agriculture ................. 26E. The Merchandise and Fiscal Effects of Government

Interventions .......................... .... 27F. Competitiveness of Philippine Agriculture ............... 32

V. ISSUES AND RECOMMENDATIONS IN PRICING POLICY AND HARKETINGINTERVENT'ION ............ , .,.* .......... 35

A. Macro-Policy Recommendations............................. 351. Policy Making Apparatus ............................s * 352. Incentives and Interventions .......................... 353. Long-run versus Short-run Policies ................... 364. Price Stabilization .a. ..... * ............ * 37

B. Micro-Policy Recommendations *.99 o*........... ..*...... 371. National Food Authority.....-. ... .. . . .... *. . 37

3. Soougar . . . . . . . . . . . . . .~ . . . . . . . . . . . . . . . . . . . . . . . *. . . . . . . . ........................................383. Sugar .. 9....... 384. Fertilizer and Pesticide Authority.........6e......... 385. Credit Subsidies... ............. 38

TEXT TABLES

Table No.1. Government Interventions and Intervention Agencies

by Product and by Instrument .......................... 192. Trends in Nominal Protection Rates of Agricultural

Commodities, 1960-82 ........... 99....... @ 203. Implicit Tariffs on Agricultural Inputs, 1980-81 .......... 234. Effective Protection Rates for Major Agricultural

Products, Agroprocessing and Manufacturing ............ 245. Average Effective Protection Rates for Major Industry

Groups ....... ,. 256. Estimated Effects of Agricultural Price Interventions

on Selected Commodities, Annual Average 1979-81 ....... 287. Estimated Effects of Agricultural Price Interventions

and Use of a Shadow Exchange Rate on Selected Commodi-ties, Annual Average 1979-81 ............... . 31

8. Domestic Resource Costs for Major Agricultural Products,Agroprocessing and Manufacturing .. ..... *..... 33

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AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Volume II

ANNEXES 1-10

Table of Contents

Page No.

ANNEXES

1. A PROFILE OF THE AGRICULTURALSECTOR............................ .1

2. ESTIM4ATING PR0'IECTION ..... .. . a..... a , , a as, 7

3. AN EXPLANATION OF TH{E WELFARE ANALYSIS .......................... 11

4. NATIONAL FOOD AUTHORITY .......... . ....................... *. 15

5. FERTILIZER AND PESTICIDE AUTHO RITY . ............. 22

6. PRICE STABILITY .. .......................... . 24

7. INTEREST RATE SUBSIDIES .................... s,, s.... ....... 27

8. PRODUCTION RESPONSE TO PRICE AND TECHNOLOGICAL CHANGE.......N.G. 30

9. LIVESTOCK-FEED RELATIONSHIP..A.. I O NS.... ..a..............a 35

10. BIrLIOGRAPHGY.- .. ......... .. .. .... 37

11. SUPPORTING TABLES AND FIGURES ....... ........ aa.... 39

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SUMMARY AND RECONMNDATIONS

1. This study reviews the impact of government market interventions onthe performance of the agricultural sector over the past 10-15 years."Interventions" cover both general (economy-wide) and crop-specific policies,programs, and institutions that influence the prices farmers receive and, insome cases, the prices consumers pay, for agricultural commodities. Types ofinterventions examined include: the procurement policies of nationalmarketing agencies; the pricing of agricultural inputs such as fertilizer,credit, and irrigation; the taxation of agricultural exports and the protec-tion of agriculture through duties and quotas on imports; and the control bystate agencies of exports and imports of certain commodities. Attention isalso given to the overall foreign-trade regime and to whether there has beenany bias in the Impact of exchange-rate policy on agriculture and industry,respectively.

2. In assessing the impact of the Government's market interventions,the study concentrated on six major commodities--rice, coconuts, sugar, corn,hogs, and poultry. "Impact" has been measured by making quantitativeestimates, with and without the interventions, for each of the six commodi-ties, with respect to the levels of:

i. output;ii. consumption;iii. exports and imports;iv. government revenues;v. foreign exchange earnings; and

vi. employment.

An assessment was also made of the welfare gains or losses of producers andconsumers, and the size of the "net deadweight loss" on the economy.

3. Quantitative estimates of the kind described require use of a with-and-without methodology that compares what actually happened with what wouldhave happened under a regime of little or no government interventions, so thatproducers and consumers are free to sell or buy in either domestic or foreignmarkets. This approach provides a useful standard against which the effectsof interventions can be measured: divergences between the two are regarded as"distortions," implying that the economy would be better off if theinterventions were removed or reduced. The approach is in useful suggestinggeneral directions in which policy and programs should move; however, thereare enough limitations to advise caution before accepting the results as"actionable recommendations," particularly recommendations that apply to crop-specific interventions as distinguished from general macro-economic policies(e.g. the relative levels of protection given to industry as compared toagriculture, and the level of interest rates). Regarding specific commodityinterventions, the conclusions in many cases need to be tested by moredetailed studies.

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Principal Findings

4. The agricultural sector has generally performed well with respect togrowth of output. Only sugar, cocoa, abaca, and tobacco have grown moreslowly than the impressive 4.5% average rate achieved by the sector in the1970s. The growth in rice production has been particularly impressive,reflecting the heavy investments in irrigation, the spread of high yieldingvarieties, and increased fertilizer use.

5. Good overall sector growth has occurred despite the fact that macro-economic policLes have favored industry and penalized agriculture. The pro-Industry "tilt" in macro-policies has reduced the relative incentives andrewards in agriculture; the results have been to shift resources out of agri-culture somewhat faster than would otherwise have occurred; it also encouragedfewer exports than would have occurred under a more neutral set of policies;and generally held down the returns to land, labor, and capital in the sec-tor. In addition to these effects of macro-economic policies, commodity-spe-cific policies on export taxes, export quotas, and parastatal control ofmarketing appear to have undervalued agricultural prices, particularly ofsugar and coconuts.

6. With respect to agricultural exports and imports, both haveincreased at roughly the same rate over the past 10-15 years. Exports havecontinued to exceed imports by about two and one-half times. This is not asstrong a sectoral balance-of-payments performance as one would like to see ina country with favorable land, labor, and climatic advantages in tropicalagriculture; one would have hoped for a faster growth in exports and a slowergrowth in imports. The review identifies some interventions which maypartially account for the sector's rather indifferent export performance.

7. The Government's policy goals have been to promote industrial-ization, provide food and raw materials at low prices, and to minimize priceinstability. Low prices could result either from a continuation of the low-productivity/low-wage situation that has traditionally characterized much ofPhilippine agriculture, or from technological changes that gradually movefarmers into higher-productivity/higher-wage activities. One efi-,ct of theindustrial "tilt" in the structure of macro-incentives has been a weakening ofprivate incentives to make the investments necessary to raising agriculturalproductivity.

8. The National Food Authority (NFA) has been given monopoly power toimport feedgrains, soybean meal, and wheat and to export rice. Creation ofits predecessor, NCA, was in response to the turbulence in world grain marketsduring the world food shortages of the early 1970s. This intervention appearsto have stabilized the price of traded commodities at levels somewhat higherthan would have prevailed if this trade had been left in private hands. Thesehigher-than-private margins reflect additional costs which the econony mustpay. The estimated cost of subsidies covering NFA operations during the 1977-82 period is P 4.4 billion (about US$600 million) in current prices. Theseadditional private and public costs may be regarded as the cost to the economyof whatever degree of price stabilization NFA has been able to achieve.Whether the cost of this "trade-off" was large or small can only be determinedby the kind of study recommended i.n para. 13 below.

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Recommendations: General

9. There are two general recommendations that come out of thisreview. One is that the Government should adopt macro-economic policies thatare not so heavily stacked in favor of industry. Important steps have alreadybeen taken in this direction by lowering Industrial tariffs. The other isthat Government should give stronger emphasis to the development and introduc-tion of new technologies that raise productivity and lower costs for key com-modities and should rely less on market interventions designed to influencep:rices. A move towards greater liberalization of domestic and foreign tradiein agricultural products need not mean the dismantling of existing institu-tions and programs; but it does mean sone relaxation of intervention andgreater reliance on competitive market forces as the main determinants ofprices, and it also means that a clearer separation between the regulatory andtrading 'unctions of the parastatals is needed.

Recommendations: Specific

10. Poultry and corn: Poultry production is receiving more protectionthan it needs in order to earn reasonable returns (poultry meat has a highimport duty). The results are unnecessarily high prices for consumers andinsufficient pressure on producers to adopt improved technologies that wouldlower their costs. Some reduction of the poultry duty has already occurred;f.urther reductions now seem justified to reflect, and to encourage, cost-reducing changes now occurring in the industry. While corn prices in the pastwere higher than corresponding import parity prices, domestic prices were keptlower in recent months than world market prices. The corn price, critical tothe feed industry, should reflect competitive prices of international trademore than it does under the NFA trade monopoly arrange-lent.

II. Feed and livestock industries: Market interventions governing theimport of corn and soybean meal kept the price of poultry feed in the past atleast 20% higher than it would have been if these key ingredients could enterat world prices (feed costs account for about 70% of the total cost of raisingpoultry). Hog and cattle growers would also be helped, but less stronglysince fodder and wastes play a much larger role in their rations. If thesefirst two recommendations are adopted, we believe Philippine corn, poultry,and hog producers could become competitive with other cotuntries and couldparticipate in the region's expanding trade in these commodities. Soybeanproduction is not well suited to the Philippines and therefore does notjustify infant-industry protection.

12. The fertilizer industry: The country does not have sufficient oiland gas to produce nitrogenous fertilizer and other agricultural chemicals atcosts that can compete with imported products. The domestic industry cantherefore exist only if it is protected, forcing farmers to pay higher pricesand/or imposing subsidy costs on the national budget. Time has eroded theoriginal justification which led, in 1973, to the establishment of theFertilizer and Pesticide Authiority, intended to protect farmers from the highenergy cost; and fertilizer prices of the first oil shock. With the changedworld energy picture, the Government now finds itself protecting a domesticnitrogen fertilizer industry that has become non-competitive. A strong case

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exists for exposing the domestic fertilizer industry to more competition andfor permitting Philippine farmers to gain access to agricultural chemicals(including fertilizers) at world prices. Just how such a shift towardliberalization should be structured and timed deserves a special study (onethat should compare Philippine experience with the similar experience ofKorea, Japan, and other Asian countries).

13. Reconciling price stability and private trading: The achievement ofprice stability for key crops involved the creation of a government apparatuswhose costs are considerably higher than those of private traders and whichhas a tendency to expand in search of additional revenue. There is thereforea strong case for minimizing the burden of higher costs of government opera-tions and for leaving as much as possible of the procurement and distributionfunctions in private hands. Both of these objectives can be realized ifGovernment, as a matter of policy, limits its interventions to assuring floorprices for producers and ceiling prices for consumers. This can be donethrough government procurement, stocking, and release nrograms that operateflat the margin" for key crops - i.e. by purchasing and later releasing rela-tively small proportions of a crop only when prices reach extreme values. Thedanger of unjustified extra costs arises when bureaucracies become inflatedand attempts are made to finance these costs by giving procurement agenciesmonopoly powers or when domestic procurement policies set ceiling prices thatmake private margins too narrow which forces commodity trade throughgovernment channels. For example the NFA monopoly role in foreign tradeshould be ended by permitting private trade. As the basis for adjusting thepresent structure of NFA interventions, an in-depth study of NFA policies andprograms should be undertaken. One major focus of such a study should be theimpact of NFA programs on low-income rice and corn farmers.

14. Rice quality and rice exports: The success achieved in expandingrice production is now widely recognized. Except for bad years, the countryis expected to have surplus production for the next decade o- more; thissurplus opens the possibility of rice exports if the quality of rice can beimproved. The high proportion of "brokens" persists primarily because of theinsulation of domestic from world market standards as a result of theGovernment's monopoly control over exports and imports. Domestic price ceil-ings are one of several factors that have weakened incentives to invest in newmilling plants and equipment. Neither the official nor the market pricestructures provide any incentive to produce rice with a low percentage ofbrokens. Allowing private exports would, over time, likely be the most cost-effective way to raise milling standards to export quality. NFA has recentlyannounced that private trade in rice exporting will be permitted, a move theBank warmly welcomes. Private trading could run parallel to continuing NFAmarket activity; it is also compatible (as in Thailanl' with government-to-government contracts.

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15. Profit levels in sugar milling and coconut processing: Profits insugar milling appear to have been held down by government interventions whichlhave resulted in the industry receiving, on average, less than the world priceof sugar. This has been aggravated by a domestic price policy which in the1970's has subsidized consutmers at the expense of prod"cers, and a revenuesharing formula which results in part of the returns from investments by millsin improved sugar extraction going to planters. Consequently, investment toupgrade older plant has been inhibited. In coconut, there has been excessiveinvestment in new plant as a result, among other things, of Board ofInvestment incentives in the 1970's. The costs of the parastatal institutionscreated to assist these two industries and margins of the selling agenciesappear high, while convincing strategies for industry development are lackingor not public.

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I. INTRODUCTION

A. Preamble

1.01 Despite tihe strong industrialization bias in the postwar developmentstrategy of tile IPhilippines, agriculture still dominates the economy in someimportant respects. Seventy percent of the population are located in therural areas. Agriculture employs about 50% of the total labor force and con-tributes nearly 30% of the net domestic product. Wien all economic activitiesreJated to agricultural processing and supply of nonfarm agricultural inputsare included, the agriculttural sector, broadly defined, accounts for at lasttwo thirds of the labor force and one-half of the net domestic product in theeconomy~ About 40% of total export receipts are also earned from raw and pro-cessed agricuLtural products.

1.02 It is, therefore, not surprising to find that government policiestoward agriculture are quite pervrasive and comprehensive. In addition, therehas been a growing involvement of Government in the direct operation of theagricultural complex in the Philippines over the last decade. Typical policyinstruments affecting farmers' prices (and therefore incomes) are pricecontrols, export taxes, import tariffs or quotas on inputs, direct subsidies(credit) and indirect subsidies (water charges), procurement policies ofnational marketing agencies, investment in agricultural research and develop-ment and its transmission to producers, and land tenure arrangements. Inaddition, some national and other sectoral policies that may not seem to havean immediate or direct influence on agriculture do in fact profoundly affectthe profitability of agriculture.

1.03 The purpose of this study is not to question the legitimate role ofGovernment in regulating or directing the agricultural sector in the Philip-pines. Rather, its aims are to report on the types of policies and interven-tions in agriculture used by the Government, to analyze their implications andto calculate their effects on the major products and inputs and on the incomeand welfare of the producers. In addition some other possible bottlenecks toagricultural growth are identified. In the Philippines, policy-making in theagricultural sector has been fragmented or compartmentalized. Policydecisions made within an agency or ministry are not always viewed in thebroader context of their effects on the total economy. This report does notfocus on the short-run and temporary problems now faced by the Philippines,btut is concerned with the medium- to long-run evolution of agriculturalpolicy. Therefore, its recommendations, including short-term ones, aredesigned to be consistent with long-run objectives rather than to respond towhat we view as current transitory problems.

1.04 This report is divided into five sections. Following a statement onthe objectives of government policies and the characteristics and recent per-formance of the agricultural sector, a chapter is devoted to defining theconcepts and explaining the method of analysis used in the report. The thirdchapter presents the current policy environment faced by agriculture in termsof the major interventions undertaken by the Government

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of the Philippines (GOP).-1/ This refers to both crop-specific interventionsand macro-policy instruments employed more generally than in the agriculturalsector alone. Using the tools outlined in the second chapter, the fourthchapter quantifies the effects of government intervention on output, effi-ciency, government revenue, and other parameters by crop and in total.Finally, the fifth chapter presents a series of issues and recommendationsconsidered by the mission to be importani: in order to improve the performanceof the sector. Much of the detailed explanatory materi&l is relegated toAnnexes. Details of policies and justification or proof of the positionstaken will be found in Volume II or in the supporting documents cited.

i.05 This work builds on sector work on the Philippines already under-taken and completed by the Bank: these include The Agricultural Credit SectorReview, May 12, 1983 (Report No. 4117-PH); Irrigation Program Review, December15, 1982 (Report No. 3545-PE); Sector Operations Review: Agriculture andRural Development Program in the Philippines, February 10, 1982 (ReportNo. 3796); Aspects of Poverty in the Philippines: A Review and Assessment,two volumes, December 1, 1980 (Report No. 3545-PH); and Grain ProductionPolicy Review, two volumes, January 22, 1979 (Report No. 2192a-Pli). Also itdraws heavily on studies by researchers in the Philippines. These are citedthroughout.

B. Objectives of Government Intervention

1.06 Whenever a government implements a policy or takes a policy actionit influences the economic environment which shapes the behavior of producersand consumers. Thus "government intervention" is a generic term given to anygovernment action that alters the incentive structure of an economy. Ittherefore includes actions such as taxes, tariffs, quotas, subsidies, specialconcessions, restrictive rules and regulations, foreign exchange controls,price setting, and the establishment of parastatal marketing organizations.Since alterations of the incentive structure wi'll uasually benefit somesegments of the population but have a negative impact on others, and sincegoverrments have a legitimate role in making and implementing policy, nojudgment on whether government intervention is "good" or "bad" can or shouldbe made on an a priovi basis. Thus the term "government intervention" as usedhere is free of any pejorative meaning.

1.07 The apparent objectives of Government market intervent.on inagriculture in the Philippines have been to accomplish three basic goals:(i) to maintain relatively low food prices to consumers; (ii) to provide arelatively stable price to rice and corn farmers; and (iii) to accelerate theprocess of industrialization.

1.08 Industrialization has been the central thrust of the Philippinedevelopment strategy since the 1950s. With a relatively high man-land ratio,industrialization was considered to be a key to modern economic growth and the

1/ "Current policy" refers to policy in place at tne time of the mission'svisit to the Philippines (in April 1983).

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more productive employer of the growing labor force. Agriculture was viewedsimply in a supporting role to supply foreign exchange, cheap food, inexpen-sive raw materials and capital resources for this effort. Given the pastdevelopment and pending reforms in the. industrial sector, greater emphasis isnow being placed on achieving improven performance in agriculture.

C. The Agricultural Sector

1.09 Agriculture is the largest sector in the economy of thePhilippines. It employs over 85% of the employed rural population, andaccounts for about half the total employment in the country. Crop production,particularly rice, corn, coconuts and sugarcane, is the major enterprise,accounting for 58% of gross value added in the sector. In 1983, livestock andpoultry contributed 18%, fisheries 17% and forestry 7%. Agriculture ischaracterized by small units, farmed by families, some of whom hold their landas tenants. Productivity is typically low and when combined with landscarciLy results in low incomes. The average family income in rural areas isabout 75% of the national average and income distribution within the sector ishighly skewed.

1.10 The private sector plays a dominant role in agriculture, but thepublic sector plays an important role in a few areas, such as research andextension, setting prices on basic commodities, marketing of certain crops andthe provision of about one third of rural credit. The predominant unit ofproduction is the small, privately owned, owner-operated farm. Tenancy isfound on approximately one third of the farms. The private sector produces,imports and distributes farm inputs and also plays a role in purchasing,processing and distributing farm produce. Within Government, responsibilityfor the agricultural sector is divided among several ministries and many otherinstitutions and agencies which are not necessarily under the direct controlof the principal sector ministries. Some 15 agencies provide varying forms ofextension services and at least eight agencies have a role in irrigationprojects.

1.11 Although there has been considerable variation by _bsector, thetrend growth rate of agriculture as a whole was a respectable 4.5% during thelast ten years. The Philippines has switched from a rice importer to anexporter in 1977 and has maintained this position during the last six years.Production of fish, pork and poultry has expanded rapidly. Coffee and rubberproduction rose by over 10% per year from 1970 but from a small base. Amongother internationally traded crops, cocoa production fell, abaca and tobaccoproduction stagnated, and sugar production rose less than 2.5% per year.Growth in the production of coconut, the country's major export crop, isdifficult to assess because of discrepanciese in the statistical series. How-ever, the cocorlut producing area grew at some 5% p.a. over the decade. Exportof both dessicated coconut and coconut oil posted annual gains averaging about5% and 13% respectively over the last decade. Banana and pineapple exportsalso rose over the decade.

1.12 The contribution of agriculture to total ex,urts has fallen from 84%in 1965-67 to 50% in 1978-80 and 40% in 1982. In 1969, forest products werethe most important export group (30% of total) followed by coconut products,sugar and mineral products (each with about 19%). By 1982, coconut products

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were the most important agricultural group, but accounted for only 12% of thenational total after manufactures (46%) and minerals (12%). Sugar accountedfor 9%, forest products 7%, and fruits, vegetables and all other agriculturalexports combined (fish, tobacco, abaca, coffee, rice) represent2d a total,of,11%. Betwe27 1972 and 1982 the share of the sector in GNP fell from about28% to 22%.-

II. CONCEPTS AND METHOD OF ANALYSIS

A. Border Prices as Reference Points

2.01 In order to measure and evaluate the effects of government interven-tion through the pricing mechanism, it is necessary to have a referencepoint. A commonly accepted reference point is the price regime that wouldprevail in the absence of any government intervention. In the absence ofgovernment interventions, prices of traded or tradeable goods in the economywould equal the price of the same goods on international markets adjusted forlocational and quality differences. This is referred to as the border priceof the good and it represents the opportunity cost to the country of the com-modity whether imported or exported or whether It is a potential import orexport. Once a set of border prices and domestic prices for each commodity atthe same point in the marketing chain is assembled, it Is possible toconstruct three measures of the degree to which domestic and border pricesdiverge.

B. Nominal Protection Rate

2.02 The first measure is the nominal protection rate (NPR). It issimply the difference between the domestic and border price of each commodityexpressed as a proportion of the border price, where the border price is con-verted into domestic currency at the official exchange rate. That is

NPR = x 100

where Pd = domestic pricePb = border price

NPRs may be positive (when the domestic price is higher than the border price)indicating that the commodity is protected or they may be negative (when thedomestic price is lower than the border price) indicating that the commodityis "taxed" or "negatively protected." Alternatively an NPR equal or close tozero indicates thlat the commodity is neither directly protected nor taxed.

2/ See Annex I of Volume II for an introduction to the Philippineagricultural sector including characteristics of the sector, itsstructure and performance. A more complete treatment of the sector andthe Bank's role in its development can be found in Bank Report No. 4318-PH entitled Philippines, Agricultural Sector Memorandum, May 10, 1983.

2.03 NPRs are used in this study merely to show how agricultural protec-tion has changed over time. The other measures used provide a more accurateassessment of the degree of protection.

C. Effective Protection Rate

2.04 The second measure of protection is the Effective Protection Rate(EPR). This measure takes account of the fact that intermediate inputs in theproduction process may be overvalued or undervalued by government interven-tions and thus may distort the level of protection calculated using NPRs.Thus the effective protection rate is defined as:

EPR Vd - VbEPR Vb x100

Where Vd = value added evaluated using domesticprices;

Vb = value added evaluated at borderprices (converting the latter intodomestic prices at the officialexchange rate)

Value added is defined as the value of output at any point in the productionprocess less the value of the purchased inputs, with prices expressed indomestic currencv using the official exchange rate for imported inputs. Itnow becomes apparent how NPR and EPR differ. The EPR measure allows for thefact that the domestic price of inputs into the process may differ from theirborder prices and therefore affect the margin (value added) of the process.Like NPRs, EPRs can be positive, negative or zero. A high positive level ofeffective protection encourages expansion of the coimno ty while a negativeone discourages production. An effective protection rate of approximatelyzero has a neutral output effect. EPRs are useful in policy analysis becausethey provide a good comparison across commodities of the net effect of variousprice interventions in the product and input markets. A comparison of EPR'swill provide an indication of the direction of resource flows both withinagriculture and between agriculture and other sectors of the economy.

D. Net Effective Protection Rate

2.05 The third measure of protection used here is the net effective rateof protection (NEPR). This is the EPR corrected for the e1inated overvalua-tion of the exchange rate resulting from the trade regime._ The basicpremise for making calculations of NPRs and EPRs is that the prices of goodsand resources in the presence of distortions and government interventions donot reflect the true social costs and benefits i.e. "social prices" of the

3/ This report does not deal with the management of the official exchangerate from the viewpoint of its appropriateness for maintaining viabilityin the current account.

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goods. The exchange rate is the price of domestic currency in terms ofanother currency, and that price also can differ from Its "social price" i.e.the "shadow" exchange rate. The latter is the rate of exchange calculated toprevail in the absence of trade interventions or under an "optimal" traderegime. In the calculation of NEPR the shadow exchange rate rather than theofficial exchange rate is used in the valuation of traded inputs and outputs.

