COMPARATIVE ADVANTAGE IN PHILIPPINESRICE PRODUCTION

by

ROY S. KEMPIS

A dissertation submitted in partial fulfilment

of the requirements for the degree of

Master of Agricultural Development Economics

in the Australian National University

July 1983

D E C L A R A T I O N

E xcep t where o th e r w i s e i n d i c a t e d , t h i s

s u b - t h e s i s i s my own work.

J u l y 1983

ii

ACKNOWLEDGEMENTS

I am grateful to both the Governments of the Republic of the Philippines and of the Commonwealth of Australia for granting me the

Colombo Plan Scholarship Award to undertake the course leading to the

degree of Master of Agricultural Development Economics at the Australian National University.

I am indebted to my supervisors, Professor Emeritus Heinze W. Arndt of the ASEAN - Australia Research Project, Research School of

Pacific Studies (RSPacS) and Dr. Sisira Jayasuriya, of the Economics Department, RSPacS for their valuable suggestions, comments and criticisms and for their patience with me all the way through while this sub-thesis was in preparation.

I am grateful to Dr. D.P. Chaudri of the Development Studies Centre (DSC) for providing me with help relating to his position as Director of the M.A.D.E. Program.

I am very thankful to Dr. Rodney Tyers of the ASEAN - Australia Research Project, and Mr. Ken Sawers of the DSC, with whom I had sought guidance in the early stages of my work. Their support also enabled me to improve the analysis and discussion of the results.

I am much indebted to the Pampanga Agricultural College

(Philippines) thru Dr. F.A. Battad, President, for granting me the

permission to study and leave the office for a considerable length of time.

iii

I am also thankful to Ms. Dawn Beresford-Wylie of the Australian

Development Assistance Bureau for her guidance on administrative

matters, and also to Mr. C. Blunt from whom I had help in editing

the manuscript.

I am also indebted to Mr. C. Olalo, Mrs. C.P. Diaz and her

friend Nancy of the Ministry of Agriculture, Philippines for providing

me the data on which this sub-thesis is mostly based.

Finally, I wish to thank my wife, Ernie, my young children Emil

Roy and Kevin Ray and all the members of my family who were the source

of my inspiration and moral support during my two years of

post-graduate work at the Australian National University.

ROY S. KEMPIS

July 1983

iv

ABSTRACT

This study is an examination of the existence of comparative

advantage in rice production in the Philippines and related policy

issues .

The analysis and evaluation focused on the assessment of the net

effect of government rice policies and on whether the country enjoyed

a natural comparative advantage in rice production during the period

1978 to 1981. This analysis was extended to include competing crops,

i.e., corn and sugar, in order to compare their relative merits. To

measure the degree of comparative advantage, the study made use of

measures of private profitability, net social profitability (NSP), and

domestic resource cost (DRC). Effective rates of protection (ERP's)

were also calculated for these crops.

The results indicate that, in general, government policies have

been biased against agriculture. Within the agricultural sector, in

relative terms the net effect of these policies have favoured rice and

corn production while they discriminated against sugar production.

The results show that the Philippines had a comparative

advantage in rice production between 1978 and 1981. The degree of

comparative advantage in rice was found to be very sensitive to world

rice prices.

Expanding the area under irrigation appears to be only marginally

socially profitable and increasing irrigation investment needs careful

reappraisal. If farmers have to bear the full cost of irrigation they

v

may be reluctant to shift from rainfed to irrigated production

conditions because their private profits could be reduced.

At current yields, expanding corn production at the expense of rice

production does not appear to be profitable. Sugar may be more competitive

at world prices, but rice is still the most desirable crop to produce at domestic prices.

In the context of technology choice, the recommended rice technology,

while socially more profitable, is less privately profitable than the

farmers' "average" technology. This probably explains why farmers are

reluctant to adopt the full recommended rice technology package.

Finally, technical change has been an important factor which

enabled the Philippines to retain a comparative advantage in rice

production. Thus, continuing technical change would be crucial to

sustain this advantage. Investment in research which increases yields

have been shown to have a high pay off, and this may be an area for

more government investment.

vi

C O N T E N T S

Acknowledgement iii

Abstract v

Table of Contents vii

List of Tables ix

List of Figures xi

Appendices xi

Chapter 1 Introduction 1

1.1 Importance of the Rice Industry 1

1.2 Rice Policies 2

1.3 Justification of the Study 3

1.4 Objectives and Scope of the Study 5

Chapter 2 The Theory of Comparative Advantage, Effective

Protection, and Domestic Resource Cost 7

2.1 Comparative Advantage and AgriculturalDevelopment 7

2.2 Demand and Supply of Protection 13

2.3 The Theory of Protection 14

2.4 Domestic Resource Cost 18

2.5 Empirical Application in Agriculture 20

Chapter 3 Impact of Government Intervention on the

Rice Industry 23

3.1 Pattern of Protection in the Philippines 23

3.2 Trends in Rice Production and Productivity 24

3.3 Impact of Intervention on Domestic and

vii

International Trade 33

3.4 Rice Exports of the Philippines 37

Chapter 4 Measuring the Impact of Government Policies

on the Use of National Resources by the Rice

Industry 43

4.1 Nominal and Effective Protection 43

4.2 Domestic Resource Cost 47

4.3 Methodology 49

Chapter 5 Comparative Advantage of Philippine Rice

Production: Results and Discussion 53

5.1 Effective Rates of Protection 54

5.2 Choice of Technology 56

5.3 Choice of Crop 58

5.3.1 Rainfed Rice, Corn and Sugar Production 58

5.3.2 Irrigated Rice, Corn and Sugar Production 63

5.4 Investment in Irrigation 66

5.5 Sensitivity of Domestic Resource Cost

Coefficients 68

5.6 Summary of Results 72

Chapter 6 Summary and Conclusions 73

References 79

Appendices 91

viii

List of Tables

Table 3.1 Structure of Protection in the Philippines,

1965 to 1974 25

Table 3.2 Area, Yield, and Paddy Production, 1969/70

to 1981/82 26

Table 3.3 Annual Growth Rate of Output, Input, and

Productivity in Philippine Agricultural Crops,

1955 to 1980 28

Table 3.4 Impact of Irrigation and Modern Rice Varieties

in Paddy Yields, Philippines, 1966/67 to

1978/79 29

Table 3.5 Total Paddy Area by Irrigation Status and Use

of High Yielding Varieties of Rice, Philippines,

1965/66 to 1981/82 31

Table 3.6 Farm and Support Prices of Paddy, and; Wholesale

and Government Prices of Rice, 1973 to 1981 34

Table 3.7 Government Paddy Procurement, 1973 to 1981 36

Table 3.8 Volume and Prices of Philippine Rice Exports,

1977 to 1981 38

Table 3.9 Rice Balance Sheet of the Philippines, 1977/78

to 1981/82 40

Table 5.1 Effective Rates of Protection in the Philippines,

1978 to 1981 55

Table 5.2 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of Rice

Production, 1978 to 1981 57

ix

Table 5.3 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of

Rainfed Rice Production, 1978 to 1981 59

Table 5.4 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of Corn

Production, 1975 and 1981 61

Table 5.5 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of Sugar

Production, 1978 62

Table 5.6 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of

Irrigated Rice Production, 1978 to 1981 64

Table 5.7 Private and Social Profitability, Protection

Coefficients, and Domestic Resource Cost of

Irrigated and Rainfed Rice Production, 1978 to

1981 65

Table 5.8 Border Prices of (Centrifugal) Sugar, 1975 to

1983 67

Table 5.9 Domestic Resource Cost Elasticities of

Philippine Rice Production 69

x

List of Figures

Figure 1 Sensitivity of DRC to Changes in World Rice

Prices 71

APPENDICES

Table 1 Cost and Returns of Rice Production, 1978 to 1981 92

Table 2 Cost and Returns of Irrigated Rice Production,

1978 to 1981 93

Table 3 Cost and Returns of Irrigated and Rainfed Rice

Production, 1978 to 1981 94

Table 4 Cost and Returns of Corn (shelled) Production,

1975 and 1981 95

Table 5 Cost and Returns Per Ton of Sugar (centrifugal)

Production, 1978 96

Table 6 Private and Social Cost of Rice Production Using

Average Technology, 1978 to 1981 97

Table 7 Private and Social Cost of Rice Production Using

Recommended Technology, 1976 to 1981 98

Table 8 Private and Social Cost of Irrigated Rice

Production, 1978 to 1981 99

Table 9 Private and Social Cost of Rainfed Rice

Production, 1978 to 1981 100

Figure 1 Sensitivity of DRC to Changes in World

Sugar Prices 101

xi

Chapter 1

Introduction

1.1 Importance of the Rice Industry

The Philippine economy is predominantly agriculture-based.

Approximately 70 percent of total population, who are dependent on

farming as a means of livelihood, are in the rural areas. Agriculture

in which an approximate 50 percent of the labour force is employed is

a major contributor to aggregate output and employment (David, 1982).

Between 1955 and 1980, agriculture's share in net domestic production

averaged 33 percent per annum; and about 74 percent of the country's

exports come from agriculture.

Despite these facts, agriculture was actually neglected when

industrialization was adopted as the overall development strategy.

When industrialization did not stimulate a faster economic growth in

the 1960's (Power, et.al., 1971, and; ILO, 1976), agriculture gained

importance again. The government focused its attention to secure food

self-sufficiency, the highest priority being given to rice. This

change in orientation was motivated specifically by at least two

factors. First, the country had a worsening food deficit and increasing

rice imports aggravated balance of payments problems. Second, with the

experience of the green revolution, the development of the "miracle"

rice varieties renewed expectations that the country could become

self-sufficient. High yields from modern rice varieties meant a boost

1

to incomes of producers. Rice is the staple food, eaten daily by 80

percent of the population and contributes a major proportion of the

household consumption basket; greater food availability meant lower

food prices to consumers. Since rice is a major wage good there was

potential for maintaining low wage rates facilitating industrial

development.

1.2 Rice Policies

Rice policies evolved with the intention of achieving different,

but often conflicting, objectives of self-sufficiency, lower consumer

prices, stable prices, high farm incomes, more government revenues,

etc. The long-term investment made by the government to achieve

self-sufficiency was the improvement and establishment of physical

infrastructure and institutional facilities like irrigation and research-

extension systems. During the 1970's price support and credit schemes

as well as a fertilizer subsidy were added. In the early 1970's consumers

enjoyed subsidized rice prices through government controls when supplies

were low both in domestic and world markets. Thereafter control of

prices continued through price ceilings and complemented by imports when

necessary. However, the government attempted to maintain price

incentives to producers to stimulate growth in output. Thus, the twin

goals of good prices for the producers and consumers were apparently

satisfied.

2

A f t e r 1977 t h e c o u n t r y e l i m i n a t e d im p o r t s a v e r a g i n g seven p e r c e n t

o f d o m e s t i c p r o d u c t i o n a n n u a l l y be tw een 1970 and 1977 . I n 1977 the

c o u n t r y became a n e t e x p o r t e r o f r i c e . By 198 0 /8 1 , t h e government

p a id premiums of P0.07 p e r k i l o g r a m of e x p o r t q u a l i t y paddy s o l d by

f a r m e r s to the go v e rn m e n t . Domes t ic r i c e p r i c e s have been h i g h e r t han

w or ld (and e x p o r t ) p r i c e s s i n c e 1979 be c ause of c o n t i n u e d government

p r i c e s u p p o r t .

1 .3 J u s t i f i c a t i o n of t h e Study

A f r e e - t r a d e p o l i c y i n c o n t r a s t w i t h p r o t e c t i o n i s t p o l i c i e s i s

b e l i e v e d by many e c o n o m i s t s to p r o v i d e h i g h e s t l e v e l s of economic

w e l f a r e f o r s m a l l c o u n t r i e s w i t h no m arke t power i n i n t e r n a t i o n a l

t r a d i n g . However , such a c om p le te f r e e - t r a d e p o l i c y i s r a r e l y found

i n p r a c t i c e . Almost a l l c o u n t r i e s a dop t t r a d e reg im es which i n v o l v e

i n t e r v e n t i o n of v a r i o u s k i n d s . For example some c o u n t r i e s adop t

p r o t e c t i o n i s t p o l i c i e s i n t h e i r d r i v e t o r e p l a c e i m p o r t s ; o t h e r s

promote e x p o r t s , and some combine b o t h t h e s e p o l i c i e s . These c a s e s

o c c u r when c o u n t r i e s f a c e d i f f e r e n t p r i o r i t i e s , f a c t o r endowments , and

p o l i t i c a l , s o c i a l , and economic c o n d i t i o n s .

T h i s s t u d y i s i n t e n d e d to a n a l y z e t h e g e n e r a l impac t o f t h e s e

numerous forms o f i n t e r v e n t i o n , i . e . , t h o s e d e s ig n e d to p r o v i d e s o c i a l

s a t i s f a c t i o n , s ave f o r e i g n exchange d u r i n g t h e im p o r t y e a r s , and

t h e r e a f t e r , t o e a r n f o r e i g n e x c h a n g e . Th is s t u d y m a i n t a i n s t h a t t h e

above schemes a d o p te d by t h e government were n o t c o s t l e s s , e s p e c i a l l y

3

to society. Aside from incurring the direct cost of implementing the

various rice policies, there could also be even more important

indirect ones. The mixture of policies mentioned in Section 1.2 may

have encouraged resource misallocation in the economy perhaps leading

to, for example, the proliferation of inefficient producers in the

rice industry.

The fundamental proposition that this study will examine is:

whether the net effect of rice price policies followed

during this period have conformed with the country's

comparative advantage as determined by its relative

factor endowment.

4

1.4 O b j e c t i v e s and Scope of t h e S tudy

The o b j e c t i v e s o f t h e s t u d y f o l l o w from t h e above p r o p o s i t i o n .

These i n v o l v e t h e a n a l y s i s and e v a l u a t i o n of t h e f o l l o w i n g :

( 1 ) s o c i a l c o s t s o f government i n t e r v e n t i o n i n t h e P h i l i p p i n e r i c e

i n d u s t r y i n the d r i v e to i n c r e a s e p r o d u c t i o n ,

( 2 ) d i f f e r e n t i a l n a t u r e of i n c e n t i v e s to a l t e r n a t i v e avenues of

r e s o u r c e use such as p l a n t i n g o t h e r c r o p s ( s u g a r cane and c o r n ) , and

( 3 ) r i c e e x p o r t p e r f o r m a n c e .

The s t u d y c o n c lu d e s w i t h p o l i c y i m p l i c a t i o n s o f t h e f i n d i n g s .

The f i r s t o b j e c t i v e a t t e m p t s to a s s e s s and e v a l u a t e the

i n t e r r e l a t i o n s h i p s be tw een government i n t e r v e n t i o n and t h e c o u n t r y ' s

c o m p a r a t i v e a d v a n t a g e i n i n c r e a s i n g d o m e s t i c r i c e p r o d u c t i o n . A

c r u c i a l p a r t of t h i s o b j e c t i v e i s t h e e v a l u a t i o n of t h e s e n s i t i v i t y of

m ea s u res of c o m p a r a t i v e a d v a n ta g e to changes i n economic v a r i a b l e s .

Th is e x a m i n a t i o n sho u ld be a b l e to i d e n t i f y w h e th e r t h e r e i s e v id e n c e

t h a t t h e c o u n t r y has a c o m p a r a t i v e a d v a n ta g e i n d o m e s t i c r i c e

p r o d u c t i o n and w h e th e r i n c r e a s i n g r i c e p r o d u c t i o n i n t h e P h i l i p p i n e s

i s r e l a t i v e l y e f f i c i e n t .

The second o b j e c t i v e a n a l y z e s t h e im pac t o f government p o l i c i e s

on corn and s u g a r , and compares t h e i r d e g r e e s o f c o m p a r a t i v e a d v a n ta g e

w i t h t h o s e of t h e r i c e i n d u s t r y . The t h i r d o b j e c t i v e c o n c e r n s t h e

e x p o r t p e r f o r m a n c e of t h e r i c e i n d u s t r y . S ince t h e c o u n t r y became a

n e t r i c e e x p o r t e r , e x c e s s s t o c k s have been d i s p o s e d o f a t a f i n a n c i a l

l o s s to the g o v e rn m e n t . T h e r e f o r e , an a n a l y s i s of t h e e x p o r t p o l i c i e s

would be h e l p f u l i n t h e g o v e r n m e n t ' s c h o i c e of f u t u r e p o l i c i e s .

