Report No. 6819-PH

PhilippinesAgricultural Sector Strategy Review(In Two Volumes) Volumne II: Annexes 1 13October 21, 1987

Asia Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This report lies a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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ABBRSVIATIO-NS AND ACRONYMS

ADB - Asian Development BankAFT - Agricultural and Food TechnicianALRP - Accelerated Land Reform ProgramAPST - Agricultural Policy and Strategy Team, authors of the Agenda

for Action for the Philippine Rural SectorAR(' - Agricultural Research OfficeASSP - Agricultural Support Services ProjectATI - Agricultural Training InstituteBACOD - Bureau of Agricultural Cooperatives DevelopmentBAEcon - Bureau of Agricultural EconomicsBAR - Bureau of Agricultural ResearchBFD - Bureau of Forest DevelopmentBPI - Bureau of Plant IndustryBPP - Barangau Pilot ProductionBS - Bureau of SoilsBSW - Bureau of Soils and Water ManagementCALF - Consolidated Agricultural Loan FundCB - Central BankCEDP - Community Employment Development ProgramCIS - Communal Irrigation SystemCLSU - Central Luzon State UniveraityCGIAR - Consultative Group on International Agricultural ResearchDA - Department of AgricultureDAR - Department of Agrarian ReformDBM - Department of Budget and ManagementDBP - Development Bank of the PhilippinesDENR - Department of Environmental and Natural ResourcesDOST - Department of Science and TechnologyDPWH - Depertment of Public Works and HighwaysDTI - Department of Trade and IndustryEC - European CommissionEDS - Extension Delivery SystemFAO - Food and Agriculture OrganizationFNRI - Food and Nutrition Research InstituteFPA - Fertilizer and Pesticide AuthorityFRG - Federal Republic of GermanyFSDC - Farm Systems Development CorporationFSSRI - Farm Systems and Soil Resources InstituteFY - Fiscal YearGDP - Gross Domestic ProductCIA - Grant-in-aidGNP - Gross National ProductGVA - Gross Value AddedHYV - High-Yielding VarietiesIA - Irrigation AssociationIADP - Integrated Area Development ProjectIFPRI - International Food Policy Research InstituteIOSP - Irrigation Operation Support ProjectIRR - Internal Rate of ReturnIRRI - International Rice Research Institute

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ISF - Irrigation Service FeeISNAR - International Services for National Agricultiral ResearchLBP - Land Bank of the PhilippinesMAO - Municipal Agricultural OfficerWACIAD - National Council on Integrated Area DevelopmentNAFC - National Agricultural and Fisheries CouncilNAPHIRE - NationLal Post Harvest Institute for Research and ExtensionNASUTRA - National Sugar Trading ComamissionNCIP - National Coconut Intercropping ProgramNDC - National Development CompanyNEDA - National and Economic Development AuthorityNEP - National Extension ProjectNFA - National Food AuthorityNGO - Non-Governmental OrganizationNIA - National Irrigation AuthorityNIS - National Irrigation SystemNPC - National Power CorporationNRDP - National Research ari- Development ProgramNRO - NEDA Regional OfficeNSTA - National Science and Technology AuthorityOLT - Operation Land TransferO&M - Operations and MaintenanceOP - Open-PollinatedPAO - Provincial Agricultural OfficerPAID - Private Agricultural Investment for DevelopmentPCA - Philippine Coconut AuthorityPCAMRD - Philippine Council for Aquatic and Marine Research and

Development (established March 1987)PCARRD - Philippine Council for Agriculture, Forestry and Natural

Resources Research and Deve'Lopment (previously PhilippineCouncil on Agriculture and Resources Research andDevelopment)

