Page 1

CREDIT AND PRICE POLICIES PHILIPPINE

AGRICULTURE

C.

Crietina

David

STAFF PAPER SERIES NO.

PHILIPPINE

INSTITUTE

IN

82째2

FOR DEVELOPMENT STUDIES

MAY

1982


CREDIT AND PRICE POLICIES PHILIPPINE AGRICULTURE

C. David*

Cristi_

Government cultural reason

products

policies

in low income

for this has been

promote

policies

policies

interest

input price subsidies.

loans

(Bale and Lutz).

subsidies,

and extension,

have

often been

premise

output.

these credit

concern

for the negative

rural financial

markets

stressed

accompanied

The underlying

favor

low to

expenditures

and concessionary

adverse

from institutional

rates

who

public

of agri-

The primary

of food and materials

of funds carry high interest Officials

prices

effects

of price

in agriculture.

and programs

and have

undervalue

used to offset

incentives

of agricultural

rates,

in research

are frequently

The credit policies the volume

countries

Input price

investments

on production

typically

to keep _rices

industrialization.

on irrigation, credit

economic

IN

that hinder

the expansion sources

at low

by supervision

and

is that informal expansion

policies

effects

of such policies

toperform

efficiently.

have

of

sources

of agricultural shown

little

on the ability They have

of

also ignored

*Research Fellow, Philippine Institute for Development Studies, on leave fFom rJ_e _i_ity of _ l_ilLpplw et Loe Re_os. The author wishes to acknowledge support for this study from the Rural Financial Market Project of the Ohio State University, the Philippine Institute for Development Studies (PIDS), and the Philippine Council for Agricultural Resources and Research (PCARR). The analyses of price policies draw from the results of a research project entitled "The Impact of Economic Policies on Philippine Agricultural Development" funded by PIDS and PCARR. Dale Adams, Douglas Graham, John Power and James Roumasset have provided valuable comments.

.

....


2 the

fact

that these policies

distribution.

usually

result

in more

of credit programs

has usually

terms of their impact on agricultural

production,

adoption

evaluation

of new technology. however,

involved impact

studies

of production

from conceptual and consumption

Aggregate problems,

policies because

and non-price

credit

impact

but empirical

impact

decision

studies

results

on production,

to agriculture

can be attributed

technology

inputs and outputs profitability

the Philippines to analyze

and relative

of this paper are related

the eltemt

and

not be surprising

commodities

and between of relative

flows.

how credit Dolicies

incentives

credit

that

of loans

programs

determinants

is to analyze

cheap

in showing

should

of resource

to economic

to which

to credit

important

direction

methodological

and proportion

across

the fungi-

by lenders.

consistent

results

prices

are much more

and, hence,

The purpose

These

and they gene-

from the interdependence

also have similar

investment,

credit

Only a few studies

techniques

rationing

are more

(Herdt and Gonzales).

problems

of farm-households,

credit

credit

in generating

loan impact.

arising

in

and

of existing

useful

programming

problems

investment,

that most micro

and are more measuring

been measured

methodological

It was concluded

and mathematical

of credit,

granted

the serious

than in rigorously

rally suffer

little

emphasized

are descriptive,

use econometric

bility

A recent

(David and Meyer).

hypotheses

loan

(Gonzalee-Ve_a)

The performance

research,

inequitable

in

in agriculture

is am effective

w_y to

and


3 offset

various

policies

affecting

The second policies section

taxes

section

on agriculture.

structure

section

describes

the

credit

presents

of government

that

facing

first

growth of the formal agricultural

on the relative argues

The

estimates

prices

of agricultural

low interest

agriculture

of the effects

products.

rates do not alter

nor rosolve

equity

system.

The third

the incentive

problems

caused

by

price policies.

Credit

Agricultural

Policies

Credit has been Philippines. promote

a major

In the early

rural private

Farmer's

Association

financial

more

the Rural

especially

than a thousand

farm cooperatives, of serious

rural banks

credit.

providing

default

problems,

Credit Administration

small supervised

credit

The government's

objective

has been hampered

1981 interest have

program

rate reform,

been regulated

to promote

was supposed

to

credit,

and renamed

It now administers

a

reform beneficiaries.

of increasing

by low interest

60

distributors

and marketing

(ACA).

