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2002 37: 147Journal of Asian and African StudiesArsenio M. Balisacan and Ernesto M. Pernia

The Rural Road to Poverty Reduction: Some Lessons from the Philippine Experience  

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THE RURAL ROAD TO POVERTY REDUCTION: SOMELESSONS FROM THE PHILIPPINE EXPERIENCE

Arsenio M. Balisacan* and Ernesto M. Pernia**

ABSTRACT

This paper examines how government policies and institutional arrangements affect ruralwelfare outcomes. Reviewing the Philippine experience, it shows that inappropriate poli-cies and institutions stifle the response of the rural sector to agricultural growth, withadverse effects on the rural poor and overall economic development. Besides economicgrowth, policies that foster rural infrastructure, favorable agricultural terms of trade, andagrarian reform lead to poverty reduction. However, weak institutions slow the imple-mentation of agrarian reform. Thus, unless agrarian reform can be achieved swiftly, ruraldevelopment strategies should better focus on investments in physical and social infra-structures, research and technology transfer, SME development, and enforcement of con-tracts.

Introduction

The Philippines has lagged behind its East Asian neighbors in economic develop-ment and improvement of people's well-being. While its real per capita GDP washigher than in any of these countries (except Japan and Malaysia) in the mid-1960s, it became one of the lowest at the turn of the new century. It also had thebest human development indicators in the early 1960s−longest life expectancy,lowest infant mortality rate, highest primary school enrollment ratio, and lowestilliteracy rate. In subsequent decades, however, the Philippines has been surpassedby these other countries in many aspects of human development and in povertyreduction.

The experience of many Asian developing countries (ADCs) suggests astrong link between agricultural growth and overall economic performance. Thisis not surprising, given that agriculture and agriculture-dependent manufacturingand service sectors represent a large component of the economy at the early stagesof development. More importantly, rapid growth in agriculture typically inducesrural non-farm growth and, hence, substantial poverty reduction in rural areas.However, this does not appear to have happened in the Philippines. At the heightof the "green revolution" (1960s and 1970s), agricultural growth in thePhilippines was high by Asian standards, but rural supply response (economiclinkages) was weak, leading to poor rural welfare outcomes.

* Department of Economics, University of Phillipines, Diliman, Quezon City, Philippines.** Economics and Research Department, Asian Development Bank, 6 ADB Avenue,Mandaluyong, 0401 Metro Manila, Philippines.

de Sitter Publications JAAS 37(2):147-167

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148 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

The post-World War II experience of Philippine rural development illus-trates how misguided policies and weak institutional factors can constrain theresponse in rural areas to the stimulus of agricultural growth, thereby stiflingoverall economic development. This paper reviews this experience, specificallyexamining the influence of government policies and institutional arrangements onrural welfare outcomes, with a view to providing some lessons for other develop-ing countries in Asia and Africa. The next section presents a simple organizingframework for understanding the transmission of agricultural growth to rural wel-fare outcomes. The third section discusses agricultural growth and its link to ruralpoverty outcomes, while the fourth section looks into the nature of governmentpolicies which could have influenced these outcomes. The fifth section thenexamines the determinants of poverty reduction in rural areas during the 1980sand 1990s, using sub-national (provincial) data. The last section provides con-cluding remarks.

An Organizing Framework

In virtually all ADCs, the main locus of poverty is the rural sector (FAO 1999;Lipton and Ravallion 1995; Quibria 1993). Nearly three-fourths of poor peopleare found in rural areas and most depend on agriculture for employment andincome. Accordingly, agricultural growth and rural development are seen as cen-tral to a strategy of poverty reduction. Indeed, economic growth in rural areastends to be more pro-poor than growth in urban areas (Kakwani and Pernia 2000;Ravallion and Datt 1996).

Increases in agricultural productivity and farm incomes stimulate thegrowth of non-farm activities and, hence, employment opportunities. Put differ-ently, while agricultural growth reduces rural poverty and food insecurity direct-ly, the indirect effects on the rural non-farm economy through demand and supplylinkages can be even more important sources of food security and rural povertyreduction in the long run.

The response of the rural non-farm sector to the stimulus of agriculturalgrowth hinges on certain "initial conditions" in rural areas, such as distribution ofassets and incomes, quality of human capital, rural infrastructure, and macroeco-nomic and political environment (Figure 1). Drawing on the Asian experience, theresponse of rural non-farm areas (as well as urban areas) and, hence, of ruralpoverty to agricultural growth, including export or urban demand expansion,requires a number of things. These include investments in rural infrastructure andhuman capital, removal of public-spending biases favoring large farmers and agri-business enterprises, promotion of small-scale enterprises, improved access toland and technology, and macroeconomic and political stability.

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THE RURAL ROAD TO POVERTY REDUCTION 149

In East Asia, where conditions were generally favorable to the emergenceof rural non-farm activities, even agricultural households became increasinglydependent on non-farm incomes (Balisacan 1996; Reardon et al. 1998). In otherparts of Asia and elsewhere, improvements in living standards of the rural popu-lation have been commonly associated with robust rural growth linkages (Ranisand Stewart 1993; Lipton and Ravallion 1995; Rosegrant and Hazell 1999).