5

Finally, the study concludes with a discussion of the economic

rationality of alternative policies for increasing rice production,

first to achieve self-sufficiency, and second, to export in order to

earn foreign exchange. Within the limits of the study, some of these

policy issues will be investigated.

The study applies the theories and arguments regarding

comparative advantage, effective protection, and domestic resource

cost provided by trade theorists such as Chenery (1961), Bruno (1962

and 1972), Balassa (1968), Corden (1966), and Pearson et al. (1976).

The study has six chapters. In Chapter 2, there is a discussion

of the theoretical basis of analyzing the interrelationships between

the impact of government intervention and the country’s comparative

advantage. It is followed in Chapter 3 by a discussion of the impact

of government policy on the rice industry. This provides information

on the protective structure in the Philippines and has suplementary

information on economic indicators of possible sources of the

Philippines' comparative advantage in increasing rice production.

Chapter 4 contains the methodology for measuring the impact of

government policies in the use of national resources by the rice

industry. Chapter 5 contains the results of these estimations which

further include the analysis on the relative performance of known

rice substitutes (corn and sugar as competitors), while Chapter 6

summarizes and concludes the findings of the study.

6

Chapter 2The Theory of Comparative Advantage, Effective Protection and

Domestic Resource Cost: A Review

2.1 Comparative Advantage and Agricultural Development

The standard approach in the study of the principle of comparative advantage in development economies and international economics is to

analyze whether some degree of relative efficiency in the performance

of a particular economic activity exists in a certain country. By definition, a country has a comparative advantage in producing a good

if the opportunity cost of producing the good is lower at home than in other countries (Chenery, 1961). In the analysis of resource allocation,

the implications of the theory of comparative advantage are derived from international trade theory while its critics base their analysis on various growth theories .

Classical trade theory postulates that differences in relative cost of production (using one mobile factor only, i.e., labour)

among countries determine production, and direction of trade (Ricardo in Johnson, 1968, Freeman, 1971, and Sodersten, 1980).

In contrast with classical theory, the contemporary trade theory using the two sector model attempts to show how

prices are determined and why intercountry price differences might arise. Essentially, this is an application of static general

7

equilibrium theory which is a concept of balance among interdependent

economic forces. A price change in one commodity engenders variations

in factor proportions, factor prices, and quantities of output as well

as product prices resulting in adjustments. However, equilibrium, in

theory tends eventually to be restored. The contemporary version

focuses on the determination of an optimum pattern of production and

trade through a comparison of the opportunity cost of producing a

given commodity with the price at which the commodity can be imported or exported.

The Heckscher-Ohlin doctrine of comparative advantage is

the basis of standard treatment of international trade. The

Heckscher-Ohlin theorem states that a country will benefit from

trade by producing commodities that use more of its relatively

abundant factor (Caves, 1960, and Caves and Jones, 1977). This

version, using two mobile factors of production, labour and

capital, suggests that those countries relatively rich in capital

will export capital-intensive goods, and countries that have

elatively more labour will export labour-intensive goods.

However, there are arguments against production specialisation

along Heckscher-Ohlin lines. One of these comes from growth theorists.

This is on the issue of static general equilibrium which

forms part of the Heckscher-Ohlin model. According to these

critics, static and pure general equilibrium are actually

never completely attained in an economy because of changes in consumer

demands and propensities to spend, save, and invest, new technological

developments, shifting competitive relationships, depletion of

8

existing resources, and discovery of new ones. The modern theories of

growth emphasize the importance of the interaction over time among

producers, consumers, and investors in interrelated sectors of the

economy. There is also importance attached to the sequence of

production and factor use by sector (sectoral transformation) rather

than on conditions of general equilibrium alone (Lewis, 1954; Rostow,

1956, and; Johnson and Mellor, 1961).

Critics within the field of international trade also emphasize

the limitations of the Heckscher-Ohlin model. For instance, according

to Johnson (1968) the model is restrictive in nature, in view of its

assumptions, namely: (1) similar production functions between

countries, and (2) immobile factor endowments, are at variance with

empirical observations like: (1) international mobility of capital,

economies of scale, and differences in technology, (2) "brain drain"

or the issue of international movement of labour, and (3) "technology

gap" between countries.

Foremost, the two-factor model is inadequate in applications to

agriculture because as Johnson (1968) also suggested it misses out a

third factor, i.e., land, which has been defined as a natural resource.

It is necessary to include land as the third factor since it is land

from which agricultural production largely comes. Jones (1971)

developed a three-factor model emphasizing the importance of specific

factors such as land. His model assumed that agriculture and manufacturing

use two inputs, one specific to each sector (i.e. land for agriculture and

capital for manufacturing) and one (i.e. labour) common to both. Anderson

9

(1980) a r g u e d t h a t t h e u s u a l t w o - s e c t o r H e c k s c h e r - O h l i n a s s u m p t i o n s

may n o t a p p l y t o d e v e l o p i n g c o u n t r i e s . T h ese c o u n t r i e s h a v e l i m i t e d

c a p i t a l ( i n c l u d i n g k n o w led g e a n d s k i l l s ) a n d wage r a t e s i n t h e

a g r i c u l t u r a l s e c t o r a r e p r e d o m i n a n t l y d e t e r m i n e d by p e r w o r k e r

a g r i c u l t u r a l l a n d endow m ent. I n t h e p r o c e s s o f d e v e lo p m e n t , in c o m e s

g row an d c a p i t a l i s a c c u m u l a t e d p r o v i d i n g r e s o u r c e s e s s e n t i a l i n

a g r i c u l t u r a l an d m a n u f a c t u r i n g p r o d u c t i o n . L ab o u r w i l l be a t t r a c t e d

t o t h e m a n u f a c t u r i n g s e c t o r w h ich w i l l e x p a n d r e l a t i v e t o t h e

a g r i c u l t u r a l s e c t o r . M o re o v e r , f o r an y g i v e n l e v e l o f c a p i t a l

a c c u m u l a t i o n p e r w o r k e r , t h e r a t e by w h ic h l a b o u r i s t r a n s f e r r e d t o

t h e m a n u f a c t u r i n g s e c t o r w o u ld b e f a s t e r , t h e lo w e r t h e i n i t i a l wage

r a t e , o r a g r i c u l t u r a l l a n d endow ment p e r w o r k e r . The t h r e e p r i m a r y

i n p u t s i n A n d e r s o n 's m odel w i l l a lw a y s a f f e c t t h e two s e c t o r s by

a l l o w i n g (1) c a p i t a l t o be m o b i le w i t h i n t h e two s e c t o r s , a n d (2)

a g r i c u l t u r a l l a n d endow m ent t o a f f e c t l a b o u r m o b i l i t y b e tw e e n

m a n u f a c t u r i n g a n d a g r i c u l t u r a l s e c t o r s .

T h i s r e c e n t v e r s i o n o f c o m p a r a t i v e a d v a n t a g e s u g g e s t s t h a t

i n i t i a l l y c o u n t r i e s r i c h i n a g r i c u l t u r a l l a n d a r e l i k e l y t o e x p o r t

a g r i c u l t u r a l p r o d u c t s a n d i m p o r t m a n u f a c t u r e d g o o d s . W ith c a p i t a l

a c c u m u l a t i o n a n d c o n s t a n t t e r m s o f t r a d e , t h e s e c o u n t r i e s w i l l g r a d u a l l y

s h i f t from b e i n g a n e t e x p o r t e r o f r e s o u r c e - b a s e d p r o d u c t s t o b e i n g

a n e t e x p o r t e r o f m a n u f a c t u r e s . The h i g h e r t h e endow ment o f l a n d o r

n a t u r a l r e s o u r c e s , t h e g r e a t e r i s t h e c a p i t a l a c c u m u l a t i o n n e c e s s a r y

f o r t h e s h i f t . The m odel i s e x t e n d e d t o a l l o w f o r (1) o t h e r p r i m a r y

p r o d u c t i o n l i k e m in in g c a n t a k e p l a c e a n d t h e r e f o r e co m p e te w i t h

a g r i c u l t u r e f o r t h e u s e o f l a n d an d c a p i t a l , (2) n o n - t r a d a b l e g o o d s

10

and services are produced, and (3) the influence of demand and

comparative growth factors. The first and last additions are

significant to the agricultural sector of developing countries. The

first one suggests that even resource-rich developing countries can

lose comparative advantage vis-a-vis resource-rich developed countries

in agricultural production if substitution of mining for agriculture

occurs to a substantial degree. However, productivity of labour and

land in agriculture can be improved with capital,

situation in most countries is that agricultural producers have

acquired sophisticated knowledge (capital) in the use of appropriate

technology thus verifying this postulate. The last extension

emphasizes that production and trade specialization depend not only on supply factors but also on factors like population growth and growth in

per capita income which affect demand.

In summary, the implications of the importance of the factor land

in agriculture are, (1) a country's comparative advantage in

agriculture will be less the lower its endowment of agricultural land

relative to say, mineral resources and non-farm capital , and (2)

newly-industrializing resource-poor countries will have a faster rate

of growth of imports of food and agricultural raw materials for

labour-intensive manufacturing, the faster their industrialization.

Moreover, resource-rich developed countries including those with high

per capita incomes will strengthen their comparative advantage in

primary products through periods when their industrial activity and

incomes are growing less rapidly than in other resource-poor

countries.

11

Anderson’s theory with its extensions however, has a short-coming

because it still contains the basic limitation of the modern version

which was first observed by Naya (1967). This is the prevalence of

factor-intensity reversals brought about by the substitutability of

inputs in agriculture (higher than in industry). However, it would be

difficult to rectify this problem because substitution parameters are

not available. The bias is recognized and known but generally its

extent is not.

The three-factor model of the theory using its more relevant

aspects can provide useful analytical results. For instance,

countries can continue to have comparative advantage in agricultural

production, given an immobile factor like land. The soil, climatic

conditions and past investment in agricultural research determine the

size and shape of the production possibility surface in a given

region. These together with favourable demand conditions, will

determine relative prices and the most profitable output bundle to

produce (Thompson, 1980).

Recent studies suggest that comparative advantage can be enhanced if dynamic interactions in world trade are adaptable to a country's policy orientation through export promotion (Kreuger,

1981). There is no a priori reason why benefits from export promotion can outweigh the gains from import-substitution. However, empirical research in recent years shows that benefits from an outward looking economy (or industry) do not only include widening the country's foreign income stream (capital accumulation and savings)

12

but also technical and innovative means of increasing aggregate output (Bhagwati and Srinivasan, 1979, and Kreuger, 1981).Proponents of import substitution policies disagree. They have

appealed to "dynamic" considerations of national priorities, economic conditions, differences in factor endowments, and infant industry considerations for departing from free or first-best static trade policies.

2.2 Demand and Supply of Protection

One of the common demands for protection or assistance to industries in developing countries has been the so-called infant-industry argument. Newly established industries would usually seek some tax incentives either through non-payment of taxes over a period of time, or in the case of an industry using some import components, exemption from duties or, for new import- competing industries, direct subsidies. Protection has been through imposition of tariffs or quotas on competing imports.In practice, however, long-established industries were subjected to government intervention not only to maintain viability but quite often also when social dissatisfaction over the government's treatment of primary cost items (e.g. food) imperils political and economic well-being of a developing country (Mangahas, 1975). Food security gets high priority in many developing countries including the Philippines. Some externalities connected with domestic production and marketing of an importable or exportable may be present and so an

intervention close to the point of the distortive effects may be

13

necessary.

Protection seems to strengthen an industry and can provide a

valuable contribution to the welfare of the community immediately

affected. Some interpret this support as facilitating income

generation and distribution (Anderson, 1978); but the latter is

difficult to achieve in developing countries. Related to this,

whereas setting up or promoting an industry can secure jobs, a liberal

trade policy that provides imports some margin to compete with local

products might induce at least short-term unemployment.

Another case for tariffs is that of protecting an industry to counterbalance adverse consequences of assistance to other industries. This is an example of government intervention in developed countries that is distortionary in itself because losses generally exceed gains to those who benefit from compensation. By contrast, there may be no such compensation paid in developing countries because it is difficult to implement. The mechanisms to redistribute the new benefits are rather weak or non-existent. Whatever the income distribution consequences, the government is likely to provide assistance based on some perceived benefits (especially to itself). One of these is its

being retained in power. However, governments also try to intervene if it senses fulfilment of political commitments and is able to provide social satisfaction.

14

2 . 3 The T h e o r y o f P r o t e c t i o n

The t h e o r y o f p r o t e c t i o n h a s made c o n s i d e r a b l e a d v a n c e s , b o t h i n

n o r m a t i v e a n d p o s i t i v e e c o n o m i c s (C o r d e n , 1 9 6 6 , and 1 9 7 1 ) , The l a t t e r

f i e l d h a s c o n t r i b u t e d s u b s t a n t i a l l y i n u n d e r s t a n d i n g how t h e s t r u c t u r e

o f n o m i n a l t a r i f f s a f f e c t s t h e d o m e s t i c p r o d u c t i o n p a t t e r n o f a

c o u n t r y ( G r u b e l , 1 9 7 1 ) . As a p r o t e c t i o n m e a s u r e , t h e e f f e c t o f a.

t a r i f f i s t o r a i s e t h e c o s t o f i m p o r t s . As a r e s u l t , t h e i n c e n t i v e

f o r d o m e s t i c p r o d u c t i o n o f an i m p o r t a b l e i s l i k e l y t o i n c r e a s e . When

p r o t e c t i o n i s n o t p r o h i b i t i v e , . f o r a s m a l l c o u n t r y t h e r e s u l t i n g

p r i c e d i f f e r e n c e b e t w e e n i n t e r n a t i o n a l a n d d o m e s t i c p r i c e s i s e q u a l

t o t h e t a r i f f w h i c h i s r e f e r r e d t o h e r e a s n o m i n a l p r o t e c t i o n ( t h r o u g h

t a r i f f s ) . However , i m p o r t s t h a t a r e u s e d a s i n p u t s a r e a l s o l i k e l y

t o o f f s e t t h e i n c e n t i v e t o i n c r e a s e p r o d u c t i o n b e c a u s e t a r i f f s a l s o

r a i s e t h e c o s t o f p r o d u c t i o n .

D o m e s t i c p r o d u c e r s ca n a l s o be p r o t e c t e d i n a v a r i e t y o f ways

n o t r e l a t e d t o t h e i m p o s i t i o n o f t a r i f f s , e . g . q u a n t i t a t i v e c o n t r o l s

on i m p o r t s l i k e q u o t a s . I f t h e r e a r e q u a n t i t a t i v e c o n t r o l s on

i m p o r t s , n o m i n a l t a r i f f r a t e s u n d e r s t a t e t h e d e g r e e o f p r o t e c t i o n .

T h u s , t h e c o n c e p t o f e f f e c t i v e r a t e o f p r o t e c t i o n was d e v e l o p e d t o

a s s e s s more a p p r o p r i a t e l y t h e e x t e n t o f p r o t e c t i o n s i n c e d e c i s i o n s

w e r e a f f e c t e d by t h e p r o t e c t i o n o f t h e p r o c e s s i n g a c t i v i t y r a t h e r

t h a n t h e p r o d u c t i t s e l f ( J o h n s o n , 1 9 6 5 ; B a l a s s a , 1968 an d 1971 ;

G r u b e l , 1 9 7 1 ; R u f f i n , 1 971 , and W i l k i n s o n , 1 9 7 1 ) ,

15

An industry’s ERP is defined as the overall proportion by which

that industry’s value-added (gross value of the industry’s production

less costs of materials used) is raised by protection of that industry

and lowered by taxes and protection to other industries (Corden,

1971). It shows how the overall protection structure discriminates

between industries. And generally, those industries which require

higher protection to compete with other industries either at home or

abroad use national resources less efficiently. If industries were

equally protected this would mean assisting none of them at all, hence

it is important to know the structure of ERP's in an economy for

useful implications to be drawn.

One of the important purposes of the development of ERP however,

was to use the "price" of value-added to predict output and factor

allocation at the margin under partial equilibrium conditions (Corden,

1966; Ethier, 1971, and Humphrey, 1971).

