Implications of input interventions on production efficiency in Philippine agriculture
Date
1983
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Abstract
This paper primarily examines the efficiency implications of government interventions affecting major farm inputs in the Philippines. It reviews such measures as minimum wage legislations, interest rate regulations, foreign exchange controls and tariffs, as well as specific programs on hybrid seed production, fertilizer subsidies, liberalized credit, and irrigation development. While these interventions encompass a variety of instruments that have throughout the years become increasingly prevalent, they are hypothesized to have various adverse effects on production efficiency in Philippine agriculture.
Using an open-economy methodological framework, this study establishes a considerable diversity in the relative efficiencies with which regions in the Philippines produce agricultural output. In contrast, agricultural policies are disclosed to have created a strong perversity in the direction of private incentives. More specifically,
incentives have favored socially unprofitable food crops such as corn and inhibited the expansion of crops exhibiting comparative advantage. Though primarily stemming from constraints on output price, this perversity, moreover, has been shown to have been independently fostered and altogether aggravated by measures distorting input prices. More potent in this respect have been policies affecting farm wages, fertilizer prices, and short-term interest rates. Furthermore, differences in input intensities have been found substantially responsible for the variable impact of distortions on production efficiency.
At the policy level, results in this paper indicate that the government should institute less aggressive wage policies as these have unduly burdened producers at farmgate and more so those growing the apparently highly wage-sensitive food crops and those engaged in large-scale farms and plantations. Similarly, trade policy has been
biased against agriculture as it has more recently comprised measures that have gradually eroded the input incentive of peso overvaluation and provided disincentives through tariff protection of inefficient domestic industries. Fertilizer policy, in turn, though intended to
provide incentives through subsidies, has done so within the constraint of inefficiency in local fertilizer manufacturing and inefficiencies in the input's retail network. Fertilizer pricing strategies, moreover, have been severely biased against efficient fertilizer-sensitive commercial crops, as subsidies were only granted to food crop fertilizer in the past.
With regards to credit policy, this study argues that while subsidized short-term credit had been a highly potent instrument for encouraging food production, its effectiveness had been severely limited by hidden costs and inefficiencies in the credit distribution and collection network. Rather than recommend greater credit support to any specific crop, this study emphasizes the need to improve penetration of formal credit into the highly risky food farms. This would be especially noteworthy since such programs have been recently utilized to introduce yield-enhancing technological innovations into food production. On this point, hybrid seed production and irrigation programs are argued as necessary as these may together be prerequisite to the successful diffusion of the "new" seed technology. Furthermore, while rehabilitation and construction of irrigation facilities may be
desirable, more equitable methods for assessing irrigation fees in place of the current flat rate need be surveyed to reduce any undue strain on efficient crops. Indeed, success in the diffusion of high-yielding seed varieties supported by an equitable irrigation system
appear imperative in the effort to raise comparative advantage in the food sector, given the government's priority objective of food self-sufficiency. Surely, changes of this sort would be necessary in order to sufficiently recover losses due to the government's interventions and constraints.
To conclude, this study reiterates the plea for a redirection of efforts towards a bottom-up approach to development, with pricing policies less discriminatory against agriculture and more compatible with regional production efficiencies. It suggests that pricing policies gradually move towards reflecting changing social values and costs. Furthermore, it calls for rationalized regional development planning in agriculture complemented by a sufficient degree of decentralization in the implementation of plans. Given the food self-sufficiency objective coupled with output price constraints, moreover,it reemphasizes the need to search for economically efficient channels for handling and distributing subsidized input and credit supplies to food farms. For this purpose, it recommends that cooperatives or producer organizations be mobilized. Concomitantly, it suggests that coordination between government agencies and producers be strengthened through improvements in the quality and administration of the agricultural extension system. Finally, it recommends that an information network be developed so that government strategies and policies transmitted to the farm through extension can be effectively monitored.