Nonetheless, given the large differences in initial conditions across coun-tries, the experiences in rural Asia are quite varied. Some rural areas, such as thosein Indonesia and India's Punjab, have responded strongly to agricultural growth,

Non-farm supply response

(Rural Industrialization)

Agricultural Growth

· technological change · area expansion

Improvement in rural welfare

· poverty reduction · household food security

Urban/export demand growth

Distribution of assets and

incomes

Macroeco-

nomic and political

environment

Public

investment in

infrastructure

and

human capital

Initial Conditions

Figure 1 Rural Growth and Rural Welfare Outcomes

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150 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

while in others, such as those in the Philippines, the response has been somewhatmuted. Even within a country, large disparities in rural performance are apparent(Datt and Ravallion 1992; Rosegrant and Hazell 1999).

Agricultural Growth

The agriculture sector in the Philippines continues to account for a sizeable pro-portion of total employment and, to a lesser extent, national income. In accordwith the well-known stylized fact of development, agriculture's share in totalemployment dropped from 59 percent in the mid-1960s to 40 percent in the late1990s, while its share in GDP declined from about 32 percent to 18 percent (Table1). The rather slow decline of the agricultural share in total employment, alongwith the sluggish absorption of labor in the industrial sector, suggests that thelarge labor force increases over the last three decades have been mainly employedin agriculture and in the informal services sector characterized by low productiv-ity and flexible wages.

The experience of the East Asian newly industrialized economies (NIEs),in particular, shows that development is accompanied also by a declining share ofagriculture in total exports, an increasing dependence on food imports (at least forcountries with relatively low land-man ratios), and an increasing share of non-farm income in total income (Oshima 1987). Further, the development processleads to absolute declines in the number of farm workers (Chenery and Syrquin1975). In the Philippines, the growth of per capita income, albeit slow in compar-

Table 1 Agriculture in the National Economy*

1965 1975 1985 1995 1999 Per capita GDP (1965=100) 100 131 128 143 146

Share of agriculture (%) in:

GDP 31.5 26.9 28.6 21.8 17.9

Employment 58.6 56.7 48.9 43.5 39.8

Imports 22.2 13.6 12.4 9.8 9.3

Exports 85.6 66.2 35.8 13.6 7.3

Ratio of agricultural imports to agricultural exports (%) 26.8 27.6 38.0 114.0 142.1

* Three-year averages centered on the year shown. Sources: Philippine Statistical Yearbook (various issues); Foreign Trade Statistics (various issues).

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THE RURAL ROAD TO POVERTY REDUCTION 151

ison with its neighboring countries, was accompanied by a sharp fall in agricul-ture's share in total foreign trade. For exports, agriculture's share plummeted from86 percent in the mid-1960s to 7 percent in the late 1990s; for imports, the fallwas from 22 percent to 9 percent.

The agricultural sector performed quite well during the 1960s and1970s, with annual growth averaging 4.6 percent, which was markedly higherthan the norm for most ADCs (Table 2). Rising land productivity (i.e., outputper unit of land) was the major source of growth in food production beginningin the mid-1960s. At the height of the green revolution, yield increases account-ed for much of the growth in agriculture. These gains were brought about main-ly by the expansion of irrigation systems, increased application of fertilizers,adoption of high-yielding varieties, and investments in rural infrastructure andeducation.

In more recent decades, developing countries experiencing relatively highgrowth rates of agricultural output tended to also have comparatively high GDPgrowth rates (World Bank 1986:79-80). The correlation is clear for ADCs in Table2. This observation is, of course, not surprising given that agriculture and agri-

Table 2 Agricultural Growth in Asian Developing Countries

Average growth rate (% per year)

Agriculture GDP

Share of agriculture in GDP

(%) Country

1965-80 1980-97 1965-80 1980-97 1960 1997

Malaysia – 3.0 7.3 6.6 37 13

Thailand 4.6 3.8 7.2 7.6 40 11 Indonesia 4.3 3.2 8.0 6.7 54 16

Philippines 4.6 1.4 5.9 1.9 26 20

Sri Lanka 2.7 1.9 4.0 4.5 32 22 Pakistan 3.3 4.1 5.1 5.5 46 26

India 2.5 3.1 3.6 5.8 50 27 Bangladesh 1.5 2.3 2.4 4.4 58 30

Nepal 1.1 3.3 1.9 4.8 – 43

China 2.8 5.3 6.4 10.9 – 20 Vietnam 0.8 4.7 0.8 6.2 – 26

– Not available. Sources: World Development Report, World Bank (various issues). Asian Development Outlook, Asian Development Bank (various issues). Food and Agriculture Organization (FAO) of the UN.

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152 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

culture-dependent manufacturing in a typical developing country is a large frac-tion of the economy. In the Philippine case, the remarkably robust agriculturalgrowth over the period 1965 to 1980 was accompanied by GDP growth that close-ly matched the average for the ADCs (5.4 percent a year) and for the middle-income developing countries (6.1 percent a year). Similarly, the mediocre growthof agriculture in the 1980s and 1990s mirrored the poor performance of the over-all economy.