PCGG - Presidential Commission on Good GovernmentPD - Presidential DecreePDB - Private Development BankPHILPHOS - Philippine Pho3phatic Fertilizer CorporationPHILSUCOM - Philippine Sugar CommissionPHILSUMA - Philippine Sugar Marketing AuthorityPIP - Public Investment ProgramPIS - Pump Irrigation SystemsPNB - Philippine National BankPNOC - Philippine National Oil CompanyPTA - Philippine Tobacco AuthorityPVTA - Philippine Virginia Tobacco AuthorityPTVT - Provincial Technology Verification TeamRB - Rural BankRBRRC - Rural Banking Rehabilitation Review CommitteeRDC - Regional Development CouncilR&D - Research and DevelopmentR&E - Research and ExtensionRIARS - Regional Integrated Agricultural Research StationsSCU - State Colleges and UJniversities

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SMS - Subject Matter SpecialistSRA - Sugar Regulatory AdministrationTA - Technical AssistanceTBAC - Technical Board for Agricultural CreditTG - Technology GenerationTOR - Terms of ReferenceT&V - Training and Visit system of extensionTV - Technical VerificationUCPB - United Coconut Planters BankUMDP - United Nations Development ProgramUNICOM - United Coconut Oil MillsUPLB - University of the Philippines at Los BanosUS - United StatesUSAID - United States Agency for International DevelopmentUSM - University of Southern MindanaoVISCA - Viscaya's State College of Agriculture

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

VOLUME 2: ANNEXES

T&ble of Contents

Page No,

ANNEX 1 Trends in Agricultural Employment, Incomes and Poverty... 1

ANNEX 2 Non-Bank Evaluations of the Sector......................o 12

ANNEX 3 Coconuts ................ 22

ANNEX 4 Sugar...................... . .0

ANNEX 5 Grains Pricing Policy Including a Suggested NewApproach to Protection.,... 0o,....o.................. 34

ANNEX 6 Irrigation..... ...................................... 49

ANNEX 7 Rural Credit ................ 77

ANNEX 8 Fertilizer ........................................ ..... 86

ANNEX 9 Research and Extension... . ........... ... .so 90

ANNEX 10 Sector Institutions... ..... ... .. 115

ANNEX 11 Public Expenditures in Agriculture...................... 120

ANNEX 12 Policy Changes 1984-87 ......... 0....,. .@*@00*0*@00@ 140

ANNEX 13 Statistical Tables ..... .. *,O ***....... 143

ANNEX 1Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

TRENDS IN AGRICULTURAL EMPLOYMENT, INCOMES AND POVERTY

Employment and Incomes

1. Between 1970 and 1986 the Philippine population grew from 37 millionpeople to 56 million, an average increase of 2.5% p.a. During the same peri-od, total employment grew from just under 11 million to just over 20 million,an average increase of 4.4% p.a. Total agricultural employment increased from5.6 million to 10.1 million, an 80% rise that works )ut to an annual growth of4% p.a. In 1970, total agricultural employment (i.e. including fisheries andforestry) provided just over 50% of national employment; by 1985 agriculture'sshare of total employment had fallen to a little less than 50% of the total.What these figures imply is that agriculture was providing nearly half of allnew employment in the economy--approximately eight times as many jobs asmanufacturing and two and half as many as either commerce or "other services",the three next-largest sectors.

2. In a vigorously growing economy one would not expect agriculturalemployment to be growing nearly 50% faster than population and nearly as fastas total emplcyment. Non-agricultural growth wouid be draining off peoplefrom agriculture. The fact that this has not happened over the past decadeand a half reflects the general weakness in the economy, forcing more peopleto remain in agriculture than would have done so had employment expanded vigo-rously in other sectors. With the value of total sector output groting at3.9% over this period (1970-86), simple arithmetic (employment growing fasterthan income) tells us that average agricultural incomes had to fall. Figureson poverty trends and on real agricultural wages confirm the picture offalling average incomes. Government figures show a fall in the real wages ofdaily laborers of 11% in sugarcane, 15% in palay, and 19% in corn between1970-82; only in coconuts was there a marginal increase (1%). Since 1982, thedownward trend of wages has, if anything, accelerated. The implication ofthese income trends for rural poverty is explored in the paragraphs thatfollow.