The theory,however, is constrained by its fixed physical-input

coefficient assumption. When the tariff structure changes, price

relationships change and induce substitution among inputs, then the

ERP estimates have a bias which overstates the effective rates

(Corden, 1966). Travis (1968) cited Balassa (1965) and Basevi (1966)

who argued that the overestimation of ERP under that assumption can

explain the divergence between nominal and effective rates to some

extent. Pursuing these implications Anderson and Naya (1969) analyzed

the bias in a Constant Elasticity of Substitution (CES) production

function analysis and concluded that arriving at the true ERP is

16

difficult because substitution parameters are usually not available.

Moreover, the theory of effective protection under the above

assumption was unable (1) to predict the direction in which a tariff

change reallocates domestic resources, and (2) to rank industries by

comparative advantage or relative international efficiency.

In the light of these problems nominal and effective rates of

protection broadly indicate the differential nature of incentives that

the combination of tariffs, trade policies, and domestic subsidies and

taxes create in the economy. Grubel (1971) summarizes NRP and ERP

relationships showing first, that for any given nominal tariff, ERP is

greater the smaller the value-added of a process. Second, ERP is an

increasing function of output tariffs and a decreasing function of

input tariffs. Corden (1971) also summarizes NRP and ERP

relationships. For instance, if the nominal rate of the input is

equal to the nominal rate of the output, then the output's effective

rate will also be equal to its own nominal rate. Also, there is a

direct relationship between the nominal and effective rates of output

and nominal and effective rates of inputs. It is also possible that

the effective rate can be negative even though the nominal rate is

positive. And if there is no nominal tariff on output but there is a

tariff on inputs, then the effective rate is also negative. In short,

ERP’s change in response to changes in nominal rates of both output

and inputs.

17

2.4 Domestic Resource Cost

Bruno (1962 and 1972) defined DRC as a concept which relates to

the real opportunity cost in terms of total domestic resources of

producing (or saving) a net marginal unit of foreign exchange. This

is more relevant in developing countries because markets are distorted

and resources like foreign exchange are constraining. DRC can be

used to measure social cost of protection, the valuation of domestic

resources needs to be in terms of shadow prices to reflect social

opportunity cost of using them. This approach has been discussed

thoroughly by Bruno (1962), Krueger (1966), Balassa (1968) , and*

Srinivasan and Bhagwati (1978) in the context of the cost of using

real resources including foreign exchange in the drive of certain

countries to expand production.

The use of the DRC criterion has increased after criticisms of ERP as an investment criterion because of problems in prediction of resource allocation effects. The ratio of opportunity costs of alternative uses between outputs is given the term "shadow price" which can be thought of as the marginal rate of substitution between the "outputs" in question - the amount of one output which has to be sacrificed to obtain another output (Dasgupta and Pearce, 1978). An

examination of the DRC criterion shows that, (1) tradable goods are

valued at world (or border)prices, and preferably (2) domestic factors are valued at their second-best distortion-reflecting shadow prices (Bhagwati and Srinivasan, 1980). Valuation of tradable andprimary factors at their shadow prices or opportunity costs

18

are discussed in detail in Chapter 4.

This calculation of the shadow price however, is less than

general because it is based on a partial equilibrium analysis that is

valid only for relatively small changes in the economic structure.

However, this can be "generalized" by conventionally defining it as

the net contribution of a marginal unit to the national product.

Modifications are made by evaluating the domestic resource cost

coefficient at the opportunity cost of using foreign exchange

(Chenery, 1961; Bruno, 1962, and; Krueger, 1966).

There is another advantage of using DRC. In the absence of

better industry information, sensitivity criteria suitable for use in

DRC approach can be used. Sensitivity analysis evaluates the change

of the DRC coefficient from corresponding changes in costs of inputs

or yields of the productive activity.

It has however, been criticised on the ground that its original

use (as Bruno and Krueger did it) treats all domestically produced inputs as non-tradable. In Balassa and Schydlowsky's (1968) view,

the Bruno-Krueger system penalizes intermediate input-using industries

by valuing domestically produced intermediate inputs at domestic

prices. Most often, these inputs can be imported at far less cost.

Hence, costing inputs at domestic prices can give estimates of DRC

that are biased upwards. Other limitations of the DRC approach are

discussed in Warr (1983),

19

The DRC approach also should evaluate the protective effects of

policies at the margin since what is relevant to policy is output

increments. Warr (1983) suggested that DRC can illustrate the degree

to which commercial policy has distorted resource allocation by

calculating DRC of foreign exchange saved in highly-protected

import-competing production and contrasting this with the same measure

for relatively unprotected export- or import-competing production.

However, this is difficult in practice because often there is no

information on marginal cost of production at aggregate levels. If we

can assume that marginal and average costs of different industries

tend to move proportionately, then average costs can be used as a

proxy for marginal costs. Then, DRC would illustrate the differential

nature of incentives as indicated by the differential social returns

from the allocation of resources in producing different products.

2.5 Empirical Applications in Agriculture

The application of these approaches to the Philippines rice industry was done in research coordinated by the FoodResearch Institute of the Stanford University as part of the project on the study of the political economy of rice inAsia (Pearson, et al., 1976). Based on the definition of comparative advantage in Section 2.1, Pearson et al, distinguished

social from private profitability of rice production. Pearson et al argued that whereas an individual firm makes its decisions on the basis of market prices for its inputs and outputs, governments acting in the interest of the whole society should make its decisions on the basis

20

of social prices of inputs and outputs. This requires the evaluation

of net social profitability (NSP - defined as the net gain or loss

associated with an economic activity evaluated using shadow prices)

which can differ from private profitability. In social profitability

calculations, all variables are evaluated at their opportunity cost,

recognizing that there are basic market distortions.

The relationship between NSP and comparative advantage is

straightforward. A country or region in a country has a comparative

advantage in producing a commodity if the NSP of the activity is

positive.

Using sensitivity analysis, Pearson, et.al. (1976) measured the

extent to which DRC tends to change with changes in the cost of

labour, in yields and world prices. Such results can give useful

policy guidelines. However, their work covered a single year only.

As Ahn (1982) showed, comparative advantage changes over time and a

snap-shot analysis would be a poor indicator of relative efficiency from which investment decisions could be made. A knowledge of

long-term trends of variables like prices is necessary. Given

volatile world prices, this is often difficult to ascertain, but

the long-term trends in DRC changes are more useful for investment

appraisal.

The other weakness of the study was the use of averages rather

than marginal figures in the analysis. There is an analtyical

conflict between theory and empirical estimates of DRC because data on

marginal products and marginal costs are difficult to obtain. Hence,

great caution must be used in interpreting coefficients of DRC based

21

on average to draw resource reallocation implications.

The study by Herdt and Lacsina (1976) on the Philippine rice industry emphasized that differences in technology used in

production of rice explain the differences in relative efficiency between regions. Two limitations of this study, in addition to the above were: (1) the use of prices significantly higher thansupport and actual prices, both in domestic and world terms, and (2) the assumption that the Philippine peso was only slightly overvalued. A study using input-output data of 1974 found the peso to be 34 percent overvalued (Medalla, 1979) while Herdt and Lacsina used a figure of five per cent. In general, 1974 was a year with record world rice prices and measures based on those prices are likely to underestimate the degree of comparative advantage that may actually exist.

22

Chapter 3

Impact of Government Intervention on the Rice Industry

3.1 Pattern of Protection in the Philippines Rice Industry

The Philippines has adopted various policies which affected the

rice industry both directly and indirectly through various forms of

intervention. Both input and output prices of rice and most

agricultural crops increased faster than those of the manufacturing sector

between 1960 and 1974 (ILO, 1976). However, the incentive structure

of government policy was effectively biased against the agricultural

sector in 1965 (Power in Balassa, 1971). This was due to higher input

prices, and trade taxes (e.g., export tax, export quota, and other

levies) on traditional agricultural exports including sugar (David,

1982). Since low consumer prices tended to dominate the objective of

food price policy, the government was expected to intervene in input

markets in order to offset the former to maintain producer incentives.

Gravity irrigation and rural institutional credit were subsidized.

Although fertilizer was supposedly subsidized to farmers through the Masagana-99 Program (a scheme for increasing rice production), there

appears to have been no actual subsidy between 1976 and 1981 (David,

1982). This happened because the government was also acting to

protect the domestic manufacturing of fertilizer. Thus, while a

subsidy was given to the fertilizer producers who were also importers,

domestic prices were set at quite high levels.

23

The effects of policies on several industries in the economy are briefly summarized in the pattern of protection costs in the Philippines

(Table 3.1). Protection of the manufacturing sector diminished in

1968 and 1974 in comparison with 1965 but many agricultural industries

actually experienced negative nominal protection and small effective

rates of protection between 1968 and 1974. Thus, the situation in the Philippines was biased against many agricultural industries including rice .

3.2 Trends in Rice Production and Productivity

Inspite of the developments discussed above, the rice industry

has experienced high growth rates. Paddy production has expanded from about 5.2 million tons in 1969 to 8.1 million tons in 1981 (Table 3.2). This is an average annual growth rate of 4.58 percent between1969 and 1981.

Continued growth in rice output is considered to be necessary to meet the expanding demand caused by growth of population and incomes.There are at least five factors that can help increase production, namely:

(1) expansion of harvested area under cultivation,(2) expansion of irrigation systems,(3) planting of HYV’s,(4) increased use of fertilizer and other chemicals,

(5) the improvement of milling technology, and(6) extension services.

24

Tab

le

3.1

. Structure

of p

rotection

in t

he P

hilippines,

1965

- 1

974

<DPh Pi d

<1) O 0 p> e •H Ph -

0) •H p d dp rH O ON C— 1 1 1 VO 1 1 'd* LTN O rO +3 Pi a 00 CO ON CO HO rH rQ d •HCD 1 1 1 1 c d •H a p

T i 4h P i Ph 4h 04-1 P e\ 0 3W «N to 0 Ph "d

c— CO •H a 0 rH 0Pi =1 p a d Ph

o v •H 00 d Ph0 si a Ph

P «3 O Ch e •H pH pi 0ö 1 M} O ' t P - l 1 1 CV] 1 1 c O *d" 1 O 0 0 O O

1 1 rH ON rH 1 PÜ 0 co a •“D •Hs 1 si 0 cd0 Pi rH > 0 rs

rO •h "d z hoO -d p d •d* d

*~3 si Si Ph c— •H•• •• d Q eH ON CO

es 0 rH dCO es d a 0CD d M 0 Ph •

•H 0 0 to O rH> Ph •H rH Geh 0 d rO

H> +3 d d M CO-p CO ON O ON C— nO rO C O O CO ON LTV CO Pi 0 Ph O •H

«H 10 C\J rO LTN 1 LTN 1—1 1—1 O I--1 pi CD Pi -H phrO 0 CO rH O +3 P 4 h P h O

m 4-i O O rH • H •H rO4h Ph d 0 rH -P rH

vn qq h£ Ph 0 d • H C/0 CO43 O • H Cl, c-j • 0

ON • H CD Ph P h CM 0 •ö Ph > ho d rH Ph

0 •H < Ph 0 CO 0 Ph0 r H p 0 P 0

CD 0 si p -p 1 H> 0 0 to d co

1 t i l l 1 1 1 1 1 1 1 1 1 1 O 4h 0co a

d iTN 0g PI 4-1 •H CO to •0 fa a 0 rH 0 0

si •r! r d d cd a•H o si 0 •

•• «• CO •H O •H ph 0 ~Ch si si p 0 p Ph •H lT \

0 0 0 0 0 p p

CD •H •H Ph 10 0 ** CO> p p CO 0 •

0 0 P 0 0 fc: rHc— VO CM 1—1 NO «Nj- CO ITN LTN CO CO O VO LTN rH CD CD si a Ph • 0 0

O rH 1—1 rH CO ITN LTN LTNVO C— CO CO VO -P •r“0 0 p P h 0

1 1 i 1 1 O 0 sU"N 4-1 Ph d p

Ph d4h 0 ^

4-i Ph Oh O es _ h cov o pq 0 LTN Eh 0

4h 0 > Ti •J. — -rHON c a O 0 0 • ■d

d O P P rH ^ dCD Ph d d 0 -pPh Eh 4h 0 P > v o cn

0 rO 8 8 8 1 rO CO rH VO LTN LTN O CO rO O Si O CO c—1 1 1 rH CO rO *=d" 'd " LTN C 1 rO +3 1—4 0 0 es ON 0

s 0 d P Ph > P P P0 Pi pi O Ph •H d '— d

Ph c d p 0 p+3 •H Ph Ph c s d "H00 hO S 0 a Ph d p

• • 0 P Ph p 0 •H CO- Ph = d 4h P to d

d P h I 0 0 pCO Ph rv z > dt— P

si---s ts 0 a a

O'- CO r rs Q 0ho «—I M CO CO • Ph

hO sd '—^ ON 0 CC 0 Eh dpq Ö O •H ** rH d c d 0

d CO ho • s - /< • H ON -H <=8 toM Ph O -P hD pi CVi P h (— Ph 0

a pi 0 hO c ~ • Ph Ph • äP3 p co 0 125 CO CO hO Pi - ON O -H •H

O 0 0 CD 0 Ph •H d 1—1 rH • rH TdEH d •H P-i i ^ h 0 h CO v—x i -H « 0

4-1 Ph Pi -P O Cd rO u CO d CO t J ,d p 0co pi p -p pi O 0 cd co c d 0 CD > 5 -p d . •H PL, •» CL, rd a

Pi CO rH Pi Sh O Ph CD -P -P •H Ph 0 rH a > d upD a3 pi Pi O 0 d <D d d 4h -H 0 + 3 Ph -P hO d d • d d 0a T i 0 O r£> O Ph hO 4h d hO O CD CO Pi 4h pi a P E h KQ 1 d -H O *H O *H O pi O Ph <D O ^ 0 -H PisiH Sh O Ph Eh Di Ü w 0 > « CO Ph pi si d a 0 nd 0

0 hO •H O *H c da <3 Ph Ph a a

P •PQ

23

Tab

le

3.2

. A

rea,

y

ield

, an

d

pad

dy

p

rod

uc

tio

n,

19

^9/7

0

- 19

81/8

2

öo•H-pO &HP

TCi o O 'Hu u

I— I o cti O -P ’O' O '— Em

-p m rO O oft 0 0 vo lift 00 VO m CO0 m "P" O 1—1 Oft VO VO lift Cft Cft ro CM Oa CM rO 1-1 lift VO 1—1 ■'3" CO 1—1 CO ft- rHlift in lift Lift \o VO VO r— ft- ft— CO

OUcti-POG)Kf-t0P-.T iI—I 0 •H t>M

oOo

cx

w>M

C O CM t — CM r f t O CM CM vo f t - L P \ r O V O Ovo C l i f t V O V O c— C O C f t 0 (— l CM m P

• • • • • • • • • • • • • O(--- 1 r H r H r H 1--- 1 1— 1 r H r H r H CM CM CM CM O

P -P rft VO rH vo Cft Oft CO Cft Oft ft- Oft rft0 O rH rH rH rft rO ft- 0 VO m lift roP 0 rH 1— 1 CM rH 'Ct lift lift lift lift VO ■p- 'P"

<>— 1 rO rft rO rO rft rft m rft rft rft rO

00c-Hftft•H

1—I •H ,0 ft

O•Hs

I—1n5JhP-PrHPo•HbQ«=3ftO3P0UPFQ

0O§oc.o

26

Until about 1960, growth in rice production was based primarily on an increase in the physical areas of land under cultivation, with relatively little change in technology and total factor productivity (Crisostomo and Barker, 1972). Between 1949 and 1959 growth in

total inputs was greater than the rate of growth of total output, with land and labour dominating (Table 3.3). The increasing scarcity of arable land suitable for rice cultivation left fewer ways from which production could be increased at the beginning of the 1960's. Figures show that the area harvested to rice has remained relatively constant at an average of above 3.2 million hectares for quite some time now. Between 1958/59 and 1977/78, area harvested had grown only by 0.4 percent per annum (Onkingco, et al., 1982). The conscious effort towards land intensive strategies brought about by the limited land availability resulted in enormous technological change in rice production in the 1970's. This reversed the dependence on land expansion as the primary means of stimulating growth. Starting in the late 1960's output significantly increased as a result of the use of new technology.