Growth among the major sub-sectors, however, was far from uniform(Table 3). Fishery registered the highest annual growth rate, averaging 5.2 percenta year, during the 1965 to 1980 period. Consequently, the share of fishery in thesector's gross valued added (GVA) rose from 12 percent in the mid-1960s toroughly 20 percent in 1980. The growth of crop GVA, averaging 3 percent a yearduring the period, also stood out in historical perspective. Growth was particular-ly robust for corn, banana, and "other crops." This sub-sector accounted for about

four-fifths of the observed growth of total agricultural output.However, output growth for virtually all crops decelerated in the 1980s

and 1990s. One reason is the slowdown in the conversion of lands for cultivation.While agricultural land expanded (primarily through deforestation) at a rate of 3.6percent annually in the 1970s, the rate slowed to only .8 percent a year in the

Table 3 Average Growth Rates of Agriculture by Sub-Sector*

Sector 1965-80 1980-90 1990-99

Agriculture 3.7

(100.0) 1.2

(100.0) 1.5 (100.0) All crops 3.0 (80.5) 0.6 (29.9) 1.5 (50.3)

Rice 4.0 (14.2) 2.6 (24.4) 3.8 (29.3)

Corn 5.7 (8.1) 3.5 (13.6) 0.3 (0.4)

Coconut 3.8 (8.8) -4.6 (-19.9) -2.0 (-0.7)

Sugarcane 4.2 (4.7) -1.6 (-3.0) 4.8 (5.5)

Banana 11.8 (4.8) -3.5 (-5.1) 2.7 (3.5)

Other crops 7.5 (39.9) 1.5 (20.0) 1.0 (12.3)

Poultry & livestock 2.3 (7.6) 6.0 (53.3) 4.6 (45.0)

Agricultural activities

** 4.1 (10.3) 0.0 (1.1)

Fishery 5.2 (20.8) 3.9 (46.1) 1.5 (13.8)

Forestry -1.5 (-8.8) -7.8 (-39.6) -19.4 (-10.1)

* Figures in parentheses are contributions to the overall growth of agriculture. The agricultural sector comprises crops, poultry, livestock, fishery, forestry, and agricultural services.

** Included in "other crops" category. Source: Philippine Statistical Yearbook, National Statistical Coordination Board (various issues).

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THE RURAL ROAD TO POVERTY REDUCTION 153

1980s and early 1990s.Exogenous factors also contributed to the growth deceleration in the

1980s, including the fall in world commodity prices affecting the traditionalexport crops (e.g., sugar and coconut), a series of natural calamities and droughts,and the virtual completion of the green revolution by the early 1980s. Then, too,there were such policy-related factors as the uncertainty regarding theComprehensive Agrarian Reform Program (CARP) and the sharp decline in pub-lic investments in agriculture.

The poultry and livestock sub-sector emerged as the only consistent per-former through the years, growing at an average of 6 percent annually in the 1980sand about 5 percent in the 1990s. Its strong showing contrasts with that of fisheryand the diminished role of forestry. The share of poultry and livestock output inagricultural GVA climbed from 14 percent in the mid-1960s to 21 percent in the1990s. The robust performance of this sub-sector probably explains the similarlystrong performance of corn (also used as animal feed)−the growth of corn pro-duction normally exceeded that of rice up until the 1980s. Despite the macroeco-nomic difficulties of the 1980s and early 1990s, poultry and livestock evinced thehighest rate of expansion among all sub-sectors of agriculture, contributing about50 percent of the observed growth of the agricultural sector in the 1980s and1990s. Growth in poultry production (mainly chicken) accounted for much of thisexpansion, which may be partly attributable to the relatively high nominal protec-tion rate for this product.

Rural Welfare Outcomes

The rural sector, comprising over half of the total population, accounts for over 70percent of all poor people nationwide (Balisacan 2001). The overwhelming major-ity of the rural poor are in agriculture. Poverty incidence in agriculture (60 per-cent in 1997) is substantially higher than in either industry or services.

Based on the official approach to poverty estimation, the level of ruralpoverty hardly changed during the 1960s through the mid-1980s. The FamilyIncome and Expenditures Surveys (FIES) data show that poverty incidence inrural areas was 55 percent in the mid-1960s, 57 percent in the early 1970s, and 59percent in the mid-1980s.1 Wage income data from the Labor Force Surveys(LFS) during the 1970s and early 1980s suggest that the average living standardof rural workers changed only little during the period despite a strong perform-ance in national income growth (Balisacan et al. 2000). The extent of povertyreduction could have been attenuated by worsening income inequality, with thepoor gaining relatively little from higher average incomes. Furthermore, ruralpoverty appeared also quite insensitive to agricultural growth itself from the mid-1960s through to the mid-1980s (Ranis and Stewart 1993; Balisacan 1993).