There

in about

the principal

The ACCFA

to

cooperative

sector.

it was reorganized

for land

in the

and Cooperative

operating

production

the Agricultural

culture

Credit

to the rural

They have become

supervised

instrument

Bank Law was passed

and the Agricultural

catering

of government-mponsored

but because

development

(ACCFA) was also established

per cent of municipalities.

develop

fifties,

banks

institutions

are currently

agricultural

the credit

rates

policies.

interest

rates

and other

by the Monetary

Board

to conform

flow to agriUp until

financial with

the

charges

the 16 per


4 cent

ceiling

decade, from

stipulated

allowable

by

interest

12 to 16 percent

depending

rates were

rates

3 percent.

about 6 percent

have been

negative

lower

consequence

and factor

were negative

in real

and penalized

savers.

rate of I0 percent

costs of transactions

proportion

official

20 percent

terms.

a number

1974, the Monetary 25 percent

however,

purchased

have strongly

certificates

credit,

reform

funds, with

in agriculture,

Organization).

excess

interest

loan demand

to small were

inherently

all lending

beneficiaries.

where

higher.

a certain

for agriculture

credit programs.

and at least Private

In

to allocate I0 per

commercial

this rule and have and other

rates

that limited

required

institutions

to agriculture

of

borrowers

farmers,

go to credit

agricultural

Because

rewarded

the government

resisted

on agricultural

of loanable

structure

of loans

of indebtedness

charges

the interest

the 1970's),

for lenders

funds

ranged

Supervised

investments

especially

directed

of their loanable

cent of total to agrarian banks,

during

of supervised

Board

credit

with additional

rates

price

Labor

This also created

portfolios

past

from 2 to 3 percent

deposits,

interest

This price

and risks

the

for time deposits.

(International

agricultural

of lenders'

and initiated

savings

but higher

the flow of loans to agriculture_

To increase

agricultural

on the rate of savings,

(around

During

loan charges

than the scarcity

intensities

rapid inflation

1916.

terms of the loans.

For rural

Since the late sixties, credit

Law of

of formal

and other

a lower interest

not exceeding

Usury

and additional

on the security

credit bears

the

government

simply securities


5 by the Central

issued

the high

Bank to comply with

cost of directly

lending

Table i lists the various

1973-1980.

fertilizer

tial rediscount tration

Between

price subsidy.

under

rates,

agricultural

total loans

Most of these programs

loans with extension.

of

linked

Financial

during

low interest,

non-collateral

were

financed,

tied to a

provided

and assistance

These were

the period

these were also

institutions

loan guarantees,

credit programs

granted

1973 and 1975,

these programs.

because

to farmers.

special

(SCPs) and their corresponding

the regulation

preferen-

in loan adminis-

in part,

by foreign

loans.

A major for almost objective priority

rice production

80 percent

promotion

of total

of Masagana

of rice production

after Masagana supervised

Problems documented

areas

to non-rice,

associated

(David).

loans came mainly

with

the Central

from additional

equity

by the increase

in the share

total resources

of rural banks

Low repayment

where

capital

the initial

crop losses

in 1973,

for rapid

was greatest.

Programs

in scale, attempted

and policies

two decades,

growth

Bank rediscount

of borrowings

to extend

are now well-

in agricultural

window

deposits.

This

rather

plagued

than

is evidenced

from the Central

from 8 percent have

Since

areas.

or savings

rates, which

99, accounted

the potential

these programs

Over the past

from

from serious

smaller

rainfed

Masagana

by SCPs.

in the short-run

99, although much

credit

granted

99 was to recover

was given to irrigated

expansion

1975.

loans

program,

Bank in

in 1961 to 54 percent almost

all supervised

in


6 Table

I.

Supervised Agricultural Credit Programs Philippines from 1973 to 1980.

Program

Commodity

I.

Masagana

99

2.

Masaganang Maisan Masagana 77

3.

Gulayan

4.

Cotton

5.

Integrated

6.

7.

in the

Loans Granted _/ (_ million)

Rice

4,554

Corn

521

and

sa Kalusugan

Vegetables

22

Cotton

71

Financi_ for Virginia Tobacco ='

Tobacco

34

Rice-Tobacco Supervised Credit Program

Tobacco

3

Philippine Tobacco (PTA) Farm Credit

Tobacco

3

Tobacco

1

Financing

Agricultural

8.

PTA Facility

9.

Bakahang

I0. Biyayang

Progress

Administration Assist. Program

Loans

Barangay

Cattle

Dagat

Fish

Total

_/As

of

December

_/As

of

1979.

Source:

31,

256 35

_5,500

1980.

Unpublished files. Technical Board of Agricultural Credit_ Central Bank of the Philippines.


7 credit

programs,

and further

threatened

damaged

these programs

credit

of Philippine

technology

since

credit

among borrowers.