2.06 The unique contribution of the exchange rate as an incentive ordisincentive to production can be measured by comparing the difference inprotection offered to a product or an industry when calculated using the EPRand the NEPR. This is the reason that both calculations are made in thisreport. In Annex 2 of Volume II the methods of estimating protection arepresented in further technical detail.

E. The Winners and Losers of Government Intervention

2.07 The analysis of the effects of intervention on product prices may beextended by measuring the effects of price changes on production andconsumption and by calculating the reallocations of income that result fromintervention. In short, the report identifies those who gain and those wholose from intervention and measures the extent of the gains and losses. Whiledetails of the calculations and concept are quite complex, the basicproposition is that if a government intervention, say an export tax, causesthe domestic price of a commodity to fall, then several effects result.First, producers respond by producing a smaller quantity. Since both quantityand price have decreased, then farmers' iacome will decrease. They "lose"from the intervention. Second, lower prices cause consumers to consumemore. Since for the same expenditure they can now purchase more than before,this is equivalent to an Increase in their income. They "win" from the inter-vention. Third, the government earns revenue from the tax. That is, govern-ment "income" increases. They are also "winners" from the intervention. Thusfar the net effect of the intervention is that income has been transferredfrom farmers to consumers and government. But there are further effects.Exports and therefore export earnings fall as production falls and domesticconsumption increases. Agricultural employment declines in response to loweroutput. Finally, the imposition of a tax causes a so-called "deadweight loss"(a net ioss of national income) to the economy as a result of operating at aless than optimal level of output. These rather difficult concepts areexplained in further technical detail in Annex 3 of Volume II.

F. Domestic Resource Costs

2.08 To investigate the relative efficiency of various agriculturalactivities and manufacturing industries in the Philippines and to judge theirinternational competitiveness, the report makes use of the concept of "domes-tic resource costs" (DRCs). An industry's DRC represents the cost of domesticresources used per unit of foreign exchange earned or saved when domesticresources are valued at their true value in the economy, which may differ fromtheir current market value. If there is a disparity among DRCs across econ-omic activities, a reallocation of domestic resources to the 'Lower DRC (more

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efficient activities) would generally result in higher total output andtherefore higher national income. Thus the D1C calculaiion shows an activ-ity's "internal foreign exchange rate." Activities with "internal exchangerates" lower than the shadow rate for the country would reveal activitieswhich should be encouraged, since they can earn foreign echange at a costbetter than the national average (represented by the shadow excharLge rate).

2.09 DRCs are used here for two purposes. First, as a measure of therelative efficiency of resource allocation within the Philippine economy, andsecond as a measure of the international competitiveness of various industries(including agricultural industries). These two uses of DRCs respond to twoquestions frequently raised in policy dialogues with developing country deci-sion-makers. First, it is often asserted that in the real world policy-makershave no choice but to promote individual priority industries by' differentialincentives. The economic policy analyst then must question whether thoseindustries favored by the policy deserve the special incentives. Are theyusing domestic resources efficiently or is there a better use of these resour-ces in the economy?

2.10 Second, it is frequently claimed by those who receive specialtreatment that removal of the incentives, protection, or subsidy would resultin their industry being drowned by international competition. The DEC measureprovides an indication of the robustness of the industry vis-a-vis similarindustries in the rest of the world. The DRC is therefore a very useful toolof analysis in formulating policy advice.

G. Limitations of the Analysis

2.11 As with all constructs in economics, the methods described and usedhere have numerous assumptions and limitations, the importance of which needto be assessed in qualifying the conclusions. These asswmptilons andlimitations are now explicitly described.

2.12 The first problem is one of choosing an appropriate border pricefrom which coniparisons can be made. International prices fluctuate for allcommodities. For some, such as sugar and rice, the annual average fluctuationin world price may be in excess of 20% per year. In such cases, it is likelythat domestic prices will exceed world prices in some years and be below themin otlhers. The usual solution to this problem is to use its trend value atany point in time. The value used in this analysis is calculated for keycommodities by the Economic Analysis and Projections Departnent of the WorldBank.

2.13 A second problem concerns the accuracy of the estimates of supplyand demand elasticities and of the shadow exchange rate. The analyst nustsatisfy himself that the values being used are the best available. In thiscase elasticities include cross-price terms and have been carefully calculatedin some cases by several researchers; therefore, the elasticity estimates canbe used with considerable confidence. Likewise the formal shadow exchangerate calculation, while now dated, represents a very careful attempt to pro-vide the best estimate of that value under the stated assumptions.

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2.14 There are some more fundamental assumptions that are made in theanalysis. First, the welfare analysis assumes that world prices will beunaffected by output changes in the Philippines. This is the so-called "smallcountry assumption," For many products the assumption is valid. For othercommodities such as sugar and copra and its products, where the Philippines isa major exporter, changes in its output could conceivably alter worldprices. However the small quantities involved here, the elasticity of worlddemand faced by the Philippine and the small part of the world market for oilsand meals that Philippi:es copra accounts for, make the assumption tenable.Second, the approach is a partial equilibrium, comparative, static one. Somecross-product effects arc ignored and the dynamic aspects in growth and outputcannot be captured. The analysis provides "snap-shots" of the sector undervarious conditions rather than a "movie" of its possible evolution.

2.15 Having said this, the analysis is still valid and useful for policy-making. The method of analysis Is helpful in showing general directions inwhich medium- to long-run policy should move. The Bait is confident in thevalidity of the report's conclusior's as applied to the Philippine economLcsituation. In some cases such as those recommendations on general aacro-eco'-nomic policies (e.g. levels of protection between the industrial and agricul-tural sectors) there is a high degree of confidence that a plan of action canbe mapped out for the formulation and implementation of pricing policy. Inother cases such as commodity specific interventions (e.g. import monopsony onfeed grains and oilseed meal and rice exports) evidence suggests a cleardirection in formulating a pricing and marketing policy, but certaln detailson the alternatives ava'lable to policy-makers need to be determined. And instill other cases (e.g. coconuts and sugar) more detailed and comprehensivestudies are required before a plan of action can be implemented. Also cautionneeds to be exercised in interpreting the numbers that are produced. Theyshould not be taken too literally. While our best estimate, using thismethodology, of the loss of foreign exchange due to copra policies, forexample, is P 1.15 billion, the best interpretation of this would be to saythat the annual loss of foreign exchange due to copr.a policies is large andsignificant.

III. MAJOR INTERVENTIONS IN AGRICULTURE: THE PRESENT POSITION

A. Macro Policy Instrutuents

3.01 Most macro-policy inscruments used in an economy have a rather uni-form effect across all sectors of the economy and are therefore not of specialinterest to agriculture. For example the personal incomie tax rate appliesmore or less equally to agriculture, processing, manufacturing and the servicesectors of the economy. Thus while this intervention can be said to be a dis-incentive to production it operates fairly equally across the economy andtherefore does not cause a misallocation of resources among productive uses.However, the effects of some macro-policies are particularly important for theagricultural sector.

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The Exchange Rate and the Trade Regime

3.02 'The agricultural sector has a large stake in both exports andimports. The amount of pesos it receives from export sales, and the peso costof imports, clearly depends on the official exchange rate. Under theexchange-rate regime in effect for many years, the country has had a commonrate applicable to all types of transactions. Thuis the exchange rate has notdiscrinilnated against certain sectors in favor of others, although it may infact have benefited some sectors more than others as a result of the differentdegrees to which they sold or purchased abroad. This study has not lookedinto that question, nor has it concerned itself with the question of whetheror not the peso has been overvalued during the past decade or so, in the sensethat Government decisions have fixed the exchange rate at a level differentfrom the free market rate.

3.03 But the official exchange rate is not the only type of Governmentintervention that determines how the various sectors are affected by foreigntrade. Of equal importance, perhaps, is the structure of government interven-tions directly affecting foreign sales and purchases, interventions commonlycalled the "trade regime." This study has been interested In this set ofinterventions, from two points of view. One viewpoint has been to estimatewhether the country's trade regime appears to have favored, or discriminatedagainst, agriculture vis-a-vis other sectors, notably manufacturing. Thiscould happen, for exaiple, if agricultural producers were required to payexport taxes which other sectors did not pay, or had to pay higher tariffs ontheir imports, or were denied access to foreign markets by trading restric-tions that did not apply to other sectors. The second question we have askedof the trade regime is whether it has resulted in export or import prices foragriculture significantly different from what they would have been under some"optimum" trade regime (i.e. some agreed minimal set of interventions,although not necessarily the complete absence of all interventions). Sincethe effect of trade interventions is to change the revenue and costs of pro-ducers, and to influence their economic behavior accordingly, the result hasmuch the same effect as if their foreign transactions were subject to anexchange rate different from the official rate.

3.04 This study has used research by local scholars to estimate thedegree to which the country's trade regime has put agricultural producers at ahandicap in their foreign transactions and to estimate the impact of thesetrade handicaps on the allocation of resources to the sector and on the wel-fare of gfricultural producers and consumers. Using 1974 input-output data,Medalla - estimated the shadow exchange rate with three different nethods andassumptions: the UNIDO method, the Bacha-Taylor method using the free tradeassumption, and a modified method by Redalla that is based on an assumed sys-tem of "optimal" trade intervention. This report is based on the approach

4/ See E.M. Medalla, "Estimating the Shadow Exchange Rate Under AlternativePolicy Assumptions," in Industrial Promotion Policies in the Philippinesby R.N. Bautista, John Power and Associates, PIDS, Manila, 1979,p. 81-110.

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proposed by Medalla, not on a completely free trade assumption. Medallacompares the current system of interventions with a projected "optimal" traderegime. The rationale for the latter is the existence of market failures andexternalities that can be corrected with various measures that have only smalldistorting trade effects, and minimal costs to the overall economy. Theshadow exchange rate for such an "optimum" regime was calculated to be around1.2 of the nominal rate. Based on Medalla's work one can state that thetrade intervention measures used in 1974 resulted in an overvaluation of theexchange rate by roughly 20%. Because this overvaluation Is caused by trademeasures it Is not affected by changes in the nominal exchange rate. The neteffect of an overvaluation induced by commer-cial policy is the same as if thenominal exchange rate itself were overvalued: exports are lower and importshigher than they would be under an "optimum" trade regime.

Industrial Policy

3.05 Much has been written both Othin and outside of the World Bank onindustrial policy in the Philippines._ Yet in large part the spillovereffects of industrial policy onto agriculture have received scant attention.The high levels of protection and the resulting incentives provided by indus-trial pricing policy are in sharp contrast to the low levels of protection andthe resulting disincentives in agriculture. The disparities have caused amisallocation of resources into activities which are not competitive.

3.06 The generous incentives offered to Industrial investments over the1970s, such as accelerated depreciation, carryovers of losses, tax exemptionon imported equipment, tax credits on domestic equipment, tax deductions forexpansion, and the additional incentives offered to "pioneer" enterprises suchas exemption from all taxes except income tax and tariff protection, had theeffect of making capital more abundant and profitability higher than wouldotherwise result. The effect of this was to accelerate the movement of pro-ductive resources away from agriculture. To the extent possible the effectsof the biased treatment of manufacturing versus agriculture are quantified inChapter IV assuning a commercial regime existing in 1982 but presentlyundergoing staged reforms.

3.07 Since 1980, major changes in the Philippines' trade regime have beenintroduced which will reduce significantly the bias of the country's protec-tion system against agricultural production in general and agriculturalexports in particular. In 1980, the Government formally announced a newindustrialization strategy which seeks to develop an industrial structure thatis based on the country's comparative advantage with respect to labor costsand raw material availability and which is efficient and competitive by inter-national standards. It includes staged reforms over an initial period of five

5/ The World Bank has reviewed industrial policies and performance inPhilippines Industrial Development Strategy and Policies, October 1979(Report No. 2513-PH); Structural Adjustment Loan 1, August 21, 1980(Report No. P-2872-PH); Structural Adjustment Loan II, April 1, 1983(Report No. 3389-PH).

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years designed to correct the import-substitution and capital-intensive biasof existing industrial and trade policies. The program includes a majorrealignment of the tariff system, liberalization of quantitative importrestrictions and changes in the exchange rate policy.

3.08 The tariff-reform program, which covers gradual tariff changes overa period of five years (1981-85), will lower the overall level of protectionin the economy (particularly in the industrial sectorj and even out the spreadin tariff rates within and betweea sectors. Peak tariff rates for all importshave already been reduced from 70% and 100% to a ceiling rate of 50% in twosteps: on January 1, 1981 and January 1, 1982. Further realignment toachieve greater uniformity in protection will be completed on January 1,1985. By 1985, the tariff adjustments will reduce the average effectiveprotection rate (EPR) for the manufacturing sector from 44% to 29% and willalso lessen the degree of escalation in the structure of protection for rawmaterials, intermediate products and finished goods. Thus the bias againstagriculture will be substantially reduced when the policy package is fullyimplemented.

B. Product-Specific Interventions

3.09 In this section government policies toward major agriculturalproducts are described as they currently (1983) exist. The background toevolution of the policies will be found in the relevant Annexes in VolumeII. Only an outline of present interventions is presented here.

Rice

3.10 The National Food Authority (NFA) reguLates the rice market bysetting floor and ceiling prices for rice in consultation with other officialbodies. It defended these prices by (until 1983) retaining a monopoly oninternational trade and in its domestic market operations. In its earlyyears, when the Philippines was a rice importer, NFA (then National GrainsAuthority) was in the position of defending the ceililg price by regulatingthe flow of imports. Now with production usually exceeding consumption atexisting prices its principal activity is to defend the floor price by exportsand stockpiling. Financing for its activities comes from three major sources-- subsidized lineb of credit from government-owned banks; the public budget;and internally generated funds coming from its position of sole buyer andseller of wheat, soybean meal and imported corn in the Philivpities and fromlicensing fees. See Annex 4 for details on NFA.

3.11 In order to defend the official price NFA attempts to purchaseapproximately IOZ of the rice crop. It has managed to achieve this share ofoutput, but private discounting at peak production times is still widespreadand accepted. Often, when warehouses are full or NFA experiences cash-flowproblems, they cannot purchase rice from farmers at the official floor

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price. Farmers, therefore, often liquidate their crop at a discount toprivate buyers (from whom they may have obtained credit) rather than waituntil the situation changes.

3.12 These interventions by the NFA do not necessarily distort productionpatterns since the average level at which prices of rice prevail in the marketis the imaportant determinant. In fact, on average, the domestic price of ricein the Philippines in recent years lhas approximated the border price. Even sorice exports were unprofitable at existing exchange rates prior to mid-1983because Philippine rice did not meet standards which attracted a qualitypremium. Domestic millers were not provided the incentive to developinternationally acceptable quality standards because private exports had beenrestricted. Recently NFA announced that it will allow private exports ofrice. This should provide some stimulus to the milling industry and shouldallow quality differentials for different types of rice to emerge. It shouldalso partially remove the burden of storage from the NFA since some stockswhich would otherwise be held from time to time would be sold on the exportmarket. These issues must be viewed In the context of the Philippines being amarginal and intermittent rice exporter, and that exportable rice surplusesmay disappear if current plans for diversification are successful.

3.13 The issue of rice quality is widely acknowledged in thePhilippines. The problem is far from intractable and may be easily explainedin terms of the fact that the Philippines has only recently been transformedfrom a rice importer to rice exporter. There is no long-standing tradition ofcontact with the international market as a seller of rice. It will take timeto make trade contacts, establish a reputation, and develop the necessarydomestic prerequisites to be a rice exporter. NFA's limited moves towardrelaxing government's monoply on international rice trading and in settingdomestic prices close to world prices are moves in the right direction(Annex 4, para. 10).

3.14 The largest source of government intervention in rice has been theprovision of irrigation. The Government bears all investment costs and someoperating costs of irrigation. Ihis subsidy increases the profitability ofrice production for farmers with irrigation.

3.15 Credit subsidies for rice production, while lowering interest ratessubstantially from formal credit rates, are so small in volume that they arenot considered a significant distortion.

3.16 Offsetting the subsidized price of irrigation are higher-than-borderprices for fertilizer, machinery, farm chemicals, and fuel. Xs a result, thenet effect is that prices received by producers Df rice are very close to theworld price. Nonetheless, rainfed farmers, who do not benefit from irrigationsubsidies but are burdened by the higher prices of other inputs, are on bal-ance slightly penalized and somewhat disadvantaged relative to irrigated ricefarmers.

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Corn

3.17 There are two types of corn grown and used in the Philippines.White corn is used for human consumption and can be used in animal feed.Yellow corn is used exclusively for animal feed. White corn accounts forabout 75% of total corn production, but production of yellow corn is growingat (18% p.a.), approximately three times the rate of white corn. Because ofthe dual use of corn as a final good for lower income consumers and as anintermediate input to livestock consumed raainly by higher income groups, theGovernment intervenes in the market on the basis of safeguarding socialequity. As for rice, subsidized credit is made available in corn productionprograms, but the important interventions are through monopolization of cornimports (yellow corn) and corn price controls. Domestic prices have beenabove border prices for over 20 years; recently the gap has been graduallyclosing, although the domestic price is still more than 20% above the borderprice. The NFA has responsibility for importing corn and for supporting atarget price by purchasing corn from farmers at that price. It then sells tocompounders, millers, and integrated livestock operations. Some farmer sellprivately at a discount to middlemen from whom they may have obtained credit.

Sugar

3.18 Sugar is a traditional major earner of foreign exchange in thePhilippine economy and until 1974 almost all exports were sold in the protec-ted U.S. market. Since then the government has heavily controlled the sugarindustry and sugar marketing on the grounds that it is necessary to protectproducers and consumers from world price fluctuations, and that a singletrading entity has greater marketing power in the global arena. Regulationsinclude export taxes, import bans, price controls, marketing controls, specialtreatment under minimum wages legislation, and low-interest rates on loans.From 1S74 to 1984, a single buyer of sugar from sugar mills, also the soleexporter, was allowed. The policymaking body is Philsucom (the PhilippineSugar Commission) and commercial operations are handled by Nasutra (theNational Sugar Trading Corporation).

3.19 It has been estimated that, over the period 1974-82, producersreceived only 77% of the world price of sugar while domestic consumers paidonly 69% of the world price. These averages conceal large fluctuations inprotection and implicit taxation induced by the traditional erratic pricemovements of sugar on the international market. Producer and consumer priceswere above border prices for three of the seven years, and producer pricesagain exceeded border prices in 1983.

3.20 Philsucom allocates sugar production to export, consumption andreserves and fixes the raw sugar buying price on the basis of the average ofliquidation price on the domestic market (which price it determines) and theexport markets. Holding the domestic price of sugar well below export pricesin earlier years, in effect subsidizing consumers at the expense of planterswho received less than the world market price, probably adversely effected

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production in a sector with excess processing capacity. lowever, an increasein domestic prices was ordered in Narch 1982 and currently export and domesticprices are roughly in line.

3.21 About 14 new mills were built between 1970 and 1974 with loansguaranteed by PNB and DBP and overall there is excess capacity; nevertheless,some new investment i± existing mills is essential to improve the industry'slow extraction rate. / This has been inhibited by the contractualarrangement for sharing revenues from sugar sales under which growers, whoreceive 60-70% of total sales according to mill district, would reap about twothirds of the benefit from investment to improve recovery rates (as opposed tocane through-put). Improvements in the productivity of the industry are alsoinhibited by the lack of a long-term policy and program for sugar developmentand suspicion arising from inadequate public accounting for sugar proceeds andof costs of operations by Philsucom and Naeutra.

Coconut

3.22 The coconut industry in the Philippines is the largest single userof agricultural land and rural labor, Its exports are one of the country'smajor foreign exchange earners and it is the world's largest producer andexporter of coconut products. As such, its performance is often regarded asthe bellwether for the rest of the economy.

3.23 Over the last decade, the Government has intervened heavily in thisindustry with export taxes, the coconut levy, the establishment of the UnitedCoconut Oil Mills (UNICOM), and the coconut replanting scheme. Levels oftaxes and levies generate much controversy and discussion. Recent issues arewhether the consolidated coconut stabilization fund (CCSF) levy has depressedfarm prices and whether UNICOM, the largest miller, haB contributed to lowerprices.

3.24 Significant intervention in the coconut industry by governmentsanctioned monopoly only began in the 1970s with the imposition of an exporttax in order to syphon off the windfall gains of a peso devaluation. Laterthe tax vss progressively increased especially on copra in order to provideincentives for domestic coconut processing. In addition, a fixed levy, thecocofund levy, was imposed in 1971, fixed at a rate of P 5.50 per ton ofcopra, to finance a processing and trading concern. The sharp increase ofcocovut prices in 1973 led to the imposition of the CCSF levy which wasoriginally intended to subsidize consumers of coconut products (oil, milk,etc.). Later, in 1974 it was also used to capture windfall gains due to worldmarket prices as well as to allocate funds for investment by the PhilippineCoconut Authority (PCA), the legal administrator of the industry. A varietyof other "special levies" have been imposed at various times since Lhen.Subsequently, the CCSF levy also funded the Coconut Industry Devzlopment Fund(CIDF, 1974) for replanting the country's coconut farms with a coconut hybrid

6/ Although, overall, the competitive position of the Philippine sugarindustry has been good, productivity increases are vital for its future.

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and the Coconut Industry Investment Fund (CIIF, 1978) for PCA to acquire themajor share of the country's total rated .Lling capacity. The newly acquiredmills were consolidated under the UINICOM_

3.25 Expansion of capacity in the industry is prohibited without approvalof the PCA. This power has been used to enable UNICOM, a PCA subsidiary,become the largest buyer of copra in the country and the biggest seller ofcoconut oil. Competition in both the oil and copra markets has thus beenlimited because of the dominant position of UNICOM.

3.26 Since 1979, the CCSF has been suspended twice for a few months whenprices fell,and has been reimposed with a different name each time. The firstreimposition was at a rate of P 600 per metric ton for exported copra with anadditional fee of P 400 per metric ton for an export clearance. This wasequivalent to an export tax of 22%. In 1982, the rate became variable,depending on coconut prices, and the export tax was reimposed. In late 1982,exports of copra were embargoed in order to more fully utilize (and toprotect) the domestic milling industry following production declines due firstto a typhoon and later by drought. But the embargo is considered temporaryand will be lifted when production normalizes. In sum, recent policies haveimplicitly and explicitly taxed coconut producers, subsidized consumers, andprotected the coconut processing sector.

Wheat

3.27 In late 1974, NFA's predecessor agency took over the importation ofall wheat; this was apparently done at the request of the flour millers whowere required to pay high import tariffs on wheat while NFA was exempt fromthe tariffs. While NFA's involvement in wheat Imports at that time seemedbEneficial to flour mIllers and couisumers, such was not the case as thegovernment import price was on the average about 20% more than the worldprice. While the wheat trade was in the private sector, the average FOB pricenegotiated (1965-74) was only one pereent above the world price; and even withthe import duty it appears that private imports would have been lower cost.

Livestock

3.28 The livestock industry contribuites about 15% of the value added inagriculture, 60% coming from large animals (swine, cattle, carabao), whilepoultry makes up the remaining 40%. The industry is composed of two distincttechnologies---traditional backyard production and modern (commercial) con-trolled-feed production. Poultry is the most commercially oriented product.Cattle and carabao are often raised as sources of farm power and are slaugh-tered for meat only when their usefulness as a draft animal has diminished.

7/ UNICOM was established by utilizing the CIIF funds, and is thereforeconsidered to be privately owned. However, the Government was clearlyinstrumental in its establishment, because the concentration of 80% ofthe processing capacity under UNICOM could not have been accomplishedwithout the Government's active support.

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3.29 The Philtppines is almost self-sufficient in meat production underthe current set of trade controls, Imports of beef are less than 10% of totalutilization, and imports of poultry and pork are less than 1%. Some pork hasbeen exported from time to time.

3.30 Government policy In the livestock industry attempts to stabilizeconsumer prices by intervening in both the output and input markets by pricecontrols supported by government purchase and storage activities. Also,tariffs and quotas are used to protect domestic producers and some domesticfeed prices are held down by controls. In 1982, tariffs on poultry and eggswere lowered to 50%, and beef and pork to 5%. They had previously been aboutdouble those levels.

3.31 Retail prices of poultry, eggs, and some pork cuts are controlled,but enforcement of ceiling prices is uneven, and the operation of governmentKADIWA stores is t small to affect the upwaru pressure on prices exerted bythe tariff policy._ The NFA purchases pork at a guaranteed price, and theBureau of Animal Industry has the sole right to import meat. In addition, NFAcontrols the formula-feed industry by having the sole import rights forfeedstuffs (yellow corn, soybean meal) and compounds, and by licensingformula-feed compounders. Likewise, exports of feed ingredients such as coprameal, molasses, and rice bran are regulated. Bran exports are embargoed, andcopra meal and molasses exports are subject to a 4% tax. Thus, governmentintervention, direct and indirect, is quite pervasive in the livestockindustry.