Poverty incidence from the mid-1980s to the late 1990s was more dis-tinctly on a downward trend, from 53 percent in 1985 to 37 percent in 1997.2 This

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154 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

decline is particularly noteworthy given that, in contrast with the steady econom-ic growth during the 1960s and 1970s−with poverty remaining stable at a highlevel−growth from the mid-1980s through the 1990s was somewhat erratic.Hayami and Kikuchi (2000) argue that the rise in incomes of the landless poorduring the 1990s derived mainly from increased employment opportunities innon-farm economic activities. These in turn resulted from both the greater inte-gration of the rural into the urban labor markets and the increase in non-farmincome opportunities within rural areas (such as petty trading and local trans-portation services). Overall, this implies that, although growth was not as robustas in the 1960s and 1970s, it may have been more pro-poor in the 1990s (in thesense that the poor benefited relatively more from higher average incomes than inthe 1960s and 1970s).

Nevertheless, on the whole, the pace of the poverty reduction over thepast four decades in the Philippines has been disappointing compared to that inother East Asian countries. Using the internationally comparable "$1 a day"poverty line, poverty incidence at the national level in the Philippines fell from 36percent to 26 percent between 1975 and 1995. Over the same period, povertyreduction was far more impressive, for example, in Indonesia where povertydropped from 64 percent to 11 percent, and in Thailand where it fell from 8 per-cent to near zero (Table 4).

Based on official estimates, poverty reduction in South Korea was partic-ularly steep in the 1990s owing to improving income inequality besides rapid eco-nomic growth (Kakwani and Pernia 2000). In the same vein, poverty reduction inThailand would have been even more dramatic if not for worsening inequality. Theexperience in Laos indicates that economic growth in rural areas has been more pro-poor than growth in urban areas.

Changes in welfare of the rural population cannot be captured solely bychanges in income and consumption profiles. Equally important are access toresources needed for leading a long and healthy life and opportunities to acquireand use knowledge. Considerable improvements in literacy, life expectancy, and

Table 4 Standard of Living and Human Development in the

Philippines, Indonesia, and Thailand

Real GDP per capita (1995 PPP dollar)

Human Development

Index

Poverty incidence

1965 1995

1995

1975

1985

1995

Thailand 1,570 6,723

0.838

8.1

10.0

<1.0

Indonesia 817 3,346 0.679 64.3 32.2 11.4 Philippines 1,736 2,475 0.677 35.7 32.4 25.5 Sources: Real GDP per capita and poverty incidence, Ahuja et al. (1997); Human Development Index, UNDP (1998).

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THE RURAL ROAD TO POVERTY REDUCTION 155

child health occurred in the Philippines from the 1960s to the 1990s. But, as withincome growth and poverty reduction, the pace of these improvements somewhatpaled in comparison to that in neighboring countries, whose social indicators weregenerally lower in the 1960s and 1970s (Table 5).

Just over half of the rural population in the Philippines had access to safewater and sanitation services in the 1980s, but this situation substantiallyimproved in the 1990s, though less so in the case of sanitation services (Balisacanet al. 2001). Rural-urban disparities in access to services have also somewhat nar-rowed over time. Access to safe water used to be available to a greater proportionof the rural population than of the urban population, while the opposite was truein the case of sanitation services.

Government Policies Affecting Rural Development

Development Strategy and Economy-Wide Policies

There is now a consensus among economists that the failure of the Philippineeconomy to experience rapid and sustained growth and, hence, significant pover-ty reduction over the past four decades largely stemmed from the absence of an"effective allocation mechanism" that allows the true comparative advantage ofvarious industries to emerge (Bautista, Power and Associates 1979; Bautista andTecson 2000). Instead, past governments introduced distortionary economic poli-cy measures, which often made socially undesirable investments attractive toinvestors and desirable ones (i.e., promising and efficient activities) relativelyunprofitable. Such policies not only hampered economic growth at the nationallevel but also spawned side effects deleterious to rural development.

From the 1950s to the 1980s, an array of policies meant to push the econ-omy along an import-substituting industrialization track inadvertently stunted thedevelopment of the rural sector by creating a bias towards large-scale, capital-intensive manufacturing industries located in urban areas (especially MetroManila). This harmed rural enterprises which are inherently smaller in size,employ more labor and make greater use of local materials (Medalla et al. 1995;Ranis and Stewart 1993). These policies also created an incentive structure thatwas heavily biased against agriculture, the backbone of the rural sector. Trade andexchange rate policies distorted the relative prices of agricultural inputs and out-puts, preventing an efficient allocation of resources, and strongly favored themanufacturing sector over agriculture, non-tradable over tradable goods, andimport-competing goods over exports. Over time, resources moved away fromagriculture and export sectors, and new investments into these sectors were dis-couraged. Since agricultural production is more labor-intensive, less import-dependent, and more efficient in earning (or saving) foreign exchange than indus-trial production (especially of import-competing consumer goods), the prematureshift of resources from agriculture to industry constricted the growth of employ-