The improvements in production and yield thereafter have been

brought about by intensified land use with the help of irrigation, and

the use of HYV’S and fertilizer. In an estimate of the impact of

irrigation on yield, a study at IKRI using microlevel production function analysis showed that irrigation was very significant (Table 3.4). On average, 50 percent of yield increases can be attributed to the use of

irrigation by allowing a second crop to be cultivated during the dry

season. Casiple-Rola (1979) showed that productivity returns were

high for investments in irrigation even at interest rates of 25 per cent.

27

Tab

le

3.3

. A

nn

ual

g

row

th r

ate

o

f o

utp

ut,

in

pu

t an

d. p

rod

uc

tiv

ity

in

P

hil

ipp

ine

a

gri

cu

ltu

ral

cro

ps,

19

55

- 19

$0

ONt— toON p1—1 00 LTN rH O c 1--1 c— 1—1 •H1 • • • • . • • • CO d

ON rO OJ rn OJ O Cv] OJ d P■d rH dON p(—1 0

ts) 0•H 0.* •• «• «<* «« *. •• •• •• 1—1 p•H COP 0

ON P >c— 0 •rHON Ph rHrH rH ro rH ON 01 • • • • • • • • d »N

ON m ro rH C\i OJ CO rO PO P COLTN d p<ON 01—1 d p

0 0. . •• •% •• «. «• . . «% O

O tot—1 PP h •H

ON E dC— 0 dON t>5 rH1—l CO O pO O O Lf\ rO 0- P rH OJ • • • • « • . • P 0 0 PON VO rH m "3* t LTN OJ 5 rQ > *<HVO 0 s •HON d d P P1—1 CO £ O P

0 0p ~ P h E. . •• •« • • •• . . •• . . •• d d 0 t>50 0 0 O>s P P rH

ON d P hVO 0 »N EON d d UN 0rH O m m c r— C“— LTN PO p P O1 • • • • . • . • d • rH

ON Os) t—\ 1—1 0 CO OJ PO P rH O dLTN d PON d d d1—1 d 0 P p

0 p d 1—1. . •• •• •• «• .. •• *. •• P d d

% N0 >P -H P p

O 0UN -H

* HLTN 0 rH 0 toON 0 d d1—1 CO PO LO\ ^ VO rH OJ OJ 0 »*1 • • • • . • • • CO UN rH

ON pO PO rO 0 0 0 Ph ■d dd " rH to O • pON d O 01—1 P X p

-pdPhpdorHdPO

EH

^ 1-PdP h

PMI—1d

d0P

dPd►Pda) d-P <dd p> -d•H

t i

-p pio

-p p •• I—I o d d pP O O d

do>sO

rHP h

os

pdod►P

-Pdp .

p ^ d d O Pd

rH>5

-P d

P0N

•rlrH•HPP0

•H>

•rHPo

doppH

dPdP)

0pd>

•HPrHdop0P h

t>>p•rl>

•HPod

dopPh

pdorQd

►P

0>dPd0>s1rO0Pd

co <+h p o ÄtO 0•H P0 d

P0tjD fcjo d d P p p -H 0 5 > O d rH I—I

oPh

>5PPco0poPhdPd>5P0rPco•HPh

P d d 00 p>5 ,P Oto

d -h p P 0 0 2

3 O Pto *>

>5

d0codrQ

PPrHdoPh

^dho| 'o l

28

SOU

RC

E:

Tab

le

4 o

f D

AV

ID,

C.

(198

2),

"Im

pac

t o

f P

ric

e

Inte

rve

nti

on

P

oli

cie

sO

n A

gri

cu

ltu

ral

Inc

en

tiv

es

in

the

Ph

ilip

pin

es"

.

Ta

ble

3

.4.

Imp

ac

t o

f ir

rig

ati

on

a

nd

m

od

ern

ri

ce

v

ari

eti

es

in

p

ad

dy

y

ield

s,

Ph

ilip

pin

es

,

1966/6

7

-

1978/7

9

du0TjOS coo d

-p -p c3

0 -pS ”

d0 oCO -H d -p 0 d d bflO *H d d

M d H

rH > ;0 FQ•H

CO0

0 *H -P

0 0 +3 -Hd d 0 d O > d 0

P-.

1—I rH<Cj

'~0 0

<+Hd•HdCd

d0+»d5l0

•HuuM

O d ' C M d ' G n O C M r O O L f V O n d ' V O C\J CM C\1 i—I C M C M C M r O C M r O L T N d '

^ i n CO ,"0 (M C— LOv I—1 1—I ON CM c~-r -l CM CM rH CO m CM

O rn orO CM 1—I

■M- i n ON CM 0 COI—I I—I I—l I—I

C— O d " VOH CM 0

1

C— CO MO MO CM r o u n r o

LTN O CO rH oCM d " ITN d * MD

M3 r<0 LTN i—Ii n i n no no

a0co >5d -p 0 0 d -PO d d dm >

d1—i0•H>h

1—I cj d o •H -P •HdddEh

rH o o n d - cm l— c— o o n o o n m noCM rO d * CM CM CM ITN t/N l A m LfN 'M'

OCOCTnrH

1—Icj.

-P0

CM CM CF\ <d ITV CM CM fO in 'Nt in 0 NOin in cn ^ cm M - i n c o i n i n ^ i n m o

o50d

•H

'hbdo

Cd

d

fH

COM3

VOVO

onvocoM3

o rH cm mc— c— c— c—

VO

d* LTV M3tn- le­

rn d -c— r~-

ltn M3 c—

CTvc—co

0oudo

CO

29

Between 1965/66 and 1980/81, the irrigated paddy area

increased by 4.7 percent annually. In 1980/81, area irrigated was 47

percent of total harvested area used in rice production.

In 1966, the first of the HYV1s were introduced. Based on the

above IRRI study, an average of 30 percent of yield increases was

attributed to the use of HYV's and adoption spread rapidly. In

1978/79 over 80 percent of the total rice area was planted to HYV’s

(Table 3.5).

The use of HYV’s was correlated with an increase in fertilizer

use. There is no available information on the breakdown of fertilizer

consumption by commodity in the Philippines. However, the Fertilizer

and Pesticide Authority (FPA) estimated in 1968/69 that 30 percent of

all fertilizers and nutrients was applied to rice. Based on this, an

IRRI studyr which used the constant factor shares method , estimated thatfertilizer applied to rice would have increased from 46.9 kilograms in

1969/70 to 68.4 kilograms per hectare in 1978/79 (Ongkingco, et.al.,

1982). Furthermore, nitrogen use in kilograms per hectare would have

increased from 11.2 in 1969/70 to 17.8 in 1978/79. This is still

below the recommended amount of 64.5 kilograms of nitrogen per hectare (Ministry of Agriculture, 1981).

Achievement of the best results from HYV's requires adequate

water control, careful attention to the timing of operations, improved

farming practices including the control of weeds, pests and diseases,

and the application of the appropriate type and quantity of

fertilizer. Hence, the role of government policy became more

30

Tabl

e 3.5. T

otal

pad

dy a

rea

by i

rrig

atio

n status a

nd use o

f hi

gh y

ield

ing

vari

etie

s of r

ice, P

hili

ppin

es,

1965/66

to 198o/8l

'■do CD -p■p (i oi Ö <D *0 CD Fn O <tj Fh U U CD M Oh

rH O N O N ^ r O C — r H O r O O <M CM rO OJ C—

<Ho o-P COti d -CD CD CD > 1 UM C— O O rO rO C\l O (M r— ON <M 1 IO Fh -P P-1 H C M ^ l A C O V O V O P P P P P C OFh < Ö t x j cd dOh (—1

Oh

tlDÖ CO •H 0t3 •H N1—1-p COCD CD vo 1-1 c\j VO vo ON vo LTV rH c— r~- O•H •H > 1 vo o LTV LTV vo CM C~— C t— o 1—1 LTV rH

u rO r— rO rO trv CO VO 1—1 1-1 rO LTVci >~r-i t-1 rH I—1 1-1 rH CM CM CVJ CVJ <M CVJ

rd >tcD /-N•HW CO

I

ro o tr- vo co co VOco rH o LTV c~- '= rOLTV LO» t- rO CVJ itn1-1 rH i—1 »—l i—1 rH rH rH

o rH on rO vo O CM 1-1vo r— O CO r— rOa\ rH rO rO rO CMrH rH i—1 c—1 i—i rH rH

rO LTV CO rH rH LTV VOrO C Ov LTV CO CO LTV e'­LTV VO VO VO LT\ LTV VO er»i—1 1—1 rH rH rH rH i— 1 rH

CM vo CTv m vo VO ONo n rH O n 00 rH vo o rOvT vT LPv vo VOrH i—1 (—i rH (—1 r—1 rH i—1

ufÖ(D

CO P CO ON Ovo VO VO vo C"-LP\ VO f— VO MO VO

CO ON VO VO

rHc—\oc—

CVJ rO 'vt- LTV VO p-c-— IP— cr— c-— c-— c— CXD C5N O c— c— COI—I C\l rOt— c— c— UM VO C- co ONc— r-~ r—

I—Ico\oCO

31

Source:

BAEcon,

Phil

ippi

nes

important because the adoption of these practices on a large scale

depended in turn on the development of an effective, well-managed

extension program. Studies have shown that the Filipino farmer has

acquired substantial technical knowledge on the use of inputs like

fertilizer and seeds of HYV’s , though many recommendations were not

followed because of input constraints (Alviar, et.al., 1978).

Improvements in milling recovery, while smaller in its

contributions to output expansion, still seem significant. Higher

growth rates of rice production in milled equivalent over that of

paddy production have been recorded. In 1969/70, the milling rate was

60 percent of a given unit weight of paddy but in 1981/82, this had

improved to 65.4 percent. Some authors suggested that the use of

"cono" mills instead of "kiskisan" mills was one of the contributing

factors to this increase (Hears, 1974, and; Deomampo and Sardido,

1979). However, a high proportion of broken rice still exists in the

present milling systems (Unnevehr, 1982). The apparent increases in

rice production could be partly due to a greater acceptance of broken

rice because the Filipino consumer is less concerned about broken

grains than aroma and variety. On the other hand, better quality is

important in world markets.

32

3.3 Impact of Intervention on Domestic and International Trade

The desire of the government to provide remunerative rice prices

to producers is reflected in the floor price schemes that were set up.

Prior to 1975, farm gate paddy prices were higher than support prices.

These differences were attributed to low domestic supplies and

inadequate imports (Unnevehr, 1982). After 1975, as supplies

increased, farm gate prices have tended to be lower than official

government prices. Retail prices prior to 1978 were higher than

official ceiling prices (Table 3.6). Since then the situation has

been reversed.

The success of interventions made in defence of the regulated

prices ultimately depended on international trade, since any deficit

was supplied through imports and any surplus disposed of through

exports. During the importing years, imports were subsidized whenever

the world price was higher than the official ceiling price, see Table

3.6. Since the Philippines became a net rice exporter starting in

1977, exports were subsidized by the government to maintain prices

favourable to producers. A wedge between domestic and international

prices was created. Between 1978 and 1981, farm gate prices received

by farmers increased more than between 1973 and 1977, but in real

terms they have declined due to inflation.

Successful implementation of price policies affecting producers

was initially limited because government paddy procurement was small.

The National Food Authority (NFA) was mandated to purchase up to 10

percent of the marketable surplus per annum. But procurements were

33

Tab

le

3.6

. Fa

rm

and

sup

po

rt

pri

ce

s o

f p

add

y,

and

wh

ole

sale

an

d go

vern

men

t p

ric

es

of

ric

e,

1973

-190

1

1L

I 00 Opq -H£<—Ia£ rH -P -HO Cd<sj -P

•• (DO

•H «—I H cd Pu

•HO tfl

•H Ö CH *HCm ,-h O *H

0 O

pqopE»

£

CD

O£pq•Hcd ^

qq i n E-t m

0£ ^ •h pq pq OP,

•H 's- /rH•Hqq M pq O

pqpq£CO

0o

•H£(US£cd

pq

H>h

i n vo *=t rH CO CO LTV CMi n oq <n o rH o CM r—

• • • • • • • • •i—i rH rH CM CM CM CM C\J CM

rH c— o rH o o vo c— i ni—1 CO cq o i—1 r—1 ro i n co

• • • • • • • • •i—1 rH 1—l C\J CM CM CM CM CM

i n t— o CM D'­ i n OV rHc— m CM D— ve rO rH ON

• • • • • • • •rH rO CM rH 1--1 CM CM CM

OJ LT\rOrO

rHCM

VOVO

VOO COCM

CMO

CMCM LTV

-p•• •• £ 00 O£ *H

i £ Qio £rH s’ ' w 0 MO CQ

£ sO

> pqO PL,

os— cq rH c— CO cq i n VO ov 1--1 M

cd rO cq Q oq o oq rH CM VO 0rH (D 0 • • • • • • • • • £ 0•H rH rH rH CM rH CM rH CM CM CM£ cö pq cq -pcd CQ cq

s •H -pi—i cd

£ •H• • •• r£ n

•H PU 0-p

O pH c•H CM co vo co co o oq rO VO O 0- P \ CM rH Ov oq oq co CO CO CO CQcd i—i • • • • • • • • • -P 0 CM

pq rH i—1 o o o o o o o O £ COcd pq cqpq i—i

• • •• £ £M 0 ~

0 pq Oo 0 cd CM

•H ,£ pq 1£ Eh C—PU - ^ rH

/—S o rH o vo o o i n vo o z-p CM vo CO CJ O rH rH CM rO i n *> CQ -P£ • • • • • • • • • -'—n 4J CQO o o rH rH rH rH 1—1 1--1 i—1 CM 0 £

■£* CO ON oq

"=q-o

oo

COON o I—I

oro

rn "vT in vo C co oq o rHr— D— tr— C- C C— t— CO COoq Oq ON oq oq oq oq oq oq(—i i—l i—i r—1 l—1 r—l rH rH ■—i

pqOpqcqqq£o13>5o

•HI- 1Ocq

co p<i toOV Pi £

' I—I cd <q

£oo

w

pq

• 0►£ O

rs -H

g « 1-1 £

•H

cd-p£CÖ

"tS►“3

^0]>1

opqP3oCO

below this target up to 1976 because producers preferred to sell to

private traders (Table 3.7). The prices that the government was

willing to pay producers were lower than prices offered by private

traders. The mandate permitted the licensing of private warehouse

owners and millers involved in various business operations except

retailing. The procurement levels after 1976 exceeded the target,

presumably because of increased supply and the new directives which

increased official floor prices to a point above open market farm

prices. However, in 1980/81, NFA purchases declined although it was

still higher than the target, at 10.58 percent of the marketable

surplus.

The inclusion of licensed private warehouse owners and millers as

NFA agents in government domestic trade may have resulted in producers

being paid lower purchase prices. The government has not removed

sufficient supplies from the domestic market to maintain floor prices

(Unnevehr, 1982). The collapse of effective farm gate prices was

probably one of the reasons that the government directed NFA to buy

765,000 metric tons or 15 percent of the estimated marketable surplus

of 5.1 million metric tons of paddy in 1982. Whether this, together

with the new government directive in early 1983 to remove possible

impediments to exports of rice, will prove to be more effective in

enforcing floor prices is yet to be seen.

35

Table 3.7* Government paddy procurement, 1973 to 1981

Y e a r : Marketed: Surplus ; Procurement •

•

PercentProcurement of Marketed Surpli

('0 0 0 m ei t r i c t 0 n s )1973 : 3529 • 63.33 1.791974 s • - -1975 ! 3763 • 201.00 5.341976 : 4041 • 268.10 6.631977 : 4116 : 634.10 15.141978 i 4283 • 513.40 II.98

1979 i 4670 0 7 5 6 .8 0 1 6 .2 0

I960 i 4587 0 485.40 IO.58

1981 : - • 58 0 .6 0 -

Source: Bureau of Agricultural Economics, Philippines.