While

the Masagana

rice production

trend

of rural

institutions,

The impact

of

at the farm level as well as at an aggregate

unclear.

in 1973, the growth rice

discipline

on production

level has remained recovery

the viability

99 helped

from the global

in rice production

the late sixties

the rapid

food grain

and adoption

cannot

crisis

of the new

be attributed

to Masagana

(Herdt and Gonzales).

Despite

these government

real and relative have

declined

took place

still far below

percent

of agricultural

since the late

of this growth

agriculture

levels

interventions,

1960's.

and total loans

in 1955-1969

production

The level

APL as a percent

granted

to 19 percent

2 indicates loans

that the

(APL) granted

APL grew in real terms but most

in the 1960'e.

that in 1969.

Table

declined

of APL in 1979 was

of net value

from 22 percent

and II percent,

added

in

and 20

resplctively,

in

the 1970's.

These trends relative

prices

outputs

are more

hence direction have

already

the effects agricultural overlooked

are perhaps

across

sectors,

important of resource

argued

commodities,

determinants allocation.

that preferential

limited

interest

effects.

and

inputs and

profitability

and Vogel

Policies

of trade

rates

technology

and between

Larson

that turn terms

will have

since

of relative

that the use of credit

of policies exports

not surprising

and others

tO compensate

against

food and

It is too often

do not affect

and

relative

for

99


8

Table 2.

Selected

Indicators

of Trends

Agricultural Production Financial Institutions,

in Loans

Granted

for

by Bank and Non-Bank 1951-1979.

Value of Year

Agricultural Loans_ / (_ Million in 1979 Prices)

1951 1955 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

376 534 2,757 3,636 4,022 4,461 4,503 4,420 4,582 5,556 5,665 5,794 4,557 3,943 3,424 2,590 1,725 1,718 982 1,096 2,534 3,378

h/Refers _/For reported.

to loans

later years,

Sources:

Asricultural Loans Agricultural Value Added

as a Percent of Total Loans Granted_/

13 17 14 19 21 24 25 23 24 27 25 22 22 21 20 19 22 21 13 06 13 19

granted

40 24 20 22 20 20 19 19 19 20 16 16 15 13 12 I0 12 09 08 -

for agricultural

data on total loans

production

granted

only.

have not been

Unpublished reports by the Technical Board of Agricultural Credit, Centr_l Bank of the Philippines, and the National Economic and Development Authority.


9 profitability. supplied

And because

by credit will

whichever

Price

Policies

The effects culture fact

that small farmers

between

agriculture

well

relations several, prices,

have been influenced often conflicting

stable

and increased controls,

prices,

and the general

important

past decade.

policies Domestic

other countries

consequences

product

by interventions

more

prices have

relative

also been

such as the US sugar

price

quota

revenues, price

nationalization currency

especially

influenced

policy

low food

In addition,

of domestic prices

as

to achieve

government

import tariffs,

overvaluation

affecting

these

intended

products.

crops,

allocation

food self-sufficiency,

farm income,

quotas,

among

and input prices

on resource

In the Philippines,

The

has been amply

relationships

between

of agricultural

taxes, trade

in agri-

in the Philippines.

Price

objectives:

higher

processing

export

of marketing_ been

distribution.

enterprise

incentives

and price-responsive

elsewhere.

important

liquidity

utility.

on economic

and non-agriculture,

to have

as on income

the greatest

attention

are rational

additional

to the most profitable

policies

adequate

by researchers

have been shown

provides

of government

have not received

demonstrated

is fungible,

be allocated

or to consumption,

Intervention

credit

prior

have

during

by policies

the of

to the 1970's

and the US PL 480 program.

The impact measured

of economic

by the nominal

policies

protection

Both NPR's and IT's measure

on agricultural

rates

the percentage

incentives

(NPR) and implicit difference

can be

tariffs

between

(IT).

domestic


10 price and border price prices

(usually

export

prices

used

of products

defined

as CIF import

official

that enter

exchange

and border

price

rates,

is attributed

and price

border

price by the shadow rate, which the general

the protection

Table dity groups government intervention balamce impact

system,

3 presents

i/

price,

rate,

price

overvaluation

exchange

rates are

opportunity

costs of at the

between

domestic

interventions

such as

hand,

by converting

of net nominal

all government

of the exchange

Border

or FOB

is converted

a measure

into account

policies,

rate defended

by

is obtained.

average

NPR's

for the Philippines

to highlight

of the agricultural

by major

many

prices

policies

sector. _/

were

of the floating

m

u

Pd

NPR _ Pb

i x 100;