Fertilizers

3.32 As in food policy, the Government's approach to fertilizer policy isto achieve a balance between the conflicting objectives of providing lowfertilizer prices to farmers and giving adequate incentives to domestic fer-tilizer producers at acceptable budget costs. The Fertilizer and PesticideAuthority (FPA) formed in 1977, is the organization that regulates the agro-chemical industry. See Annex 5 for details on FPA.

3.33 Two sets of instruments ensure that the fertilizer price announcedby FPA prevails in the market. FPA and other government agencies decide onthe annual level of imports to fill the gap between domestic production andutilization. This quantity is allocated to importers and fertilizerproducers. Imports by FPA are duty free. Second, domestic producers are alsoexempt from duties and taxes on raw material imports for fertilizer. Inaddition, cash subsidies are paid by the Government for losses incurred by thedomestic producers as a result of price control.

3.34 Overall, it has been reported that because of administered pricesfarmers have paid a premium of approximately 10A over the border price in

8/ The KADTWA stores are retail stores located in lcw-income neighborhoodsselling food staples at regulated prices. Currently, NFA operates about280 stores in the major cities of the country.

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recent years 9/ But the implicit tariff has varied enormously with fluctua-tions in world price and in local pricing policies from 56% to an implicitsubsidy of 20%. Also the pricing policy has not had a uniform impact acrosstypes of fertilizer. For example in 1982, mixed fertilizer received a smallsuibsidy (in the sense that domestic price was below the equivalent worldprice); urea was priced slightly above world price, ammonium sulphate was 27%higher than its world price, and muriate of potash (used on sugar and otherexport crops) was priced 86% higher than world prices. The fertilizerindustry is heavily protected--approximately 50% over the last decade--as aresult of Lts duty-free privilege to import fertilizer and raw ingredientswhen domestic retail fertilizer prices are controlled above competitive worldlevels. Given the level of protection that the three 20 years old fertilizerplants enjoy, there is little incentive for upgrading and modernizingequipment.

3.35 The evolution of protection in the fertilizer industry is an exampleof unintentional policy effects. The policy initiated to protect domesticfood production in the face of turbulent food, fertilizer and energy prices of1973 has evolved because of the changing international environment intomaintaining excess capacity in the domestic fertilizer industry. This hasretarded agricultural output since farmers bear part of the burden ofsupporting the inefficient domestic fertilizer industry. Without quotas,tariffs, and price controls, fertilizer prices would fall to world levels,agricultural production would be stimulated and the domestic fertilizerindustry would become more efficient or possibly shrink in size.

Farm Mechanization

3.36 The unintended side-effects of government policies have been tolower the user cs> of farm mechanization by 60% in the early 1970s and by 50%in recent years.- The Government does not directly intervene in thefarmer's decision to use farm machinery. Rather, it affects farmer's deci-sions by indirectly lowering the cost of machinery through various means.First, the cost of imported machinery is kept low by an overvaluation of thepeso caused by the trade regime. Anti-usury laws and the credit-basedmechanization programs have lowered the real interest rate below the socialopportunity cost of capital. During the 1970s the real rate of interest formachinery did not exceed zero and was negative in many years. An interestingside effect of interest subsidies on mechanization was that due to the excessdemand for credit, lenders invariably rationed scarce loanable funds to themore creditworthy (lower risk) farmers. These are large farmers that can

9/ See C.C. David and A.M. Balisacan, "An Analysis of Fertilizer Policiesin the Philippines," Staff Paper No. 82-1, Philippine Institute ofDevelopment Studies, May 1982.

10/ See C.C. David, "Government Policies and Farm Mechanization in thePhilippines," Staff Paper No. 82-3, PIDS, August 1982. "EconomicPolicies and Philippine Agriculture." Paper presented at PIDS-PCARRWorkshop, March 1983.

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efficiently use large tractors. Thus, a low interest rate polLcy, not onlyfavored machines over labor, but large machines over small machines, and Largeover small farmers.

3.37 Tariffs and taxes on fuel used In farm machinery are not of suffi-cient magnitude to offset the credit and currency valuation effects. Butincreasing protection afforded to the domestic power-tiller and small waterpump industries in the 1970s has had the vnintended side effect of increasingthe price of locally manufactured equipment relative to larger (imported)equipment and so has favored the use of larger tractors and pumps which aremore labor displacing. The net implicit subsidy on the price of power tillersand pumps has remained at around 2% over the last 12 years. The overallimpact of tariffs and taxes specific to farm machinery, overvaluation of thepeso, the interest subsidy, and the fuel tax has had the net effect oflowering the costs of farm machinery by 50% during the 1975-80 period. Farmmechanization has been stimulated and farm-labor displacement has beenaccelerated by seemingly inadvertent government policies that have created thenet distortionary effect described here.

3.38 Table 1 provides a summary of the types of intervention devices usedIn Philippine agriculture by commodity and by the administering body.

IV. EFFECTS OF GOVERNMENT PRICE INTERVENTION IN AGRICULTURE

4.01 This chapter examines government price intervention in agricultureduring the late 1970s and early 1980s, in order to see how agriculture hasbenefitted or has been inhibited by those policies and to track the directionof the interventions. Of special concern is the treatment of agriculture vis-a-via other sectors in the economy, such as agroprocessing and manufactur-ing. A common phenomenon in developing countries is the policy of promotingindustrialization by protecting the domestic market while viewing agricultureas providing cheap food, foreign exchange, and cheap labor. This in turnleads to unbalanced growth and sub-optimal development of the agriculturalsector. Eventually such a strategy impedes overall economic progress becausefood production is insufficient, balance of payments difficulties arise,growth in employment is slow, and the distribution of income becomes moreuneven as a result of the policy-induced resource flows out of agriculture.Thus, the balance of Incentives or disincentives in agriculture vis-a-visother sectors of the economy is an important issue. In addition to studyingthe direct policies affecting prices in agriculture, a further aspect is toinclude the larger set of macro-economic policies such as fiscal and monetarypolicies and exchange rates in the analysis. Estimates are provided on theextent to which policies have promoted or reduced economic efficiency andresource allocation.

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Table 1i GOV9R?feNT INTERVENTIONS AND INTERVgNTION AGENCIESBY PRODUCT AND BY INSTRUKENT

Farmer Conaumer importprice price Export Import nontariff Levy/ t(onopoly Monopoly Retail Exportsupport ceiling tax tariff barrier tax Subsidy export import salen ban

Natianal Food AuthorityPalay/rice X X XCorn/grits X X XWheat X XSoybean meal XOther staples X

Price Stabilization CouncilHogs X

Poultry X X X

Philippine Cocoaut AuthorityCopra XCoconut oil X X XDesiccated coconut X

Philippine Sugar ComissionSugar X X X

Fertilizer and PesticideAuthorityRaw materials X XFinished fertilizers X X X

Philippine Tobacco AuthoritiesNative tobacco X XFlue-cured tobacco X

Philippine Cotton AhthorityCotton X

Bureau of Animal IntdutryMeat X

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A. Nominal Protection of Agriculture

4.02 Table 2 provides the NPRs for selected agricultural conmodities overtime. Because of the limitations of NPR's the table serves better to mapchanges in interveation over time than to assess the leveL of intervention.Perhaps the most apparent feature is the general decline Ln protection ofcommodities over time, many becoming negative since 1975. Rice, the nostimportant crop, has gone from being quite heavily protected during the 1960sto being at approxinate parity with world prices over the most recent years.This has been partly the result of productiviLy gains over the 1970s accom-panied by improved seeds, fertilizer use, and government investment inirrigation and extension. The second feature is that export commoditiesreceive less protection (or negative protection) while inport-competingproducts receive higher levels of protection.

Table 2: TRENDS IN NOMINAL PROTECTION RATESOF AGRICULTURAL COMMODITIES, 1960-1982

(percent)

1960-64 i965-69 1970-74 1975-80 1981-82

Rice 21 15 7 1 1Corn (yellow) 46 38 20 20 20

(white) 22 20 5 2 17Copra 0 0 -12 -27 -26Coconut oll 0 0 -4 -4 -9Dessicated coconut 0 0 -4 -4 -4Sugar 32 174 36 -16 5Cotton la la /a -7 -27Pork 54 50 18 -3 6Chicken 97 122 55 57 -Eggs 60 48 18 11

/a There was very little domestic production during this period.

Source: C.C. David. "Economic Policies and Philippine Agriculture." Paperpresented at the workshop on The Impact of Economic Policies onAgricultural Policies, Tagaytay City, Philippines, March 1983, andmission estimates.

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4.03 The changing protection rates for sugar require furtherexplanation. The high levels of protection prior to 1973 were due to theU.S. sugar policy of protecting their industry and allowing the Philippinespreferential access to that market. When this arrangement ended in 1973,there were some years of high world prices, especially 1974., 1975 and 1980,when sugar consumption in the Philippines was subsidized and farm prices werefixed at below world prices, resulting in negative protection. The morerecent operation of forward selling on long-term contracts of part of thesugar crop by Nasutra in the face of extremely variable world prices has hadthe effect, among other things, of cushioning the produ-Er price from worldprice fluctuatLons.

4.04 Over the last twenty years coconut products have gone from zeroprotection to negative protection. But while copra has gone from no protec-tion to some negative protection, then to an export ban, the further refinedproducts of coconut oil and desiccated coconut have gone from zero protectionto only a small but inreasing amount of negative protection most recently.The pricing policy is designed to favor the further processing of coconut pro-ducts. In other words, the coconut processing industry is being protectedwhile the coconut growing industry is being penalized by the pricingstructure.

4.05 The high protection rates on livestock and more especially onpoultry products are achieved mainly through the use of tariffs. Tariffs formeat have declined 41hile tariffs for chicken and eggs have remained high. Butthe apparently quite dramatic decline in NPRs for pork, chicken, and eggs hasresulted from the increased efficiency of these activities as larger-scalecommercial production integrated with feed milling has increasingly taken overfrom smaller backyard operations. The central conclusion from this analysisis that protection of agriculture has declined and in many cases has becomenegative over the last two decades.

4.06 One element in this negative protection has btn the long-termimpact of Government attempts to increase the stability of agricultural prices- annual, seasonal and geographic (Annex 6). This has been approached in par-ticular by increasing the participation of Government in marketing and con-trolling prices by edict, reinforced, where Government does not completelycontrol the market, by defensive buying and selling operations. The long-runimpact has been to depress producers' incentives, particularly in the majorexport crops. For copra and sugar, levies lhave reduced price peaks but thesehave not been fully compensated in low price periods, a situation aggravatedin the case of sugar by a policy of holding down domestic consumer prices(para. 3.21). Similarly for imported commodities - corn, wheat, soybean mealand fertilizers - although implicit taxes were minimized during high priceyears, low world prices were not passed on to users. Incentives to invest-ments in private marketing and storage have also been reduced for many cropsbecause of narrow margins between controlled farm and retail prices.

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B. Implicit Tariffs on Agricultural Inputs

4.07 Government price activities in the agricultural input market have,with the exception of irrigation, been relatively modest. This is showa inTable 3. Gravity irrigation, which is used an about 44% of the rice area, isthe major recipient of government subsidy amounting to almost 60% of the irri-gation fee. The subsidy actually reaches almo8t 90% because of the low col-lection rate, Implicit tariffs on small pumps and two-wheeled tractors arehigher than those on larger equipment in order to encourage domestic produc-tion. This has made the unit cost of larger equipment relatively lower thanthat of small equipment, and has encouraged the use of larger equipment thanwould be the case under a non-intervention poLicy.

4.08 From 1973-81 the domestic fertilizer industry received heavy prote:-tion and farmers paid a price premium on all fertilizer averaging 10% over theborder price. This implicit tariff varied enormously from year to year withfluctuations in world prices and across types of fertiiizer (Annex 5).Because of the cost to the budget, cash subsidies were abolished In 1982, butthe recent drop in world prices has not been passed on to farmers and the con-siderable burden of subsidizing the domestic fertilizer industry rests fullyon the farmers. Moreover, a major regulatory program designed to ensuredomestic fertilizer production for food security has largely failed (importshave grown as a proportion of total use) in part because the subsidization ofthe domestic industry has not encouraged modernlzation and has created anindustry which cannot compete with the world market.

4.09 Revenue effects have also arisen from the Government's subsidizationof interest rates on credit to counter low agricultural prices. tow interestrates, which turned negative in real terms during the rapid inflation of the1970s, limited the flow of formal credit especially to small farmers wheretransaction costs and risks to lenders are high. The real and relative levelsof agricultural loans were lower in the late 1970s than in the 1960s(Annex 7). Probably only 10% of the implicit interest rate subsidy isreceived by agriculture and most lending was concentrated on sugar, coconutsand NFA, and mainly for marketing, not production. Rice and corn productionloans accounted for only 4% of the total amount lent to agriculture. Overall,the preferential interest rate is estimated to have provided an effectivesubsidy of only 1% to agricultural unit prices and clearly has notsignificantly offset the disincentives created by other price policies.Moreover, the low interest rate policy has impaired the ability of the ruralfinancial market to perform, and the policy has probably had a regressiveeffect on income distribution. The subsidy is shouldered by the lower incomepopulation, holders of currency and bank deposits; distribution ofconcessional loans favors irrigated and larger farms, typically better offthan the average; and subsidies encourage economically unjustified capitalintensive, labor displacing, techniques.

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7able 3: IMPLICIT TARIFF ON AGRICULTURAL INPUTS, 1980-81

lnputs Implicit tariff(y)

Irrigation (NIA gravity) /a -86(NIA communal) -92

Irrigation pumps /b 30Hand tractors /b 33Four-wheeled tractors /b 10Animal feeds (hog grower mash) /c 7

(cattle feeds) 17(layer mash) 20(broiler mash) 23

Agricultural chemicals /d 23Fertilizer le 10

/a Includes subsidy due to low irrigation fee and low repayment rate.

/b Based on tariff rate.

/c Based on weighted average implicit tariff on feed ingredients.

/d Based on tariff rate and advanced sales tax.

/e Based on price comparison of urea, atmonium sulphate, mixed fertilizerand phosphates from 1973-81.

Source: C. David, op.cit

C. Effective Protection in Agriculture

4.10 The effective rate of protection (EPR) of a good is a weighted aver-age of the price distortions on it (usually tariffs and quotas measured intariff equivalents) and the price distortions on its inputs. The EPR isdesigned to reflect the extent to which the set of price incentives or disin-centives embodied in a country's commercial policy protects domestic produc-tion of the good.

4.11 The overall effect of government intervention in the pricing rechari-ism, as shown by the effective protection rates in Table 4, has been ta createa system of incentives that is biased against agriculture when compared tomanufacturing. Through various devices not specified here but described inprevious studies, the value added in manufacturing has been protected by 44%while policies in agriculture have had the effect of implicitly taxingagriculture, i.e. have resulted in negative protection.

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Table 4: EFFECTIVE PROTECTION RATES FOR MAJOR AGRICULTURAL PRODUCTSACGOPROCESSING AND MANUFACTURING /a

Sector EPR Net EPF

AgricultureRiceu -0.4 -19

Rai£nfed -4.7 -24Irrigated 3.6 -15

Corn /b 20 ( 29) 0copraTC -27 -47Coconut oll -2.0 (42.0) -Desiccated cocount -4.3 (18.4)Sugar /b -16 -36

Cotton Jd -12 -32

Hogs (commercial -20 to 17 0 to -40Cattle (commercial) -16 to 8 -10 to -30Chicken (commercial) 155 to 241 178Eggs (commercial) 7 to 19 0

Logs -10 -32

Tobacco (Native and Virginia) -8 -28

AgroprocessrngSlaughtering and poultry dressing 128 73Meat products (uncanned) 68 27Dairy products 52 15Canned fruits and vegetables 80 36Rice milling -49 -60Corn milling -46 -59Flour milling 1,148 845Bakery products 3,371 2,530Sugar ailling and refining -12 -33Desiccated coconut products -10 -32Lumber 16 -12Plywood and veneer 5 -20

Ma nufacturingTextile mill products 78 35Other textiles 36 3Footwear 18 -11Paper products and containers 193 118Tanning and leather finishlng 145 86Tires and inner tubes 323 220Basic industrial chemicals -7 -30Insecticides and agricultural chemicals 17 -11Petroleum refineries 21 -8

Average (all aanufacturers) 44 21

/a The reference years are 1973 to 1979 with 1980 to 1981, if available, inparenthesis, Exceptions are noted.

/b Noninal protection coefficient.

/c Copra had an export tax and CCSF levy between 1973 and 1979, and anadditional UNICOM levy in 1980 to 1981.

/d 1975-81.

Source: David, Bautista and Power, and mission calculations.

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4.12 In addition to the negative protection given to agriculture, it Issalient to observe the pAttern of protection in agroprocessing. The generalpattern that emerges is that agroprocessing is protected quite highly exceptfor milling and coconut product manufacturing. But, the average level ofprDtection in agroprocess[ng is not as high as In manufacturing. 'Ihe generalconclusion of this analysis is that the positive protection granted to theprocessing of raw products is achieved by depressing prices of the rawproducts, thus comes at the expense of the farmer producing those products.Manufactures have even more favorable treatment than agroprocessing. The neteffect is that resources have tended to move out of agriculture and into theprotected sectors.

4.13 The bias against exports in the country's protective structure willbe greatly lessened when trade and tariff reforms now underway are fullyimplemented. The reforms will favor the agricultural sector relative to theindustrial sector. First, the EPR differential between non-exportables andexportables is expected to be reduced signlficantly by 1985. Second, thedegree of overvaluation of the Philippine peso will be lessened because (i)tariffs on imports will be reduced and (ii) the official exchange rate willcontinue to be adjusted in line with the ob4ectives and policies of the tradeliberalization program. Indeed, the peso has already depreciated by more than40% against the US dollar since the start of the trade reforms in 1980J81.This should assist in restoring the intersectoral balance of incentives in thePhilippines. Table 5 Indicates present and future rates of protection underthe tariff reform program currently underway.

Table 5: AVFRAGE EFFECTIVE PROTECTION RATES FOR MAJOR INDUSTRY GROUPS(7%)

Before Tariff After TariffIndustry Group Reform (1980) Reform (1985)

Agriculture and primary 9 5

lanufac turing 44 29Consumption goods 77 41Intermediate goods 23 29Inputs into construction 16 15Capital goods 18 18

Exportables (incl. agriculture) 4 5

Nonexportables 61 47Import, competing 37 30Import, noncnmpeting 148 113

OJverall average 36 23

Source: Bank staff estimates.

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4.14 An interesting question arises from the recent devaluation of thepeso. The question is whether the change in the value of the peso hasrendered obsolete the calculations and conclusions made here. It has not.The initital impact of a devaluation is to make the negative protectioncoefficients for exports even worse as the foreign price (in pesos) has risenyet the domestic price has remained constant. Over time the value of thedevaluation may or may not be paet3ed on to farmers. If farm prices areadministered often the only price increases allowed are to compensate forincreased imported input costs. Experience in other countries shows that eventhis amount is not passed on to producers. In a situation where the marketingfunctions are competitive, virtually the total effect of the devaluation ispassed back to the producer. This outcome can also result when parastatalsfill the marketing function but is is more frequently the case that only asmall portion is passed back to producers.

D. Net Effective Protection in Agricuti-ure

4.14 When examining the extent of incentives or disincentives toagriculture, it is important to assess the effects of the distortion of theexchange rate resulting from trade intervention. Net effective protectionrates have been calculated and are shown in Table 4.

4.15 In the case of manufacturing the average level of protection isstill substantially positive even after the adjustment for the overvalua-tion. Compared to that, in the agricultural sector, the net EPR9 are gener-ally negative. Only poultry is still significantly protected when the effectof the overvaluation of the exchange rate is netted out. It is apparent thatthe exchange rate distortion, induced by the trade regime, has acted as adepressant on agricultural performance. Commodities that previously appearedto suffer from negative protection now register even larger levels of negativeprotection, while some that apparently enjoyed small positive protection arenow seen to actually be negatively protected (e.g., irrigated rice). Thedirection of protection does not change for agroprocessing, except for woodproducts. For the traditional milling/refining activities levels of negativeprotection are further magnified when exchange rate distortions are taken intoaccount.

4.16 Thus, calculations of net EPR's reinforce the conclusions of EPRestimates. Agriculture is disadvantaged by the structure of policiesaffecting it in the Philippines. Agroprocessing of imports and import-replacement commodities enjoy positive levels of protection but which areusually modest compared to manufacturing (with the exception of the high levelof protection given to wheat processing), while agroprocessing of traditionalproducts or export products are heavily disadvantaged by the policies althoughnot as heavily as the raw material on which they are based.

4.17 The effects on intersectoral resources flows as a result of theincentives or disincentives provided in the structure of intervention are inthe same direction as indicated earlier. With a negative net EPR in agricul-ture, resources flow out to the protected sectors of agroprocessing and tomanufacturing. The net EPRs exhibit the common tendency of "cascading" tariff

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rates where protection is zero or negative for raw products, pocitive butsmall for semiprocessed products, and positive and large for finishedmanufactures.

E. The Merchandise and Fiscal Effects of Government Interventions

4.18 In Table 6, using welfare analysis, the output, consumption, andtrade effects of the pricing policies used in agriculture in the Philippinesare estimated relative to those levels that would have existed in the absenceof such policies. In addition, the pecuniary effects in terms of the welfarecost to producers, the welfare gain to consumers, the change in governmentrevenues, and the change in foreign exchange earnings of the existing policiesare estimated. The results are discussed by commodity.

4.19 Interventions in the rice economy of the Philippines are so minor orare sufficiently offsetting that the net production effects, the gained exportearnings, and the other measured costs and benefits resulting from the currentset of policies are small. Such is not the case for copra and sugar, commodi-ties which have been discriminated against by the set of pricing policieswhich they faced. The production of copra has been decreased by around600,000 metric ton p.a. while that of sugar is estimated to have decreased byabout 460,000 tons p.a. The exports of each were reduced by about the sameamount because of the policies. In 1980, this resulted in a loss of foreignexchange to the Philippines of over P 1 billion for copra (one half of totalexports) and nearly P 700 million for sugar (two thirds of total exports).The policy of underpricing these two commodities resulted in revenue accruingto the government or parastatal organizations of nearly P 1 billion for copraand nearly P 600 million for sugar. Perhaps the major influence of thepolicies is the distributive effects that they have. The policies had theeffect in 1980 of reducing the welfare of copra and sugar producers by P 1.3billion and P 800 million respectively while increasing the welfare of con-sumers by about P 160 million and P 120 million, respectively. Lessgovernment involvement or government sanctioned involvement in the pricing,trading and taxing of these commodities would have the beneficial effect ofincreasing profits to sugar and coconut growers. But it would have a negativeeffect on Philippine consumers who have been paying less than the border pricefor both refined sugar and coconut oil.

4.20 For two major reasons rice exports from the Philippines have been anunattractive proposition. First, the exportable surplus in any one year isusually quite small and varies from year to year. The NFA hoes not feelcomfortable exporting such a narrow margin when the political consequences ofpossibly having to import at a later period are large. Second the monopolyposition of NFA as the sole rice exporter has not created the supply ortrading conditions necessary for an effective rice export program. Thesubsidies received by NFA (as a monopsonistic agent in the importing of wheat,corn and soybean meal from public budget outlays; from exemption from taxes,duties and fees; and from subsidized interest rates) do not give sufficientincentives to NFA to resolve the two major issues standing in the way ofeffective rice exports. Those issues are the lack of quality with specificreference to the high number of "broken" grains and mixed rice varieties and,

Table 6: ESTIMATED EFFECTS OF AGRICULTURAL PRICE INTERVENTIONS

ON SELECTED COMMODITIES, ANNUAL AVERAGE 1979-81

tnange InChange in Change in foreign Change in ielfare Welfare Net

Change in Change in exports Government exchange (employment gain of gain of deadweightNFC production consumption (imports) revenue earnings (full-time producers consumers efficiency loss

('000 mt) ('000 mt) ('000 mt) P 000 P 000 workers) P 000 P 000 (p '000 Mt)

Rice

Rainfed 0.97 -9.6 26.6 -36.1 7,526 -57,533 -840 -98,886 90,496 863

Irrigated 0.97 -45.7 36.5 -82.2 10,403 -131,414 -5,119 -137,336 124,962 1,971

Overall 0.97 -55.3 63.0 -118.3 17,029 -188,947 -5,959 -236,222 215,458 2,834

Copra -. 69 -585.5 74.1 -659.6 993,078 -1,147,176 -47,777 -1,328,820 157,930 177,812

Sugar 0.77 -460.5 23.5 -484.0 598,630 -672,577 -33,154 -798,142 122,165 77,346

Hogs 1 05 30.2 -18.0 48.2 -14,143 181,567 - 129,910 -120,306 4,539

Broilers 1.63 64.6 -28.0 (-92.6) -310,192 712,740 - 856,364 -770,685 2PA.513

Yellow corn 1.15 122.9 -218.9 (-341.8) 18,198 380,431 17,200 532,019 -578,750 28,532

Total 1,303.500 -733,962 -69,690 -844,891 -974,188 515.576

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secondly, the lack of experience in the international trade of rice. Thesolution to both of these problems lies with the private sector which wouldnot only respond to trade opportunities more appropriately than INFA, butt woulddo so with lower marketing margins (Annex 4).