36

3.4 Rice Exports of the Philippines

The country's rice exports are differentiated into two major

groups based on use, namely: (1) non-glutinous rice, wholly-milled or

semi-milled which is either polished, glazed or unpolished, for food

purposes, and (2) non-glutinous rice in the husk for propagation

purposes. The Philippines which became a net rice exporter only in

1977 has actually been a net exporter of rice for seed purposes as

early as 1971 involving 7.3 tons and increasing to 20,000 tons in 1981

or an equivalent of 40,000 per year over the whole period (JSIFA, 1982).

These exports attracted relatively higher prices, the highest of which

was U.S.$424 per ton in 1980 (Table 3.8). Most of the deliveries went

to various Asian nations, two countries in Africa (Egypt and Malagasy

Republic) and even the United States of America.

In contrast, exports of rice for food purposes started only in

1977. The country's initial exports involved 4,200 metric tons to

Indonesia. Indonesia, which is located near the Philippine

archipelago has been the primary buyer of the country’s rice exports.

In 1980 alone, total deliveries involved 91,466 metric tons of rice

valued at U.S.$26.9 million (NFA 1982), Indonesia has been the consistent

buyer of low grade rice with 35 percent broken grains (Soombonsup,

1975). The Philippines, which produces rice with 25 to 45 percent

broken grains because of inferior milling technology, is one of the

suppliers of this low grade rice. Philippine f.o.b. prices for 35

percent broken quality rice are as, if not more, attractive than world

(Thai) prices of the same quality. The highest price received by

37

Tab

le

3.8

. V

olum

e an

d p

rice

s o

f P

hil

ipp

ine

ric

e

exp

ort

s,

1977

to

I9

8I

1—1 C\J •P* CO c—CO r — 1—1 1 ON 0o \ t — r O ON1—1 ON

c— 1—1

• • •• — • • • • ••

0 0 VO CO OCO 1—1 CO vo co CMON ON 0 0 r O1—1 LTN vo

ITNOJ

•• •• • • • • • • • •

^__s

0ON a - CM 1—1 c— r ot — P 0 CO ON ON OON r— CM CM CO "p -rH O

VO- p 1—1

0

• • -H % • • • • • • • ••

p

- p

0)

ECO c— CO v o rHr— ' ' P ' 0 rH ON VOON O r O r O 1—1 r O1—1 C—

• • •• • • «• • • •«

C— O r O VOC O CO CM 1 1ON CO CM CM1—1

1—1

• • • • •• •• •%/—s / --Vm 0 in

0 p D 0 P ! 3O 0 •H / —> O " >

•H Ch '—✓ P CO <H ■>>—*P=S P h p >3

0 CO P LTN •H 0 0 P PtH P 0 0 / —' r O P P 0 0 P0 0 CO - p •H v—" P O 0 • p P

P 0 P ub P O •HO •H P h p rP P ■H P h p £O -P p 0 Eh O p -P P 0 •H

•H P P P h >---' -P 0 P P P h 1—1P rH P h 1—1 P h 0

P-. to 0 P O to 0 P1 Ti P 1--1 0 P 1 Ti P P h

c« p 0 rH p P h p 0 rH P0 0 P 0 0 0 P

0 <H > 0 >P h *>5 • •

Eh rH CM

38

Source:

Nati

onal

Poo

d Au

thor

ity(

NFA), Philippine

exports so far is U.S.$314 per ton in 1981.

The repercussions of continued government control on exports tend

to insulate the domestic market from world demand for quality. The

domestic milling industry has no incentive to become competitive in

higher quality international markets. The problem is magnified when

markets like those of Indonesia and other Asian countries like Vietnam

which are capable of increasing output, dry up. This has already

happened twice in 1981 and 1982, when Indonesia’s imports dropped

sharply because of bumper harvests. Therefore, a closer integration

of the domestic and international markets, promoted by allowing

private exports of rice or improving milling standards of NFA in line

with its export promotion mandate may be required to make Philippine

rice competitive in the higher quality markets. This may help to

reduce the payouts for premiums of P0.07 per kilogram of export

quality paddy sold by farmers to NFA. Also, export subsidies which

are partly spent subsidizing the costs of separating and grading to

meet the quality standards of some overseas buyers can be reduced

(Central Bank of the Philippines, 1981). Otherwise, the increased

subsidy costs (in the order of over P44 million between 1977 and 1981) brought about by the difference between domestic and export prices,

could increase -

An examination of the Philippine rice balance sheet between 1977

and 1981 indicates that exports declined to 95,000 metric tons in

1981/82 (Table 3.9). This is equivalent to 7 per cent of domestic stocks ending 1981/82. Prior to this, the highest ever recorded delivery was

39

Tabl

e 3

.9.

Rice b

alan

ce s

heet o

f the

Phil

ippi

nes,

19

77

/78

to 1

981/

82-pdcdodoft

to d •H

co d-P dd w d * rO 0 CO C0 rH 1—1ft ftH O

W• • •• •• • • •• •• ••

t o 14 CO O 1—1 CVl UNd 0 0 d * rO d * CVJ

•H O CM UN c— d - d -d -p 1--1 1--1 1-- l 1—1 1—ld co

W• • «•

d rO r o C— vo c oO O UN CO CM v oO C— ON rH UN v oft rO r o d ' d - d *

• • ••

OCO -p / --s d * 0 vo 1—1 UN

d co O m d - d " d -0 d CO rO rO r o r o rO0

P=f d

•• •• 0

CO -pd ON d * d * «--1 CMCD 00 ON O O 1--1CD 0 t--i 1--1 (M CM CM

CO•H

• • ••d

CO-p -Pd0 (D VO CO UN VO UNft d* rO VO UN ONW S 1--1 CMft• • •• O •• • • •• • • • •

O1—l pH O UN r o VO UNd f t O LTV UN r o vo ■d

•P f t d * O VO C—0 d v—/ UN VO VO VO vo

Eh CO

M • • •• •• • • •• ••

dO

•H-p c— C— rO UN rO0 O d - ON rO Od vo CO O O rO

d d - d - UN UN UN0dft• • •• •• •• • • • • • •

toG

•H 14 vo CO O rH CMd 0 rO 0 d " r o dd 0 CO CM UN IN- d

•H -P rH 1--1 1--1 rHto co0

pq•• •• •• • • • • ••

ud CO ON O rH CMO c— c— CO co CO

>H \c— 00 ON O 1--1ft c— c— C'— co co

O ON ON ON ON ONd rH rH rH rH rH

40

Sour

ces

Bur

eau

of

Ag

ric

ult

ura

l E

cono

mic

s,

Ph

ilip

pin

es.

in 1980/81 at 256,000 metric tons or 18 percent of reserves.

As a new rice exporter, the Philippines’ capacity to export would

depend on increasing production and inventories, as maintaining

domestic supplies still dominates government policy. A substantial

stock in 1979/80 helped to increase exports in 1980/81, especially to

Indonesia whose production declined during this year. The increase in

exports reduced inventories in 1980/81 and this problem was aggravated

by a reduction of domestic production of 58,000 metric tons compared to

1979/80. Thus, in 1981/82 exports declined.

Philippines as a small rice exporter is a price taker in the

world market. However, government policies have affected peso prices

of exports by overvaluing the peso, and have made Philippine rice (and

other) exports more expensive and less competitive in the world

market. High levels of domestic inflation during the 1970's and

towards the 1980's have tended to further reduce the competitiveness

of exports. The improvement in quality of rice exports, and a more

realistic exchange rate are likely to provide a stimulus to export.

In the recent period, the peso has. been allowed to depreciate

substantially and in June, 1983 was devalued by a further 7 percent.

Reports indicate that a poor harvest due to adverse weather may

result in there being no exportable surplus in 1983. This again

demonstrates the fact that the Philippines is at present only a

marginal rice exporter. Continuing substantial investment in

irrigation is required to even maintain self-sufficiency (Herdt,

41

1982) and a major policy issue is whether such investment is

economically desirable.

42

Chapter 4

Measuring the Impact of Government Policies on the Use of Resources by the Rice Industry

In this chapter the analytical measures discussed in Chapter 2 will be described and the computational methods used in the study are presented.

4.1 Nominal and Effective Protection

The concept of the nominal rate of protection (NRP) is used to estimate the degree to which trade tax policies distort nominal output prices relative to those which would exist under a free trade

situation. In algebraic form, it is defined by

NRP -3

P

P

D

B

NRPj ~P j____P_. where, i.e. A nominal pricespB

is the nominal rate of protection on the jth commodityis the domestic price of commodity j, and

is the border price of commodity j

The above equation can be used to measure output price distortions.

It can be also used to measure tradable input price distortions,

but the ERP concept is usually preferred.

43

The effective rate of protection is analytically a more useful concept for assessing the effects of protecting an industry. There are three crucial assumptions used in deriving the ERP (Corden, 1971). First, there is a fixed physical input coefficient in domestic rice

production which implies constant costs and zero elasticity of substitution among inputs. Secondly, there is the small open economy

assumption, implying that foreign supply elasticities for all inputs and outputs are infinite. And thirdly, trade remains even after

the imposition of tariffs. The above assumptions greatly facilitate the investigation of problems by allowing a framework for partial

equilibrium analysis.

The effective rate of protection is defined by first letting the

unprotected or free trade production values to be: (following Corden,

1971)

= Zxijp! + SxkjpkB .............. (1)where,

1 — world market price of output is unity

xrr amount of physical inputs i per unit of

output j

amount of primary inputs k used per unit

of output jgp^- world (border) market price of physical input i

pj - world market price of primary input k

44

On the other hand, let the protected or actual production values be:

1 + tj= E x jP® (i + t p + Zxk .p® (2)where,

t - is the proportion by which domestic market

prices exceed world market prices due to

tariffs and other protective instruments

It is assumed in the analysis that while products and

material inputs are traded, primary inputs are not, therefore, the

world market price of outputs and material inputs are increased by

the amount equal to t while leaving the world price of primary

inputs unaffected thus,

Let x pij iB

a .... value of tradable (material) inputsijx p = a .... value of primary (factor) inputskj k kj

Substituting these in (1) and (2), we get,

1 = Za. . + Za1D kj1 + t = Za. . (1 + t .) + Za, .D 13 i k j

(3)

(4)

And setting (3) equals v. as the value-added per unit of

commodity j at world prices, and 1

(4) equals v. as the value-added per unit of

commodity j at domestic prices, then

v .= 1 -Za . .D ID

and v'.= (l + t ) - Z a (1 + t )D j ij i

(5)

(6)

45

Now, let E be defined as the effective rate of protection:commodity j such that,

E.=v. - v. ............. (7): — i----- t ~

v.DThus, algebraically:

E =[(l+t.) - Za..(1+t.)] - [1-Za. ,] ............ (8)

[1-Za ]ij=l+t.- Za. . - Za. ,t, - 1 + za---1---- ar)-----r-rt---------- ±j~

1_Zaij= t, - za. . t. or t. - t.za .“ 3------^ *-?-----3--- T-j-

1-Za. . 1 - Zai: ijor t. + Za, . (t - t) ............ (9)j "~rj j t

1 - Za. .IDwhere ,

t = Za t /Za - the weighted average tariff rateD ij i ijon inputs of commodities into

the jth industry. [In this study,

the average of tariffs is drawn

from Herdt and Lacsina (1976).]

on

46

4.2 Domestic Resource Cost

The DRC concept was discussed in Chapter 2. Here, the domestic

resources considered are the values of labour, land, capital, and

non-tradable inputs. These values are taken at second-best shadow

prices. Leaving value-added in the same world prices as those used in

estimating ERP, the domestic resource cost per unit of foreign

exchange earned or saved through the jth industry becomes the ratio :

(following U.N., 1972, and; Islam, 1980)

Value of labour + land + interest + cost of

using capital + non-traded goods

Output in world prices - domestic tradable

inputs in world prices - imports

where,

a - the multiplier used in converting the

official exchange rate (OER) into its

shadow exchange rate

k - the official exchange rate

The above expression can be rewritten as follows:

Value of labour + land + interest + cost of

using capital + non-traded goods

Output in world prices - domestic tradable

inputs in world prices - imports

The denominator is expressed in world (or border) prices at the ruling

<

- ak

47

exchange rate. The calculated DRC in the above formulation gives the

social opportunity cost necessary to earn (save) a net marginal unit

of foreign exchange through the jth industry. In other words, for

optimal domestic resource allocation, industry j should be expanded,

remain as it is, or be contracted if DRC of industry j is less than,

equal to, or greater than one.

The use of DRC is premised on four assumptions. These are

(1) the world price of product j is given exogenously, (2) the

incremental costs of production are determined by a given technology

and a set of relative factor prices assumed to be constant, (3)

elasticity of input substitution is zero, and (4) shadow prices of

outputs, inputs, and foreign exchange can be calculated. Assumptions

numbers (2) and (3) emphasize the static, partial equilibrium nature

of DRC (like ERP) and emphasize that comparisons of DRC coefficients

over time can only be made if input-output data are available on a

time series basis or if production technology and growth patterns

do not substantially alter input mixes and domestic factor costs.

Assumption (4) is crucial. Shadow prices of factors of

production in this study are defined in terms of social opportunity

costs of using the factors in their best alternative employment. These

shadow prices apply to primary factors while shadow prices of tradable

outputs and inputs are border prices. In addition non-tradable input costs

48

are divided into tradable input costs and primary domestic costs.

4.3 Methodology

All the above measures are applied to input-output data on crop

production obtained from the Ministry of Agriculture of the

Philippines. The data were sorted, classified and subjected to a

disaggreated analysis. This analysis was based on; (1) existing data

of rice production surveyed by the Ministry, (2) the recommended rice

technology through Masagana-99 Program, (3) irrigated versus rainfed

conditions, (4) comparison of relative efficiency of production

between rice, corn, and sugar, (5)changes of comparative advantage in

rice production in a span of four years ending in 1981, and (6)

sensitivity of relative efficiency of rice production to changes in

costs of relevant variables.

In calculating NRP, ERP, and DRC, private and social costs are

distinguished from each other, and differentiated between private and

social profitability as follows:

(A) Private Profitability is calculated by letting, (following

Akrasanee and Wattananukit, 1976)

(1) Gross Domestic Price of Output = current price of

wholesale milled rice (or corn or sugar)

(2) Tradable Inputs at Actual Market Prices = material

component of tradable inputs like seed, fertilizer,

chemicals, and the material component of non-

49

tradable inputs like irrigation, and processing and

transportation. The method of calculating these costs

follows Herdt and Lacsina (1976)

(3) Value-Added in Actual Prices = (1) - (2)

(4) Factor Costs Other Than Capital = primary costs of

labour, land (rents+payments made in kind for the use

of land), unallocated cost or non-tradable component

of the tradable inputs in (2)

(5) Private Profitability = (3) - (4); in practice,

indirect taxes are also deducted from (3) but

there was no information on sales and excise taxes

in rice production.

(B) Net Social Profitability is calculated by letting,

(6) Gross Border Price of Output = border (world) price of

milled rice, i.e., f.o.b. and c.i.f. prices during

export and import years, respectively and border

price of corn and sugar when appropriate

(7) Tradable Inputs at World Prices = material components

of tradable and non-tradable inputs valued at

social opportunity cost or at prices at which inputs

like seed and fertilizer can be exported or imported

instead, respectively. The opportunity cost of

fertilizer is equivalent to the average c.i.f.

prices of urea, ammonium sulfate, and complete

fertilizer, excluding social costs of domestic

marketing and storage which are classified as

50

non-tradables

(8) Value-Added in World Prices = (6) - (7); this is

equivalent to vj in equation 6 of section 4.1

(9) Domestic Resource Cost Other Than Capital = primary

costs of labour, land, and unallocated costs valued

at social opportunity cost. The opportunity cost of

labour (including family labour) is assumed to be

equal to the average wage rate of hired labour. This

assumption implies that the labour market is well-

developed as it is considered to be in the Philippine

context. The labour market is quite competitive

especially in peak seasons and labour is quite

mobile within production areas. The opportunity

cost of using land is an imputed value based an

the highest return from planting alternative crops.

Social values of unallocated costs are assumed to

be similar to actual private costs.