IT = Pb

While

Pd = price

paid by the user,

instituted

of exchange

I x i00; m

commo-

the impact of increasing

period was part of the overall

Pd U

price

On the other

exchange

takes

growth,

on consumer

they represent

to government

policies.

in the later

economic

for importables

at official

When border

for two time periods regulation

respectively. _/

as in NPR or IT, the difference

fiscal,

including

because

trade.

trade,

protection

price

for exportables)converted

as bases of comparison

commodities

and inputs,

where

and Pd = price

government

attempts

to cushion rates

the

in 1970

P denotes

received

to

border

by domestic

producers and importers. Prices are defined at a comparable point in the marketing chain to insure that differences between domestic and border pzices are due to government interventions rather than to real costs. _/Annual differences in nominal protection rates were not shown because they would, in general, be related to price fluctuations rather than to policy changes.


II

Table 3.

Nominal Protection 1955-1980.

Rates

Proportion of Value Added

in Philippine

Nominal Protection Rate

(%)

Agriculture,

Proportion of Value Added

Nominal Protection Rate

Food Crops Rice Corn Other Crops

Export

Livestock

.25 .08 .18

-7 I 0

.09 .09 .09

60 -8 0

.09 .08 .12

-23 -22 - 4

.17 .07

28 77

.13 ,07

4 48

and Poultry

Livestock Poultry

e

4 2 0

Crops

Sugar Copra Other Exports

Average

.27 .09 ,13

(Total)

(I.00)

15

(1.00)

-2

(%)


12 and the oil and food grain

Import

Among

crises

Food Crops

Competing

the domestically

marketed

and corn, have historically tions. roots,

Prices

to border border

of other

and tubers were

structure, l/

Domestic

prices.

in 1973-1975

fourfold

because

food grain prices incentives defend

prices

when world

Food Authority

for producers.

a farm floor price,

Previous

studies

for urban consumers

farm price to raise

incomes

except

domestic

Drice

fruits,

potentially

prices

nuts,

by the tariff generally

rice price was below

of rice and fertilizer

and world-wide

grain

(NFA) is responsible for consumers

rice

interven-

this was due to the price

low prices

close

the interrose

shortages.

for regulating and adequate

in the domestic

but the amount

of imports

or exports

which

determinant

of grain

prices.

is the main

that the provision tended

of stable

to dominate

of small

farmers

market

price

It buys grains

monopoly

had noted

of direct

of rice and corn have been

In part,

to achieve

the food staples,

such as vegetables,

less controlled

of the oil crisis

are under government

prices

food crops

In the 1970's,

ventions

food crops,

been theobjects

price by 7 percent.

The National

in 1973.

and low

the objective

(}_ngahas).

to

rice

of supporting

This was

!/Tariff protection is redundant for exportable crops and does not apply to food grains where only the govermment can import or export. It should also be noted that tariffs are expected to be effective in raising domestic price over border prices only in potentially import competing products. Since most of the agricultural commodities are either subjected to quantitative trade restrictions or are not significantly tFaded, price comparisons have been used to measure NPR instead of legal tariff rates.


13 achieved

through

imports

1975, the domestic commercial

rice prices

rice exports

rice technology important

have

of production

became

occurred

and irrigation

upland

population,

during years

expansion.

a relatively

low price

Export

regulation

in the export

Moreover,

consumers

sector.

of agriculture Prior

to 1970_

the overvaluation

of exchange

foreign

exchange.

limited

exports

protect

domestic

However,

consumers

to the highly

incentive

effect

of the

of keeping

the

for maintaining

the 1970's,

policy

agricultural

the Bovernment crops

except

and other

of production

protected

quota

prices

government those

Since

rarely

regulations

intervened

export

access

through

relating quotas

were instituted

policy

significant

indirectly

Despite

this,

that provided

on domestic

generally

that would

the floating

crop exports

the

an export in a

sugar production.

reduced

have prevailed

of the exchange

have been

that

in 1962 to

from 1955 to 1969 resulted

policies

to

of Philippine

U.So sugar market.

rate of 60 percent

crops below regime.

in the 1970's has been

from the increased

than world

protection

of export

1970, many

reason

in the case of sugar,

of the UoS. sugar

higher

high nominal

rates

to 60 percent

producers

previous

20 percent

of corn.

and trade of export

prices

of the new

for corn, an

the policy

is another

in the production

During

policy

Some

Crops

Growing

price much

Price

After

competitive째

1978 as a result

food for about

also has the same bias.