4.21 The monopsony on wheat, corn and soybean meal imports held by NFAand the subsidies received by NFA through low interest rates are NFA's twomajor sources of subsidy. During the 1977-82 period, NFA is estimated to havegained P 2.1 billion (about US$300 million) in current prices as net profit onthe difference between NFA's selling price and the CIF value of imports lessthe marketing margin (including normal prcifits) to move the commodity from thehigh-ocean vessel to barges or trucks, anei then to transport it to flour andfeed mills. By rediscounting P 16.5 million at a subsidy of 15 percentagepoints below market rate the Central Bank provided an implicit subsidy of P1.4 billion over the years 1979-82. The total subsidy granted to NFA for thisperiod is estimated to be about P 4.4 billion (about US$600 million). This isapart from the special allocation which the Central Government grants to NFAfor losses on the procurement of rice and corn from farmers.

4.22 The policies influencing the price of hogs have had the net effectof keeping producer prices of hogs about 5% above the border price resultingin a small gain in production and a small loss in consumption. Producers gainP 130 million while consumers suffer a welfare loss of P 120 million. Broilerproduction was heavily protected resulting in producers receiving pricesapproximately 1.6 times the border price of chicken. This caused anoverprodluction of 65,000 tons and under consumption of 28,000 tons. Importswere reduced by almost 93,000 tons resulting in a foreign exchange savings ofP 712 million. The effects of the policy were to reduce consumer welfare byP 770 million, increase the welfare of broiler producers by P 850 million, anidproduce a deadweight loss to the economy c4 P 225 million.

4.23 During the period 1979-81 yellow corn was also protected fromforeign competition by NFA holding the exclusive rights to import corn. Byits import and resale policy, NFA maintained the domestic price of corn atapproximately 15% above the border price. As a result of the policy, domesticyellow corn production increased by 123,000 metric tons and consumptiondeclined by 219,000 metric tons. Imports decreased by 342,000 tons, resultingin a foreign exchange savings of P 38f million, and the NFA earned P 18million in monopoly rent by being the sole importer. The pricing policyyielded a welfare gain to producers of corn of P 532 million and a decline inwelfare to consumers of corn of P 579 million. Since corn is a major feedcomponent in the broiler compound ration, raising the price of corn increasesthe cost of producing broilers. Tnis, therefore, requires that higher levelsof protertion and hiaher prices be provided for the broiler industry thanwould be the case if corn were supplied at the border price.

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4.24 Agricultural policies play a major part in directing resource flowsinto or out of agriculture, and between the various products within the sec-tor. Because only the most important exports or import competing goods areconsidered in this analysis, it is not possible to give net effects for theagriculture sector as a whole. However, it is clear that there have beenlarge reallocations of resources within agriculture and between consumers andproducers due to the agricultural policies. Traditional exports have beentaxed, lowering output and export revenue, while import competing products aresubsidized.

4.25 A notable feature of the analysis is the net efficiency loss (orloss in national income) which resulted from the intervention policies. It isestimated that the recent annual efficiency losses of the policies for the sixcommodities studied was of the order of P 0.5 billion. Of special concern arethe policies affecting copra and sugar. Production and exports of both ofthese were reduced significantly resulting in considerable foregone exportearnings.

4.26 The magnitudes of the calculated production, consumption, revenueand welfare effects of intervention are further increased when the exchangerate is included as a determinant of agricultural performance. The resultsare given in Table 7. The overvalued exchange rate acted as a depressant onagricultural performance. For example, rice exports under the current set ofpolicies were 900,000 tons lower over five years than would have been the caseunder a situation where prices were set at their opportunity costs. Foreignexchange earnings thus foregone amounted to P 1.7 billion. For copra andsugar approximately one million tons p.a. of production and exports for eachwere foregone amounting to 1.5 and 2.1 billion respectively in lost exportearnings. In total, over 190,000 full-time jobs and about P5.7 billion inforeign exchange were lost as a result of the existing policies. Likewise,the welfare transfers away from the farming sector and to consumers andgovernment were large. What is clear is that resources were flowing out ofagriculture at a more rapid rate than would be the case under a set of commer-cial policies that was neutral across and within sectors.

4.27 There are four principal cornclusions to be drawn from this analy-sis. First, the set of policies induced large efficiency losses to the econ-omy, as resources were diverted from their best uses. Second, considerableforeign exchange earnings were foregone in the agricultural sector. Third,the welfare transfers from producers to consumers may be inte:preted astransfers from the rural areas to the urban areas. This has strong socialimplications for employment, migration, wage rates, social services, andcongestion in the cities. Finally, the dynamic effects on growth of thePhilippine economy of the policies have been significant. The reallocatiornsand efficiency losses caused the economy to grow at a suboptimal rate. lnbrief, the social and financial cost of all these effects have been ones thatthe Philippines could :11 afford.

Table 7: ESTIMATED EFFECTS OF AGRICULTURAL PRICE INTERVENTIONS AND USE OF A SHADOW EXCHANGE RATEON SELECTED COMMODITIES, ANNUAL AVERAGE 1979-81

Change inChange in Change in foreign Change in Weltare Welfare Net

Change in Change in exports Government exchange (employment gain of gain of deadweightNFC production consumptio,; (imports) revenue earnings (full-time producers consumers efficiency loss

('000 mt) ('000 mt) ('000 mt) e000 o 000 workers) P 000 P 000 (p '000 Mt)

Rice

Rainfed 0.81 -72.4 200.7 -273.1 57,082 -522,546 -6,372 -761,412 654,688 49,642

Irrigated 0.81 -346.7 277.1 -623.8 78,897 -1,193,571 -38,825 -1,096,313 904,027 113,389

Overall 0.81 -419.1 477.8 -896.9 135,979 -1,716,117 -45,197 -1,857,725 1,558,7'S 163,031

Copra 0.58 -943.7 119.5 -1,063,2 1,600,635 -2,199,682 -77,005 -2,297,413 234,845 461,933

Sugar 0.64 -867.1 44.3 -911.4 1,127,312 -1,523,835 -62,433 -1,625,402 223,800 274,290

Hogs 0.88 -86.4 51.5 -137.9 40,500 -620,386 - -403,488 325,765 37,223

Broilers 1.36 44.3 -19.2 (-63.5) -212,442 585,046 - 620,301 -513,301 -105,308

Yellow corn 0.96 -36.3 70.0 (109.3) -5,813 -145,579 -5,495 -174,273 177,175 2,912

Total 2,686,171 -5,620,553 -190,130 -5,738,000 2,007,133 1,044,697

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F. Competitiveness of Philippine Agriculture

4.28 In this section estimates of "domestic resource costs" for agricul-ture, agroprocessing and manufacturing are assembled in order to evaluate theinternational competitiveness of these activities. An activities domesticresource cost (DRC) is a measure of the social opportunity cost of domesticresources used per unit of foreign exchange earned or saved. A DRC lower thanthe shadow exchange rate indicates a competitive activity since the shadowexchange rate is the social value of foreign exchange. The infoL;ation provi-ded by DRC calculations Is useful for two purposes. First, if DRC calcula-tions indicate that resources are employed in activities that are sociallyless profitable than other activities, then by reallocating resource usenational income will be improved. Second, DRC calculations provide a usefulindication of how competitive an activity would be if the intervention regimewere removed and the activity or industry were exposed to Internationalcompetition.

4.29 The basic conclusion of the analysis of DRCs is that the major agri-cultural activities in the Philippines have been internationally competitiveand that numerous (but not all) agroprocessing and manufacturing activitiesare also competitive or very close to it. Relaxation of commercial policy tomore closely approximate free trade is therefore not an action that need beviewed as devastating to industry in the Philippines. Certainly some lines ofproducts would scale down or go out of production but others would increaseeven more, so that overall the economy would be better off. The fact thatcertain manufacturing in the Philippines can be internationally competitivewithout protective assistance is demonstrated by the success of the exportzones and bonded warehouses in the Philippines where free trade alreadyexists.

4.30 The domestic resource costs and corresponding shadow exchange ratesfor selected agricultural products and for a range of agroprocessing and manu-facturing activities are shown in Table 8. For agriculture, domestic resourcecosts were less tha? 5he shadow exchange rate for all activities exceptbroiler production., This indicates that Philippine agriculture iscompetitive on a global basis despite the large disincentives imposed by thepolicy regime. For agroprocessing the DRC measures are much more dispersedthan is the case in agriculture, ranging from 4.7 for desiccated coconut pro-ducts to 26 for flour milling. It can be seen that agroprocessing of import-replacement products (dairy products, canned products, and flour milling) arenot competitive and would be imported under a free trade commercial regime.On the other hand, the processing of some export products such as desiccatedcoconut products, sugar milling and sugar refining is very competitive.

11/ In his study of Philippine poultry, Cabanilla argues that the DRC forbroiler production is falling over time as production technology istransferred from abroad and as management techniques are learned by localoperators.

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Table 8 DORESTIC RESOURCE COSTS FOR MAJOR AGRICULIURAL PRODUCTSAGROPROCESSING AND MANUFACTURING

Sector DRC SER /a Year

Agricu:ltureRice 6.3-6.9 - 1979Corn 7.9-9.5Copra 5.9-6.2 8.9 1976Sugar

Cotton 7.2 9.1 1975-81

Hogs (commercial) 6 9.0 1978, 1980Cattle (commercial) 6-7 9.0 1978, 1980Chicken (commercial) 11-17 9.0 1978, 1980Eggs (commercial) 7 9.0 1978, 1980

Logs 3.4-5.5 8.9 1974, 1977-79Lumber 6.2-6.9 *8.9 1974, 1977-79Plywood and veneer 4.7-6.0 8.9 1974, 1977-79

Agroprocessing 8.9 1974Slaughtering and poultrydressing 8.0

Meat products (uncanned) 9.4Dairy products 18.1Canned fruits and vegetables 10.3Rice milling 9.9Corn milling 7.4Flour milling 26.0Bakery products 15.7Sugar milling and refining 6.4Dessicated coconut products 4.7

Manufacturing 8.9 1974Textile mill products 12.2Other textiles 8.2Footwear 6.5Paper products and containers 11.3Tanning and leather finishing 9.6Tires and inner tubes 9.9Basic industrial chemicals 10.1Insecticides and agriculturalchemicals 5.2

Petroleum refineries 9.0

Average (all manufacturers) 8.9

/a SER = Shadow Exchange Rate in pesos per US dollar.

Note: Ranges of DRC in agriculture represent difference across technology,location, season, or sources of data.

Source: Bautista and Power, David (1983), and mission estimates.

- 34 -

4,31 For manufacturing, the selected DRCa presented here show some dis-persion, with some activities being iaternationally competitive (footwear,some textiles, and agricultural chemicals) while others are not internation-ally competitive (textile mill products, paper products, tires, basic chem-icals). Yet none of the DRCs of manufacturing activities are severely out ofline with the shadow exchange rate, and the weighted average DRC of all zanu-factures and agroprocessing equals the shadow exchange rate. this indicatesthat, on average, protection provided to manufacturing and agroprocessing isunnecessary for their survival. Those industries enjoying protection aremaking excess profits (economic rents) or are operating at a high Level ofinefficiency, or both. The absence or reduction of international competitionallows domestic firms to be complacent over resource use and efficLency where-as those exposed to the brisk windB of competition must be effi(:tent end inno-vative in order to survive.

- 35 -

V. ISSUES AND RECOMMENDATIONS IN PRICING POLICYAND MARKETING INTERVENTION

5.01 The GOP has made substantial progress in liberalizing trade inindustrial products and a major unilateral tariff-cutting exercise is nowunder way. It has also adjusted the exchange rate downward in response tomarket pressures. With respect to agriculture, the GOP acknowledges that sec-toral problems exist and intends that greater efforts be made in identifyingand resolving them. The GOP has thus demonstrated its willingness to addressdifficuLt structural adjustment issues, and conditions now seem favorable forinitiating reforms in the agricultural sector. The private sector has shown aremarkable responsiveness to price and nonprice incentives to agriculture ingeneral, and rice and corn production and yield increases in particular(Annex 8).

5.02 The policy issues and recommendations suggested here are dividedinto two categories - macro and micro - and indicate the directions in whichpricing and marketing policies should move. Policy changes need to be viewedin the broader context of their cross- and intra-sectoral ramifications. Insome cases, areas for further study are suggested.

A. Macro-Policy Recommendations

Policy Making Apparatus

5.03 Policy-making has been too fragmented or compartmentalized toproduce a coordinated national policy for the overall agricultural sector.Responsibilities for the sector regarding macro-policy as well as pricing andmarketing policies are dispersed among several ministries and agencies causingoverlapping of functions and lack of coordination. Most parastatals such asNFA, PCA, and Philsucom also have a large degree of autonomy in policy-making. Furthermore, there is no effective mechanism to recognize or dealwith the intersectoral effects of pricing and marketing policies.

5.04 The immediate result of this diffused management is an absence oflong-term direction for policy-making in the sector as a whole. This raisesdoubts about the ability of Government to direct its attention to priorityproblems. It is recommended that the GOP develop a plan to tighten, unify andbroaden policy analysis and formulation in agriculture (paras. 3.11-3.35).

Incentives and Interventions

5.05 Overall, agriculture has operated in an environment characterized bydisincentives to production. Such disincentives arise from national commer-cial and financial policies as well as measures specifically aimed at theagricultural sector. One of the most important past sources of bias againstagriculture originated from the trade interventior system which protected theindustrial sector and resulted in an overvalued exchange rate. The problem isbeing modified in the right direction. Tariff reforms in the industrialsector should lower the effective protection rate from 44% in 1980 to 29% in

- 36 -

1985. Export taxes, export quotas or embargoes on agricultural products, andparastatal control of marketing have also undervalued agricultural prices,particularly of the major export crops, and adversely affected price incen-tives to farmers. Poultry and to a lesser extent corn are the importantexceptions (paras. 4.10-4.13).

5.06 The net effect of these interventions is that resources have fLowedout of agriculture and into industry at a more rapid rate than would occurunder a neutral policy regime. The movement of resources out of agriculturehas the effect of lowering agriculturaL production, lowering export earningsCrom agriculture, provid4ng a significant income transfer from the rural tothe urban population, and results in a lower level of national output thanwould have occurred under a more neutral policy environment. In a dynamiccontext, the lower national output naturally means a reduction in economicgrowth. Slower growth of agriculture will also limit the speed of industrial-lzation since the absolute size of the agricultural sector makes it animportant source of capLtal, foreign exchange, food supply, and labor for theindustrialization effort as well as a major market for its products. Further,it contributes to social problems of drift and urban congestion and higherlevels of unemployment.

5.07 The irony of the present pricing policies is that they are largelyunnecessary and counterproductive to the stated government objectives ofraising living standards, stabilizing prlces, and promoting industrializa-tion. Almost all of the major agricultural activities appear to have acomparative advantage (paras. 4.30-4.33). Reducing the intersectoral bias inthe structure of incentives will go a long way to realizing the strong econ-omic potential of agriculture and in stimulating efficient growth and a moreequitable distribution of the Philippine national income. Agroprocessing andmost manufacturing would continue to remain viable in the absence of protec-tion although certain industries might suffer and possibly phase out ofproduction over time. But by allowing the competitive pressures of the worldmarket place to direct economic activity in the Philippines, local farmers andtraders would be encouraged to engage in the production and processingactivities most responsive to world demand and most beneficial for theindividuals involved and the nation as a whole.

Long-run versus Short-run Policies

5.08 Related to the first two issues of insufficient coordination inpolicy-making and the policy bias against agriculture is the emphasis given toshort-run policies in response to transitory conditions and, by comparison,the lesser attention given to longer-term objectives and the development ofpolicies required to achieve then. In the fertilizer industry, for example,long-run policy problems are not sufficiently distinguished from short-runissues in the choice of policy Lnstruments. When redesigning the decision-making apparatus for agriculture, provision should be made to ensure thatlong-term goals are addressed and long-term policies are developed, withinwhich shorter-term (and even emergency) policy issues may be assessed andappropriate policy packages formulated and implemented (paras. 3.10-3.35).

- 37 -

Price Stabiltzation

5.09 The argument that control of agricultural markets and prices, parti-cularly tlhrough parastatals, is required in order to ensure stable prices h1asbeen carried beyond the point of usefulness and now appears to be depressingproducer incentives by holding down average prices (para. 4.06). In addition,the stabilization schemes, which are invariably complex, are costly to bothadminister and operate. Prices will fluctuate, and both producers and consun-ers will respond. While under some conditions, it may be useful to cut offthe peaks and valleys of price fluctuations, attempts to engineer perfectprlce stability never seem justified. It is therefore recommended that as anoverall policy direction thie GOP and its policy-making agents take a much moreconservative approach to commodity price stabilization measures than they havein the past.

B. Micro-Policy Recommendations

National Food Authority

5.10 NFA's recent decision to allow private external trade of rice iswelcome. Its monopoly over rice exports has been an expensive operaticn whenthe related cost of storage and interest on stocks is considered. Noreover,the use of private traders is highly desirable to develop a viable exporttrade based on an improved quality of export rice (para. 4.21).

5.11 Monopsonistic control by the NFA of feed grains and soybean mealcontributes to higher livestock prices due to its large margins on theseinputs. Prices are stabilized at levels usually well above world prices.This is true also for wheat. The .NFA should therefore aove its prices closerto border prices. In addition the NFA should relax its restrictions on thedirect importation of wheat and feed grains since private industry can operatemore efficiently than it can (para. 4.22). This does not mean that NFA mustwithdraw from the business altogether. It could still monitor trade and nighteven 1have the power to collect a modest tariff on imports. But private tradeshould be allowed to directly influence the market.

Coconuts

5.12 Since the early 1970s, the Government sanctioned marketingorganization has increased its involvement in the production, processing andmarketing of cocolituts and its products through a series of levies onproducers, controlled pricing, export taxing and quasi-control of theprocessing industry. This policy has resulted only in low coconut output andlost opportunities for export of coconut oil; it has also had detrimentaleffects on the incomes of coconut producers, who comprise about 30% of thelabor force in agriculture. Since 1979, Governm:r.t has lifted the coconutlevy three times after having reinstated it. Currently, there is no levy oncopra, but Government policy even for the near term is not clear. & studyshould be undertaken to determine the appropriate role of Government in theindustry, to establish the most effective means of reducing costs and marginsin domestic processing, and to determine how to ensure that farmers get a fairshare of the proceeds of exports and domestic sales (para. 3.26).

- 38 -

Sugar

5.13 A comprehensive study should also be undertaken of the sugarindustry with the aim of determining the appropriateness of government inter-vention in the sector, weighing the pros and cons of the system and its effi-ciency compared with alternative approaches. The study should, inter alia,review and analyze the impact of current price setting, market allocation andrevenue liquidation artangements, the costs of Plu.lsucom's and Nasutra's oper-ations, and the factors affecting incentives to millers and growers (paras.3.19-3.22).

Fertilizer and Pesticide Authority

5.14 Time has eroded the original justification which led, in 1973, tothe establishment of FPA, which was to protect farmers from the high energyand fertilizer costs resulting from the first oil shock. With the changedworld energy picture, the Government now finds itself protecting a domesticnitrogen fertilizer industry that has become noncompetitive. A strong caseexists for exposing the domestic fertilizer industry to more competition andfor permitting Philippine farmers to gain access to agricultural chemicals(including fertilizers) at world prices. Just how such a shift toward liber-alization should be structured and timed deserves a special study. The Bankrecommends that direct controls of imports and domestic sales of fertilizerand farm chemicals by Government be progressively phased out and that Govern-ment limit its role to quality control and environmental protection from farmchemicals and fertilizers.

Credit Subsidies

5.15 With improvements in the agricultural terms of trade being madethrough the exchange rate realignment and the changing coamercial policytoward manufacturing, the need to subsidize interest rates for agriculture islargely removed. In any case, attempts to give agriculture preferentialaccess to credit do not work any better in the Philippines than in othercountries because of the various rationings that result (para. 4.09). Accord-ingly, the Bank recotmends that the GOP and its parastatals forego in thefuture the use of subsidized credit, including discounting to parastatals, asa policy instrument.

AGRICULTURE IN THE PHILIIPPINES: ISSUES IN PRICING POLICY

Volume II

ANNEXES 1-10

Table of Contents

Page No.

ANNEXES

1. A PROFILE OF THE AGRICULTURAL SECTOR............................ 1

2. ESTIMATING PROTECTION.............. . .. *......... 7

3. AN EXPLANATION OF THE WELFAREANAIYSIS.......................... 11

4. NATIONAL FOOD AUTHORITY ................................. *.*...*.....*.....*...*.*...*.....*.*. 15

5. FERTILIZER AND PESTICIDE AUTHiORITY .............................. 22

6. PRICE FBLTY........ 24

7. INTEREST RATE SUBSIDIES ...... ....... *......... ... *.. .. ... 27

8. PRODUCTION RESPONSE TO PRICE AND TECHNOLOGICAL CHANGE... ........ 30

9. LIVESTOCK-FEED RE.ATIONSIP ....................... .......... . 35

1. SUPRIOGRAP LES A FTE. . ........ . .-. . 37

011 SUPPORTING TABLES AND FIGRG U R ES........ 39

ANNEX I

Page I

A PROFILE OF THE AGRICULTURAL SECTOR

A. Characteristics of the Rural Sector

1. Over 34 million people, or 69% of the population of the Philippines,live in rural areas. Although, due to migration, the population growth rateis lower in the rural areas than in urban centers, the rural population couldincrease 50% by 2000.

2. Agriculture is the dominant occupation of the rural areas. Itengages over 85% of the employed rural population, or a little over half thetotal employment in the country. Crop production, particularly rice, corn,coconuts and sugarcane, is the major enterprise, accounting (in 1975) for 58%of gross value added in the sector. Livestock and poultry contributed 18%,fisheries 17% and forestry 7%.

3. Philippine agriculture is characterized by small units, farmed byfamilies, many of whom hold their land as tenants. In 1960, 80% of the 2.2million farms, covering 43% of the cultivated area, were under 5 ha in sizeand 40% were under 2 ha. The average farm size was slightly over 3.5 ha.Since then probably a further 1.2-1.3 million ha of land have been broughtinto cultivation but, as a result of population growth and traditional inheri-tance customs, the average farm is probably only 2.7 ha, and fragmented. Ofthe estimated 9 million ha under cultivation, about 1.0 million ha are irri-gated, mainly for rice production. There are few unsettled frontiersremaining: probably not more than a million ha of land could still be broughtunder cultivation mainly in the Cagayan Valley and in Mindanao. (Theeconomics of rehabilitating a further one million ha of cogon grasslands needsto be studied.) It is estimated that irrigation could be extended to afurther 1.2 million ha if economically justified.

4. Land Classes and Tenure. The Philippines' total land mass ofapproximately 30 million hectares may be divided into four geographicalzones. The coastal wetlands, comprising mangrove areas which, together withthe off-shore reefs and shallow (under 7 fathoms) seas, are exploited by"municipal" fishermen; the lowlands, covering 2.5 million ha of relativelyflat land, about 40% of which is devoted to irrigated farming, mainly of rice;the uplands, which comprise about 11 million ha, typically at higher eleva-tions and undulating so that it cannot be brought under irrigation, but with aslope of less than 18% and suited to cultivation using minor soil conservationmeasures; and the forest zone, with the remaining 17 million hectares, com-prising land with a slope exceeding 18% on which farming is prescribedalthough permits are issued for logging and livescock grazing. Only 5 mil-lion ha remain of commercially valuable forest.

5. Since 1972 the Government has pursued a program of agrarian reformaimed at the transfer of land ownership to tenant farmers on rice and cornlands. The reform is being implemented in two ways: under "Operation LandTransfer," applicable to all landowners with over 7 ha, tenants become owner-cultivators, paying for the land over 15 years; and under the LeaseholdEnforcement Program, for farms up to 7 ha, tenants receive security of tenure

ANNEX 1- 2 - Page 2

on land being cultivated. Some 730,000 ha and nearly 400,000 tenants weretargeted for the land transfer program, and about 1,460,000 ha and over 1 mil-lion tenant families under the leasehold program. Land reform has movedfastest in Central Luzon and areas near Manila and slowest in Mindanao andother regions with security problems, Certificates of Land Transfer have beenisBued to about 80% of the tenants involved in Operation Land Transfer andleaseland contracts have been issued to nearly 70% of potential beneficiariesin the leasehold program.