Rural Poverty

3. The measurement of poverty in the ?hilippines, the identification ofpoverty groups, and the foundation of policies and programs to alleviate po-verty are all handicapped by data problems. Measures of absolute and relativepoverty in the Philippines are based on household surveys that are thought to

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Page 2

be not wholly reliable or comparable over time. A more serious problem isthat there is no agreed definition of poverty nor of the methodology for mea-suring it. Thus estimates of the extent of poverty vary considerably,depending upon the analyst's concept. For example, estimates of the povertyline in 1971 vary from a low of P 360 per capita to as much as P 1l102. Eventhe two Bank reports on the subject use different methodologies.-

4. For the purposes of this report, we use the definition of thepoverty line used by the 1985 Bank report. It set the poverty line at P 7,363for the average rural family and P 10,584 for the average urban family.According to this definition, these amounts of purchasing power were justenough to provide the needed food and nonfood items. The threshold of extremepoverty was defined as the income level which provides necessary caloriesonly, equal to 16 kg of rice per head per month.

5. Despite deficiencies in data, there is broad agreement on thefollowing basic conclusions:

(a) poverty in rural areas is a problem that needs to be addressedurgently;

(b) the uncertain prospects for the Philippine economy in general andfor agriculture in particular will further blunt the impact of agrowth-oriented strategy for poverty alleviation;

(c) many specific poverty-oriented programs have been largelyineffective, either because of faulty design or lack of politicalcommitment; and

(d) there is therefore a need for a much more systematic and determinedstrategy for attacking poverty.

1/ The first Bank report on Poverty, Aspects of Poverty in thePhilippines: A Review and Assessment was prepared at the request of theConsultative Group and issued in December, 1980. It was the firstsystematic attempt by the Bank in the Philippines to measure the extentof poverty, to assess trends in poverty and income distribution and toanialyze the causes of poverty. It also analyzes the policy issues facingthe government in trying to alleviate poverty. The second report, ThePhilippines: Recent Trends in Poverty, Employment and Wages, issued inJune, 1985, was muchi narrower in scope. It analyzed the trends inpoverty, income distribution, employment, and wages, critically reviewedthe data on which the estimates were based, and offered detailed recom-mendations for improving the data base. Unlike the 1980 report, however,it did not analyze either the causes of poverty or the strategic optionsopen to the Government in reducing poverty or income inequality in thefuture.

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6. This Annex draws on available studies to briefly indicate the mag-nitude of the problem, identify the poor, and assess the causes of poverty.It then reviews past poverty programs and some of the current proposals forfuture action. In so doing, it suggests a possible conceptual framework forformulating a strategy for alleviating rural poverty.

Scale of the Problem

7. While data problems seem to preclude accurate measurement, thegeneral dimensions of the poverty problem are fairly clear:

(a) The incidence of poverty in the Philippines is relatively high for amiddle income country. Using the 1985 Bank report's definition ofpoverty, some 40% of families in the country felt below the pove:tyline in 1983, of which about a fifth were in extreme poverty.

(b) The distribution of income is highly inequitable. In 1983, thebottom 20% of families received 3% of total income and the bottom40% less than 10%. The top 20% received over 58% of total income.

(c) Poverty is heavily concentrated in rural areas and in agriculture.According to the 1985 Bank report, the incidercc of poverty in ruralareas was 45% in 1983 (compared with 26% in urban areas), of whichone third was extreme poverty. Over 80% of the poorest (lowest 30%)Philippine families were in agriculture, where a high incidence (50-60%) of poverty occurs among families primarily dependent on corn,coconut and sugar cane, among small-scale fishermen, and among agri-cultural laborers (see paras. 10-12 below).

(d) The incidence of poverty varies significantly across regions. In1983 the highest rates (about 50%) were found in Western and CentralVisayas where over half of the nation's sugar industry is concen-trated. Extensive poverty was also often found in inaccessible,resource-poor areas. Relatively high rates of poverty incidence(around 40%) were also observed in Ilocos, Cagayan Valley, Bicol,Western and Northern Mindanao. The most favored areas, CentralLuzon, Southern Tagalog, Southern Mindanao and Central Mindanao, hadrates around 20%.