price of meat low for urban

internationally since

crop and the staple

shortfalls.

penalized

domestic under

the

rate in

by export

taxes


14 ranging

from 4 to 6 percent.

traditional

exports

of copra

degrees

of processing

subject

to a 4 percent

molasses, export

abaca,

premium

and centrifugal

of agricultural export

bananas,

duties

the gains from higher imposed

The rate of 6 percent

prises.

measures,

levied

These

export

coconut

Between

on

to promote

Other

tax are processed

temporarily

world

as stabilization

exports.

and tobacco째

were

sugar

is levied

higher crops

products,

1973 and 1975, additional

to siphon

off part of

export taxes

were

initially

but they have been continued

as a

tax on agriculture,

In the case of sugar producers

rose to more

industries.

and copra,

than 20 percent

Since 1970, sugar

first under the Philippine National

Sugar Trading

and seller Producers

of sugar

which

are paid a composite

of export price,

price.

However,

transferring

income

and the Coconut industry rising

price

domestic

price

since

Fund

1973o

and falling

has become

price,

and domestic

export

producers

to domestic

Consumer

Stabilization

the world

the

have been

reserve

has served

prices

thereby

consumers.

Fund

imposed

have changed price

buyer

is a weighted

this arrangement

The tax rates

under

markets.

that theoretically

below

in these

the sole wholesale

and international

(Cocofund)

with

tax on

been nationalized,

Inc., and currently

significantly

the Coconut

Investment

has effectively

system,

from domestic

or implicit

due to new regulations

wholesale

as in the quota

Two taxes called

typically

Exchange,

Corp.,

average

coconut

trading

in both domestic

to lower the domestic

the penalty

over

of copra.

(CCSF) on the time, In some


15 years,

the CCSF levy in ad valorem

20 percent miller's

level,

About direct

of border

on domestic

to finance

Research,

to date,

industry

actually

On the other hand,

alternative of waiting short

conditions. source

programs

program

to harvest

run, the CCSF and Cocofund

under

coconut

of income have been hesitant

for three years

in the coconut

from these programs

small

a first

The

of the coconut

seeds will perform

Furthermore,

the

and scholarships.

segment

from the replanting

hybrid

at the farm level.

oil products.

integration,

the benefits

the gains

It is not known how well Philippine

of coconut

shows that only a small receives

at the

from the tax supports

development

vertical

a tax of about

the tax is collected

consumption

such as replanting,

represented

of the tax is clearly

of the revenues

is supposed

industry

Although

the incidence

20 percent

subsidy

remainder

price.

terms

(David,

1977).

are uncertain. diverse

farmers

with no

to face the prospect

crop.

At least

levies may be considered

for the

a tax on the

industry.

Livestock

and Poultr_r

The incentive rewards

structure

than for poultry,

sector.

However,

because

of government

prices

but both

the general

of livestock,

and 77 percent

for livestock

higher

policy

also seems

than their higher

pork,

to offer

favored

trend of declining

specifically

the 1970's and slightly

are more

appears

to have

than the crop

incentives

occurred.

and poultry

corresponding

were

border

than those predicted

lower

over time

Domestic 28 percent

prices

by their

prior tariff

to


16 rates, i/

In the 1970's,

somewhat

lower than the legal

and 70 percent

for poultry.

on those products

which

feeds and feedgrains, provide

a reasonable

Protection

non-agriculture on product

percentage

inputs

difference

of corn,

for producers

EPR for manufacturing

for livestock

controls

and other

during

to levels

controls

also by price

imposed on mixed

feedgrains

to

this period.

depend

flows between

on the effects

between

added

It takes

Since

paid by farmers

as estimated

(EPR) measures

of price

prices

protection

the

and value

interventions

of EPR for agriculture

the nominal

on agri-

in the non-

at domestic

the impact

estimates

rate

and

rate of protection

of policies

of incentives

protection

value

agriculture

by the nominal

The effective

tariffs

declined

and Manufacturing

Table 4 compares

to the implicit

imports

and on the nature

prices.

into account.

available,

accompanied

they also

sector.

difference

rates of I0 percent

are not only influenced

prices;

added at border

tariff

and rate of resource

input prices

agricultural

were

margin

price

This may be due to price

higher

of Agriculture

The direction

cultural

percentage

on

are not

rate in agriculture

for agricultural

inputs

and to

by Tan. z/

_/Since international trade in livestock and poultry has been minimal and confined mainly to imports of breeding animals, special cuts of meat for restantants or of fats for the meat processing industry and their border prices were represented by the average CIF import unit values in Hongkong. _/NPR's in agriculture are not expected to be substantially different from their EPR's because the proportion of intermediate inputs to value added remains relatively small in Philippine agriculture. Moreover_ one can expect EPR's to be lower than NPR's because of higher protection on agricultural inputS.