(10) Social Profitability = (8) - (9)

(11) Domestic Capital Cost = cost of using capital valued at

opportunity cost

(12) Net Social Profitability = (10) - (11) and valued at

OER

(13) Ratio of SPFX to OER = set at 1.34 in all calculations,

based on Medalla (1979)

(14) Net Social Profitability at SPFX = the product of the

value-added at world market prices and the

51

ratio of SPFX to OER less all costs of domestic

resources used in rice production

(C)Protection Coefficients And Domestic Resource Cost are

calculated by letting,(15) Nominal Protective Coefficient on Output (NPCO) = ratio

of gross value of production in domestic prices to

gross value of production at world prices per

kilogram of rice

(16) Nominal Protective Coefficient on Input (NPCI) = ratio

of tradable inputs valued in domestic prices to

tradable inputs at world prices

(17) Effective Protection Coefficient (EPC) = ratio of

value-added in domestic prices to value-added at

world prices

(18) Domestic Resource Cost (DRC) = ratio of all cost of

domestic resources to value-added at world prices

Since the border price has been defined as unity, calculation of

NRP and ERP simply involves subtracting NPCO, NPCI, and EPC from the

value of the border price. This can be further expressed in

percentage terms by multiplying the difference by 100.

52

Chapter 5

Comparative Advantage of Philippine Rice Production:

Results and Discussion

The estimates of the impact of government policies on domestic

rice production are discussed in this chapter. The analysis concerns

issues relating to allocative decisions and hence to choice of

technology.

Estimates of effective rates of protection (ERP's) are first

discussed to give an overview of the present pattern of protection

between rice, corn, and sugar production.

In the discussion, the technology that is followed by the farmers

in irrigated systems is called the "average technology". The

technology which is recommended by Masagana-99 Program is called the

"recommended technology".

In the analysis, a comparison was made between these two

technologies to derive implications for technology choice.

The relative economic performance of growing rice rather than

other feasible crops was examined in the study. Likewise, the

economics of the average technology under irrigated conditions with

rice production in rainfed conditions was examined to determine

converting rainfed into irrigated rice areas would be desirable.

53

5.1 Effective Rates of Protection, 1978 - 1981

The ERP's of rice, corn, and sugar production, computed on the basis of procedures described in Chapter 4, are given in Table 5.1.The net effect of government intervention as reflected in the ERP estimates showed that rice as well as corn have enjoyed a small positive effective rate of protection, while sugar has had negative effective rate of protection in recent years. Based on these estimates, the net effect on welfare of government policies appears to have discriminated against sugar production while favouring rice and corn production. Comparing other estimates of ERP in previous years (see Table 3.1), rice and com have enjoyed small positive effective rates of protection which have remained relatively unchanged, though in the case of corn, its ERP in 1981 was lower than the ERP during the mid-sixties. The major change over this time period was in sugar which had a relatively high level of portection in 1965, but became negative in 1968, and remained negative (at a somewhat higher rate) in 1978.

Since manufacturing had continued to enjoy a relatively high level of protection throughout the whole period, the overall policies of the government have continued to be biased against agriculture in general. Within the agricultural sector, the discriminatory nature of government policies are analyzed in the next two sections based on the social profitability of rice, corn, and sugar production.

54

Eff

ecti

ve

rate

s o

f p

rote

ctio

n

in r

ice

, co

rn

and

suga

r p

rod

uct

ion

, 19

78

19Ö

1

rH•

LfN

0 I— I

CÖE-i

1--100 CM O o G" o 1ON rH 1—1 <—1 1—11--1

• • ••

o00 g - rO CM 00 1 1

Pd ON i—l 1--1 rHrH

••

ON>-• r— CO UN MO 1--1 1 1

ON i—1 rH r—1 rH1--\

• • ••

CO g - 1 ONc— rO rO UN i—1 rHON l r n 1 i irH

•« ••

Gs 0

G G0 G 0

0 0 -P G-p to c: ci 0

rf e to Gh GM G o •H G G d

0 o G •H G to> 0 G 0 O G

cd M cd o CO

w0G

• Ha ,a

•HI— i•HgCG

0u

•H

GOOWi— I 0 G G -PI—IGO

■HGCn<4-1O

GG0GGCQ

WoCGGOCO

55

5.2 Choice of Technology

The domestic resource cost (DRC) coefficients at the shadow price

of foreign exchange (SPFX) of the average and recommended technology

are given in Table 5.2. These estimates are consistently less than

unity. These imply that both technologies appear to be relatively

efficient and indicate that the nation has a natural comparative

advantage in rice production for either technology.

While the actual values changed over the period 1979 and 1981,

the DRC’s at SPFX of the recommended technology are consistently lower

than the average technology. Examination of social profits at SPFX,

the "net social profits" (NSP) also indicates that the recommended

technology has a higher NSP than the average technology. But private

profitability of the recommended technology is lower than the average

technology by an average of P0.04 per kilogram of rice output.

These results imply that the majority of farmers have no

incentive to change to the recommended technology despite its social

desirability, and can help to explain why farmers are reluctant to

fully adopt the recommended technology. This suggests that there may

exist an economic argument for government intervention to eliminate

the divergencies between private and social profitability. Such

government intervention may lead to an increase in the net

contribution of the rice industry to aggregate national output.

However, the method of intervention will have to be carefully examined

to ensure that its benefits would indeed be higher than potential

costs. In this regard, it is likely that recent steps to deregulate

56

0 I— Iftd

rO l—1>5 rH ft" rO C— o o o c— r- o •HfO co 1-1 ft- 1—1 o o o c— m m do on • • • • • • • • o >

rH rH 1-1 o rH rH CM o o o ft- do ro 1—1 PP 1 Pf to o in rO ft- o o o rH o o ON d0 CO rH rO ON o o o co VO o ON f tEh ON • • • • • • • • o d

rH rH O o m c— d o o ft- co dd rO 1—1 p0 1 d co

d 0 c—P O n G ON ON ft- o O o CM 1—i o S ONo c— ON C\J CO o o o CO vo in rHG on d • • • • • • • • ON ONG »—1 o o o VO rH in o o d ON ••'O P f t f tO I Q30 tO P tof t o p

VO O rO rO ON O o o vo MO o •h dr— rH rft c— o o o c— in in f t f ton rH • • • • • • • • vo orH rH O o ON in d o o d P d•rH 1—1 ft- d d

d l O C/3P f t P dd f t• • • • 0

p 0 PCO o df t 0 •H -pP i—1 rH rH ON o o O ON ft- in P o03 co f t CVJ o VO o o O ON c— d 0•H o \ • • • • • • • • ON t o f tO rH 1—1 rH o o 1—1 c CM o o CM p•H CO d 03 d 1--1 ■H pCm ON 1 C/3 0Cm rH tO O d f t0 O o c— ON o o o o O n VO O 0o o rH co 03 C\J rH ON o o o CO vo 1--1 P dO f t o on • • • • • • • • CO O rH

p rH 0 rH o o m d ft- O o CM P 0P VO f t ft- rH •H *Ho c— o f t 1•H ON 0 Cmf t rH Eh • O CmO MO O0 ~ 0 ON o <—1 CM o O o O in o 0 0-P P £0 C— ON o m o o o o c— in 1--1 G C3o o d on • • • • • • • • t— f t 0 GP ft P 1—1 o o o vo ON CO 1—1 o CM d f t df t -P 0 1 d 1—1 1—1 O P

O > 1 •H CO to•> P ft d o

>5 d co rH CM CM o o o d ON rH > d i—i-P o c - VO rH c— o o o ON '■Q t-— d •H•H p ON • • • • • • • • l—l p i f trH ft rH o o o f t - CM d o O CM P•H 1—1 f t - 1 G Oft 03 1 1 d d ind o -p p ON-P ft • • •• • • d qD H*•H Pi d OCm P oO cm vo f t f tP i O /■—\ t—ft /—s X ON ON f t

-P f t f t 1--1 ON pi—1 03 f t 0d o CO • vs 1 rH

•H O >5 dO -p -p to d >O 03 d d /--\ o P f t03 O "---- 0 i—1 d P

P >5 Pi o to cdd p -P >5 d p d 0P o •H -p -P -P f t CO«3 03 rH •H •H Ü o d -

03 G •rH rH rH 0 0 S coo Pi ft •H •H ft -ft P

-P 0 d ft ft 0 dd o -p d d P to ft >> -H -P •H -p ft 0 p -p d

•H -p •H •H /■—N X ft •H oPi 03 M o Cm Cm ft ft ft Pft 03 p O O H ft • C/3 0s ft Pi P O CO to •H d• o ft ft ft X P

c\i d 0 -o. /--s -P -p 0 P-p rH rH V—" d d d ft

LTV d d d s—/ 'v—/ d> •H •H o M rH

<1) •H o o f t f t ft o o 0p o o f t f t f t f t ■H

f t f t CO CO f t f t W « Pfij

Eh

57

Sou

rces

B

asic

D

ata:

M

inis

try

of

Ag

ricu

ltu

re,

Ph

ilip

pin

es

the fertilizer industry may prove helpful. Already, domestic

fertilizer prices have declined and are now closer to international

prices .

5.3 Choice of Crop

5.3.1 Rainfed Rice, Corn, and Sugar Production

A comparison between rainfed rice, corn (shelled), and sugar

(centrifugal) production attempts to analyze the net effects of

government policy. The importance of rice has been discussed in

Chapter 1, but corn and sugar are also important crops. Corn is the

staple food of about 20 percent of the population, is second in

importance to rice in terms of area cultivated and , is a major

component of the animal feed industry. Sugar is an important export

crop, although the area it occupies is smaller. It has contributed

around 25 percent of crop value-added annually, and as an export crop,

on average it has accounted for 26 percent annually of total

agricultural exports during the period 1955 to 1980.

The estimated profitability measures and DRC coefficients at SPFX

of rainfed rice, corn, and sugar production are presented in Table

5.3. The various estimates of profitability and relative efficiency

in rainfed rice production change over time, but these indicate that

the country has had a comparative advantage as the DRC coefficients at

SPFX are less than one for each year.

58

T ab le 5 *3 « P r i v a t e and s o c i a l p r o f i t a b i l i t y , p r o t e c t i o n c o e f f i c i e n t s , and d o m e s t i c r e s o u r c e c o s t o f r a i n f e d r i c e p r o d u c t i o n ,1978 t o 1981

I t e m 1978

( p e s

R a i n f e d

1979o s p e

R ice P r o d u c t i o n

1980 I9 8 I

r k i l o g r a m )

P r i v a t e P r o f i t a b i l i t y 0 .5 8 0.85 1.13 1.25

S o c i a l P r o f i t a b i l i t y ( a t OER) 0 .2 2 0 .0 8 0.17 0.14

S o c i a l P r o f i t a b i l i t y ( a t SPPX) O.87 0 .6 6 0 .7 8 O.89

NRPO Jo) 1 4 .0 0 6 .0 0 3 .0 0 1 .0 0

NRPI Jo) -I7 .O O - 2 3 .0 0 - 2 6 .0 0 - 1 7 .0 0

ERP Jo) -I4 .O O 11.00 8 .0 0 4 .0 0

DRG ( a t OER) O.89 0.95 0.93 0 .9 4

DRG ( a t SPFX) 0 . 66 0.71 O.69 0 .7 0

Y i e l d (kg . p e r h e c t a r e ) : I650 1710 1615 1830

S o u rce : B as ic D a ta , M i n i s t r y o f A g r i c u l t u r e , P h i l i p p i n e s

59

Corn (shelled) production does not appear to have any comparative

advantage; in 1981, the DRC coefficient at SPFX is greater than one

(Table 5.4). Corn production can improve its comparative advantage if

attempts to raise yields by using modern (hybrid) varieties are

successful, i.e., if yields are raised from one to three or four tons.

While it is hazardous to draw firm conclusion from a single year

figure, it must be noted that world corn prices in 1981 were

substantially higher than in many previous years. Therefore, the

conclusions that at current yield levels, corn is uneconomic can be

rather strongly argued.

Meanwhile, estimates of NSP of sugar production in 1978 indicate

a lower degree of comparative advantage compared with rice. The NSP

is lower compared to 1978 NSP of rainfed rice production (Table 5.5).

This means that sugar production in 1978 was less efficient than rice.

Further analysis of the three crops' private and social profits

(see Tables 5.3 - 5.5) indicates that private and social profits

of rainfed rice production are greater than from corn.

It may be noted that in some cases DRC and NSP give different

rankings of the crops. This arises from weaknesses of the DRC

criterion as an indicator of social profitability - in particular,

this is due to the fact that as a ratio it is affected by how benefits

and costs are defined. The DRC suffers from the problem of arbitrary

reassignments of benefits as negative costs and costs as negative

benefits. Generally, NSP is to be preferred over DRC as an investment

60

Tab

le

5.4»

P

riv

ate

and

soci

al

pro

fita

bil

ity

, p

rote

ctio

n c

oe

ffic

ien

ts,

and

dom

esti

c re

sou

rce

cost

of

cor

n p

rod

uct

ion

, 19

75

an(i

19

&1

£B£

fe , ~O B£

Oh 1—t £ rO u n c o CO o r o CM ON oCO CM o CM 1--1 ON VO ON

£ ON £ • • • • • VOö i—1 O o o o o m£ t ot o£ OCO

•H (—1£

S -H

•• *• 04

£

0

f t

i—t Ui LT\ VO 1 f t CO O O CM VO OCO O rO o 1—1 o VOON O • • • • • o1-- l O o o 1—l 1—l I—l

Ui 1 1

0

f t

• • • •

u n UN CM CM Lf t O VO r— ON UNc O rH 1 1 ^ t- o C"—ON • • • • • CO1—1 o O

1o

irH 1—1

--- \ xa3

Oh

O GO

-P -P£ £

V---- ' 0B >5 £

-P >5 £0 •H -P f t f t

rH •H •H O- p •H rH i—1 0

rft •H •H PM £

f t £ £ • £•H -p f t / -- 'N 0ft •H •H X f to f t f t 04 &H£ o o oq O h •

Oh £ £ o 00 t oOh Oh / --N / ---N P

0 ✓ ---N f t f t-P rH rH £ ££ £ £ V--- x i d> •H •H O H rH

•H o o O h O h O h O o 0£ o o C 4 0 4 04 04 0 4 •H

Oh m to g g W P p >-•

bJD£

•Hft££

I—IftftO

£O

•HftOBO£ft0

P £f t £

OP °hD£ 0 O -P £ •£

, £ r £-P 3

-p id £ £ f t £ -P£ ~o ui

0£ -H £ P> O 0 O •£

£bJD ££ >

•HUi£0£O£

•H

ftO

0g0

r £oCO

Uiid•H£

££Oo

61

Sou

rce:

B

asic

D

ata,

M

inis

try

of

Ag

ricu

ltu

re,

Ph

ilip

pin

es

Table 5*5 • Private and social profitability, protection coefficients, and domestic resource cost of sugar production, 1978

: Sugar ProductionI t e m : 1978

(pesos per kilogram)

Private profitability 0.18Social profitability (at OER) 0.27Social Profitability (at SPPX) 0.59NRPO (#) -14NRPI {%) 0ERP (°/o) -19DRC (at OSR) 0.70DRC (at SPPX) 0.53Yield (kilograms) 4810

Source: Ministry of Agriculture, Philippines.

62

criterion. For a discussion of this issue see Warr (1983) and Emerson

(1983) .

Assuming constant costs in sugar production and analyzing the

sensitivity of NSP and DRC to changes in border prices indicates that

while recent rather low border prices decrease NSP’s (DRC's increase)

they continue to be positive. Border prices of recent years are still

higher than the levels in 1978. In fact prices in 1978 were the

lowest during the period from 1975 and 1983 (Table 5.6). Border

prices have to drop below P850 (equivalent to U.S.$115) per ton before

sugar production in the Philippines would lose its comparative

advantage, i.e., NSP to become negative and DRC to exceed one

(Appendix Figure 1). However, this is subject to the assumption of

constant costs; if domestic costs have risen, the relevant border

price would be higher.

5.3.2 Irrigated Rice, Corn, and Sugar Production

In this section we ignore the fixed cost of irrigation of

irrigated rice production on the grounds that it is sunk capital.

Then the estimates of DRC coefficients at SPFX are less than one

during the period 1978 to 1981 (Table 5.7). The analysis indicates

that in irrigated rice production, the Philippines has a comparative

advantage.

