The redistributive potential of the Masagana 99 credit subsidy
Date
1981-08
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Abstract
For economic and political reasons, the attainment of self-sufficiency in rice has been a goal of national administrations since the 1950s. The M99 Program was launched in 1973 to add impetus to the government's production intensification campaign for rice.
A credit subsidy constitutes the core of the M99 Program consistent with the view that the provision of low-cost credit is the key to increasing farm productivity because it reduces the small farmers' borrowing costs and enhances their self-sufficiency. Thus, the M99 Program is usually perceived as an equity measure.
This study examines the potential of the M99 credit subsidy as a mechanism for transferring income to small rice farmers. The coverage of the credit program, the size of the credit subsidy and its distribution among farmer-beneficiaries and between farmer-beneficiaries and credit agencies are the factors considered in establishing the redistributive potential of the credit subsidy.
The findings of this study indicate that as an equity measure the M99 credit subsidy is not only ineffective but also expensive to implement. The coverage of the credit program has been limited to at most one-fourth of the total number of small rice farmers in the country. The amount of government subsidy in terms of low-cost funds channeled to the M99 Program has been substantial, although the main portion of this subsidy has accrued to the financial institutions as incentives to lend to small farmers.
Because the distribution of M99 loans is not independent of farm size, the distribution of the credit subsidy that eventually reaches farmer-borrowers is biased against small farmers. Furthermore, the income transfers realized by borrowers from the credit subsidy derive mainly from non-repayment of loans. This makes the credit subsidy a costly vehicle for effecting income transfers, without attaining the equity objective.
The study also raises the possibility that the low-income groups are bearing the burden of the cost of the M99 credit subsidy. However, this point requires a more systematic examination.
Finally, if a reduction of rural interest rates is deemed desirable on equity grounds, measures other than subsidizing the lending costs of institutional credit sources ought to be attempted. Improvements in the small farmers' repayment capacity are likely to have a more lasting impact on the level of rural interest rates than legislated ceilings. A thoroughgoing and genuine land reform may be more effective.