17 As can be noted, structure

government

that is significantly

added in manufacturing price

intervention

the last decade

Because

policies

through

is only will

subsidy

controls

and direct

implicit

tariff

domestic

manufacturing

indicated

tariffs

subsidies

for fertilizer째 of these

agricultural

higher

an important

The overall by the measure overvaluation the exchange

fer fertilizer

consideration

magnitude

tariffs because

interventions However, credit,

it as

from 24 to 46 percent

tax.

Despite

there

is still

of the price a positive

that the protection inputs, or IT{but of direct

which

of

is also

is actually subsidies),

has

of policy.

of the bias against

of net protection of the exchange

of agricul-

chemicals,

as a result

sales

It appears

during

to be some government

ranging

on fertilizer,

by the level of implicit

significantly

and formal rural

in agriculture

and indirect

this.

for agricultural

and feed mixes

protection

of legal tariffs

that government

there appears

value

input prices.

the objective

try to offset

irrigation,

Implicit

machineries,

will

oroduction

and higher

to dominate

While

by 44 percent,

agricultural prices

an incentive

agriculture째

raised

it was expected

later, where

the effective

structure

been

tend

input markets

to producers째

agricultural reduce

product

in the case of Bravity

be discussed

against

undervalued

lower

price policy,

in the agricultural

biased

have created

has been artificially

low food Drices

tural product

policies

rates

that

agriculture

includes

the impact of the

rate due to the protection

rate has been allowed

to float

since

is reflected

1970,

system.

Although

the structure

of


18

Table 4.

Comparison of Protection Rates D_nufacturing Sector, 1970Vs.

Agriculture

(Nominal

Protection

(Net Nominal Agricultural

Inputs

Rates)

Protection

(Implicit

in Agriculture

- 2

Rate)

-37

Tariffs)

Fertilizer _/ Agricultural Hand

and

i0 Chemicals _/

28

Tractors--b/

46

Four-wheel

Tractors _b/

24

Irrigation

Pump _b/

46

Irri_ation

Gravity

Mixed

(NIA system) _/

-55

Feeds--b/

Manufacturing _d/ (Effective

33 Protection

(Net Effective

Rate)

Protection

_/Based on price comparison of urea, fertilizer and phosphates from 1973-1980. _/Based

44

Rate)

ammonium

on legal tariff rate and sales

9

sulphate,

mixed

tax.

_/Based on comparison of NIA irrigation fee and estimates of annualized cost of irrigation system by Moya, P.F., L. Small, and S. Bhuiyan, "Cost of Different Types of Irrigation System in Central Luzon," Department Paper No. 80-10, Dept. of A_Zlcultural Economics, IRRI, June 1980. _/Based on estimates by Tan, N. "The Structure of Protection and Resource Flows in the Philippines," in Bautista, R., and J. Power, Industrial Promotion Policies in the Philippines, Philippine Institute for Development Studies, 1979.


19 tariffs

and other

thus increased Medalla

trade restrictions

the value

estimated

culture

of domestic

of the pesos

If this is taken

a 9 percent general

severe

policy,

be expected survives

Impact

with no price

and indeed

to agri-

currency

would

receives

As a consequence

of this

is less than what

such as coconut

intervention. suggests

free trade

still

production

consumption

in a 32 per

penalties

manufacturing

commodities

and

products

may be somewhat

higher

it

and than would

The fact that agriculture

an inherent

comparative

advantage.

of Credit Policies

To compare policies,

at border

the quantitative

the effective

of interest

rate subsidy

prices

difference agricultural Another

grows

to a balanced

rate.

agricultural

the level of domestic

resulted

of an overvalued

while

protection

should be, and for certain sugar,

effect

(-37 percent)

net effective

pricing

relative

for imports

For the mid-1970's,

into consideration,

net of the disincentive

be even more

currency.

demand

that the tariff and tax system

cent overvaluation situation, z/

has reduced

subsidy

impact rate

in the cost of borrowing loans multiplied

method

(ESR) which

as a percent

has been estimated.

is to estimate

of credit

policies expresses

of net value Subsidy

between

by the value the amount

added

is defined

agricultural of agricultural

of subsidy

to price the amount

in agriculture in terms of the and nonloans

accruing

granted.

to the

Z/The situation since the mid-1970's has been one of chrolic and growing deficits in current accounts, financed by heavy foreign borrowing. This indicates an even higher percentage of peso overvaluation than that protected by the tariff and tax system alone.