Unfortunately, only limited comparisons with irrigated corn and

sugar production can be made. The study did not have data available

for irrigated corn and sugar production. Hence, comparisons are made

63

Table 5«6. Border prices of (centrifugal) sugar, 1975 to 1983

Y e a r : U.S. Dollar( P e r t Pesoson)

1975 : 597 44441976 : 317 23511977 : 209 15441978 : 175 12921979 : 183 13811980 : 347 27471981 : 383 31421982a : 205 -

1983a : 271 -

3 /June only, Far Eastern Economic Review

Source: FAO Trade Yearbook, various issues

64

T a b le 5*7 • P r i v a t e and s o c i a l p r o f i t a b i l i t y , p r o t e c t i o n c o e f f i c i e n t s , and d o m e s t ic r e s o u r c e c o s t o f i r r i g a t e d r i c e p r o d u c t i o n ,1978 t o 1981

3 /I r r i g a t e d R ice P r o d u c t i o n

I t e m : 1978

: ( p e s1979

o s p

1980

e r k i

1981

l o g

P r i v a t e P r o f i t a b i l i t y : 0 . 6 1 0 . 9 0 1.27 1 . 2 1

S o c i a l P r o f i t a b i l i t y ( a t OER) : 0 .47 0 . 4 0 0 .6 5 0 .5 3

S o c i a l P r o f i t a b i l i t y ( a t SPFX)

01—l•rH•• O. 98 1 .2 9 1 . 2 6

NRFO C/o) : - 1 4 . CO 6 . 0 0 3 . 0 0 1 . 0 0

NRPI (fo) : - 2 4 .OO - 1 6 . 0 0 - I 9 .OO - 1 3 .0 0

ERP ( / ) : - 1 2 . 0 0 1 0 . 0 0 7 . 0 0 5 . 0 0

DRG ( a t OER) : 0 .7 5 O. 76 0 . 6 6 0 .7 5

DRC ( a t SPFX) : O.56 0 .5 7 0 .A9 O.56

Y i e l d (k g . p e r h e c t a r e ) : 2171 2750 2810 2935

3 »e x c l u d e s f i x e d c o s t o f c a p i t a l o f i r r i g a t i o n

S o u rc e : B as ic B a t a , M i n i s t r y o f A g r i c u l t u r e , P h i l i p p i n e s

65

with rainfed corn and sugar production. The relevant estimates for

rainfed corn and sugar production were given in the previous section.

It is noted that these figures probably underestimate the

profitability and relative efficiency of these crops when grown under

irrigated conditions.

Subject to these limitations, rice production appears to remain

more profitable and efficient than corn production (in 1981) in

irrigated areas. Both private profits and NSP's of rice production in

irrigated areas are higher than those of sugar production in 1978.

These imply that irrigated rice is unlikely to be replaced by these

other crops, and that such replacement is not desirable from a social

viewpoint.

5.4 Investments in Irrigation

In this section, the economics of investment in irrigation is

analyzed. This focuses on converting existing rainfed rice areas into

irrigated conditions. Here, fixed costs of irrigation which were

ignored in the previous section, assume great importance.

The DRC’s of irrigated and rainfed rice production are given in

Table 5.8. Even when the full costs of irrigation are included, the

DRC's continued to be less than one. Further analysis indicates that

private profit estimates in irrigated rice production are generally

slightly greater (except in 1981) than the private profits in rainfed

conditions. However, NSP's of irrigated rice production are lower

than those of rainfed rice production, as a consequence of allowing

66

Tab

le

5.8

. P

riv

ate

and

soci

al

pro

fita

bil

ity

, p

rote

ctio

n c

oe

ffic

ien

ts,

and

dom

esti

c re

sou

rce

cost

o

f ir

rig

ate

d a

nd r

ain

fed

ric

e

pro

du

ctio

n,

1978

to

I9

8I

1---1 LTN O N 0 0 O f t - O 0s CO CM rH C O 0 0 O O N c m0 0's • • • • • • • • c o

• H 1—1 rH 0 0 1—1 c *vT O O rH- p 1—10 1

x i 0 r O c— C O 0 0 O r O O N LTN0 CO ✓ — X rH rH c— 0 0 O O N VO 1---1Jh O N • • • • • • • • v o

f t r—1 s rH 0 0 r O VO C O O O 1—lCM

X J CÖ 10

f t O N u LTN CO VO O O O LTN 1---1 Oc— C O O VO O O O O N c 1—1

• H O N t o • • • • • • • • c—d 1---1 O O O VO r O r—1 O 0 1—1

f t 0 CM 1—1

1—1

CO • H C O CM c— O 0 0 O N VO 0c LTN CM CO O 0 0 C O VO LTNo n f t • • • • • • • ♦ VO1—1 O O 0 ■sj- c— f t " 0 O rH

1---1 1—1 1---1Fh 1 1

0• • • •

f t

OrH 0 O N CM O N O 0 O LTN O

d CO rH r O O N O 0 • C O v o CMö O N O • • • • • O • • C O0 1—l 1—1 O O 1---1 0 r H O O CM

• H 0 P O- p 10 0

0 VO LTN O 0 0 LTN VO LTNx J C O f t CM O O 0 0 t— LTN O N0 O N • • • • • • • • VOu rH 1---1 O 1---1 r O O N CM O O CM

f t 1---1

00

• H 0f t O N O r H V O O 0 O t — U N LTN 0

r — O N CM O 0 O C O VO r O •Hx i O N • • • • • • • • VO - p0 rH O O O VO VO VO O O CM r f

- p m 1---1 t oCÖ 1 • Ht o u

• H C O c— !i"N O O O C O O VO Fhu C— VO rH O O O 0 C O 00 •Hu O N • • • • • • • • CM

M rH O 0 O LTN LTN 1—1 0 CM f t1 r H

I1 0

r H• • • • • • d

- P• Hf tgJ

x— X O/ —x X

gf tf ti n

f tO

- P- P - p 0

d c3 Ov—^ 0 0s jL,

- P a j x i0 •H - p • p - p 0

r H • H •H 0 X- p • H rH rH CD • H

r Q •H •H & f tM d r Q rO

- p d Cj Sh 0•H - p - P / ---N 0 0

•H •H / - N X ft x 30 f t f t f t f t du 0 0 f t f t + rH

f t u Fh O m t o 0f t f t f t 0

0 - f t - p V— / •H- p 1—i 1---1 v--- ' d dd «5 d x i> • H •H O M r—1

• H 0 0 ft ft ft 0 0 0Fh 0 0 ft ft ft ft ft • Hft m i n ft ft ft ft ft > -<

67

Sou

rce:

B

asic

D

ata.

M

inis

try

of

Ag

ricu

ltu

re,

Ph

ilip

pin

es

for the full cost of irrigation. These results imply that producers

would be reluctant to shift from rainfed to irrigated rice production

if they have to bear the full cost of irrigation. Furthermore, given

that the social profitability of irrigating new areas appears to be

declining and is very slight in any case, there appears to be grounds

for a comprehensive examination of the government’s irrigation

policies.

5.5 Sensitivity of Domestic Resource Cost Coefficients

World rice prices are very volatile and technological change can

increase yields. Therefore, values and costs of production are

subjected to a sensitivity analysis to account for changes in prices

and yields. Elasticities of DRC’s are obtained by recalculating the

DRC coefficients assuming a 20 percent increase in costs of some

inputs. The elasticity is defined as the proportional change in the

cost of the input under consideration divided by the proportional

change in DRC coefficient.

Results are presented in Table 5.9. These indicate that

generally increases in domestic resource cost or loss in relative

efficiency in rice production were primarily caused by declining

border prices, decreases in yields, and increasing cost of

land, labour, and irrigation. For instance, a DRC elasticity

for border price of -0.99 for average technology indicates that a

0.99 percent increase in border prices is needed for improving relative

efficiency by one percent. It is also quite sensitive to increases in

68

Tab

le

5.9

« D

omes

tic

reso

urc

e co

st

ela

stic

itie

s of

Ph

ilip

pin

e ri

ce

pro

du

ctio

n

' t jo

i—1 CO r~1 o i n rOr n CO C— 1 LTN vo r o O•H ft • • • • • •

c3 1--1 a \ VO rO rH rHPh (—1 1 i

• • •• • • • • •• • • • • •• • • ••

o- pcti VO o CM o VO CO c—to 1—1 ON c o O o i—1 ON on

•H • • • • ft • • •u rO CM rO O o ou i—1 i—l 1 1

M

• • «< • • •• • • • • • • •• • • ••

O >3to

Ö o0) i—1 i n o O o o c— CMs o VO CO LTV CO c— VO rH OS Ö ft • • ft • ft • •O ft! CM rO ON rO LTV CM i—1 rHo o i—1 l i0) 03f t Eh

• • •• •• •• •• •• • • •• •• ••

>3a)to o

i—I o CM rO c o ON c— CTNu o CO CO C— C— CO CM ONo ä • • • • • • • •> f t CM CM CM CO 1--1 O

o i—1 rO 1 1o

Eh

•• •• •• •• •• •• •• •• • • ••-PUoft

CO COÖ

(1) a}Pi

1—1 Eh

rQ

cö £ to Pi03O

o £ 03 •H•H •H •H CO u

r-1 -P CO •H f tJh u cd «3 73 i—1

B -P to 03 •H Tip3 o •H •H O -P rH i—i

rQ CJ f t u o Pi 0 Pi> cj aJ cd u H 03 •H O

f t f t o M f t f t [3

69

incl

ud

es

fix

ed c

ost

of

ir

rig

ati

on

social cost of irrigation with a DRC elasticity of 2.73. This means

that only 2.73 percent increase in the cost of irrigation is needed to

reduce relative efficiency by one percent. Differences in sensitivity

among the systems of production are also indicative of the (1) capital

intensiveness of the Masagana - 99 technology and the (2)

land-extensiveness and importance of irrigation cost in the irrigated

production system compared with the rainfed system. The DRC of the

rainfed system with respect to land is quite sensitive but this was

not primarily due to its land-extensiveness but rather to the high

returns obtainable from planting alternative crops. In contrast, DRC

coefficients of all the systems are relatively insensitive to

increases in the price of fertilizer and farm capital. For instance,

using average technology, the cost of fertilizer has to increase by

38.89 percent before there is a reduction in relative efficiency by

one percent. This is because the proportion of these costs in the

total cost structure is small (Appendix Table 6). [Farmers in the

Philippines have not used the recommended high amounts of fertilizer.

Therefore, their expenditures on this input were small.] These

indicate that the country's comparative advantage is only marginally

affected by changes in their input prices in the range examined.

The most important determinant of changes in comparative

advantage appears to be the world price of rice. World prices of rice

have been quite volatile in the past, though the long-term trend has

been a decline in real terms (Palacpac, 1982). If the world price of

rice were to drop below U.S.$222 per ton, at the margin the

relative efficiency of rice production would disappear (Figure 1),

70

effi

cien

t as a

Ratio o

f SPPX

/OER

« 1.0

Pesos per kilogramFigure 1. Sensitivity of DRC to Changes in World Rice Pricesaborder price at which Philippine rice production would lose its

comparative advantage; equivalent to P1700 (or U.S.S222) per ton^border price of rice in 1981

71

5.6 Summary of Results

The Philippines appears to have enjoyed a natural comparative

advantage in rice production during the period 1978 to 1981.

The official recommended technology has higher social

profitability, but the farmers' "average" technology has higher

private profitability. Hence, farmers are not likely to shift to

recommended technology in the absence of appropriate government

intervention to offset this divergence between private and social profitability.

Converting rainfed rice lands to irrigated conditions appears

to be marginally socially profitable. However, private benefits are lower than the additional private costs of irrigation and farmers are unlikely to have adequate incentive to bear the full cost of irrigation.

At current yields, corn is not competitive with rice in rainfed

environments, though sugar may emerge as an important competitor,

depending on world price movements. In already irrigated areas, rice

appears to have high private as well as social profits.

The country's comparative advantage in rice production is

relatively little affected by changes in fertilizer and capital

prices, but is very sensitive to world rice prices and also to land,

labour, and irrigation costs.

72

Chapter 6

Summary and Conclusions

In general, Philippine government policies have been biased

against agriculture. However, attempts were made to revitalize the

rice industry, particularly in the 1970’s.

Various policies evolved with the intention of achieving

different, often conflicting, primary goals like low consumer prices,

self-sufficiency, and maintenance of rural incomes.

Direct government intervention took place in many aspects of

production and trade in the rice industry. The government monopolized

foreign trade. It also adopted a "two-price" system in support of

producers and consumers through floor price and ceiling price policies

respectively. The government made some direct purchases from

producers through the state marketing agency, the National Food

Authority. However, this was usually inadequate to effectively

maintain floor prices. It fairly successfully controlled consumer

prices after 1978 when an exportable surplus began to emerge. In

terms of farm inputs, the government subsidized credit and irrigation

costs. Widespread use of these inputs together with fertilizer,

chemicals, and seeds of modern rice varieties provided the basis for a

major increase in production. Additional government support was

provided through research and extension.

73

In this study, analysis and evaluation focused on the assessment

of the net effect of these government policies and on whether the

country enjoyed a natural comparative advantage in rice production

during the period 1978 to 1981. This analysis was extended to include

competing crops, i.e., corn and sugar, in order to compare their

relative merits. To measure the degree of comparative advantage, the

study made use of measures of private profitability, net social

profitability (NSP), and DRC. Effective rates of protection (ERP)

were also calculated for these crops.

The net effect of government intervention as reflected in the ERP

estimates showed that in the more recent years, rice as well as corn

have enjoyed a small positive degree of protection. Meanwhile, sugar

has had negative protection. Thus, in relative terms, the policies

have descriminated against sugar production while favouring rice and

corn production. Compared with ERP's in previous years, rice and corn

enjoyed positive protection which has remained relatively unchanged,

though in the case of corn, its ERP in 1981 was lower than the rate

during the mid-sixties. The major change over time in this respect

was seen in sugar production which had relatively high levels of

protection in 1965, which became negative in 1968, and remained

negative (at a somewhat higher rate) in 1978. Since manufacturing

continued to enjoy a relatively high level of protection throughout

the whole period, overall government policies have continued to be

biased against agriculture in general.

74

The results of the analysis confirmed that the Philippines had

enjoyed a comparative advantage in rice production during the period

studied. Various issues now become relevant for policy. For

instance, whether the degree of comparative advantage could support a

viable export industry and whether continuing large-scale investment

in irrigation is justifiable become important. Likewise, issues

pertaining to choice of technology and crop substitution are

important.

In general, the degree of comparative advantage in rice was found

to be very sensitive to changes in world rice prices. World rice

prices have historically been very volatile. Since real world rice

prices have tended to decline over time, the present degree of

comparative advantage could be reduced in the future if this trend

continues. Thus, policies affecting the rice export industry should

take careful account of these possible future developments. At the

margin, the Philippines should expand, maintain, or contract

production when the change in world prices would cause DRC

coefficients to be less than, equal to, or greater than one. When

short-term fluctuations can change DRC, it is very important to

consider the long-term trend in deciding policy.

In terms of irrigation investment, expanding the area under

irrigation appears to be only marginally socially profitable. Again

depending on world rice prices and costs, even this margin may

disappear. Hence, the policy of increasing irrigation investment

needs careful reappraisal. If farmers have to bear the full cost of

75

irrigation, irrigated rice production will not be privately profitable

to farmers. Thus, they may be reluctant to change from rainfed to

irrigated rice production unless the government continues to subsidize

irrigation costs or other measures are taken.

At current yields, corn production at the expense of rainfed or

irrigated rice production does not appear to be profitable. Sugar may

be more competitive but privately and socially, rice is still the most

desirable crop to be grown. Prospects for world sugar prices do not

appear very bright and Philippine export markets are under pressure

from competing sugar exporting countries and increased domestic

production in those countries. Hence, it is unlikely that this

situation would change much in the near future.

At present, the recommended technology is socially more

profitable than average farmer’s technology, though the former is

privately less profitable. This probably explains why farmers are

reluctant to adopt the full recommended technology package. Some form

of government intervention may be desirable to eliminate theseN

divergencies between private and social profitability. However, such

interventions should be carefully evaluated to ensure that their

social costs are not greater than their benefits.

The recent deregulation of an important input industry

fertilizer, is a welcome move, and would be of assistance, though its

impact is not likely to be very substantial, as fertilizer costs will

have to change by very large amounts to make an appreciable change in

DRC.