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156 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

ment opportunities and output in rural areas.Many authors point out that the bias did not come principally from meas-

ures aimed directly at agricultural commodities, although government interven-tions in the form of taxes, customs duties, subsidies, quantitative trade restric-tions, import prohibitions, price controls and monopoly control in internationaltrade had, up until the late 1980s through the mid-1990s, also affected agricultur-al incentives. Rather, it was the indirect effect of the overall development strategythat accounted for a substantial part of the policy bias against agriculture (e.g.,Intal and Power 1990; Bautista 1987; Bautista and Tecson 2000). The primarychannel was the overvaluation of the domestic currency, which in turn had itsroots in the industrial protection system and in the fiscal, monetary, and exchangerate policies, specifically those adopted to promote import substitution andaccommodate current account imbalances. Estimates of the overvaluation of thedomestic currency in the 1970s and 1980s were on the order of 20 to 30 percent−much higher than those for Thailand (16 to 24 percent) and Malaysia (less than 3percent) (Bautista 1990).

Sectoral Policies

In the early 1970s, the government began to directly intervene in agriculture in alarge way, including agricultural production, marketing and international trade.The intervention in the rice sector was precipitated by the rice crisis of 1971 to1972 resulting from both climate-related factors and international price shocks.Intervention was in the form of price controls on rice and a massive program toachieve rice self-sufficiency. Dubbed Masagana 99 and launched in 1974, theprogram called for government assistance in terms of credit, irrigation, extensionservices, and fertilizer subsidy.

Moreover, the National Grains Authority (NGA−the government's riceand corn agency) expanded its control over the food sector to include the effectivemonopolization of wheat (beginning 1975) and soybean (beginning 1978)imports. Marketing controls included all food commodities by the early 1980swhen the NGA was transformed into the National Food Authority (NFA) as thegovernment's food price stabilization arm. The NFA financed its expanded oper-ations partly from price margins on its duty-free imports. In the case of the exportcrop sector, the government's intervention shifted from its traditional role of allo-cating domestic sugar quotas, collecting minor export taxes and undertakingresearch and extension in tandem with the private sector, to one of monopolizingdomestic and export marketing.

The economic consequences and cost of government interventions in the1970s and 1980s were considerable. Yet, in most cases, the interventions wereeither ineffective or yielded results contrary to the avowed intentions. In the caseof rice, for example, while increased government intervention during the 1970sreduced seasonal fluctuations in palay (paddy) prices, the intervention was inade-

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THE RURAL ROAD TO POVERTY REDUCTION 157

quate to maintain producer prices at the official floor price. This meant that theopportunities to sell at the official price had to be rationed, often to the disadvan-tage of small farmers.

While the 1970s saw an unprecedented rise of government interventionsin agriculture in the form of price and quantitative controls, levies and taxes, aswell as entry into activities for which the public good argument was lacking, thelate 1980s saw the undoing of these policies towards a market-oriented agricul-tural economy, relieving it of the burden of explicit and implicit taxation. Thederegulation that commenced in 1986 included the following:

• Lifting of the export ban on copra and export taxes on copra (10 percent)and coconut oil (5 percent);

• Abolition of monopsonistic agencies and arrangements in sugar andcoconut trading and the dismantling of government monopoly controlover international trade in coconut oil, corn, soybeans, soybean meal andthe marketing of sugar;

• Liberalization of fertilizer distribution and importation;• Removal of price controls on rice, poultry products and pork;• Opening up of import trade in wheat, flour and animal feeds to the private

sector;• Divestment of the National Food Authority (NFA) from non-grain activi-

ties and the reorientation of its primary function to price stabilization of rice and corn; and

• Consolidation of commodity-specific funds into the ComprehensiveAgricultural Loan Fund (CALF) to unify various agricultural lending pro-grams and minimize government participation in these programs.

Despite these reform measures, however, the deregulation of agriculturewas left largely incomplete. Reforms undertaken did not include the abolition ofthe remaining restrictions such as:

• NFA monopoly of international trade and domestic market operations inrice and corn;

• Import controls on sugar;• Import prohibitions on onions, potatoes, garlic, cabbage, coffee and

seeds;• Hectarage controls on banana production;• Centralized importation of ruminants (for breeding and/or slaughter) and

beef;• Bans on buntal and ramie planting materials;• Export restrictions on animal and animal products; and• Licensing and/or registration of production and domestic trade for some

agricultural goods.

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158 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

Rather than expanding the scope of deregulation, which could have had apositive impact on the welfare of rural population, the government moved insteadto strengthen the regulation of agriculture, especially over the international tradeof agricultural products. In 1992, the Magna Carta of Small Farmers was passedwhich barred importation of agricultural products produced locally in sufficientquantity.

Another major government program launched in the late 1980s was theComprehensive Agrarian Reform Program (CARP). Unlike the earlier agrarianreform program initiated in the early 1970s, the CARP covers all agriculturallands, regardless of commodity produced and type of tenurial arrangement, andincludes the provision of support services for farmers. The CARP intends to redis-tribute about 580,000 hectares of rice and corn lands (covered under the previousprogram) and over 2 million hectares of privately-owned non-rice/corn lands (notpreviously covered) over a period of ten years. However, the huge budgetaryrequirements of the program, together with the limited capacity of the imple-menting agencies, stood in the way of swift implementation.