20 sector

due to the difference

between

the nominal

interest

rate and the

rate of inflation.

Differences agricultural most,

in interest

loans from _ormsl

2 percent.

of borrowing.

Moreover,

Typically,

cost than agricultural

Assuming

that

interest

rate amounts

to only

structure

financial

in favor

will not alter

mobilizing

financial

that is based

only part of the costs

has meant

less transaction

Even if interest

vis-a-vis

savings

incentive

created

rate policy

to efficiently

perform

impairs

the

incentives

an allocation rather

by price

seriously

It does not provide

and wealth

is

that the interest

the unfavorable

and it induces

subsidy

rate differential

non-agriculture

markets

on size of collateral

the effective

it is clear

low interest

process.

a cost of borrowing

of agriculture,

significantly

of rural financial

intermediation

are small, at

loans entail

in magnitude,

On the other hand,

the ability

represents

rate policy

times

in agriculture

institutions

and non-

for borrowers.

I percent.

two or three

policies.

interest

loans

of 6 percent

rate subsidy

financial

agricultural

non-agricultural

differential

increased

rates between

for

of credit

than productivity

of credit use.

The impact of the distribution is

shouldered

of

currency,

low

interest

tends by bank rates

low

to the

be

interest regressive.

lower

deposits, on

rate

income and

savings,

tax and

policy

on income

The implicit population, payers direct

subsidy

i.e., through

government

holders inflation, outlay.


21 Only about received

I0 percent

of the total

by agriculture.

not consistent

with employment

for agricultural labor without

Within

machinery

significant

tractors

was used

and equity

shifts

less than I0 percent

In supervised

credit

to institutional

landless

households

farmers

coconut,

tobacco,

locations

in production

of the implicit

with

of the implicit

farmers.

in the

Four-wheel with

the bulk

or more who constituted

are usually

Rice has been the emphasis

off than average

involved

Within

credit

in these

subsidies

as incentives

of setting

of inequity programs

99.

increases

loan limits farms.

in distribution was reported

have been received

mainly

relatively

for larger

The study

to lend to small

but

priority

i.e.,

for rapid

ceiling

of

in corn,

sector,

markets,

potential

n_mber

farmers

the rice

to primary

of Masegana

by the farmer borrowers

Program

areas.

dimension

one-third

of

the significant

a higher

institutions

than 15 percent

were purchased

The procedure

financial

use of

of farmers.

the greatest

analysis

credit

despite

close

important

subsidies

in a recent

two-thirds

areas

against

only farm operators

crops.

basis means

an even more

Esguerra

better

in the short-run.

on a per hectare Perhaps

credit

and other

was given to irrigated progressive

programs,

in the rural

are actually

of small

is

is also

Low cost

Mechanization

50 hectares

of total number

entitled

rice

with

allocation

system

Less

Bank Credit

farm equipment

of the loans by sugar farmers

credit

the incentive

tillers

rate subsidy

objectives.

impact on yield.

for power

and other larger

interest

agriculture,

the value of loans in the World Philippines

implicit

estimated

by that

5y participating

farmers

from non-repayment

and only

of loans.


Z2 Furthermore, borrowers farmers

the distribution

has been biased

can be increased

simply

transform

income

transfers.

in favor through

supervised

The common belief

of the subsidies of larger

higher

credit

that extension

were

In the case of rice9

already

of rainfed

adopted

farmers.

default

would

by 67 percent

be more

to

for effecting

effective

borne

varieties

of irrigated

farms prior to the Masagana

The subsidy

vehicle

is not clearly

the modern

to farmer

rates but this would

into a costly

with low cost credit and vice versa evidence.

accruing

if tied

out by empirical

introduced

farms

99 Program.

in 1967

and by 45 percent

The fact that the

rate of adoption increased to 85 percent and 71 percent, respectively, solely in 1977 cannot he,attributed to the program but rather should be viewed as a continuation extended little despite

of the long-run

since the late

dissemination the Maisan

technology

rural development, the efforts without

77 and Masaganang did not offer

of financial

markets

but the strategy

of scarce

significantly

competent raising

process

of the new technology

In the case of corn,

of new varieties

apperently

and development

1960's.

adoption

developed Maisan

higher

in the early

programs

of linking

repayment

because

profitability.

are indeed

technicians

there has been

important

1970's the new

Extension components

of

the two has dissipated

in loan adllnistration

rates

in supervised

credit

programs.