8. The extent of poverty in the Philippines is also reflected in thenutritional level of the people. The Second Nationwide Nutrition Surveyundertaken in 1982 showed that about one third of Filipino households hadinadequate energy intake levels (less than 80% of recommended daily levels).Adequacy levels were closely correlated with household incomes and theeducational level of the meal planner, and negatively correlated with size ofhousehold. Nutritional deficiencies showed up particilarly among high-risk,pre-school children: about 10% of children aged 0-6 years were found to besuffering from either chronic or acute miialnutrition. The 1982 survey resultsshowed significant gains over the first survey undertaken in 1978. Never-theless, it is clear that major nutritional problems remain.

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9. In certain important respects, the poverty and income distributionsituation seems to be getting worse, rather than better:

(a) the total number of poor families increased during the period 1971-83, despite an 80% real increase in GDP;

(b) the incidence of poverty, after falling for many years, has probablyrisen again since the economic crisis of 1984 and 1985, when averageper capita income fell by about 15% in real terms;

(c) income distribution has become more inequitable since 1971; theshare of income going to the lowest 40% of families fll from 12% in1971 to less than 10% in 1983, while the share going to the top 20Xincreased from 53% to 59%;

(d) average family incomes have increased more than twice as fast inurban areas than in rural areas since 1975, resulting in a furtherwidening of rural/urban income differentials;

(e) agricultural incomes have fallen further behind incomes in othersectors, primarily due to poorer terms of trade for agriculture; and

(f) while no data are readily available, it is probable that malnutri-tion has increased since 1978, particularly since per capita incomefell.

Who are the Poor?

10. This report is concerned with the rural poor only. In 1983 therewere estimated to be some 2.8 million rural families living in poverty. Mostcf them depended on agriculture for their primary source of income:

Farming 31%Farm labor 16%Fishing/livestock/forestry 11%

58%

But a surprising proportion of the rural poor were dependent mainly on non-agricultural sources of income:

"Dividends, rents, pensions" 20%Non-agricultural labor 14%Wholesale/retail trade 3%Other 5%

42%

Thus it is clear that (i) the problem _f rural poverty is not confined toagriculture and (ii) that agriculture alone cannot be expected to solve ruralpoverty (let alone national poverty).

ANNEX 1Page 5

11. A systematic classification of the major poverty groups might be auseful first step towards identifying more specific poverty prigrams. The1980 Bank report identified six particular groups of poor families inagriculture:

(a) Rice/corn farmers, estimated to be the largest single group in theagricultural sector.

(b) Rice/corn farm laborers, who were t;.ought to be the poorest singlegroup.

(c) Small coconut farmers and laborers (over 50Z of whom are poor).

(d) Small sug&r farmers and laborers (poverty rate high, especiallyamong the landless labor).

(e) Farmers in upland/remote/marginal areas (estimated at about 1 mil-lion farm families).

(f) Coastal ("municipal") fishermen and their laborers.

12. This chapter continues to use this typology for convenience . How-ever, a more detailed breakdown of poverty groups would be required as a firststep in formulating a systematic poverty alleviation strategy. In particular,it would seem desirable to recognize that:

(a) There are important differences within the majot poverty groups.(For example, within the rice/corn farm group, it would be useful todistinguish betrfeen irrigated farms, rainfed farms in lowland areas,and upland areas).

(b) Many poor families will fall into more than one category (forexample, a rice/corn farmer may also grow coconuts or be employed asa parttime laborer.) It would be useful to know more about therange of economic activities available to poor families.

(c) It would be desirable to identify other distinct farm labor categor-ies (not just rice/corn labozers), since their problems and needsare different. In particular, it would be desirable to distinguishbetween landless laborers and laborers who also farm (i.e. small-holders or tenants with off-farm labor income).

(d) More information is needed about families in upland areas; thesewould appear to be both the largest poverty group (estimates go ashigh as 3 million families) and the most vulnerable.

Why Are They Poor?