The uncertainty surrounding program implementation served to discour-age the flow of private investments into agriculture as well as encouraged non-planting and premature conversion of agricultural lands into non-agriculturaluses, a trend exacerbated by weak monitoring and absence of a comprehensiveland use policy (e.g., Medalla and Centeno 1994). The CARP also diminished thecollateral value of agricultural lands by constraining private land sales. This hascaused the demise of private markets for agricultural lands. Indeed, the amount ofloans (at constant prices) granted by private and government banks in the early1990s was only half of that in the early 1980s.

A change in the policy environment had been anticipated with the coun-try's accession to the World Trade Organization (WTO) in 1995, since thisrequired opening up local agricultural markets to competition as well as enactinglaws prescribed by the trade treaty.3 Political negotiations to win public supportfor this policy thrust severely weakened the drive towards greater openness in thefarm sector. Rice, for example, has been exempted from the trade commitmentsfor a period of ten years. In 1996, Congress passed a law lifting all quantitativerestrictions on agricultural imports (except rice) but replacing non-tariff barrierswith the highest possible tariff protection of 100 percent (i.e., the ceiling or bind-ing tariff rates).4 Clarete (1999) points out that the manner of "tariffication"resulted in tariff levels that exceeded the corresponding equivalent quantitativerates for most products.

After sustaining the bias of the import-substitution industrialization strat-egy of the 1950s through to the 1980s, agriculture was largely relieved of suchbias in the 1990s. The effective protection rates for agriculture became roughlyequivalent to those for manufacturing, following major changes in the economy'stariff structure over the last ten years. Clarete (1999) and Medalla et al. (1995)suggest that the tariff reform program has moved the economy towards a lower,

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THE RURAL ROAD TO POVERTY REDUCTION 159

sector-neutral and trade-neutral effective protection policy. Along with the sweep-ing reforms in the non-agricultural sectors, this led to a rise in the relative pricesof agricultural products in the domestic market, thus partly explaining the pickupin agricultural growth during the 1990s.

Determinants of Poverty Reduction in Rural Areas

Rural welfare outcomes vary substantially not only across regions and economicsectors but also across provinces (Figure 2). We now attempt to assess the impactof certain time-varying factors, such as policy regime, and initial conditions−related to infrastructure, distribution of physical and human assets, income, andinstitutions−on the performance of the various provinces in poverty reduction.The analysis covers the period between the late 1980s and late 1990s, for whichcomparable nationwide household survey data disaggregated by province areavailable.5

We estimate reduced-form functions relating to changes in the proportionof the rural population deemed poor,6 using poverty estimates (1988 and 1997FIES) based on comparable provincial poverty lines reported in Balisacan (2001).In each function, we include the following initial-condition variables: povertylevel at the start of the period; land inequality, given by the landholding Gini ratiowhich has extreme values of one (perfect inequality) and zero (perfect equality);average farm size; irrigation, expressed as the ratio of irrigated land to total farm area; road wealth, defined as quality-adjusted road length per square kilometer ofland; and Pinatubo, a dummy variable indicating provinces devastated by theMount Pinatubo eruption in the early 1990s. In addition, we include variables rep-resenting the political environment, namely: dynasty, defined as the proportion oflocal officials, related to each other by blood or affinity, to the total number of

Figure 2

Poverty R eduction, 1988-97: Incidence

-100

-80

-60

-40

-20

0

20

40

60

0 2000 4000 6000 8000 10000 12000

1988 per capita expenditure

Cha

nge

(in p

erce

ntag

e po

int) Province

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160 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

elective positions; political party, a dummy variable indicating whether theprovincial governor belonged to the political party of the country's President; andMILF, a dummy variable indicating whether the province had problems withMuslim insurgency. To capture the effects of time-varying factors on the evolutionof poverty, we add the changes in the following explanatory variables: agricultur-al terms of trade, defined as the ratio of the price of agricultural to non-agricul-tural products; electricity, defined as the proportion of households with access toelectricity; functional literacy, defined as the proportion of adult population whocan read, write, and execute simple messages; and CARP, proportion of cumula-tive agrarian reform accomplishments to total potential land reform area; and percapita regional gross domestic product (RGDP).

The land-inequality variable reflects access to land and, given imperfec-tions in credit markets, serves to proxy for household ability to smooth consump-tion during shocks. This variable is expected to be negatively related to povertyreduction. The irrigation variable, a proxy for land quality, is expected to posi-tively influence poverty reduction. Road wealth denotes access to markets and off-farm employment. The functional-literacy variable reflects the quality of humancapital and is expected to, among others, improve returns to labor and, hence,reduce poverty. The terms-of-trade variable reflects the relative price incentivesfor agriculture. RGDP is an indicator of the general condition of the regionaleconomy. The political-dummy variables reflect the quality of local governanceand access to fiscal resources. The dynasty variable captures the extent of partic-ipation (competition) in local politics. We expect that political dynasty inhibitseconomic growth through its negative effect on the efficient operation of markets(i.e., restricting competition in local markets and creating rents for the politicalclan) and, hence, slowing poverty reduction.7 The political-party-affiliation vari-able reflects access to the national coffers for local economic development.