Concluding

Remarks

In summary,

interest

rate subsidies

hav_ not significantly

altered


23 the unfavorable policies. culture

economic

incentives

It is not surprising, in real terms have

quotas

and special

subsidies

because

Relative

determining

prices

make an unprofitable

income

farmers,

receive

to reflect replace

distribution the cheap

profitability

hand, more positive

instituted

credit

profits

liquidity

or utility

are the major

enterprises.

rate

due to pricing

Additional

marginal

to agri-

Cheap

are

factors

credit

will not

profitable_

credit

subsidies

because

through

When

interest

intermediation,

as the basis agricultural

low interest

only a few, typically

credit.

cost of financial

penalties

as yields

funds

rates of interest

of credit.

to most

activity

It is also clear that worsen

Even higher

where

ss well

rates of return

government

in offsetting

to activities

caused by government

that loanable

despite

credit programs.

of the fungibility

will be allocated highest.

therefore,

declined

will be ineffective

policies

in agriculture

wealth

of allocating

prices

rates

would

rates

progressive are not allowed

and political

credit.

benefit

power

On the other

more

low income

farmers.

The choice adverse grants

of credit

policies and loans_

do, this approach Cheap

and to other fails

increasing

retard

in rural exports,

agriculture

ease,

short-run

to achieve

also

institutions

sufficiency_

to compensate

is due to administrative

credit policies

financial

policies

availability

considerations.

either

equity

the development

areas.

of external

While

or efficiency of viable

The objectives

and improving

for other

income

easy

to

objectives.

formal

of food selfdistribution


24 requires

long run solutions.

in real and financial structure9 overcome

irrigation,

production

markets

This includes and making

research_

disincentives

correcting

investments

and extension.

price

distortions

in marketing

Cheap

caused by low prices

infra-

credit will not and/or

low yields.


25 REFERENCES Bale, M. and E. Lutz, "Price Distortions in Agriculture and Their Effects: An International Comparison", World Bank Staff Working Paper No. 359, October 1979. David, C. and R. Meyer, "Measuring the Farm Level Impact of Agricultural Loans in Low Income Countries: A Review Article", in Borrowers and Lenders, OEDB, London, 1980. David, C., "Structure and Performance of Rural Financial Markets in the Philippines", ESO No. 598, Department of Agricultural Economics and Rural Sociology, The Ohio State University, Hay 1979. David, Vo, The Barriers in the Development of the Philippine Coconut Industry, Unpublished MBA thesis, Ateneo de Manila University, 1977. Esguerra, E째, The Redistributive Potential of the Masa_ana 99 Credit Subsidy, Unpublished MA thesis, School of Economics, University of the Philippines, August 1981. Gonzales,

Vega, Claudio,"Interest

bution", American Journal No. 5, December 1977.

Rate Restrictions

of Agricultural

and Income

Economics,

Distri-

Vol. LIX,

Herdt, R. and L. A째 Gonzales, "A Reaction to the Study on the Benefits and Costs of Masagana 99 Program", Paper presented at the Fifth National Agricultural Credit Workshop, Zamboanga, Philippines, March 1981. International Labour Organization. SharinE in Development: A Programme of Employment Equity and Growth for the Philippines, Geneva, International Labour Office, 1974. Larson, Do W. and R. C. Vogel, "Interaction of Price and Credit Policies in Costa Rica Agriculture", ESO Noo 813, Department of Agricultural Economics and Rural Sociology, The Ohio State University, November 1980. Mangahas, M., "Philippine Rice Policy Reconsidered in Terms of Urban Bias," IEDR Discussion Paper 72-8, School of Economics, 1972. Medalla, Eo and J. Power, _'Estimating Implicit Tariffs and Nominal Rates of Protection", in Bautista_ Ro and Power J_ Industrial Promotion Policies in the Philippines, Philippine Institute for Development Studies, 1979. Moya, P. and Others, "Cost of Different Types of Irrigation System Central Luzon", Paper No. 80-10, Department of Agricultural Economics, International Rice Research Institute, Los Ba_os, Philippines, June 1980. Tan, N., "The Structure of Protection and Resource Flows in Bautista, R. and Power, Jo Industrial Promotion Philippines,

Philippine

Institute

for Development

in

in the Philippines", Policies in the

Studies,

1979.

Credit and Price Policies in the Philippine Agriculture  

STAFF PAPERSERIES NO. 82°2 CREDIT AND PRICE POLICIES IN PHILIPPINE AGRICULTURE MAY 1982

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