6. Rural Incomes. Productivity in Philippine agriculture is typicallylow and, combined with land scarcity, this results in low incomes. Accordingto the Bank's 1980 Poverty Report, about three quarters of the poorest 40% inthe Philippines in the 1970s lived in the rural areas of which up to 70% weredependent on agriculture. In 1971 the average family income in rural areaswas about P 4,400 ($580), about 75% of the national average, and, apparently,little more than half that of the urban areas. Income distribution was highlyskewed. The bottom 40% received only 13% of rural incomes and the lowest 20%only 5.2%; the top 20% received over half. Income disparities have presumablybeen a major factor in heavy rural-urban migration. Although urban birthrates have been only 70% of rural rates, population growth rates in urbanareas have been one third above the national average.

7. Farm size is the most important variable explaining differences inincome level, and the distribution of cultivated land among Filipino house-holds is highly skewed: 61% of farmers have less than 3 ha and own only 24% ofall farmland, while 5% of farmers have more than 10 ha in production andtogether account for 34% of farmland. Also important among factors explainingincome variations are qualities of land and the non-availability of alterna-tive, non-farm, jobs. Tenancy was not found to be as important a correlate ofpoverty as is often supposed. Rural poverty is particularly associated withfarmers growing rice and corn because rice and corn are the dominant staplesin the Philippines and little more than subsistance amounts are being producedon many of the smallholdings especially in the rainfed areas. Not surprisingly,extensive poverty is found in inaccessible, resource-poor areas. It is asso-ciated with shifting agriculture in mountain areas, "municipal" fishermen, andlandless laborers, and with past neglect of the muslim areas of Mindanao. Theregional incidence of poverty varies markedly, The highest incidence is foundin Central and Eastern Visayas, Northern Mindanao, Bicol and the CagayanValley; the lowest in Southern Tagalog, Central Mindanao and Central Luzon.

8. Sector Organization, Both the public and private sectors areactively involved in the agricultural sector in the Philippines. The publicsector is primarily concerned with policy formulation and planning, with mostresearch and extension work, price fixing and interventions in marketing, andthe provision of about one third of all rural credit. The predominant unit ofproduction in Philippine agriculture is the small, privately owned, owner-operated farm, both in the irrigated and rainfed areas, but tenancy in variousforms is practiced on one third of the farms. These include cash rental,share tenancy, and payment of a fixed quantity of farm output. The privatesector also produces, imports and distributes fertilizers, pesticides,feedstuffs and veterinary supplies; plays the major role in purchasing,processing and distributing marketed produce; and provides short-term credit.

ANNEX 13 Page 3

9. Within Government, responsibility for the agricultural sector isdivided among several ministries and many other institutions and agencieswhich are not necessarily under the direct control of the principal sectorministries. Some 15 agencies provide varying forms of extension services andat least eight agencies may have a role in irrigation projects.

10. The Ministry of Agriculture (MOA) is primarily responsible forpolicy and planning concerning crops and livestock; for conducting appliedresearch and providing extension services; production of improved seed, plantmaterial and animal breeds; plant and animal disease control; cooperativedevelopment a.d soil testing. In accordance with the policy of decentralizingGovernment services, 12 regional offices of the MOA were created in 1980- toprovide technical services to the regions 2 The M1i1stry controls the plansand programs of foxy Government-owned corporations 32 and of eight otherattached agencies - whose role is to promote crop production or controlaspects of agricultural development. The Minister chairs a coordinating body,the National Food and Agricultural Council, and tS1e Ministry has a role inpolicy formulation for four supervised agencies _ The Ministry of NaturalResources is responsible for fisheries, forestry, mining and lands. Responsi-bility for the fisheries resources is vested in the Fisheries IndustryDevelopment Council (FIDC), for planning; the Bureau of Fisheries and AquaticResources (BFAR) for regulation, research, extension and statistics; and thePhilippine Fisheries Development Authority (PFDA) for marketing regulation anddevelopment. Responsibility for the control of forest resources, reafforesta-tion and forest management rests with the Bureau of Forest Development (BFD),and land surveying and titling are the responsibility of the Bureau ofLands. The Ministry of Agrarian Reform is charged with carrying out thecountry's land reform program. It is also responsible for settlementactivities which cover some 50,000 families on nearly 720,000 ha in over 40schemes, scattered throughout the Philippines though mainly in Mindanao.

1/ Authorized by Presidential Decree No. 1579, June 1978.

2/ Responsibilities are set out in MOA Administrative Order No. 2, Series of1981.

3/ Philippine Tobacco Administration, Philippine Virginia TobaccoAdministration, Coconut Investment Company, Philippine CottonCorporation.

4/ Fertilizer and Pesticide Authority, Abaca rndustry Development Authority,presidential Committee on Agricultural Credit, Philippines AgriculturalTraining Council, Pagkain ng Bayan ["Food for the Needy"] NationalAdvisory Council, National Governing Board of the Philippines TrainingCenter for Rural Development, and Philippine Dairy Corporation.

5/ Green Revolution Expanded Program Action Committee, Livestock DevelopmentCouncil, National Rain Stimulation Committee and National Meat InspectionCommittee.

ANNEX IPage 4

-4-

11. The development, operation and maintenance of all national irriga-tion systems In the Philippines is the responsibility of the NationalIrrigation Administration (NIA), a government corporation organized under theMinistry of Public Works. The organization of farmers to participate in com-munal irrigation developments is the responsibility of the Farm SystemsDevelopment Corporation (FSDC) which answers to the Ministry of HumanSettlements. The National Food Authority (NFA) acts as buyer of last resort,mainly for grains, and, through Food Terminal Inc., its wholly-owned subsidi-ary, also handles vegetables, poultry, eggs, fish, oil, sugar and milk. Ithas a mandate to ensure stable prices through its purchase and storage activ-ities, and controls grain imports and exports. NFA comes also under thepurview of the Mialstry of Human Settlements and the administrator hasministerial ranku.4 Other important bodies under the President's Office arethe Philippine Coc.aut Authority (PCA) and the Philippine Sugar Commission.Each of these organizations has sources of funds which have enabled them tooperate largely independently of the principaL ministries.

12. Other government departments directly involved in the rural sectorinclude the Ministry of Education and Culture, the Ministry of LocalGovernment and Community Development, the Ministries of Health and PublicWorks, and the Ministry of Commerce and Industry which directly administersoverseas sugar sales under the International Sugar Agreement, and supervisesthe rice and corn board and the fiber inspection service.

13. Rural Credit. Historically, agricultural credit has been providedlargely by traders and other informal sources and although there was a signif-icant expansion of institutional credit in the 1970s, only about one third ofrural lending is by formal sources, a reflection of high arrears under pastloans. Small farmers in particular have problems obtaining access to formalcredit, and formal credit facilities are concentrated in the richest areas: in1980 Metro Manila and Southern Tagalog had 42% of banking outlets and receivedone third of loans. About three quarters of institutional rural credit isprovided by over 1,000 private rural banks, owned and operated by close familygroups. In addition to their own deposits, rural banks have access to CentralBank rediscounting facilities, but many have not been able to take advantageof these facilities because of arrears in excess of the 25% limit for redis-counting, caused particularly by their involvement in Government's Masagana 99rice production program in the 1970s. High transaction costs of dealing withsmall farmers have also inhibited the rural banks' participation.

14. Commercial Banks have been required to set aside 25% of theirloanable funds for agricultural finance but except for the government-ownedPhilippine National Bank (PNB) they have few rural branches, and the quotasystem has been thwarted in its objective as banks invested in Central Bank

6/ NFA's powers are set out in PD 1770, January 1981.

ANNEX IPage S

securities ratlher than directly in agricultural lending.7/ The government-owned Land Bank of the Phi-lippines, established in 1964 to pay off formerlandlords aAd to provide production cred't to land reform beneficiaries, isalso engaged in commercial banking. Its lending has been modest (outstandingloans total about $10 million). The Development Bank of the Philippines(DBP), also fully government owned, is much larger with a total loan portfolioexceeding $1.5 billion. Agricu]tural loans comprise 80% of the number ofsubloans but only 20% of the amount of subloans let by DBP. With on]y 60outlets, DBP's geographical coverage is limited. Credit is medium- and long-term and tends to be to larger farmers.

Recent Performance

15. Although there has been considerable variation by subsector, thetrend growth rate of agricultu-e as a whole was a respectable 5% during the1970s. This pace has slowed a. in 1982 was about 3.5%. Once a majorimporter of rice, the Philippines has exported small amounts in the last sevenyears and rice self-sufficiency seems assured in the 1980s and beyond,requiring only the completion of irrigation works already started (about350,000 ha), greater attention to rehabilitation than in recent years, andmodest increases in yields of rainfed and irrigated rice. Any further expan-sion of irrigation before the 1990s would need to be conditional on a steadyc-;port market for Philippine rice, much beyond the levels of the past fewyears, and/or success 'l diversification of irrigated land into profitaolealternative crops. In physical terms, production of fish, pigs and poultryhas expanded rapidly. These are preferred foods (for which, normally theincome elasticity of demand exceeds 0.5) and can expect a continuing buoyantdemand. Based on the latest available data, root crop, vegetable and legumeproduction grew at well above average rates througlh the 1970s and corn (usedfor food and feed) averaged about 4% a year. Both coffee and rubber produc-tion rose by over 10% a year from a small base, but among other internation-ally traded crops, cocoa production probably fell, abaca and tobacco produc-tion stagnated, and sugar production rose under 2.5% a year vittually allgoing to domestic consumption. Growth in the production of coconut, thecountry's major export crop, is difficult to assess because of a change in thestatistical series. However, the producing area grew at some 5% p.a. over thedecade. Although copra exports fluctuated widely and no trend was discefn-4.ble, export of both desiccated coconuL and coconut oil posted steady arnnualgains averaging about 5% and 13% respectively. Banana and pineapple exportsalso rose steadily.

16. The contribution of agriculture to total export value has fallensteadily, from 74% in 1969 to 50% in 1978 and 34% in 1981. In 1969, forestproducts were the most important export group (30% of total) followed bycoconut products, sugar and mineral products (each with about 19%): by 1981coconut products were the most important agricultural group, but accounted foronly 12% of the national total after manufactures (45%) and minerals (17%).

7/ Government now (April 1983) plans to replace the quota system by anannu.al allocation of resources to sectors by the Central Bank and NEDA.

ANNEX 1- 6 - Page 6

Sugar accounted for 8%, forest products only 6%, and fruits, vegetables andall other agricultural exports combined (fish, tobacco, abaca, coffee, rice) atotal of 7%.

17. In 1972 prices, the contribution to GNP of agriculture, fishery andforestry rose from f 14,700 million in 1970 to P 22,600 million in 1978, orfrom P 555 to P 673 per head of the rural population, a growth of about 2% percapita per year. Between 1972 and 1982, the share of the sector in GNP fellfrom 28.5% to 22.5%. Thus the sector on which nearly 70% of the populationlargely depends earns under one quarter of the country's income.

18. When a decline in the exceptionally high prices, which had beenobtained for coconut products, sugar and copper, coincided with the adverseimpact of oil price increases, large current account deficits in the balanceof payments emerged in 1975-76. To have contained these deficits would haverequired a rapid growth in export volume relative to import volume and arecovery in the overall terms of trade, which declined 40% from 1974 to1980. Neither of these events occurred. In the last 2 or 3 years, even incurrent prices the absolute value of all the major agriculture exports hasdeclined, and copper prices have sagged. Thus, the deficits have continued,in 1981 reaching $2.5 billion, or 6.4% of GNP. Early in 1983 the immediateeconomic outlook is mixed. Although the recent reduction in OPEC prices willbenefit the Philippines, prices continue high for both oil and nonoil imports,and the prospects of an early reduction in imports appear slim while industryis dependent on imported raw materials, and an energy program can develop onlygradually. On the other hand, Government's 40% devaluation of the peso in1983 will help to close the trade gap; there has been a recent hardening ofsome commodity prices, including coconut oil; and the 1983 modest recovery ofthe US economy should have a considerable positive impact on the Philippines,including the agricultural sector.

19. The trend in absolute poverty - defined as living at income levelswhich do not allow access to even minimum dietary and non-dietary needs - hasprobably been a worsening one. On top of slower overall economic growth, aland frontier which is largely closed, and high oil prices, bad weather in thelate 1970s probably reversed progress made in reducing rural poverty in theearly part of the decade, when absolute poverty was the lot of some 13 millionpeople in the rural areas of the Philippines, an incidence of 44%. In view ofthe high birth rate in the Philippines, it is likely that the number ofabsolute poor in rural areas has continued to rise in recent years.

20. Another area which gives considerable cause for concern is thedeterioration of the environment. Although data are lacking, it has beenestimated that of the 17.0 million ha of forest land in the Philippines,almost 5.0 million ha have already been denuded. Uncontrolled logging and theactivities of shifting cultivators who frequently move into logged-over areashave resulted in large areas covered with cogan grass (Imperata cylindrica)which represses regeneration of trees and adds to fire hazards. Typhoons havecaused severe damage to denuded watersheds, some 1.5 million ha of which arethe sources of water to important irrigation, power and water supply dams, andthe potential threat to these facilities from erosion and sedimentation isenormous. Also affected are the fragile mangrove areas and coastal reefswhich are the source of livelihood of municipal fishermen.

ANNEX 2Page I

ESTIMATING PROTECTION

l. The basic production, consumption, trade and price data used to cal-culate the welfare effects of Philippine agriculture, presented in Appendix 1,come from official Bureau of Agricultural Economics, Ministry of Agriculturesources. The basic references used to estirnate protection in the Philippinesare shown in Appendix 2.

2. Elasticities of supply and demand were obtained in large part fromthe published work of the National Policy Analysis Staff, Ministry ofAgriculture, supplemented by work done by the International Rice ResearchInstitute, Los Banos.

3. Effective protection coefficients (EPCs) for agriculture werecalculated from EPRs reported in David (1983) except for yellow corn and sugarthat were calcuLated by the Bank. Net effective protection coefficients werecalculated by the Bank based on the conservative assumption that the currencyis overvalued by 20%.

4. EPCs are simply 1 + E-R where the effective protection rates aregiven by the ratio of the protecPed value added to the free trade value addedfor each activity (industry, commodity). The general formula is:

nrP + T - aij.rP (1 + T.)

EPEL il 1 1 -n

rp - a. ..rP.3 i= 1 1

where r = official exchange rate

Pi or i = border price of output, j, or inputs, i.

Tj or i = implicit tariffs or subsidies on output, j, or inputs, i,calculated as the ratio between the domestic price andthe border price, in domestic currency, and

aij = ntermediate inputs per unit output

5. The formula used to calculate NERPs is:

rP O + T n ~~~~(1 + T..rP. (1 + T.) _ i a ij.rP i

NERPj = -1* ~~~n

r P. £ a.. r*P.

where r* the shadow exchange rate (SER).

ANNEX 28 - ~ Page 2

Suppressing superscripts, the relationship between the EPR and NEPR measurescan be seen to be

NEPR r(I + EPR) _r

6. The labor coefficients used to calculate the employment effects ofintervention policies were drawn from diverse sources. For rice the sourcematerial is David and Barker, Armas, and IRI. For corn, the Armas study andRodriguez are the sources. The labor coefficients for copra farms are fromSchmid et al., and Clarete and Roumaset, while the data for labor use in sugarfarms were obtained from Armas and Torres.

ANNEX 2Appendix I

Variables Used In Quantitative Analysis

EffectiveLong-run Long-run protection Labor

Domestic elasticity elasticity rate coeffi-Year price Production Consumption Exports of supply of demand (EPR) Net EPR cientsP/ton '000 m.t. '000 m.t. '000 m.t.

Rice

(Rainfed) 1979-80 1,500 2,058 1,901 74 0.15 -0.45 0.953 0.76 2Z(Irrigated 1979-80 1,500 2,842 2,625 101 0.52 -0.45 1.036 0.85 28Copra 1980-81 1,200 2,172 330 1,710 0.60 -0.50/a 0.71 0.61 20Sugar 1974-80 1,070 2,267 394 1,602 0.68 -0.20 0.77/b 0.62 18Tiogs 1980 3,960 704 629 0 0.90 -0.60 0.95 0.77 -Broilers 1980-82 12,540 209 145 0 0.80 -0,50 6.00 5.73 -Yellow corn 1981-82 1,280 3,248 3,357 -219 0.29 -0.50 1.341b 1.07 35

/a Elasticity is for coconut oil.

/b Nominal Protection Rate (NPR).

ANNEX 2Appendix 2

- 10 -

References

Armas, A. "Economic Incentives and Comparative Advantage in Rice, Sugar andCorn in the Philippines." Council of Asian Manpower Studies, School ofEconomics, University of the Philippines, undated.

Clarete, R.L. and J.A. Roumaset. "An Analysis of the Economic PoliciesAffecting the Philippine Coconut Industry." Paper presented at the PIDS-PCARR Workshop, March 1983.

David, C.C. and R. Barker. "Labor Demand in the Philippine Rice Sector."Presented at a meeting on Labor Absorption in Asian Agriculture, Bogor,Indonesia, June 1981.

David, C.C. "Government Policies and Farm Mechanization in the Philippines."Staff Paper No. 82-3, PIDS, August 1982. "Economic Policies andPhilippine Agriculture." Paper presented at PIDS-PCARR Workshop, March1983.

International Rice Research Institute, unpublished survey data from the Agri-cultural Engineering Department.

Rodriguez, A. "Comparative Advantage of Corn Production in the Philippines."Unpublished M.A. thesis, School of Economics, UPLB, April 1982.

Schmid, R., et al. "Rice in a Coconut Environment." Department of Agricul-tural Economics, IRRI, 1981.

Torres, E. "Employment and Income in Sugarcane Cultivation in thePhilippines." Study for the International Labor Organization, Bangkok.

ANNEX 3Page 1

AN EXPLANATION OF THE WELFARE ANALYSIS

1. The intent of this annex is to lay out in terms understandable tothe informed layman, the basis for the estimates of the welfare and distribu-tion effects of commercial policy as estimated in this paper. The theoreticalconstruction and the formulae used to calculate the effects are well known andwidelT accepted in the economics profession and are detailed in Bale andLutz_- Nonetheless, it is necessary to start with a simple graphicanalysis. Consider Figure 1 where the supply schedule and domestic demandschedule for one product such as copra, is shown. Price is plotted on thevertical axis and quantity (produced or consumed) is plotted on the horizontalaxis. The slope of the demand function indicates that as the price of theproduct rises, the quantity consumed declines. The slope of the supply func-tion indicates that as the price of the product increases producers increaseoutput of their product. In the absence of trade the unique point wheredemand equals supply is shown as E. This is called the no-trade domesticequilibriun. Since the Philippines is an exporter of copra, the world pricemust be above the no-trade equilibrium price - say at Pi. Since Philippines'exports of copra represent a very small share of the world vegetable oil/mealcomplex, it is assumed that the Philippines can export any quantity it wishesat price PI. Thus the world demand for Filipino copra is DW. At this pricedomestic production is OOI, domestic consumption is OQ2 and the quantityexported is Q2Q1'

2. The Filipino Government then decides to impose a tax, t, on copraexports, equivalent to P1PO. This effectively lowers the price that producersreceive for all of their copra. To them the world demand function now appearsas DW+t. At this lower price, PO, producers cut back production to Q3. Sinceproducers can sell on the international or domestic market, they now offermore on the domestic market and continue to do so until the domestic pricefalls to the same level as the after-tax international price. At the lowerprice consumers increase consumption to Q4. The difference between productionand consumption, Q3Q4 is exported. Clearly exports have declined. Thegovernment earns tax revenue equal to the quantity exported multiplied by thetax rate, t. This corresponds to the rectangle bounded by Pop1 and Q4Q3.

3. In order to extend the analysis further it is necessary to define anadditional concept. The triangular area under the demand curve but above theprice line, that is P1Da, is said to be the "economic surplus" collected byconsumers, and the area above the supply curve but below the price line, thatis SPIg, is said to be the "economic surplus" earned by producers. Bothmeasures are expressed in terms of the domestic currency.

4. When the government imposes the export tax the economic surplus ofproducers and consumers is altered and it is these amounts that are calculatedin the earlier analysis. Specifically, when the tax is imposed such thatprices fall to PO consumers are made better off. The increase in their

1/ Bale, Malcolm and Ernst Lutz, Price Distortions in Agriculture and TheirEffects: An International Comparison; World Bank Staff Working PaperNo. 359, October 1979; Washington, D.C.

ANNEX 3

- 12 -

welfare is measured by the increased economic surplus, P0 PIad. Producers,contrarily, suffer a loss of welfare measured by the area P0Plgf. As notedearlier, the government earns tax revenue of cdfe.

S. Still referring to Figure 1, it is now possible to net-out theeffects of the policy. Consumers and government have gained while producershave lost. There has therefore been a transfer of wealth (revenue) fromproducers to consumers and government. But producers lose more than consumersand government gain. The overall net loss Is measured by the two trianglesacd and egf. This is called the "deadweight loss" or the "efficiency loss",and it represents the net loss to the economy resulting from the tax which hashad the effect of misallocating resources between producers and consumers.It is always the case that interventionB by government in the pricing mecha-nism not only cause a reallocation of resources (wealth) but also result in adeadweight efficiency loss to the economy.

6. Now consider the case of an import tariff such as that imposed onpoultry. It is depicted in Figure 2. As in Figure 1, the supply and demandschedule for a product such as poultry is shown. Again E is the no-tradedomestic equilibri -. Since the Philippines is an importer of poultry theworld price must be below the no-trade equilibrium price, say at Poo At thisprice, domestic production is OQ3, domestic consumption is OQ4 and imports are

the difference, Q3Q4

7. The Government then decides to impose a tariff, t, on imports. Thisraises the price that consumers must pay for poultry to Pi* The world supplyfunction now appears to Filipinos as Sw*t. At this higher price domesticproduction increases to 0Q1, domestic consumption declines to °Q2, and Importsdecline to the difference, Q1 Q2. The government earns tariff revenue equal tothe quantity ii.ported multiplied by the tariff rate. This corresponds to therectangle cdfe. Consumers have lost an amount equivalent to P hePi andproducers have gained an amount P bcPl. Netting out these gains and Losses,the two triangles bed and efh remain as net losses. As in the previous casethese represent the net "efficiency loss" of the policy. Thus the interven-tion not only causes a reallocation of income from consumers to producers andgovernment but also results in a net loss of income. These effects occurwhenever import restrictions are imposed on a product, be it a manufacturedgood, agriculture, or inputs to be used in manufacturing or agriculture.

8. If instead the government imposes a quota, deciding to limit importsto the level that would result from the imposition of the tariff, i.e., toQ1 Q2 rather than Q3Q4 which would be imported under free trade, the effectsare almost identical to those of a tariff. Refering still to Figure 2, aquota on imports of QlQ2 is seen from the Philippines as altering the worldsupply function, S , to Pofe. That is, the world supply function becomeskinked. Facing thYs situation consumers consume OQ2 at price Pl, as in thecase of the tariff, and producers produce OQ1 at price Pi. Consumers lose andproducers gain an amount identical to the earlier cases and the net"efficiency" losses are the same as before. The important difference in thissimplified presentation is that the revenue cdfe that went to the governmentas tariff revenue now goes to importers as "monopoly profits" - the rent theyearn on holding quota rights.

ANNEX 3Fis2ure 1

- 13 -

Fgure 1THE EFFECTS OF AN EXPORT TAX

D

Price\(Pesos)

Supply

P D1

° ~~~~~2 Q4 Q3 Q ..... Qatt

Woold Ban-25

ANMEX 3

- 14 -

Figure 2THE EFFECTS OF A TARIFF OR QUOTA

Prce

boo SW

6|3 Qe; 4

World Bank- 2580

ANNEX 4Page 1

- 15 -

NATIONAL FOOD AUTHORITY

1. In its concern for food security, the Philippine Government estab-lished the National Rice and Corn Administration in 1936 to provide supportprices to rice and corn farmers. This institution eventually evolved withexpanded powers to become the Rice and Corn Administration in 1962. Theseagencies procured rice and corn domestically in order to defend floor prices;they also imported these commodities on a tax free basis. The private sectorwas prevented from importing first by high tariff walls and since early 1960sby Government decree.