The regression results are given in Table 6. The models explain roughlythree-fourths of the observed differences in poverty reduction across the 73provinces between 1988 and 1997.8 As expected, the initial level of poverty influ-ences the speed of poverty reduction, for instance, provinces with initially highpoverty levels tend to experience relatively rapid poverty reduction, ceterisparibus. This has to do partly with the fact that the distribution of living standardsis invariably skewed to the left. Thus, for a given growth rate and income distri-bution, poverty reduction would be faster for provinces with initially lower meanincome (and hence higher poverty). Put differently, the marginal return (in termsof poverty reduction) to an investment that raises mean income is larger the high-er is the initial poverty.

Initial landholding inequality appears not to be significant, but the CARPvariable is, suggesting that in provinces where the implementation of the agrarianreform program was relatively rapid, poverty reduction tended to be correspond-ingly fast. This result supports the finding of Deininger et al. (2000), demonstrat-ing that CARP beneficiaries achieved higher household incomes than comparable

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THE RURAL ROAD TO POVERTY REDUCTION 161

households not covered by the program, other things remaining the same.

Initial farm size is also not significant, but irrigation is (at least in thefinal model). This suggests that it is the endowment of land quality, not farm sizeper se, that tends to influence the speed of poverty reduction. Road wealth andelectricity are positive and highly significant in all equations, suggesting thatprovinces with favorable access to markets and off-farm employment tend to havefaster poverty reduction. The result confirms the common assertion that publicinvestment in rural infrastructure, especially rural transport and electricity, gener-ates economic linkages and externalities critical to sustained growth and develop-ment of the local economy (ILO 1974; World Bank 2000a).

The overall climate for rural growth, as indicated by RGDP variables,likewise proves to be a significant factor which influences the speed of provincialpoverty reduction. This is consistent with Balisacan's (1999) observation thatoverall growth represents the main source of national poverty reduction in recentyears.

Also in accord with expectations, the terms-of-trade variable is positiveand significant, indicating that changes in the price of agriculture relative to theprice prevailing in other sectors of the local economy have a profound impact onthe speed of poverty reduction. As noted above, the overwhelmingly large major-ity of the poor are dependent on agriculture for employment and income.

Surprisingly, functional literacy is insignificant in all regressions. Thisresult appears to contradict the popular observation emanating from the East

Table 6 Determinants of Poverty Reduction

Explanatory variable Full Model Final Model Parameter t-ratio Parameter t-ratio

Initial Conditions: Late 1980s Incidence 0.790 8.48 0.820 10.55 Land inequality 0.521 1.01 Farm size -0.375 -0.21 Irrigation 9.301 0.97 15.348 1.85 Road wealth 12.700 2.72 12.250 2.90 Dynasty -7.186 -1.09 Political party 1.206 0.41 Pinatubo 6.265 0.87 MILF 1.922 0.33 Change between 1988 & 1997 Terms of trade (Pa/Pna)

41.945 1.74 45.59 2.32

RGDP 0.001 3.15 0.002 4.77 Electricity 0.308 2.46 0.277 2.31 Functional literacy -0.174 -1.02 CARP 4.444 2.31 3.057 2.19 Constant -85.843 -2.55 -61.160 -5.148 Adjusted R squared 0.713 0.721 F-ratio 11.26 22.01 Note: Dependent variable is change in poverty incidence between 1988 and 1997. Data pertain to 73 provinces.

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162 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

Asian miracle story that improvements in human capital formed part of the build-ing blocks for sustained economic growth and poverty reduction (Ranis 1995;World Bank 2000; Herrin and Pernia 2000). Note, however, that the result mayhave been unduly biased by the rather short interval (five years) chosen for thisvariable due to data limitations.

The dynasty variable, as well as the variable representing political partyaffiliation of local government executives, is not significant in all regressions.This is intriguing considering the usual claim that dynasty in local politics inhibitseconomic performance−through its effects on economic efficiency−and hencepoverty reduction. It is possible, however, that these variables do not adequatelyreflect the quality of local governance. For instance, the dynasty variable may notcapture all the possible networks of blood/marriage relationships running from theprovincial governor to municipal officials.

Concluding Remarks

Agricultural growth in the Philippines during the 1960s and 1970s was quiterobust. Much of this growth resulted from increases in productivity, specificallyfrom the adoption of high-yielding varieties, increased use of fertilizers, and pub-lic investment in rural infrastructure (especially irrigation). Nevertheless, the denton rural poverty appeared to be weak, compared to, for instance, the experiencesof Thailand and Indonesia. One reason may have to do with the history and socialstructure of rural Philippines, including the rising incidence of landlessness dur-ing the period. Moreover, it is well documented that the economy-wide import-substituting industrialization strategy (via, e.g., overvalued domestic currency,protectionist trade, and industrial policies) from the 1960s through the 1980spenalized agriculture by, inter alia, depressing the relative price of agriculturalproducts, and encouraged capital-intensive industrialization, thereby constrictinglabor absorption. Further, policy interventions in the agricultural sector wereessentially anti-small farmer and, thus, anti-poor. For example, small farmers werebasically rationed out of the credit market due to the subsidized credit programsthat tended to favor large farmers, fertilizer subsidies were ineffective, and publicinvestment in infrastructure and research tended to disproportionately benefitlarger farmers.