13. A strategy for poverty alleviation needs to attack the basic causesof poverty. For those families who depend upon agriculture for their mainincome, there seem to be five main determinants of poverty:

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(a) Limited Access to Resources. The most important resource is land.The primary reason agricultural households are poor is because theyoperate very small farms, or have no land at all. Accori,ing to the1980 Agricultural Census, 50% of farms were less than 2 ha in size,and 23% were less than 1 ha. The gross inequality in access to landis shown by the fact that the 50% smallest farmers cultivated only16% of the land. At the other end of the scale, the 3% of farmerswith holdings in excess of 10 ha cultivated 26% of the land. Someexamples of the proble. of small size within major poverty groupsinclude:

(i) 50% of rice/corn farmers have holdings of 1-3 ha and 15% haveless than 1 ha. Depending upon their access to irrigationand technology, many of these farms would be too small toprovide an acceptable income level;

tii) 50% of coconut holdings are less than 1 ha; and

(iii) 60% of sugar holdings are less than 5 ha, and account foronly 12% of total area.

However, the poor also typically have poor access to the otherresources that might intensify their land use (such as credit orextension) or that might impr.ve their quality of life (such ashealth and other public services).

(b) Low Productivity. High-Yielding Varieties (HYVi technology has donemuch to increase incomes on many farms, mainly in irrigated rice-growing but also in bette:-endowed rainfed areas. Nevertheless,yields of all major crops are still low, compared with othercountries, and (in the case of rice, coconuts and sugar) comparedwith technology available in the Philippines. Poverty is doublylikely when low productivity is combined with sub-marginal landholdings.

(c) Depressed Prices. During the 1975-82 period, the internal terms oftrade for agriculture declined by sume 30%, offsetting much of thegain from the adoption of improved technology. This was largely dueto a set of prize controls, tariffs and taxes that discriminatedagainst agriculture in favor of manufacturing (and the consumer).Externally, net terms of trade fell by nearly 60% between 1974 and1985.

(d) Lack of Employment Opportunities. Non-agricultural employmentexpanded faster than agriculture in the period 1970-85 mainly due tothe growth of the service sector. Nevertheless, agriculture stillaccounted for some 60% of new employment during this time, manybeing absorbed as unpaid family workers, Nationally, the number ofunemployed increased more than threefold between 1970 and the cnd of1985.

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(e) Catastrophic weather and/or pest attacks. The poor family is likelyto be particularly vulnerable to periodic catastrophies--to theextent of possibly losing their land or jobs and being pushedfurther into poverty.

Past Poverty Programs

14. Overall Assessment. In its 1985 review of government policiesaffecting low-income families in agriculture, the National and EconomicDevelopment Authority (NEDA) differentiated betwee. (i) the indirect impact ofmacroeconomic policies/programs on the poor, (ii) specific agricultural/ruraldevelopment programs, and (iii) policies and programs specifically targeted atthe poor. There is general consensus (Bank, NEDA, APST Report) that the pastmacroeconomic policy framework, far from helping to alleviate poverty, had agenerally negative impact on the rural poor.

15. In reviewing specific agricultural/rural development programs, theAPST report identifies three types of programs:

(a) The old community development approach of the 1950s and 1960s, nowgenerally discredited.

(b) The single-commodity approach which, being primarily production-oriented, was not well focussed on poverty target groups (and inNEDA's judgment excessively "top-down" in approach).

(c) Integrated area development programs which, while located in poorareas, did not qualify as poverty programs since they did not"deliberately target the poor communities as program beneficiaries."

16. One of the best reviews of past programs for alleviating poverty isby Rahman Sobhan, Chairman of the Bangladesh Institute of Development Studies,who was retained by the Food and Agriculture Organization (FAO) to reviewrural poverty in the Philippines.21 He concludes that, despite declaredobjectives of combining growth with equity, the emphasis of previousgovernment development plans has been on promoting economic growth throughindustrialization, exports, and agricultural development. Successive plansall declared war on poverty. But while they identified specific targets forincreasing esmloyment, incomes and services, "there was no clear conceptual orprogrammic linkage between the goals of attacking mass poverty and theinvestments and programs" within the plans.