2. The new Government of 1972 created the National Grains Authority(NGA) as a government corporation which was supposed to have adequate funds,operational flexibility and independence from immediate political pressures tocarry out price policies consistent with long-run agricultural policy objec-tives. NGA was immediately challenged by the global commodity crisis of 1972,followed by the oil crisis one year later. Through domestic procurement andimports, NGA managed to ensure the continued availability of rice and corn.It moved into wheat imports in 1974 when flour millers requested that NGAimport its wheat requirements because of high world prices and in order torelieve the firms of import tariffs and other taxes. Over the 1970s, itsimportance grew as it invested in warehouses, post-harvest equipment andestablished a supply-price monitoring system throughout the country.

3. Steps were taken to help reduce grain marketing costs and improvefood security. Some of these steps and organizational changes were:

(a) a warehouse receipts system was organized in 1978 permitting farmersand traders to use their receipts as collateral for loans;

(b) an insurance scheme was established against grain losses to covernatural calamities such as flood and fire;

(c) an institute was set up to improve efficiency in post-harvesthandling, processing and storage of grains; and

(d) a large food processing and marketing complex was made operationalfor the purpose of stabilizing basic food comT?dity prices by retailselling through the network of KADIWA stores,_

4. In 1981, the National Food Authority (NFA) was created from theNational Grains Authority and charged with the responsibility of marketregulation of the entire food industry. It is attached to the Ministry ofHuman Settlements with its chief executive holding rank of a Cabinet Minister.

1/ The KADIWA stores are retail stores located in low-income neighborhoodsselling food staples at regulated prices to ensure market competitionamong other retail suppliers. Currently, NFA operates more than 200stores in the major cities of the country.

ANNEX 4Page 2

- 16 -

5. Government interventions in wheat, soybean meal, and corn haveresulted in profits to NFA while losses have been incurred mainly from themarketing of rice and domestic procurement of corn. Table 1 shows theamounts of wheat, corn and soybean meal which were imported during the 1976-82 period. It also estimates the difference between the NFA selling price andthe CIF value of imports less the marketing margins, including a 10% return oninvestment required to move the commodities from the ocean-going vessel to thefeed and flour mills. This analysis shows that NFA is reaping substantialopportunity profits from its position as a monopoly trader in the Philip-pines. Over the 1976-82 period, NFA made a net profit of P 2.4 billion (about$310 million) which it used for financing capital investment and operatingexpenditures. This amount represents the loss to the economy because NFAholds its monopoly on imports.

6. The returns varied annually according to world price trends. Worldprices of wheat and corn moved together and reached a new high in 1980.Returns from imports of soybean meal partly cushioned what would have been asharp drop in NFA revenues derived from price margins during that year. Overa seven-year period, soybean meal exhibited the greatest price margin based onan average implicit tariff of 34%, while the implicit tax on wheat grains islower at 25%. Profits from wheat accounted for about 77% of the total,followed by soybean meal at 14%; the share of corn is only about 9%.

The Problem o! Rice Exports

7. It should be rnoted that only about 20% of the rice which governmentprocured from the domestic market has been exported between 1977 and 1982.The majority has been accumulated bringing average government stockholdingfrom 1978 to April 1982 up to more than 837 thousand tons.

8. Why has there been an apparent reluctance of the NFA to export moreand reduce its carrying cost of government stocks? The official justificationis the need to maintain a larger buffer stock, and that rice prices in 1982/83were low so stock levels could accumulate at a more modest budget cost. Alsoit is politically and psychologically not possible for the Philippines toexport rice in good years and import it at other times even though this mightbe an economically desirable policy. Nonetheless, the World Bank stillexpresses concern at the level of stockholdings that accumulate at times andthe seemingly arbitrary decision-rule on stock levels. The optimal level ofstocks (150-300 thouind mt) suggested by reserve stock analysis has beenfrequently exceeded.- Unfortunately, world prices dropped in 1982 whenstocks were at a record high and NFA's credit line was nearly exhausted. Thecost of implementing price policy goals would have been clearly lower if morereliance was placed on international trade. Although rice production maydecline and demand increase because of the adverse impact of the 1983 droughton corn production, exporting the surplus rice at the previously high price

2/ A. Te, An Economic Analysis of Reserve Stock Program for Rice in thePhilippines, University of the Philippines, 1978.

ANNEX 4Page 3

Table 1: ESTIMATED NET PROFIT FROM IMPORTS OF WHEAT, CORN, ANT) SOYBEAN MEAL /a

Wheat Corn Soybean meal NetCalen- Gross return Gross return Gross return profit

dar Imports (P/t) (P mln) Imports (Pit) (P mln) Imports (P/t) (P mln) (P ruin)year ('000 mt) /a /b ('000 mt) /a /b ('000 mt) /a lb Ic

1976 710.0 326 231.5 96.4 123 11.9 - - - 243.41977 618.2 587 362.9 148.3 181 26.8 - - - 389.71978 753.9 510 384.5 105.8 204 21.6 44.2 772 34.1 440.21979 77.5 305 237.1 34.6 208 7.2 123.6 476 58.8 303.11980 822.0 85 69.9 218.5 18 3.9 215.0 559 120.2 194.01981 827.7 232 1,920 256.3 121 31.0 217.8 439 13.6 236.61982 903.2 383 345.9 342.0 366 125.2 387.5 776 97.2 568.31977-82

Total 1,i8238 227.6 323.9 2.375.3(Percentage (77) (9) (14) (100)of total)

/a Difference between NFA selling price and CIF unit value of imports less the marketing margin to movecommodity from the port to the teed or flour mills.

/b Net return per ton multiplied by the quantity of imports./c Sum of the net returns from wheat, corn and soybean meal.

Note: The marketing margin from the port of Manila to the feed mills includes costs of bulk loading andunloading; transport of commodity by 100 km; use of 12 m ton payload capacity trucks or river bargesto flour mills, an average wheat price (cif) of P 1,4561m ton, corn price P1,0851m ton, soybean priceP 1,767/m ton in current prices for the years 1976-82. A 10% return (P 994 million) on the invest-ment (P 9.9 billion) for the entire period is also included in the marketing margin as "normal"profits. The average marketing margin for the period was estimated to be P 211/m ton in currentprices and was estimated to be 19.4% of the cif commodity price of corn; and 11.9% of soybean meal.NFA selling price of wheat is ex-vessel; flour mills absorb the marketing costs of moving the wheatfrom ocean vessels to the flour mills, largely by river barges.

Source of basic data: NFA and mission estimates.

ANNEX 4- 18 - Page 4

and importing rice at the currently low world prices to fill up any potentialdomestic shortage would have been more efficient.

9. Unlike for a commercial trader, the cost of holding stock is verysmall for the NFA because the cost of part of credit is only 6% compared to atleast a 21% market interest rate. Also the financial resources available toNFA from price margins derived from imports of wheat, soybean meal and cornhave been substantial. On the other hand, rice exports show losses in theagency's accounts. Although domestic price was slightly lower than borderprice, P 42.7 million were lost by the Government in exporting rice between1977 and 1979, because rice for export had to be separated and graded atconsiderable cost to meet quality standards. Philippine rice normally has ahigh percentage of brokens (25 to 45%) which is heavily discounteA in theworld rice markets.

10. There are at least two issues which need to be addressed if thePhilippines continues being in a rice surplus situation.

(a) While the problem of rice quality is well-recognized, the policyresponse has been to introduce government interventions eitherthrough subsidized credit for new milling equipment or for thepossibility of designating export zones where production and millingof rice shall be of "export quality." These approaches, however,ignore the root cause of the quality problem which is the insulationof the domestic from world market standards as a result of theGovernment's monopoly control on exports. The quality factors thatdetermine the structure of prices in world markets are differentfrom those in domestic markets. Appearance and cooking quality arethe important determinants of the domestic structure of riceprices. In contrast, the primary consideration in world markets isthe percentage of brokens. Neither the official nor the marketprice structure provide any incentive to produce rice with lowpercentage of brokens. Letting the world price structure bereflected in domestic markets by allowing private exports wouldlikely be the most cost-effective way to produce rice of "exportquality". In this way, "correct" price signals would prevail at alllevels of the rice market which is necessary because the quality ofrice depends not only on milling but also on the handling of palayand the rice variety planted at the farm level.

(b) The world rice market is characterized by a higher degree ofinstability than other world markets of cereals. Locating buyersand sellers is relatively difficult. The Philippine Government hastraditionally been an importer. The private sector has not beeninvolved in the international trade of rice and corn over the pastfour decades although, of course, virtually all other imports andexports are privately conducted. One question is whether theprivate or the public sector will be more efficient in learning todeal with the world rice market or whether both, in competition, canincrease thc uc..ntry's economic efficiency in rice marketing.

ANNEX 4Page 5

19 -

Indirect Effects of Government Monopolies: The Case of Wheat

11. The impact of a government monopoly on marketing includes not onlythe effect on prices but also on the quality of products and marketingservices delivered. Take the example of the government monopoly on imports ofwheat grains. Since the NFA gained monopoly control on importing wheat inmid-1975, domestic prices to the millers have been on average about 32% higherthan border prices implying an implicit tariff that is higher than under pri-vate importing with a tariff oI 20%. On the other hand, price controls onwheat flour have reduced the average nominal protection rate from about 41% to32% since the mid-70s, substantially reducing the effective protection rate onflour milling.

12. These simple price comparisons, however, understate the negativeeffect of recent policies on the flour miller's incentives because marketinginefficiencies generated by the system of government marketing monopolies havenot been fully taken into account.

(a) the above implicit tariff of 32% is based on the border priceestimated as the actual CIF unit value of the grains purchased bythe Government. Actual government import prices appear to be on theaverage 20% more than world prices (FOB, US) and in some years wereeven as high as 30%. Price of private sector imports for 1965-1974were also higher than the same world price series but the yearlydifference has never exceeded 14%. With the very favorable importdeals concltuded i,. the early 1970s, the average FOB price negotiatedby the private sector for 1965-1974 was above the world price byonly 1%.

(b) A similar monopoly by the Philippine National Lines on shipping ofall government conducted international trade has been a frequentsubject of complaint by flour millers. NFA selling price of wheatis quoted in terms of ex-vessel. All attendant cost in transferringthe grain to the factory is shouldered by the flour millers.Outmoded handling equipment and other types of inefficiencies havereportedly raised miller's cost due to heavy demurrage charges.

Financial Cost of NFA

13. An attempt is made in this section to analyze financial aspects ofoperating NFA to assess in a rough way the subsidy involved and the incidenceof the burden.

14. The cost of NFA operations has been financed in ti7o ways. Explicitsubsidies are derived from the fiscal system either directl> through budgetcontributions or indirectly through foregone tax revenues. Irofits fromimports, licensing and registration fees are foregone tax revenues. TheGovernment, in effect, transferred to NFA (a) its power to tax or subsidizeimports of selected food commodities; and (b) the right to engage in theLrading and manufacturing of food products. Implicit subsidies, on the otherhand, originate from the monetary system through concessional loans from theCentral Bank.

ANNEX 4Page 6

- 20 -

15. Table 2 illustrates the level and relative importance of thedifferent sources of NFA funds from 1977 to 1982. These estimates indicategeneral patterns. Revenues from marketing margins provide the major source ofsubsidy to NFA operations, contributing at least half of the total. Revenuesfrom marketing margins depend mainly on the annual movements of w'rld pricesand levels of imports. Profits have accrued to NFA from imports of wheat,soybean meal, and corn while losses have been incurred mainly from themarketing of rice and domestic procurement of corn. Other income consistinglargely of interest income and sales of by-products were more important thandirect budget outlays which amounted to only about 3% of the total annual costof the subsidy.

16. The interest rate subsidy has been frequently overlooked in theaccounting of cost because this is not usually reflected in income or balancesheet statements. Market cost of borrowing is conservatively estimated at 18%during 1977-79 and 21% during 1979-82. In co-parison, interest rates on NFAloans were lowered from 9% to 6% in late 1978 and its credit line reachedf 2.5 billion ($330 million equivalent) in the early 1980s. These loans werefully rediscounted at the Central Bank at a rate 3 points below the interestrate. From 1979 to 1982, NFA loans ranged from 17 to 25% of total agricul-tural loans rediscounted at the Central Bank. Concessionary interest ratesaccounted for over a third of the total subsidy for NFA operations since 1979.

17. One general aim of the NFA price stabilization program is to protectthe economic welfare and nutrition of the poor and thereby improve incomedistribution. Considering the source of funding, it is not clear whether asignificant improvement in income distribution can be expected because thebenefits of low staple prices are available not only to the poor but also tothe entire population. These relatively low prices, which were mainily due tothe overvalued exchange rate since the mid-seventies, have been primarily atthe expense of rice and corn producers who are relatively poor.

- 21 - ANNEX 4Page 7

Table 2: NATIONAL FOOD AUTHORITY: ESTIMATED ANNUALCOST OF SUBSIDY OF OPERATIONS

' million)

ImplicitExplicit Interest

Other rateCalendar Price margins Public income subsidyyear (1) /a (2) /b budget /c Total /d /e Total

1977 390(69) 296 33(6) 66(12) 489(87) 72(13) 5611978 440(66) 285 25(4) 97(14) 562(84) 108(16) 6701979 303(42) 430 26(4) 129(18) 458(64) 255(36) 7131980 194(33) 156 24(4) 122(20) 340(57) 255(43) 5951981 237(31) 335 24(3) 120(16) 381(50) 375(50) 7561982 568(52) n.a. 24/f 120/f 712(65) 375(35) 1,087

Total 2,132(48) 156(4) 654(15) 2,942(67) 1,440(33) 4,382

Figures in parentheses are percentage of the total.

/a Based on Table 1.

/b Based on the reported gross profit on sales from all NFA marketingoperations (excludes FTI account). In contrast to column (1), column (2)includes margins (most likely losses) incurred in the sales of domesticallyprocured corn and in the total purchases and sale of rice.

/c Registration and licensing fees, management and training fees, sales cibyproducts, sales of empty sacks, interest income and other miscellaneousincome. The largest components were interest income and sales ofbyproducts. Registration and licensing fees ranged from about P 7 millionin 1977 to P 10 million in 1982.

/d Column (1) was used to indicate revenues from price margins because column(2) already removes part of the cost of subsidy to rice and corn marketingoperations.

/e Based on Annex 11, Table 18.

/f Arbitrarily assumed to be equal to 1981 figures.

ANNEX 5- 22 - Page 1

FERTILIZER AND PESTICIDE AUTHORITY

i. The fertilizer marketing system in the Philippines is regulated bythe Fertilizer and Pesticide Authority (FPA). The creation of the regulatoryagency and its objectives can be understood in terms of the events of 1973when the Fertilizer Industry Authority, a precursor of the present FPA, wasformed. The world price of fertilizer quadrupled in 1973 due to the oilcrisis. This threatened the food security of many countries and the Philippineresponse was to intervene directly in the fertilizer industry. It did this byestablishing a domestic price ceiling defended by two policy instruments(a) tax free importations of finished fertilizers and raw materials and(b) cash subsidies for losses incurred by the domestic fertilizer producers asa result of price control.

2. The FPA permits fertilizer imports by five authorized firms tosupplement domestic production sufficiently to satisfy domestic demand at theofficial price. The FPA, in consultation with other government agencies,determines the level of imports necessary to satisfy domestic demand. Thefirms then distribute the imported and domestically produced fertilizer totheir dealer networks for final sale to the farmers. Imports are exempt fromcustoms duties, advance sales tax, and the 50% margin deposit on the value ofimport letters of credit. Further, domestic producers are also exempted fromthe same requirements for imports of raw materials.

3. The domestic producer or authorized importer either produces orimports fertilizer for distribution to the farmer. Only five firms arecurrently authorized to import fertilizer; they include the three fertilizerproducers: Planters Products, Inc., Atlas Fertilizer Corporation; and MariaCristina Fertilizer Corporation; and two firms which only import but do notproduce fertilizer: Sugar Producers Cooperative Marketing AssociatIon; andthe Fertilizer Marketing Company of the Philipppines. One additional company,Chemical Industries of the Philippines, produces but does not import ferti-lizer. The fertilizer is then shipped to a distributor for final movement tothe farmer. The distributor may be an independent firm, a cooperative or apart of the fertilizer company. The distribution system is a largely competi-tive industry operating on a ceiling mark-up of price from the ex-warehouselevel.

4. An ex-warehouse price is established for fertilizer by the FPA withallowances for additional expenses for transportation, handling, local taxcharges, and a profit mark-up: the handling, transportation and tax chargesconstitute approximately 5-6% of the retail price. Originally the ex-ware-house price was established at a level below the world market import pricelevel to protect the farmer from the high world market price. A cash subsidyis paid by the government for losses incurred by the domestic producers andimporters as a result of these price controls. As the cash subsidies are paidon all operating losses associated with domestic production or importing offertilizer, no incentive exists for the efficient operation of the fertilizerindustry. In fact, the least efficient firms would be able to sustain thegreatest losses. The largest importing firms also have the potential toachieve the greatest cash subsidies.

ANNEX 5

- 23 - Page 2

5. During the 1973-75 period, world fertilizer prices exceeded the ex-warehouse price and the cash subsidies were needed to allow fertilizer to besold at the officially established ex-warehouse price. However, when theworld market price fell sharply in 1976, the ex-warehouse price was notreduced proportionately. The consequence was that the farmers paid a higherprice for fertilizer under the regulated ex-warehouse price than would be thecase under world market prices.

6. Between 1973 and 1975 a two tier pricing system was in effectproviding a domestic price ceiling on fertilizer which was below the worldmarket price for food crops but higher for export crops. The crisis caused bythe high fertilizer prices ended in 1976 when the world price of fertilizerfell by approximately 70%. Unfortunately, the regulation of the fertilizerindustry remained (though the two-pricing system was abolished) and has becomea substantial burden on the general tax payer and the farmer.

7. From 1973 to 1981, farmers paid a price premium averaging approxi-mately 10% over the border price. This implicit tariff has varied enormouslywith fluctuations in world prices and across types of fertilizer. The priceof mixed fertilizer has received a small subsidy but urea has been priced 16%above world prices, ammonium sulphate 27% higher, and muriate of potash (usedon sugar and other export crops) 86% higher than world prices. Given theseaverage price margins allowed by the pricing policy and the cash subsidies,the fertilizer industry has been heavily protected - a total subsidy equiva-lent to about 50% of border price per unit of domestically producedfertilizer.

8. Because of the substantial burden on the general taxpayer, the cashsubsidies were abolished in 1982. However, although domestic prices were notraised, farmers ended up paying much higher implicit tariffs because of therecent drop in world prices which was not passed on to agriculture. In 1982,the domestic price of urea was 44% above the import price, the ammoniumsulphate price was 103% above the import price, and the muriate of potashprice was 111% above the import price. At present, therefore, the totalburden of subsidizing the domestic fertilizer industry rests fully on thefarmer.

9. One of the original goals of the government regulatory program wasto ensure domestic fertilizer production for food security reasons. This haslargely been a failure as imports have grown from 30% in 1970 to 75% of totalusage by 1980. This relative decline in domestic production can be attri-buted, at least in part, to the government programs which have compensateddomestic firms for losses Incurred in fertilizer production. The consequencehas been to discourage modernization and create an inefficient industry whichis unable to compete with other firms in the world market.

ANNEX 6

- 24 - Page 1

PRICE STABILITY

1. Price stability is an important policy goal of the Government. Itis frequently believed that price uncertainties lead to inefficient resourceallocation and hinder adoption of new technology. Price fluctuations in foodstaples may also adversely affect nutrition of poor consumers and income ofsmall farmers who neither have financial reserves nor access to lower costcredit. From a macro viewpoint, extreme instability in agricultural pricesalso creates difficulties of balance of payments and inflation.

2. Prior to 1973, when prices of the main agricultural exports such assugar were closely linked to U.S. agricultural stabilization policy, exchangerate adjustments were the major cause of large price changes in the domesticmarket. These were addressed by temporary taxes on exports rather thangovernment marketing, and government direct market involvement to stabilizeagricultural prices was limited to the rice sector, historically the chiefconcern of agricultural pricing policy. Though corn is also a food staple forabout 20% of the population, there seems to have been much less politicalpressure to directly intervene in the market to stabilize corn price or tominimize the reportedly small seasonal and geographic price variation incorn. Agricultural prices became much more volatile during the 1970s due tothe 1970 devaluation, the world-wide grains crisis (1973-74) and the two oilprice shocks (1974,1980), and many of the present price intervention policieswere instituted as a policy response. It is important to distinguish theimpact of price intervention policies on the short-run price stabiity fromtheir long-run effects on price levels.

Impact on Long-term Prices

3. As price interventions started in the 1970s continue to prevail intothe 1980s, the long-run impact has been to depress producers' incentives par-ticularly in the major export crops. For copra and sugar, stabilization ofdomestic prices has been generally achieved by cutting off the peaks of pricefluctuations but failing to fill in the troughs. Similarly, for importedcorn, wheat, soybean meal, and fertilizer, implicit taxes were minimizedduring high price years (and indeed fertilizer price was subsidized in1974-75) but low world prices were not fully passed on to the users. Forsoybean meal and wheat, this has squeezed feed and flour millers margins' andhas increased the price of most products to consumers.

Impact on Annual Prices

4. Given the level of production and demand, the level of annualgovernment exports/imports and government stockholdings are the main policyinstruments determining the annual price. Domestic procurement and marketdistributions on the other hand, affect the seasonal and geographic pattern ofdomestic prices.

5. Annual domestic prices at the wholesale level have been usually morestable than world prices. Because of the role of marketing cost and storagein insulating domestic from world price fluctuations, the importance of

ANNEX 6- 25 - Page 2

government market intervention in reducing annual price stability is not clearand cannot be determined without further analysis. Up to the early 1970s, theGovernmŽnt's rice imports were more a function of election years than measuresof rice deficits. Furthermore, domestic prices have generally been higherthan border prices providing a positive protection to farmers. Since 1973relatLve price stability has apparently been maintained at a level that isslightly below border price, favoring consumers but implicitly taxing farmersespecially if the 1982 plunge in world price is ignored. The real price ofrice has also declined but since this was primarily a consequence of product-ivfty gains brought about by irrigation investments and promotion of newtechnology, the income of at least irrigated farms has not been adverselyaffected.

Seasonal and Geographic Price Variation

6. The official margin between floor and ceiling prices indicates therange of acceptable price variation across season and location. The Govern-ment itself buys and sells at a single price, ignoring transport and storagecost between location and season. Due to the conventional belief that privatetraders extract excessive profits, a narrow official margin haa historicallybeen instituted to limit seasonal fluctuations and geographic dispersion inprices, in an attempt to benefit both producers and consumers. However, thishas been at the cost of Government's willingness to absorb part of the privatecost of marketing.

7. Early official margins were not even sufficient to cover the cost ofmilling. Official margins were substantially widened after 1973, but theystill covered only the milling and marketing costs between the farm and retailbut not the cost of storage between harvest and lean months. However, despitethe larger share of the Government in rice marketing and subsidized credit andinsurance programs for private marketing, actual price spreads continued to beslightly more than official margins.

8. Abnormally high seasonal price variations existed prior to 1973,largely explained by ineffective management of imports rather than by mono-polistic manipulations of private traders. With the shift in the tradebalance, the increase in the amount of rice handled by the Government and thelarge government stocks, the NEA has had considerable reserves with which todefend ceiling prices. By the second part of 1970 this had significantlyreduced the seasonal price changes. However, procurements have not been largeenough to maintain floor prices.

9. Geographic price differences have also declined as domestic procure-ment and distribution of government rice became more evenly spread throughoutthe country during the past decade. Central Luzon still is the focus ofdomestic procurement but the proportion of government procurement to pro-duction in this region has decreased from 29% in the mid-50s to 20% in 1980.Greater emphasis was placed on defending floor prices in Mindanao where therate of domestic procurement rose from 17 to 27% of domestic production. Dis-tribution of government supplies was highly concentrated in Manila but hassince declined one fourth of the total by 1980.

ANNEX 6- 2 6 - Page 3

Policy Tmplications

10. Price stabilization efforts have not had a neutral effect on long-run domestic prices, i.e., they have tended to distort domestic prices awayfrom their border prices. The narrow official marketing margins between farmand retail prices have reduced incentives to Investments in private marketingand storage, although this tendency has been much less apparent in rice, thanfor other crops.

11. The difference between palay farm price and rice retail price shouldcover the cost of milling, transport, storage (including the opportunity costof capital) and risk. An official margin that does not adequately account forthese costs can only be attained by subsidizing the marketing cost of rice.The latter has been achieved by greater participation of the Government inmarketing at a cost falling directly or Indirectly on the budget rather thanby subsidizing private marketing. Government marketing may provide net socialbenefits only if the government has a comparative advantage in marketing andstorage or if there are significant monopoly profits in private marketing.However, government cost of marketing has been shown to be higher than theprivate sector, while studies of rice marketing indicate a generally compet-itive market. Margins appear to be wide because of high transport costs andthe high cost of credit to the private sector.