76

Finally, it is important to recognize that technical change has

been an important factor which enabled the Philippines to retain a

comparative advantage in rice production during the period considered.

Continuing technical change would be crucial to sustain this

advantage. Investment in research which increased yields have been

shown to have a high pay off, and this may be an area for more

government attention.

In concluding this chapter and the whole study, despite the

aggregate nature of industry information, a better understanding has

been achieved of the impact of government intervention on the

country’s comparative advantage of producing rice, corn, and sugar.

However, the study suffers from a set of limitations. Some of the

methodological weaknesses of the various measures used to analyze the

degree of comparative advantage were reviewed in Chapter 2. Other

major limitations arise from the data which were available for this

study. Primarily, the data available for competing crops were

inadequate. Of the competing crops, only corn and sugar production

could be considered. Even then, data for these two crops were

available only for a single year for rainfed conditions. Even for

rice, only aggregate data for the entire country were available.

Regional and more disaggregated data, particularly for different

agro-climatic environments would have enabled analysis to concentrate

on the "marginal" areas.

77

However, the major implications drawn in this study appear to be

sufficiently strong to warrant further research into reappraising some

major policy areas such as the strategy of increasing production

through large-scale irrigation investment and the importance of

investment in technological change. Finally, the determination of the

pattern of comparative advantage would have been more meaningful if

analysis could cover more major industries in the economy.

78

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90

APPENDICES

91

Table 1. Cost and Returns of Rice Production, 1976 to 1981Average Technology Recommended Technology

1. Gross Output at Actual Market Prices

2. Tradable Inputs at Actual Market Prices

3. Value-Added (1 - 2)

4. Factor Cost Other Than Capital, Market Prices

5. Private Profitability(3 - 4)

6. Gross Output at World Market Prices

7. Tradable Inputs at World Market Prices

8. Value-Added (6 - 7)9. Domestic Resource Cost

Other Than Capital10. Social Profits (8 - 9)11. Domestic Capital at

Opportunity Cost12. Net Social Profits

at OER (10 - 11)13. Ratio of SPFX to OER

14. Net Social Profits at SPFX (8x13-9+11)

15. NPCO (1/6)16. NPCI (2/7)17. EPC (3/8)

18. DRC (9+11/8)19. Ratio of DRC to

SPFX/OER (18/13)

20. Yield (kg./hectare)21. Milling Ratio

1978 1979 1980 1981(pesos

1.96 2.14 2.29 2.61

0.31 0.27 0.26 0.351.65 1.87 2.03 2.26

1.04 0.97 0.76 1.05

0.61 0.90 1.27 1.21

2.28 2.02 2.22 2.57

0.50 0.44 0.45 0.551.78 1.58 1.77 2.02

1.56 1.48 1.47 1.900.22 0.10 0.30 0.12

0.10 0.11 0.11 0.11

0.12 -0.01 0.19 0.011.34 1.34 1.34 1.34

0.72 0.52 0.90 0.69

0.86 1.06 1.03 1.010.58 0.61 0.57 0.630.97 1.18 1.14 1.12

0.93 1.006 0.89 0.99

0.Ä9 0.75 0.66 0.74

2171 2750 2810 29351.55 1.54 1.53 1.53

: 1976 1979er kilogram) : 1.99 2.14

19802.29

19812.61

: 0.16 0.27 0.27 0.35

: 1.83 1.87 2.02 2.26

: 0.70 0.88 0.87 1.12

: 1.13 0.99 1.15 1.14

: 1.66 2.02 2.22 2.57

: 0.29 0.39 0.43 0.51: 1.37 1.63 1.79 2.06

: 1.01 1.27 1.39 1.52: 0.36 0.36 0.40 0.54

: 0.03 0.07 0.07 0.07

: 0.33 0.29 0.33 0.47: 1.34 1.34 1.34 1.34

: 0.79 0.84 0.94 1.17: 1.19 1.06 1.03 1.01: 0.55 0.69 0.63 0.68: 1.33 1.15 1.13 1.10

: 0.76 0.82 0.81 0.77

: 0.56 0.61 0.60 0.57

: 3650 3950 4000 4050: 1.57 1.54 1.53 1.53

92

Table 2. Cost and returns of irrigated rice production, 1978 - 19811. Gross Output at

Actual Market Prices1978

1.962. Tradable Inputs at

Actual Market Prices 0.313. Value-Added in Actual

Market Prices (1 - 2) 1.654. Factor Cost Other Than

Capital, Market Prices 1.045. Private Profitability

(3 - 4)0.61

6. Gross Output at World Market Prices 2.28

7. Tradable Inputs at World Market Prices 0.41

8. Value-Added in World Prices (6 - 7) 1.87

9. Domestic Resource Cost Other Than Capital 1.30

10. Social Profitability (8 - 9)

0.57

11. Domestic Capital at Opportunity Cost 0.10

12. Net Social Profits at OER (10 - 11) 0.47

13. Ratio of SPFX to OER 1.34

14. Net Social Profits at SPFX (8x13-9+11) 1.10

15. NPCO (1/6) 0.86

16. NPCI (2/7) 0.76

17. EPC (3/8) 0.88

18. DRC (9+11/8) 0.75

19. Ratio of DRC to SPFX/OER (18/13) 0.56

20. Yield21. Milling Ratio

21711.55

1979 (pesos 2.14

1980per kilogram)

2.29

1981

2.61

0.27 0.26 0.35

1.87 2.03 2.26

0.97 0.76 1.050.90 1.27 1.21

2.02 2.22 2.57

0.32 0.32 0.41

1.70 1.90 2.16

1.19 1.14 1.520.51 0.76 0.64

0.11 0.11 0.11

0.40 0.65 0.531.34 1.34 1.34

0.98 1.29 1.261.06 1.03 1.010.84 0.81 0.871.10 1.07 1.050.76 0.66 0.75

0.57 0.49 0.5627501.54

28101.53

29351.53

93

Table 3. Cost and returns of irrigated and rainfed rice productionIrrigated Rainfed

1. Gross Output atActual Market Prices

1978

1.96

19792.14

1980 1981(pesos

2.29 2.61: 1978 1979per kilogram)

1.96 2.1419802.29

19812.61

2. Tradable Inputs at Actual Market Prices 0.29 0.25 0.25 0.35 0.30 0.24 0.23 0.31

3. Value-Added in Actual Market Prices (1 - 2) 1.67 1.89 2.04 2.26 1.66 1.90 2.06 2.30

4. Factor Cost Other Than Capital, Market Prices 1.00 0.99 0.78 1.07 1.08 1.05 0.93 1.05

5. Private Profitability (3 - 4)

0.67 0.90 1.26 1.19 0.58 0.85 1.13 1.25

6. Gross Output at World Market Prices 2.28 2.02 2.22 2.57 2.28 2.02 2.22 2.57

7. Tradable Inputs at World Market Prices 0.53 0.39 0.41 0.50 0.36 0.31 0.31 0.37

8. Value-Added in World Prices (6 - 7) 1.75 1.63 1.81 2.05 1.92 1.71 1.91 2.20

9. Domestic Resource CostOther Than Capital 1.80 1.21 1.26 1.64 1.60 1.49 1.63 1.92

10. Social Profitability (8 - 9)

-0.05 0.32 0.55 0.43 0.32 0.22 0.32 0.28

11. Domestic Capital atOpportunity Cost 0.09 0.11 0.11 0.11 0.10 0.14 0.15 0.14

12. Net Social Profitsat OER (10 - 11) -0.14 0.21 0.44 0.32 0.22 0.08 0.17 0.14

13. Ratio of SPFX to OER 1.34 1.34 1.34 1.34 1.34 1.34 1.34 1.34

14. Net Social Profitsat SPFX (8x13-9+11) 0.45 0.76 1.05 0.99 0.87 0.66 0.78 0.89

15. NPC0 (1/6) 0.86 1.06 1.03 1.01 0.86 1.06 1.03 1.01

16. NPCI (2/7) 0.55 0.64 0.61 0.70 0.83 0.77 0.74 0.83

17. EPC (3/8) 0.95 1.16 1.12 1.10 0.86 1.11 1.08 1.04

18. DRC (9+11/8) 1.08 0.87 0.75 0.85 0.89 0.95 0.93 0.94

19. Ratio of DRC toSPFX/OER (18/13) 0.80 0.65 0.56 0.64 0.66 0.71 0.69 0.70

20. Yield 2286 2635 2695 2820 1650 1710 1615 183021. Milling Ratio 1.55 1.54 1.53 1.53 1.54 1.53 1.53 1.53

94

Table 4. Costs and returns of corn (shelled) production, 1975 and 19811975 1981 Maisagana Program, 1981

1. Gross Output atActual Market Prices 0.95

(pesos per kilogram) 1.20 1.20

2. Tradable Inputs at Actual Market Prices 0.12 0.27 0.42

3. Value-Added in Actual Market Prices (1 - 2) 0.83 0.93 0.78

4. Factor Cost Other Than Capital, Market Prices 0.78 0.88 0.55

5. Private Profitability (3 - 4)

0.05 0.05 0.23

6. Gross Output at World Market Prices 1.00 1.11 1.11

7. Tradable Inputs at World Market Prices 0.12 0.27 0.42

8. Value-Added in World Prices (6 - 7) 0.88 0.84 0.69

9. Domestic Resource Cost Other Than Capital 1.22 1.13 0.62

10. Social Profitability (8 - 9)

-0.34 -0.29 0.07

11. Domestic Capital at Opportunity Cost 0.08 0.07 0.02

12. Net Social Profits at OER (10 - 11) -0.42 -0.36 0.05

13. Ratio of SPFX to OER 1.34 1.34 1.3414. Net Social Profits

at SPFX (8x13-9+11) -0.12 -0.07 0.2815. NPCO (1/6) 0.95 1.08 1.0816. NPCI (2/7) 1.00 1.00 1.0017. EPC (3/8) 0.94 1.10 1.1318. DRC (9+11/8) 1.47 1.42 0.9219. Ratio of DRC to

SPFX/OER (18/13) 1.09 1.06 0.6920. Yield (kg. per hectare) 875 1060 3690

95

Table 5. Costs and returns per ton of sugar (centrifugal) production,19781. Gross Output at

Actual Market Prices 1115.68

2. Tradable Inputs atActual Market Prices 355.88

3. Value-Added in ActualMarket Prices ( 1 - 2 ) 759.80

4. Factor Cost Other ThanCapital, Market Prices 437.23

5. Indirect Taxes 258.43

6. Private Profitability 178.80( 3 - 4 - 5 )

7. Gross Output at WorldMarket Prices 1292.13

8. Tradable Inputs atWorld Market Prices 355.88

9. Value-Added in WorldPrices (7 - 8) 936.25

10. Domestic Resource CostOther Than Capital 634.74

11. Social Profitability 301.51(9 - 10)

12. Domestic Capital atOpportunity Cost 27.14

13. Net Social Profitsat 0ER (11 - 12) 274.37

14. Ratio of SPFX to OER 1.34

15. Net Social Profitsat SPFX (9x14-10+12) 592.69

16. NPC0 (1/7) 0.86

17. NPCI (2/8) 1.00

18. EPC (3/9) 0.81

19. DRC (10+12/9) 0.70

20. Ratio of DRC toSPFX/OER (19/14) 0.53

21. Yield (tons per hectare) 4.81

96

Table 6. Private and social cost of rice production using average technology, 1978 to 1981

Private Social

1978 1979 1980 1981 :(pesos per

1978 1979kilogram)

1980 1981

Primary InputsLabour 0.41 0.35 0.32 0.37 0.41 0.35 0.32 0.37

Land 0.10 0.29 0.28 0.31 0.25 0.47 0.60 0.71

Capital 0.10 0.11 0.11 0.11 0.10 0.11 0.11 0.11

Unallocated:Irrigation 0.01 0.01 0.01 0.01 0.37 0.35 0.40 0.45

Processing andTransport 0.51 0.31 0.13 0.36 0.51 0.31 0.13 0.36

Tradable InputsSeeds 0.04 0.04 0.05 0.05 0.09 0.08 0.09 0.08Fertilizer 0.08 0.07 0.09 0.11 0.08 0.07 0.09 0.11

Chemicals 0.03 0.05 0.06 0.06 0.03 0.05 0.06 0.06Irrigation 0.003 0.004 0.004 0.004 0.14 0.13 0.15 0.17Processing and

Transport 0.16 0.09 0.04 0.11 0.16 0.09 0.04 0.11

Source: Basic Data, Ministry of Agriculture, Philippines

97

Table 7. Private and social cost of rice production using recommended technology, 1976 to 1981

Private Social

1976 1979 1980 1981 :(pesos per

: 1976 1979kilogram)

1980 1981

Primary InputsLabour 0.36 0.38 0.54 0.57 0.36 0.38 0.54 0.57

Land 0.17 0.16 0.16 0.13 0.30 0.33 0.42 0.26

Capital 0.03 0.07 0.07 0.07 0.03 0.07 0.07 0.07

Unallocated:Irrigation 0.03 0.03 0.03 0.02 0.21 0.25 0.29 0.33

Processing andTransport 0.14 0.31 0.14 0.36 0.14 0.31 0.14 0.36

Tradable InputsSeeds 0.02 0.02 0.02 0.02 0.08 0.06 0.08 0.06

Fertilizer 0.06 0.09 0.12 0.13 0.06 0.09 0.12 0.13

Chemicals 0.03 0.05 0.08 0.08 0.03 0.05 0.08 0.08

Irrigation 0.01 0.01 0.01 0.01 0.08 0.09 0.11 0.12

Processing andTransport 0.04 0.10 0.04 0.11 0.04 0.10 0.04 0.11

Source: Basic Data, Ministry of Agriculture, Philippines

98

Table 8. Private and social cost of irrigated rice production, 1978 to 1981

Private Social1978 1979 1980 1981 : 1978 1979 1980 1981

(pesos per kilogram)

Primary InputsLabour 0.39 0.36 0.34 0.38 0.39 0.36 0.34 0.38

Land 0.09 0.31 0.30 0.32 0.36 0.37 0.47 0.55Capital 0.09 0.11 0.11 0.11 0.09 0.11 0.11 0.11Unallocated:Irrigation 0.01 0.01 0.01 0.01 0.54 0.27 0.32 0.35Processing and Transport 0.31 0.31 0.13 0.36 0.51 0.31 0.13 0.36

Tradable InputsSeeds 0.04 0.04 0.05 0.06 0.08 0.08 0.09 0.08Fertilizer 0.07 0.07 0.10 0.12 0.07 0.07 0.10 0.12Chemicals 0.03 0.05 0.06 0.06 0.03 0.05 0.06 0.06Irrigation 0.003 0.004 0.004 0.004 0.20 0.10 0.12 0.13Processing and

Transport 0.15 0.09 0.04 0.11 0.15 0.09 0.04 0.11

Source: Basic Data, Ministry of Agriculture, Philippines

99

Table 9. Private and social cost of rainfed rice production, 1978 to 1981

Private Social1978 1979 1980 1981 :: 1978 1979 1980 1981

(pesos per kilogram)

Primary InputsLabour 0.42 0.42 0.45 0.40 0.42 0.42 0.45 0.40Land 0.15 0.32 0.34 0.28 0.66 0.76 1.05 1.14

Capital 0.10 0.14 0.15 0.14 0.10 0.14 0.15 0.14

Unallocated:Irrigation - - - - - - - -

Processing and Transport 0.51 0.31 0.13 0.36 0.51 0.31 0.13 0.36

Tradable Inputs

Seeds 0.04 0.06 0.06 0.07 0.11 0.12 0.14 0.12

Fertilizer 0.07 0.07 0.11 0.12 0.07 0.07 0.11 0.12

Chemicals 0.02 0.01 0.01 0.01 0.02 0.01 0.01 0.01

Irrigation - - - - - - - -

Processing and Transport 0.15 0.09 0.04 0.11 0.15 0.09 0.04 0.11

Source: Basic Data, Ministry of Agriculture, Philippines

100

of S

PFX/

OER

•2rtCÖctiwcd-p

H3V h

oo«

1000 1100 1200Pesos per ton

Figure 1. Sensitivity of DRC to Changes in World. Sugar Prices

aborder price equivalent to P8 5 O (U.S. $115) at which Philippine sugar production would lose its comparative advantage

^border price of sugar in 1978

101