8485 WORLD BANK COMPARATIVESTUDIES I The Political Economy of Agricultural Pricing Policy Public Disclosure Authorized Trade, Exchange Rate, and Agricultural Pricing Policies in the Philippines Ponciano S. Intal, Jr. Public Disclosure Authorized John H. Power Public Disclosure Authorized s ~~~~%6 Public Disclosure Authorized The Political Economy of Agricultural Pricing Policy Trade, Exchange Rate, and Agricultural Pricing Policies in the Philippines Ponciano S. Intal, Jr. John H. Power WORLD BANK COMPARATIVESTUDIES The World Bank Washington, D.C. Copyright C 1990 The International Bank for Reconstruction and Development/THE WORLD BANK 1818H Street, N.W. Washington, D.C. 20433 All rights reserved Manufactured in the United States of America First printing March 1990 World Bank Comparative Studies are undertaken to increase the Bank's capacity to offer sound and relevant policy recommendations to its member countries. Each series of studies, of which The Political Economy of Agricultural Prici;g Policy is one, comprises several empirical, multicountry reviews of kev economic policies and their effects on the development of the countries in which they were implemented. A synthesis report on each series will compare the findings of the studies of individual countries to identify common patterns in the relation between policy and outcome-thus to increase understanding of development andi economic policy. The series The Political Economv of Agricultural Pricing Policy, under the direction of Anne 0. Krueger, Maurice Schiff, and Alberto Valdes, was undertaken to examine the reasons underlving pricing policy, to quantify the systematic and extensive intervention of developing countijes in the pricing of agricultural commodities during 1960-85, and to understand the effects of suchi intervention over time. Each of the eighteen country studies uses a common methodology to measure the effect of sectoral and economywide price intervention on agricultural incentives and food prices, as well as their effects on output, consumption, trade, intersectoral trarnsfers, government budgets, and income distribution. The political and economic forces behind price intervention are analvzed, as are the effcrts at reform of pricing policv and their consequences. The findings, interpretations, and conclusions in this series are entirelv those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Direclors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Departnent, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of World Bank publications is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition is available free of charge from Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d lena, 75116 Paris,France. Ponciano S. Intal, Jr. is professor of econornics at the Universitv of Philippines, Los Banos; John H. Power is professor of economics emeritts at the Universitv of Hawaii; both are consultants to the World Bank. Library of Congress Cataloging-in-Publication Data InTal, Ponciano S. Trade, exchange raTe, and agricultural pricing policies in the Philippines / Ponciano S. Intal, Jr., John H. Power. p. cm. -- (The Political economy of agricultural pricing pol icy) Includes bibliographical references. ISBN 0-8213-1496-3 1. Agricultural prices--3overnment policy--Philippines. 2. Agriculture and state--Philippines. 3. Philippines--Commercial policy. 4. Produce trade--Philippines. I. Power, John H, II. Title. III. Series: World Bank comparative studies. Political economy of agricultural pricing policy. HD2088.75. 158 1990 338.1'8599--dc2O 90-32769 CIP Abstract Economic progressas measured by real gross national product (GNP) per capita declined steadilyin the Philippinesbetween 1960 and 1985, thus helping to set the stage for the forced abdicationof long-timepresident FerdinandMarcos in 1986. Like many of the other developing countries examined in this series of comparativestudies, the Philippinesduring this period sought to build up its industrialsector. As a consequence,the net result of the trade and sectoralpolicies adoptedduring the period was an underminingof the agriculturalsector, an outcome reinforcedby the significantchanges in the world economy in the 1970s and first half of the 1980s. The country'sfuel bill, for example, rose from 11 percent of the cost of importsin 1972 to about 25 percent in 1981. This study concentrateson measuring and analyzingthe effectsof trade and agriculturalpricing policies on the agriculturalsector up until 1985, with particularattention to rice and corn, the main food grains, and sugar and coconuts,the chief export crops. Although agriculturalproduct exportsas a share of all exports dropped from about 80 percent in the early 1960s to about 30 percent in the mid-1980s,about half the population still lived in the countrysideand agrarianreform continuedto be a matter of intensecontroversy. Among the principal findings of the study is that the various types of direct and indirect price interventionresulted in substantial reductionsin sugar and coconutproduction, a very small negative effect on rice output,.and a notable increase in corn output. Another significant findingis that direct intervention by the government in the producer prices of sugar and coconutshad net negative effects that were exacerbated by indirect intervention (e.g., manipulation of exchange rates). This appears to account for the shift in politicaldissension from the rice- growingregions of Luzon to the Visayas,Bicol, and Mindanao, traditional sugar and coconut-producingregions. A characteristicof domestic politics during the period was emphasis on patron/client relationsand personal loyaltiesrather than on the economicinterests of larger groups. The study also reports on the effects of agriculturalprice interventionon such things as food consumption,foreign exchangeearnings, and income distribution. Acknowledgement We received a great deal of assistance from a number of individuals and institutions in the course of our research. Carminda Cereno deserves to be singled out for her excellent and dedicated research assistance throughout the project. Raquel Clar de Jesus, Cesar Quicoy, Achilles Costales, and Salvador Catelo also provided research assistance al: various stages of the research. We benefited immensely.from discussions on agricultural policy with colleagues in the College of Economics ancd Management of UPLB, Cristina David and others in the Department of Agricultural Economics of IRRI, the UPLB Agricultural Policy Working Group, and the World Bank Political Economy of Agricultural Pricing Policy Project. Cristina David and Bart Duff of IRRI, Agnes Quisumbing, Cielito Habito and Corazon Aragon of CEM, UPLB and Manuel de Leon of NEDA generously provided us with data for the project. Secretarial assistance was provided by Marianito Morntero, Merce Arellano, and Lorna Vargas. Finally, we would like to thank the Philippine Institute for Development Studies and the Department cf Economics of UPLB for providing office space for the research staff. v Table of Contents Page No. Introduction 1 Chapter 1: An Overview of the Economy 4 The Economy Background Overall Economic Performance The Relative Importance of Agriculture Sources of Growth in Agricultural Production The Agricultural Sector Physical Aspects Farms Locational Pattern of Agricultural Production Chapter 2: Descriptive History of Policies 29 Macroeconomic Policy Economic Policy and the Balance of Payments Government Revenues, Expenditures and Enterprises Capital Market Interventions Labor Market Interventions Trade Policy and Fiscal Incentives The Exchange Rate Types and Phases of Government Interventions in Agriculture Types of Intervention Phases of Intervention Chapter 3: Prices and Measures of Price Interventions 62 Product Selection and Prices Measures of Intervention Chapter 4: Effects of Price Interventions on Output, 80 Consumption and Foreign Exchange Method Output Effect Consumption and Foreign Exchange Effects Results Effect of Price Interventions on Intersectoral Factor Flows vi Page No. Chapter 5: The Impact on Government Budget and Bureaucracy 100 Budgetary Effects of Agricultural Pricing Policy Revenue Effects; Expenditure Effects Net Budgetary Effects The Agricultural Budget Government Investment and Expenditure Bias Administrative Impact of Interventions Chapter 6: Transfers 127 Method Results Chapter 7: Income Distribution Effects of Interventions 137 Income Distribution and Poverty in the Philippines Income DistributioniEffects of Price Interventions on Producers Method Estimates Income Distributior.Effect of Interventions on Agricultural Laborers Income Distribution Effects of Price Interventions on Consumers Chapter 8: Variability