12. High food prices and wide seasonal, geographic, and processingmargins are long-term problems requiring long-term policy instruments. Agri-cultural research, extension, irrigation and other supply shifting policiesare the positive measures to lower agricultural prices without harming realincomes of farmers. Irrigation and short-season varieties are also tech-nologies which reduce uncertainty and seasonal supply variability. Researchand extension in post-harvest technology, better dissemination of currentprice and other market information, development of physical (roads, telecom-munications, etc.) and financial marketing infrastructure to reduce real costsof marketing will be more cost-effective means of reducing geographic andseasonal price variations.

13. Domestic prices and margins should be allowed to reflect theiraverage long-run social opportunity costs because these price signals have themost pervasive impact on the way private as well as public sector resourcesare allocated. Unacceptable or extreme price fluctuations are short-termproblems which should be addressed by short-term, flexible type of policyinstruments such as variable Import or export taxes. International trade andmarket institutions such as futures markets and international commodityagreements serve to minimize excessive price fluctuations. It should be notedthat competitive private trading is expected to be collectively more skillfulthan monopolistic government agencies in the timing of selling and stockingdecisions. Same degree of price variation or risk aversion will not neces-sarily lead to significant inefficiencies in resource allocation. For manyproduction decisions, choice of technique has been shown to be Insensitive torisk preferences. On the other hand, government marketing involves highadministrative cost, and may Introduce uncertainties and inefficiencies inprivate marketing which may offset any positive impact on price stability.

ANNEX 7Page 1

- 27 -

INTEREST RATE SUBSIDIES

1. To counter the negative effects of low agricultural prices infarmers' incentives, the Government has used credit policies to reduce costper unit of output. Prior to the 1970s, Government's efforts focussed ondeveloping institutions to serve the financial needs of the rural sector. Inthe early 1950s, the establishment of private rural banks was promoted bygovernment equity contributions, tax exemptions, preferential rediscountingand various other development support. At the same time, the AgriculturalCredit and Cooperative Farmer's Association (ACCFA) was also created topromote cooperative financial and marketing institutions for small farmers.There are still currently more than a thousand rural banks operating in about60% of municipalities. The ACCFA, however, ran into serious default problemsafter a few years and was eventually subsumed in 1982 to the Land Bank of thePhilippines which was established in 1972 as the primary source of financingthe land reform program.

2. With the introduction of the new rice technology and growing commer-cialization of agriculture, the need to expand supply of formal credit becamemore prominent. The high cost of credit from the traditional informal lenderswas considered an impediment to the rapid adoption of the new technology whichinvolved greater cash inputs and, therefore, working capital. To increaseagricultural credit, the Government initiated supervised credit programs andrequired a certain proportion of financial institutions' loan portfolios go tocredit for agriculture. Supervised credit programs link low interest, non-collateral loans with extension. They are carried out by rural banks andother Government financial institutions given preferential rediscount rates,loan guarantees, assistance on loan administration and sometimes seed moneyfrom the Government or external agencies. Masagana 99 was the most massiveprogram delivering credit to rice farmers; it reached its peak in the wetseason of 1974. This program was a direct policy response to the 20% drop inrice production in 1973 and the implementation of the land reform programwhich removed landlords, an important source of farm credit. Since then,other supervised credit programs have been started covering non-riceagricultural commodities.

3. In 1974, the Monetary Board directed all lending institutions toallocate 25% of their loanable funds to agriculture and at least 10% of thetotal to agrarian reform beneficiaries. Private commercial banks, however,have indirectly resisted the spirit of this rule by choosing to purchaseCentral Bank certificates of indebtedness and other government securities tocomply with the regulation because of the unprofitable margin from directlylending to farmers.

4. The impact of these programs and policies are now well-documented.The share of agriculture in total loans granted dropped from about 20% in theearly 1960s and about 14% in the late 1960s to 8% during the 1970s. The ratioof agricultural loans to gross value added in agriculture increased somewhat

ANNEX 7- 28 - Page 2

from about 24% during the late 1960s to 28% during the late 19709. Between1975 and 1980, this ratio for rice and corn declined in terms of productionloans though it increased if marketing loans are included. Loans granted tosugar and coconut as a proportion of their respective contribution to valueadded were highest, more than 15 times and 3 times greater than for rice.

5. Growth in agricultural loans therefore has been concentrated insugar, coconuts, and the National Food Authority and Food Terminal Inc. By1982, they received 71% of agricultural loans under preferential redis-counting - sugar (32%), coconut (42%), and NFA-FTI (27%). Rice and cornproduction loans account for only 4% and only half of this is under the riceand corn supervised credit program. The subsidized credit for privatemarketing of rice and corn is less than 2% of NFA loans. The NFA-FTI,furthermore, receives a greater rate of credit subBidy because its interestrate is at almost half of that paid by the private sector on their share ofsubsidized credit.

6. The declining trends in agricultural credit is consistent with thenegative bias against agriculture of price intervention policies. Thepreferential interest rate is estimated to provide-an effective subsidy rateof only 1% of unit price of agriculture. Even if this fs multiplied two orthree times, it is clear that the interest rate subsidy will not significantlyalter the unfavorable sectoral incentive structure against agriculture createdby price policies. Resources will flow into more profitable enterprises;technology and relative prices are more important developments of relativeprofitability than interest rates.

7. The low interest rate policy seriously impairs the ability of therural financial market to efficiently perform the financial intermediationprocess. It does not provide incenti.ves for mobilizing financial savings andinduces an allocation of credit that is based on size of collateral and wealthrather than on a productivity criteria. The exemption of agricultural lendingfrom the floating of interest rates under the financial reform exacerbated thedisincentive for agricultural lending. Growth in agricultural loans camemostly from the Central Bank rediscount window rather than from additionalequity or savings deposits. The share of borrowings from the Central Bank asa proportion of total resources of rural banks rose from 8% in 1971 to 54% in1975. Low repayment rates, which have plagued almost all supervised credit,threatens the viability of rurai credit institutions and further damage creditdiscipline among borrowers.

8. The impact of crudit policies on agricultural production at the farmand at an aggregate level has remained unclear. While Masagana 99, the mostsignificant supervised credit policy, was instrumental in the rapid recoveryof Philippine rice production from the global food grain crisis in 1973, thegrowth trend in rlce production and adoption of the new rice technology sincethe late 1960s cannot be solely attributed to this program.

9. There may also be reason to believe that the low interest ratepolicy has a regressive effect on income distribution. The subsidy isshouldered by the lower-income population, i.e, holders of currency and bankdeposits, and taxpayeis through inflation, low savings interest rates and

ANNEX 7- 29 - Page 3

direct government outlay. Only about 10% of the implicit interest ratesubsidy is received by agriculture. Within agriculture, this encourages useof more capital-intensive production techniques. Distribution of theseconcessional loans also generally favors irrigated, large, and rice farmswhich are typically better off than the average Philippine farm. Furthermore,it has been shown that for supervised credit, about two thirds of the implicitsubsidies are received by participating financial institutions and only athird by farmer-borrowers mainly from non-repayment of loans. The total costof borrowing from the formal sources including all other charges andtransaction costs has been estimated to reach almost 30%.

ANNEX 8

-30- Page 1

PRODUCTION RESPONSE TO PRICE AND TECHNOLOGICAL CHANGE

1. In the Philippines, even more so than elsewhere, evidence suggeststhat farmers are price responsive. Figure 1 shows that agricultural growthhas been impressive over the last twenty years which is explained in part bythe favorable domestic agricultural terms of trade from 1960 to 1974, afterwhich there began and still continues a decline in those terms of trade.International agricultural terms of trade have also deteriorated since 1974 ata greater rate that the decline in the domestic te ri of trade, indicating afurther erosion of real prices received by farmers .- This raises the issueof the general profitability of agriculture. The productivity gains fromimproved technology provided the incentives necessary for a respectable rateof growth of rice and corn after 1974 even though the terms of trade began todeteriorate for the agricultural sector. Figures 2 and 3 show that rice andcorn production has increased rapidly since 1960. When the domestic terms oftrade turned against agriculture in 1974, production of rice and corn con-tinued their upward climb. The increases in productivity helped farmers toabsorb a drop in relative prices and still realize adequate profits.

2. Figure 4 shows the price of farm outputs relative to fertilizerprices from 1973 to 1981. The amount of the commodity which is required by afarmer to purchase one unit of fertilizer specific to rice, corn, sugar andtobacco is shown. Despite the absolute rise in commodity prices during the1973-75 period, the high fertilizer prices as shown by the fertilizer-to-commodity price ratio discouraged farmers from using fertilizers on theircrops. The subsequent 1975-78 period showed relative stability in the priceratio but farmers faced considerably higher fertilizer prices than prior to-the oil crisis. Since 1978, a general deterioration in the price ratiooccurred which directly contributed to the worsening of the domestic terms oftrade for agriculture during this period.

3. Table 1 shows that real income of farmers increased during theperiod 1960-74 when favorable terms of trade prevailed in the sector. Incomesdeclined from 1976 to the present, but at a lesser rate than the deteriorationof the terms of trade. The difference between the terms of trade and farmers'income is principally due to improvements in yields and reductions in unitcosts.

Regression analysis was undertaken to see if there was a statisticallysignificant relationship between value-added in agriculture and thedomestic terms of trade. The results were unsatisfactory In that only asmall percentage of the change in agricultural GDP was due to a laggedagricultural domestic terms of trade. The impact of variation in theweather may have washed out much of the correlation between annualaggregate supply and terms of trade.

ANNEX 8Page 2

- 31 -

FIGURE 1AGRICUMTRAL GDP AND DOMMnC IMS OF TRADE OF AGRICULTUtE

IN CONSTAW 1981 PRICES FOR GDPAGIULURA.GDP

DOE11C TO IUAONS PC50120 .. _ 7n

1O noosc /so

100- \50

-40

v ~~~~AC GD

70 1 . -20"GO 19 n 66 196 9O WM 14 17 O 1"8 198

MOm ARICULTURAL. GDP 1i LAGED ONE YEAR BD04ID DOMEflOT

FIGJRE 2DO0N C TERMS OF TRADE, PRODUCIlON AND YELS OF PALAY

yIO.S (K~MA) DOmESInC TOT PLAY PDU=OM

2500 120 -.,.,.,

PALAY PROD"D " I

Ito DOMESti TOT -

2000-100 -6

1500-

80 ~~~~~~~~~~~~~~4

160 1962 t 964 166 1817 9217 9617 9016

P40Th PALAY PRODUCtION AND YIEW.0 ARE LAGGED ONE YErAR BEHIND DOMMSIIC TOT

ANNEX 8Page 3

-32-

FiWURE 3DOMBsTIC IWAS Of' WhDE. POOUcoTN AND YLS OF' CORN

rn2.Ds oaEA3 DOomUTCTA oO RN or oo1t

10bO0- Ito , 4 .,

.01111 DOM5I:1C TO 3a

300w Inc 2.5

COR^N In f S/

i00 so.gooJ 70- so " § w w w|CORN -1.

1550 1552 16 155 I 1SS 1W0 171 1374 176 173 1550 15MOlts N AND YT AIM LA5W ONS YE A*03M DOMUTIC 1TOT

FIGtURE 4RMUUCR-TO-C0MMOMY PRCE RATIO, 1973-81

PRCE RATIO

AMMOSUI,MR

AMMOSU61SUOAR

1 / t __~~__

t73 v t1 1977 urn "elN MO RICE W URD CRMAND SU CMPARED TO AMMONIUMSUUJITL TO WIXED FWTLO R

ANNEX 8Page t4.

Table 1: INDICES OF AGRICULTURAL OUTPUT, PRICE AND INCOME FORPHTLTPPTNE AGRICULTURE

(1981 = 100)

Terms of Rural Rural Incomeoutput trade income employment per farmer(1) (2) (3) (4) (5)

1960 40 88 35 58 601961 42 89 37 63 591962 42 93 39 66 591963 45 93 42 70 601964 44 93 41 68 601965 49 93 46 67 821966 50 93 49 70 701967 52 106 55 67 821968 55 111 61 80 74;1969 59 112 66 70 941970 61 123 66 70 /ci1971 62 119 74 66 1121972 65 130 84 76 1ll1973 69 135 93 85 1(91974 70 136 95 84 1131975 74 125 92 87 1061976 81 126 102 91 1121977 82 122 100 92 1091978 88 117 103 94 1101979 92 102 99 96 1011980 97 102 99 98 1011981 100 100 100 100 100

Sources:(1) National Accounts, NEDA.(.2) IBRD, ,lecEed Issues for the 1983-89 Plan Period, .June 1, 1982. Report

No. 386'1-1-"11. output price deflated by index of nonagricultural prices ofthe industrial and services sector.

(3) = (1) x (2).(4) IBRD, Aspects of Poverty in the Philippines, December 1, 1980. Report

No. 2984-PH for 1960-76; assumed that employment in rural sector expandedat a constant rate of 2% p.a. for 1977-82.

(5) = (3) t (4).

ANNEX 834 - Page 5

4. In the medium run, Government investment in technological change,especially during periods of severe fiscal constraints, most likely has abetter pay-off than price support policies because: (a) elasticity of aggre-gate supply is generally greater with respect to technological change thanwith respect to price and this partly explains the apparently perverse reac-tion of increased output to declining real prices of rice and corn; and(b) competitiveness of Philippine export agriculture to maintain and to pene-trate new foreign markets requires a continuing effort on the part of Govern-ment and farmers to introduce technological change in order to increase pro-ductivity per land and animal unit and, tbereby, reduce unit costs while sus-taining or increasing farm incomes during intensified competition for mar-kets. Competitive advantage of Philippine farmers is not a constant and canbe lost through failure to keep up with reductions in unit resource cost incompetitor countries or can be further strengthened by productivity gains inexcess of those of competitors.

5. The Philippines has in place the building blocks for achievingfurther progress in agricultural research and extension and the Bank, throughthe National Extension Project, the Agricultural Support Services Project andthe Rainfed Agricultural Development (Iloilo) Project is assisting in theseareas. Implementation, however, needs continuing Government support. Inaddition to the public effort, private sector investment in crop and animalresearch is significant in commercial activities o' coconuts, sugar, bananas,pineapples, hogs, poultry and other cormodities.

ANNEX 9- 35 - Page 1

LIVESTOCK-FEED RELATIONSHIP

1. The behavior of the commercial livestock industry is dependent uponthe cost of feed since as much as 70% of the cost of meat or poultry productsis feed costs. With such a close linkage, the programs and policies whichaffect the production and pricing of feed crops such as corn also affect thelivestock industry. For this reason, the policies affecting corn and otherfeed products need to be viewed in terms of their effects on the livestockindustry.

2. Government policy in the livestock industry has attempted to stabi-lize consumer prices by intervening in both output and input markets. Pricecontrols have held down the potential protective impact of tariffs on domesticlivestock prices. Price comparisons indicate an NPR of 57% for broilers overthe 1975-80 period compared to a 70% tariff and a NPR of 11% for eggs comparedto a 100% tariff. Tnis large difference between actual and potential protec-tion for eggs reflects not only the effect of price control but more importantthe greater efficiency of the domestic layer industry. Pork production hasnever been conferred a high tariff protection. The tariff is 10% and givenprice control, as well as domestic competition, domestic price has been nearborder price.

3. To offset the impact of price control in livestock, price controlshave also been imposed on mixed feeds which are defended mainly by the pricingpolicy on feed ingredients - corn and soybean meal. Imports of corn which areunder government monopoly have accelerated since the mid-1970s relative tototal production, lowering the NPR fror ibout 40% in the 1960s to 20%. Whilethis still implies a positive implicit t.riff which reduces the profitabilityof the livestock industry, this rate of protection for corn is only sufficientto offset the negative impact of the 20-30% underevaluation of foreign exchange.

4. The pricing policy for soybean meal, however, is very different.Since 1978, imports of soybean meal together with other legumes and feedgrainshave been placed under the monopoly control of the NFA as part of its effortto develop these crops. Government's pricing policy appeared to have raisedthe implicit tariff on soybean meal from 10% (legal tariff) to 34% based onprice comparisons from 1979-81.

5. The net effect of the government pricing policies has raised thevalue added on broilers by 200% and eggs by 10% compared to their value addedat border prices. Pork production, however, is paralyzed by a negative effec-tive protection rate. When the foreign exchange distortion is taken intoaccount, only broiler production receives a positive protection from govern-ment policy. The poultry sector has responded by growing by 94% over the1970-80 period compared to only 46% for the pork sector.

6. In the case of pork or live hogs, reducing price distortions in thefeed-livestock industry with increased production efficiency would clearlylead to exportable surpluses. On the product price, tariff protection forbroilers and eggs should gradually be lowered to just equal the rate of

- 36 - ~~~~~ANNEX 9- 36 - Page 2

foreign exchange distortion. Part of the tariff protection at present hasbeen redundant because of price control and domestic competition. If thenominal protection rate becomes lower than the foreign exchange undervalua-tion, which will be the case for pork and perhaps eggs, direct subsidies mustbe used to counter the disincentive effect of distortion to foreign exchangeto make them competitive in the international market.

7. Lowering the price of feeds will have the strongest impact on profi-tability in livestock. Average implicit tariffs on feed ingredients are 23%in broiler mash, 20% on layer mash, 17% on cattle feed, and 7% on hog growermash. Soybean has the highest implicit tariff net of the foreign exchangeundervaluation. Overpricing of soybean meal, an important protein source,adversely affects efficiency of livestock production, having a much greaterimpact on the efficiency of poultry than of pork and beef production.Lowering the price of soybean meal, on the other hand, will likely have littleeffect on domestic production of soybeans. Domestic demand for the meal hasbeen much higher than for raw soybeans so that a high NPR for soybean meal ismore effective in raising protection to soybean meal substitute rather thanraw soybeans.

8. Corn is the most important feed ingredient. Tts domestic price hasbeen close to its social opportunity cost in recent years. The implicittariff is about equal to the rate of the undervaluation of foreign exchange.Allowing greater imports of corn to let domestic price reflect border price atthe official exchange rates will promote livestock production but at theexpense of corn production. Replacing government monopoly in corn by avariable import tariff which will keep the domestic price equal to the CIFimport unit value converted at the shadow exchange rate may result in someefficiency gains.

9. Domestic livestock producers will remain less competitive in theworld market as long as corn continues to be imported. The CIF price willalways be higher than the cost of corn in most livestock exporting countries,which typically produce their own corn, by the international marketing cost ofcorn. The fact that corn yields in Thailand (where both corn and poultry areexported) are much higher than in the Philippines suggests some potential fordeveloping a comparative advantage in corn. This calls for government invest-ments and incentives for research, extension, and infrastructure developmentto reduce unit cost of producing corn in the Philippines.

ANNEX 10Page 1

- 37 -

BIBLIOGRAPHY

Armas, A. "Economic Incentives and Comparative Advantage in Rice, Sugar andCorn in the Philippines." Council of Asian Manpower Studies, School ofEconomics, University of the Philippines, undated.

Balisacan, A.M. "Economic Incentives and Comparative Advantage in thePhilipplne G.)tton Industry". Unpublished MS thesis, University of thePhilippines at Los Banos, 1982.

R.M. Bautista, John Power and Associates. "Industrial Promotion Policies inthe Philippines", PIDS, Manila, 1979.

Bouis, H. "Seasonal Rice Price Variation in the Philippines: Measuring theEffects of Government Intervention". Unpublished paper, InternationalFood Policy Research Institute, Washington, October 1982.

Cabanilla. "Economic Incentives and Comparative Advantage in the LivestockIndustry", PIDS Working Paper # 83-07, Philippine Institute ofDevelopment Studies, Makati, Rizal.

David, C.C. "Economic Policies and Philippine Agriculture", Working Paper #83-02, Philippine Institute of Development Studies, Makati, Rizal.

David, C.C. "Government Policies and Farm Mechanization in the Philippines",Staff Paper No. 82-3, PIDS, August 1982.

David, C.C. and A.M. Balisacan. "An Analysis of Fertilizer Policies in thePhilippines," Journal of Philippine Development, Vol. VIII, Nos. 1 and2, 1981.

David, C.C. and R. Barker. "Labor Demand in the Philippine Rice Sector."Presented at a meeting on Labor Absorption in Asian Agriculture, Bogor,Indonesia, June 1981.

De Leon, M.S.J. "International Capital Flows and Balanced Agro-IndustrialDevelopment in the Philippines", Working Paper No. 84-01, PhilippineInstitute of Development Studies, Makati, Rizal.

Nelson, G.C. and M. Agcaoili. "Impact of Government Policies on PhilippineSugar", Working Paper No. 83-04, Philippine Institute of DevelopmentStudies, Makati, Rizal.

Rodriguez, Gil, Jr. and A.S. Rodriguez. "Corn Policies and ComparativeAdvantage in the Philippines", paper presented at the Workshop on theImpact of Economic Policies on Agricultural Development sponsored byPIDS and PCARR, DAP, Tagaytay City, March 1983.

Schmid, R., et al. "Rice in a Coconut Environment." Department ofAgricuiltural Economics, IRRI, 1981.

ANNEX 10Page 2

- 38 -

Te, Amanda. "An Economic Analysis of Reserve Stock Program for Rice in thePhilippines", Unpublished Ph.D. thesis, U.P. School of Economics,October 1978.

Torres, E. "Employment and Income in Sugarcane Cultivation in thePhilippines." Study for the International Labor Organization, Bangkok.

Unnevehr, L.J. "The Effect and Cost of Phllippine Government Intervention inRice Markets." IFPRI Working Paper No. 9 for the Rice Policies inSoutheast Asia Project, December 1983.

Unnevehr, L.J. and A.M. Balisacan. "Changing Comparative Advantage inPhilippine Rice Production", PIDS Working Paper II 83-03, PhilippineInstitute of Development Studies, Makati, Rizal.

ANNEX 11Page 1

- 39 -

SUPPORTING TABLES AND FIGURES

Table No. Page No.

1. Sugar: Average Annual Prices of Sugarcane and Raw Sugar..... 41

2. Copra: Average Annual Prices .................... o ... . 42

3. Cigar Tobacco: Average Annual Prices, Production andExports ........................ ................................. 43

4. Virginia Tobacco: Average Annual Prices, Production andExports,.......* .................. . .................. ............... 44

5. Rice (Ordinary Quality): Average Annual Prices................. 45

6. Yellow Corn: Average Annual Prices*..* ...... o ...... ....... .. 46

7. White Corn: Average Annual Prices.......................60 .... 47

B. Hogs: Average Annual Prices.e.....s.eo ..................... 48

9. Broilers and Eggs: Average Annual Price*...* ..... * 49

10. Wheat: Comparison of Domestic and Border Prices of WheatGrains and Wheat Flour ...................... t ........... . 50

11. Fertilizer Prices: Domestic Ex-warehouse Prices and WorldPrices, 1973-81 .................. *............*..O...* ...... 51

12. Corn-to-Rice Price Ratios: Philippines Compared L) WorldMCarket ...................... ............................ to 52

13. Fertilizer-to-Commodity Price Relationship, 1968-80...**...... 53

14. Domestic Agricultural Terms of Trade, International Teras ofTrade, Value Added in Agriculture, Selected Years,1960-81 ............... o............ to.... ................... 54

15. The Consolidated Coconut Stabilization Fund Levy and Export TaxRates on Coconut Products: 1970-81......# .......... .... too 55

16. Value of Agricultural Imports, f.o.b. Basis, by CommodityGroup .... . o................ * . . .................. too 56

17. Value of Philippine Agricultural Exports by LeadingCommodities, 1965-83 ................... t... ........................ . 57

18. National Food Authority: Selected Characteristics ofConcessionary Loans Received.........*.....o ............ 58

ANNEX 1 1

- 40- Page 2

Fiure

Figure No. Page No .

1 . Rice Marketing Flows in the Philippinese.****. *Os**. e o.e*. 59

2. National Food Authority Organization Chart .................. 60

ANNEX 11- 41 - Table 1

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUE1 IN PRICING POLICY

Sugar: Average Annual Prices of Sugarcane and Raw Sugar

Sugar pricePrice received Domestic

by farmers wholesale Export Composite WorldP/MT P/MT sugar f.o.b. Manila price ISO price

Year sugar /a cane /b 7/MT F/MT P7MT P/MT

1972/73 654 66 791 1,152 1,026 1,0141973/74 929 93 808 1,804 1,458 1,4011974/75 1,103 111 1,123 2,016 1,731 4,4531975/76 1,079 108 948 1,976 1,694 3,2441976/77 816 82 948 1,432 1,281 1,2261977/78 846 85 1,107 1,423 1,328 1,3231978/79 947 96 1,528 1,423 1,486 1,2751979/80 1,239 124 1,739 2,134 1,945 1,5761980/81 1,460 147 1,739 2,727 2,292 4,6681981/82 1,588 155 2,246 2,656 2,492 2,7391982/83 1,683 169 2,608 2,664 2,642 2,055

/a Based on the following sharing of proceeds from sugar

Planters share: 63.71%Mill share: 35.55%Association dues: 0.74%

The above figures are the national average for September 1982. However,because of lack of information on the sbaring for other years, the samesharing distribution was assumed for the entire period.