The poor performance of agriculture in the 1980s and early 1990s result-ed from a combination of factors, including the decline of world commodityprices, stagnation in public investments (especially in rural roads, irrigation, andresearch), exhaustion of the potential of high-yielding varieties, and uncertaintyarising from the slow implementation of the land reform program. On the policyfront, the overvaluation of the domestic currency persisted throughout the 1980sand, consequently, the negative (indirect) protection on agriculture remained high.

Policy measures with anti-small farmer biases introduced in the 1970swere reformed, though incomplete, in the 1980s. Meanwhile, despite the marked

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slowdown of agricultural growth in the 1980s and 1990s, rural poverty appearedto decline somewhat faster. A main explanation may have to do with the expan-sion in the non-farm income earning opportunities in rural areas. In addition, thepolicy reforms of the 1980s and the 1990s may have made economic growth more"pro-poor" (i.e., the poor benefiting relatively more than the non-poor) comparedto the earlier period.

In the 1990s, there have been both accelerated policy reforms (e.g., liber-alization of foreign exchange markets, trade liberalization, privatization in theservice sector) and increased protection for the agricultural sector (e.g., high tar-iffs overcompensating for the lifted import quotas). Consequently, the effectiveprotection rate for agriculture became roughly equal to that for manufacturing.

Land reform aimed at reducing inequality is a crucial aspect of ruraldevelopment and poverty reduction. Since the early postwar period, efforts atreforming agrarian relations have not been lacking. However, results thus far havenot been encouraging. Indeed, the unduly long period of land reform implemen-tation has bred unintended effects harmful to agriculture and rural development.(Successful land reform programs elsewhere in East Asia were implementedswiftly under authoritarian regimes.) The uncertainty surrounding the programhas discouraged the flow of investments into agriculture and encouraged prema-ture conversion of agricultural lands into non-agricultural uses. Moreover, theprogram has effectively caused the private market for agricultural lands to cease,thereby diminishing the collateral value of agricultural lands and, hence, discour-aging lending to agriculture, especially by private financial institutions.

Rather than making land reform the centerpiece of the strategy for ruraldevelopment and poverty reduction, priority should perhaps be given to invest-ments in physical and social infrastructures, agricultural research and technologytransfer, small and medium enterprise development, and enforcement of contrac-tual arrangements and property rights. As the East Asian experience demonstrates,these, along with sound macroeconomic fundamentals, are critical to sustainedbroad-based growth and poverty reduction.

NOTES

1 Conducted every three years since 1985, the FIES provides the only nationallyrepresentative surveys for poverty comparison in the Philippines. Unit recorddata are available for these surveys. Earlier surveys covering 1961, 1965, and1971 are available only in published forms. While surveys covering 1975 and1979 are also available, these are beset by serious technical problems (seeBalisacan 1994).

2 The official approach to poverty measurement does not capture well the changesin standard of living of the poor. This is so since the official poverty lines appliedfor various regions, areas, and years imply different living standards, tending to

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164 ARSENIO M. BALISACAN AND ERNESTO M. PERNIA

systematically underestimate (overestimate) the reduction (increase) in absolutepoverty in economically more progressive (backward) regions or sectors, or dur-ing periods when the overall economy is expanding (contracting). The problemarises because of the use of region-specific (and, within region, area-specific)poverty line based on the prevailing consumption pattern of that region (area).See Balisacan (2001).

3 Commitments of the Philippines with regard to agriculture include a prohibitionon the use of (additional) non-tariff measures, conversion of all existing quanti-tative restrictions to tariff measures (except for rice, the tariffication of which hasbeen deferred for 10 years), binding tariffs at ceiling rates, tariff reductions (average cut of 30 percent) and harmonization of sanitary and phytosanitary measures.

4 These binding (tariff) rates are slated to go down to a range of about 40 to 50 per-cent for the various crops in 2004 in accordance with the WTO agreement.

5 The choice of province instead of region as unit of analysis permits the use of amuch larger number of observations (73 as opposed to 13) for econometric work.In this section, "rural areas" pertain to all provinces outside of major cities(Metro Manila, Cebu, and Davao).

6 Results for two other regressions involving the depth and severity of poverty (notreported, for brevity, in this paper) are qualitatively similar to those reportedbelow.

7 Put differently, local governance by political dynasty may make feasible the con-centration of economic controls to a few hands, thereby leading to (perpetuating)high income inequality. High income inequality, in turn, may inhibit subsequentgrowth in the local economy, as suggested by recent development literature.

8 For ease of interpretation, poverty reduction is specified in the regressions aspoverty in the beginning year (1988) less poverty in the ending year (1997).

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