/b Price calculation is based on the following TC/TS ratios (tons sugarcane perton sugar):

1976-77 10.14 TC/TS1978-79 9.461979-80 9.671980-81 9.981981-82 9.65

For years with no information on TC/TS an average of 9.98 was used.

Sources: NASUTRA: Liquidation Process of Centrifugal Sugar 1969/70 to1982/83. Domestic .Market Reseorch Department, October1982.

NASUTRA: Sugar Sharing System by Mill District Technical-EconomicGroups, September 1982.

PRILSIJCOM: Annual Synopsis of Factory Performance Data. SpecialOperation Office. Volumes for the following crop years:1976/77; 1978/80; 1980/81; 1981/82.

,SC0: Foreign Trade Statistics, f.o.b.

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Copra: Average Annual Prices

Domestic Average export Average export price Average export Average exportFarmgate wholesale Average export price for for coconut oil in price for copra price for desi-

Year price /a price price for copra coconut oil copra equivalent /b meal cake cated coconuts- (P/kg) ---- _- --- - (f.o.b. Manila PFkg)

1972 0.45 0.65 0.80 1.21 0.74 0.33 1.541973 1.12 1.69 1.51 2.43 1.55 0.61 2.911974 2.07 2.71 3.63 6.25 3.94 0.68 3.061975 0.80 1.07 1.70 2.68 1.67 0.80 3.121976 0.89 1.28 1.46 2.60 1.64 0.82 3.201977 1.32 1.89 2.55 3.77 2.37 0.96 6.141978 1.65 2.32 2.75 4.50 2.80 0.96 6.631979 2.50 3.29 4.55 7.75 4.87 1.13 9.15 3

1980 1.20 1.70 2.92 5.33 3.38 0.15 9.911981 1.13 1.78 2.45 4.50 2.84 /c 9.311982 1.07 1.76 2.34 4.10 2.56 /c 6.51

la The farmgate price for chopped copra is hig.her by about 8-15% than for regular copra./b Based on the conversion factor of 1.587 from coconut oil to copra equivalent.Tc Philippine Coconut Authority kPCA) placed 'ban' on copra exports in 1981.

Sources: Bureau of Agricultural Heoomnics, Prices Received and Paid by Farmers, 1972-82.

Philippine Council for Agriculture and Resources Research: Data Series on Coconut Statistics in thePhilippines, 1980e

UCAP Coconut Statistics for average export price for copra.

1%)b

ANNEX 11- 43 - Table 3

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Cigar Tobacco: Average Annual Prices, Production and Exports

Farm Level ExportYear Production Price Volume Price

(mil kg) (P/kg) (mil kg) (P/kg)

1971 35.7 1.85 28.12 3.371972 35.77 2.34 24.02 3.511973 43.69 2.46 20.76 6.021974 34.91 3.38 21.86 5.471975 34.91 4.18 27.71 5.40

1976 33.38 3.76 20.85 5.761977 27.92 3.79 18.38 5.961978 34.51 3.87 16.05 6.401979 27.88 6.41 18.10 7.151980 23.51 4.50 13.72 7.091981 21.16 6.01 18.34 9.82

Source: "The Philippine Cigar (Native) Tobacco Industry in Perspective,"Philippine Tobacco Administration, April 1983.

ANNEX 11Table 4

- 44 -

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Virginia Tobacco: Average Annual Prices, Production and Exports

Virginia Export PriceYear farm production Farm Price Exports f.o.b,

('000 mt) P/kg '000 mt P/kg

1971 5.3 4.66 17.9 4.681972 25.2 3.69 17.2 5.641973 25.6 6.29 11.2 5.301974 29.8 6.86 13.9 6.921975 33.8 10.88 11.2 9.05

1976 48.0 7.60 9.1 10.341977 43.5 6.73 8.9 10.271978 42.3 8.79 10.4 11.321979 43.0 8.08 12.1 9.321980 39.6 10.61 8.0 14.11

Sources: NEDA - SCSO, PVTA Annual Reports.

PHILIPPINES

AGRICULTURE IN TH1E PHILIPPINES: ISSUES IN PRICING POLICY

Rice (Ordinary Quality): Average Annual Prices(P/kg)

Palay RiceSupport Support Import or Export

Year Farmgate price Farmgate price W4holesale Retail Retail (export) priceprice NFA price NFA price price ceiling price f.o.b.Market warehouse Market wareheuse Market Market price c.i.f. or Manita

(f.o.b.) (Thai 35%brokens)

1972 0.60 0.54 0.92 0.83 1.15 1.23 - 0.85 0.721973 0.68 0.65 1.05 1.00 1.31 1.55 - 2.24 1.75 X1974 0.89 0.90 1.37 1.38 1.97 1.98 1.90 3.35 3.37 U'

1975 0.92 1.00 1.42 1.54 1.85 1.93 1.90 2.21 2.201976 1.10 1.10 1.69 1.69 1.95 2.02 2.10 1.66 1.721977 1.13 1.10 1.74 1.69 2.03 2.09 2.10 (2.06) 1.671978 1.10 1.10 1.69 1.69 1.97 2.08 2.10 (2.28) 2.351979 1.16 1.30 1.78 2.00 2.11 2.26 2.45 (2.02) 2.1919R0 1.27 1.43 1.95 2.20 2.29 2.41 2.60 (2.57) 2.891981 1.48 1.55 2.28 2.38 2.53 2.65 2.85 /a 3.471982 1.57 1.70 2.41 2.62 2.71 2.86 3.10 (2.23) 1.96

/a In 1981 there were no exports of rice.

Note: The palay farmgate and NFA support price was converted into a rice equivalent price underthe assumption of a 65% recovery rate for milled palay.

Sources: Bureau of Agricultural Economics, Prices Received and Paid by Farmers, 1972-82 and dataseries on wholesale market prices 1972-82.National Food Authority, prevailing farmgate, wholesale and retail price 1976-1982, pub-published laws and decrees setting the rice ceiling price to consumers.

ANNEX £ 1- 46 - Table 6

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Yellow Corn: Average Annual Prices(P/kg)

SupportFarmgate price Import

Year price NWA Wholesale price pricemarket warehouse Philippines Manila f.o.b.

1972 0.54 0.40 0.64 0.63 0.401973 0.56 0.50 0.73 0.67 0.681974 0.91 0.71 1.04 1.11 1.191975 0.94 0.80 1.02 1.18 1.061976 0.94 0.90 1.16 1.26 0.991977 1.00 0.90 1.22 1.28 0.921978 0.97 0.90 1.37 1.27 1.211979 1.12 1.00 1.16 1.31 1.051980 1.02 1.15 1.47 1.54 1.521981 1.36 1.30 1.67 1.84 1.781982 1.45 1.30 1.78 1.47 1.45

Sources: Bureau or Agricultural Economics, Prices Received and Paidby Farmers, 1972-82, and data given on wholesale marketprices, 1972-82; National Food Authority, farmgate prices1979-82, wholesale prices, Philippines 1975-82, publisheddecrees setting suggested price for shelled corn to farmers;Prie Stabilization Council, published decrees setting retailceiling price to consumers. Border prices from 1971-74are import unit values as reported in the Foreign TradeStatistics, NCSO; from 1975-82 are import unit values (c&f)provided by NFA.

ANNEX I1Table 7

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

White Corn: Average Annual Prices(P/kg)

Shelled corn Corn gritsFarmgate Support Wholesale Farmgate Support Wholesale Retail Retail

Year price price price price price price price ceilingMarket NFA Philippines Market NFA Market Market price

warehouse warehouse

1972 0.49 0.40 0.54 0.56 0.46 - 0.92 0.831973 0.53 0.50 0.62 0.60 0.57 - 1.06 0.831974 0.94 0.71 0.90 1.07 0.81 0.46 0.48 1.451975 0.95 0.80 088 1.08 0.91 0.46 0.48 1.451976 0.96 0.90 1.02 1.09 1.02 1.53 1.55 1.601977 1.00 0.90 1.02 1.14 1.03 1.59 1.60 1.601978 0.94 0.90 1.07 1.07 1.02 1.57 1.57 1.601979 1.01 1.00 1.15 1.14 1.14 1.45 1.60 1.601980 1.18 1.15 1.35 1.34 1.31 1.66 1.80 1.CZ1981 1.37 1.30 1.60 1.56 1.48 1.90 2.10 2.15I982 1.46 1.30 1.71 1.66 1.48 2.05 2.23 2.28

Note: Shelled corn prices were converted into a corn grits equivalent price under theassumption of an 88% recovery rate for milled corn.

Sources: Bureau of Agricultural Economics, Prices Received and Paid by Farmers, 1972-82,and data given on wholesale market prices, 1972-82;National Food Authority, monitored prevailing ex-farm and wholesale (shelled)prices 1976-82; published decrees setting suggested price for corn to farmers;Price Stabilization Council, published dec:rees setting retail ceiling price toconsumers.

ANNEX 11- 48 - Table B

PHILIPPINES

AGRICULTURE IN THE PHILrPPINES: ISSUES IN PRICING POLtCY

Hogs: Average Annual Prices(P/kg)

ImportWholesale price /b

Year price /a f.o.b.pork pork

1972 4.27 3.621973 5.34 4.691974 8.04 7.811975 7.61 7.991976 8.48 10.211977 9.62 11.401978 9.73 11.621979 14.20 12.2.1980 15.45 12.801981 17.92 15.841982 19.83 18.53

/a Wholesale price is ex-Manila and the series isfrom the Central Bank for 1972-79 and from NCSOfor 1980-82.

/b c.i.f. import unit volume of Hong Kong from FAOTrade Yearbook.

Source: Bureau of Agricultural Economics, Prices Receivedand Paid by Farmers. 1972-82.

- 49 - ANNEX 11

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICv

Broilers and Eggs: Average Annual Prices(P per kg)

Broilers EggsDomestic/a Import Domestic/a Import

Year wholesale price wholesale priceprice /b price /b(1) (2) (3) (4)

1970 5.38 3.07 3.75 3.341971 5.64 3.14 5.12 3.551972 5.52 3.62 5.28 4.021973 6.74 5.17 5.15 4.941974 8.49 6.19 7.02 7.301975 9.70 6.48 7.06 7.851976 9.55 7.77 8.02 8.071977 11.41 7.25 8.84 8.991978 12.06 7.55 8.55 8;581979 13.51 7.77 9.54 7.611980 14.84 8.45 11.30 7.321981 17.62 9.21 12.65 9.641982 17.35 9.20 12.50 9.60

/a Wholesale price Manila; 1970-79 from Central Bank; 1980-82from NCSO.

/b CIF import unit value of U.S. from FAO Trade Yearbook.

ANNEX 11Table 10

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Wheat: Comparison of Domestic And Border Prices ofWheat Grains And Wheat Flour

Grains /a Flour lb GrainDomeatic Border Domestic Border to

Calendar price /a price /b S1) price price 3) flouryear (1) (2) (2) (3) (4) (4) (1)i(3)

1964-75 - - 1.20/c - - 1.41/d 0.621975 1,705 1,441 1.18 2,541 2,307 1.06 0.671976 1,705 1,324 1,29 2,546 1,814 1,40 0.671977 1,705 1,0L9 1.67 2,546 1,792 1.42 0.671978 1,705 1,109 1.54 2,546 1,968 1.29 0.671979 1,784 1,428 1.25 2,723 1,975 1.38 0.661980 1,931 1,832 1.05 3,100 2,618 1.18 0.621981 2,100 1,829 1.15 3,693 2,749 1.34 0.571982 2,100 1,652 1.27 3,940 2,662 1.48 0.531975-82 - - 1.32 - - 1.32 -

/a Domestic price is NFA selling price (ex-vessel). Border price is theimport unit value (c.i.f.). Source of basic data is NFA.

/b Domestic price is wholesale Haftila for the Central Bank (1975-80) and theNCSO (1981/82). Border price

/c Based on tariff rate of 10% and advanced sales tax of 7% on a base of 25%higher than landed cost including the tariff.

/d Based on tariff rate of 30% and advanced sales tax of 7% on a base of 25%higher than landed cost including the tariff. Flour millers do noteffectively pay any domestic sales tax paid on wheat grain to this.However, this privilege was lifted in early 1983 because the BIR ruledthat it has not actually received any advance sales tax on wheat grains.

ANNEXA- 51- Table 11

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES TN PRrCING POLICY

Fertilizer Prices: Domestic Ex-warehouse Price and World Price, 1973-81(P/kg of fertilizer)

Urea Ahmonldw sulfate Muriate of potash Mixed fertilizerDomestic Domestic Domestic Domestic

ex-warehouse ex-warehouse World ex-warehouse World ex-warehouse Worldprice /a World lb price price price price price price

1973 0.55 0.74 0.37 0.41 0.80 0.36 0.53 1.0030.96 0.56 1.00

1974 1.73 1.95 0.90 1.18 1.11 0.62 1.32 1.972.92 1.69 2.31

1975 1.68 2.75 0.93 1.62 1.24 0.67 1.23 2.802.60 1.53 1,94

1976 1.53 0.93 0.96 0.52 1.07 0.58 1.23 0.951977 1.53 0.99 1.09 0.68 1.07 0.52 1.23 1.091978 1.53 1.53 1.09 0.80 1.07 0.55 1.23 1.301979 1.79 1.33 1.28 0.84 1.29 0.68 1.55 1.341980 2.03 1.90 1.50 1.05 1.89 1.12 1.72 2.001981 2.39 2.20 1.77 1.22 2.12 1.18 2.07 2.32

/a Computed based on the domestic ex-warehouse price for urea set by the FPA. For 1973 to 1975,the first entry refers to price applicable to the food crop sector while the second entry isprice of the export crop sector.

/b Based on the import price (CIF) of urea.

Source: C.C. David and A.M. Balisacon.

ANNEX 1l

- 52 -Table 12

PHILIPPINES

AGRICULTURE IN THE PHILIPF?INES: ISSUES IN PRICING POLICY

Corn-To-Rice Price Ratios; Philippines Compared To WorLd Market

Farmgate Farmgate Farngate Farmgate Corn/ricecorn (yellow) palay rice price corn/rice price

Year price price (estimate) price ratio ratio

1972 .54 .60 .92 .59 .381973 .56 .68 1.05 .53 .281974 .91 .89 1.37 .66 .241975 1.00 .96 1.48 .68 .441976 1.00 .96 1.48 .68 .44

1977 .97 1.00 1.54 .63 .351978 1.01 .97 1.49 .66 .271979 1.14 1.01 1.55 .74 .351980 1.29 1.08 1.66 .77 .29F.81 1.34 1.23 1.89 .71 .27

Average1972-81 .67 .32

Source: Price prospects for major primary commodities, EPDCE, July 1982.

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES; ISSUES IN PRICING POLICY

Fertilizer-to-Commodity Price Relationship, 1968-80

Commodities Fertilizers /a Price ratiosMixed Ammo- Ammo- Mixed/

Coco- Tobacco Ammonium ferti- Urea/ sul sul/ coco- Mixed/Palay Corn Sugar nuts (Virginia) Urea sulphate lizer palay corn sugar nuts tobacco

1973 7.90 0.56 9.43 112 5.30 0.55/0.96 0.37/0.56 0.53/1.00 0.70 0.66 1.06 0.89 1.89

1974 8.90 0,91 17,50 Z07 6.9Z 1.73(2.92 0.99f1.69 1.3212.31 1.94 0.99 1.32 1.12 2.50VI

1975 9.30 0.94 18.12 80 9.05 1.6812.60 0.93/1.53 1.23/1.9 1.81 0.99 1.07 2.42 2.14 1

1976 9.60 0.94 13,50 89 10.34 1.53 0.96 1.23 1.59 1.02 0.91 1.38 1.19

1977 10.00 1.00 15.00 132 10.27 1.53 1.09 1.23 1.53 1.09 0.82 0.93 1.20

1978 10.00 0.97 15.00 165 11.32 1.53 1.09 1.Z3 1.53 1.12 0.82 0.75 1.09

1979 10.50 1.01 16.53 250 9.32 1.79 1.28 1.55 1.70 1.27 50.94 0.62 1.66

1980 10.78 1.14 20.58 120 14.11 2.03 1.50 1.72 1,88 1.32 0.84 1.43 1.22

1981 12.34 1.29 22.38 113 17.17 2.39 1.77 2.07 1.94 1.37 0.92 1.83 1.12

/a Between 1973 and 1975, a two-tier price system was in effect providing lowqer fsrtilizer prices to domes- m mtically consumed crops than to export crops. La

ANNEX 11Table 14

- 54 -

PRILIPPIN4S

AGRICULTURE IN HRE PHILIPPINESt ISSUES IN PRICING POLICY

Domestic Agricultural Terms of Trade. International Terms of Trade.Value Added in AWricuLture, Selected Years, 1960-81

(Base year 19r1 a 100)

Value addedDomestic International in agriculture

agricultural terms terns of (Billions of pesos inof trade of trade constant 1961 prices)

1960 88 - 27.51965 93 - 34.11970 123 - 42.41975 126 141 51.21976 126 125 56.11977 122 114 56.71978 117 126 60.91979 105 131 63.61980 102 110 66.81981 100 lOO 69,2

Percentage change:1960-81 25% 150.0%

ANNEX IITable 15

- 55 -

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

The CCSF Levy and Export Tax Rates on Coconut Products: 1970-81

CCSF levy: (P/mt copra equivalent) Export tax: percent ofValue of

Period Value of processedcovered Actual Average copra coconut Export

Year by levy rate rate /a exports or exports and price

1970 - 10 8

1971 - 8 8

1972 - - 6 4

1973 08/10-12/14 150 60 6 4 412/15-12/31 250 - - - -

1974 01/01-01/10 250 770 6 4 2101/11-05/23 550 - - - -05/24-11/05 1,000 - -11/06-12/31 700 - - - -

1975 01/01-01/10 700 350 6 4 2101/11-05/18 400 - -

05/19-12/31 300 - - - -

1976 01/01-12/31 300 300 6 4 20

1977 01/01-03/15 300 530 6 4 21

1978 03/16-12/31 600 - - - -

1979 01/01-12/31 600 600 7.5 4 13

1980 01/01-05/27 600 700 3/a 2/a 2405/28-07/12 suspended - --

07/13-12/31 1,000/b - -

1981 01/01-09/09 1,000/b 800 lifted lifted 3109/10-10/02 lifte- - -

10/03-12/31 500

1983 01/83 lifted

/a Weighted average.71 On exported copra only.

Source: Philippine uoconut Authority.

ANNEX 11Table 16

- 56 -

PHILIPPINES

AGRICULTURE IN THE PHILIPPINESt ISSUES IN 2RICING POLICY

Valme of Agricultural Imrortsa P*.O3 Basis-.bv Comx*odLty Group

1955-57 1960-62 1965-67 1970-72 1975-77 1978-80 1G91 1982

------------------- In millions of US$------------…-________

Agricultural imports 121.6 130.7 194.4 213.5 456.8 611.7 719.0 814.0

Food and beverages 100.4 91.9 147.3 142.3 312.5 393.0 504.0 591.0(82.6)/a (70.3) (75.8) (66.7) (68.4) (64.2) (70.1) (72.6)

- Meat and meat 8.3 6.5 6.6 4.9 10.2 14.0 18.0 20.0preparation (6.8) (5.0) (3.4) (2..z) (2.2) (2.3) (25.0) (2.5)

Dairy products 29.9 26.6 28.0 38.8 62.3 89.4 146.0 167,0(24,6) (20.4) (14.4) (ld.2) (13.6) (14.6) (20.3) (20.5)

Fish and fish 12.3 15.4 16.4 18.9 29.1 23,3 32.0 38,0preparation (10.1) (11.8) (8.4) (8.8) (6.4) (3.8) (4.4) (4.7)

Cereals 33.5 33.8 77.5 60.6 151.6 159.7 273.0 242.0(27.6) (25.9) (39.9) (28.4) (33.2) (26.1) (38.0) (29.7)

Feed stuffs 1.6 2.4 3.6 9.1 33.8 56.9 81.0 111.0(1.3) (1.8) (1.9) (4.3) (7.4) (9.3) (11.3) (13.6)

Others 14.8 7.2 15.2 10.0 25,5 49.7 46.0 13.0(12.2) (5.4) (7.8) (4.7) (5.6': (8.1) (6.4) (1.6)

Other agricultural 21.2 38.8 47.0 71.2 !53.3 218.7 215.0 222.0commodities (17.4) (20.7) (24,2) (33.3) (33.6) (35.8) (30.0) (27.3)

Total imports 555.7 600.6 907.5 1,168.6 3,669.1 6,200.3 7,946.0 8,161.0

% of agricultural tototal imports 21.9 21.8 21.4 18.2 12.5 9.9 9.0 10.0

/a Figures in parenthesis are precentages of agricultural imports.

Sourcet Foreign Trade Statistics, National Census and Statistics Office.

ANNEX 11-57 - Table i,

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

Value of PhilipP±ne agricultural Exportsby Leadhig Commodities. ,965-1983

(FOB US$ mln)

1965-67 1970-72 1975-77 1978-80 1981-83/a

Agricultural Exports 680.4 800.2 1,681.6 2,259.3 2,087Coconut products 217.7 230.3 589.0 919.0 649

(32.0) (28.8) (35.0) (40.7) (31.1)Sugar products 146.7 211.3 535.7 359.7 494

(21.6) (26.4) (31.9) (15.9) (23.7)Forest products 228.0 264.7 311.3 475.3 375

(33.5) (33.1) (18.5) (21.0) (18.0)Fruits and vegetables 13.7 42.3 141.0 214.0 307

(2.0) (5.3) (8.4) (9.5) (14.7)Abaca 21.7 16.0 26.0 35.7 20

(3.2) (2.0) (1.5) (1.6) (0.9)Tobacco 38.0 16.0 31.0 31.0 50

(5.6) (2.0) (1.5) (1.6) (0.9)Fish and Marine Products 0.5 5.6 28.5 98.5 129

(0.1) (0.7) (1.7) (4.4) (6.2)Others /b 14.1 14.0 18.1 126.1 63

(2.1) (1.7) (1.1) (5.6) (3.0)

TOTAL EXPORTS 806.0 1,101.2 2,673.0 4,604,6 5.446

% of agricultural to total 84.4 72.7 62.9 49.1 38.3exports

/a 1983 is preliminary.

/b Includes mainly coffee, beans and rice.

Note: Figures in parenthesis are percentage of agricultural exports.

Source: Foreign Trade Statlstics, National Census and Statistical Office, GOP.

ANNEX 1 1Table l18

- 58 -

PHILIPPINES

AGRICULTURE IN THE PHILIPPINES: ISSUES IN PRICING POLICY

National Food Authoritys Selected Characteristics

of the Concessi.onary Loans Recotved

Redis Amount ofcounted NFA Market Interest

Credit loans interest interest Interest rateline granted rate rate rate subsidy

Calendar (P mln) (P mln) (X) (%) subsidy (1 mln)year (1) (2) (3) (4) (4)-(3) (4-3)x(l)

1977 800 n.a. 9 18 9 72

1978 1,000 n.a. 9 18 9 90

1979 1,500 2,500 6 21 15 225

1980 2,000 2,400 6 21 15 300

1981 2,500 3,861 6 21 .15 375

1982 2,560 2,423 6 21 15 384

Source: NFA

ANNEX 11Figure I

- 59 -

PHILIPPINESAGRICULTURAL PRICING AND MARKETING POLICY

Rice Makeing Fow In me PhllIppInes

| FAWRME

L ._ =-- .- - - _l

a CE _ w~~~MVATE NAALFO

CONSUME WAIILE VA A IORAG

s- - - Go..ewb a-

s~~~~~~~~~~~~~~ol i ,,-/ 432

ANNEX 11Fiure 2

- 6.0

PHILIPPINESAGRICULTURAL PRICING AND MARKETING POLICY

National Food Authority Organization Chart

|NFA COJNCI

ADMINIST12ATOR

| EXECURh/E ST-Af |_ 2 DERJIYAEMINISIATCRS

-r-------A Cz

-D--- - -- b-r- - - -- - -,r -

FUND BOARD

MVNAGrMENT sIraDIREPAC FORDIRECTOR~ATE COPRT PANN

DM0 Ger? CFD F7~~~~~71 TRED OG S R ~ C

REGONA OFFICES

PROMNCLAI OFF9CES

Worl1d Beank-25431