17. According to Sobhan, there was an "implicit assumption that targetgroupa of the poor can be reached through the development process withouthaving to redistribute wealth or access to resources." The main thrust of the1983-87 Plan, for example, was to "equate poverty alleviation with theincrease in employment opportunities and to in turn relate this to the accele-

2/ Rural Poverty and Agrarian Reform in the Philippines, FAO (undated, circa1983).

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ration of development expenditure." There was an implicit assumption thatincreased production would absorb labor and that iypropriate technologies andincentives would be available for this to happen.-.

18. More precise attempts to target the poor were made through invest-ment programs in backward areas, targeted at marginal groups in fishing,forestry or upland agriculture. Again, it was assumed that such programswould stimulate employment and incomes for the poor, although there was nomechanism to ensuire that they would reach their target beneficiaries. Sobhanconcludes that such broad spectrum programs (including social services) failedto reduce poverty because they had no built-in components to identify andreach the poorest groups and to ensure that resources were allocated in favorof the poor (and not the privileged groups).

19. Agrarian Reform. The agrarian reform programs, particularly since1972, were among the more precisely targeted poverty programs. While it isnot certain how reliable the data are, the programs seem to have been modera-tely successful, in terms of their original (limited) objectives. There is nodoubt that these agrarian reform programs, in spite of the delays in theirexecution, have increased the incomes of a substantial group of poorfamilies. They are also probably the most successful and visible program fortackling social inequity in the Philippines. Yet as anti-poverty programs theagrarian reforms have some major defects:

(a) First is the limited scope of past programs. Rice/corn tenant farmsaccount for only about 40% of farmers or 15% of the total agricul-tural labor force. The program did nothing for other major povertygroups, such as the landless or tenants in crops other than rice orcorn. Nor did it recognize the needs of the subtenants who wereexcluded from the program.

(b) Second, the program redistributed but did not necessarily increaserural incomes. In principle, if not always in practice, the lease-hold program, for example, reduces the landlord's share by half anddistributes it to the tenant. Although it may be too early tojudge, there seems to be no evidence so far that total production,income or employment has increased in areas where land reform hasbeen in process. (On the contrary, there is some evidence that, atleast in the short term, production may suffer when the new owner iscut off from the services previously supplied by the landlord thatpublic sector institutions cannot immediately make up for.)

(c) Third, it appears that the ongoing agrarian reform program cannot byitself overcome the poverty of even those tenant farms it reaches,never mind the majority of rural poor it cannot reach. It issuggested that limited access to land, rather than land tenure, isthe primary cause of poverty (see para. 13 above). But the major

3/ But it did not materialize because of capital-intensive investments anddistorted incentives.

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land reform programs of the past have not given more land to thepoor; most of the farmers are still dependent on very smallholdings. Nor have the programs tackled another major cause ofpoverty--low productivity* Yet without such programs, many holdingsare too small to be viable, whatever the legal status of thecultivator.

20. The Government has proposed a program to accelerate theimplementation of the existing agrarian reform program and to extend it to amuch larger area of land. This ambitious program seeks to address most of thecriticism of the previous programs cited above. In particular, it proposesto:

(a) greatly accelerate the rate of implementation in rice/corn areas;

(b) extend the land reform programs to other areas, most notably thoseunder sugar and coconut;

(c) make available various categories of land that are expropriatableunder existing law;

(d) legitimize the de facto occupation of large areas of public land;and

(es provide follow-up services, particularly extension and credit, tonew owners or settlers to help them make good use of their land.

21. This program has been reviewed by a recent Bank mission, which madeimportant recommendations for accelerating and improving the program and forreducing its cost.-' Many details of the program have still to be worked out,and it is not yet clear what the impact on rural poverty will be. In theshort-term, there will be an immediate increase in production and incomes tothe extent that presently unused land is brought back under cultivation. Onthe other hand, where land already under cultivatiorn is being transferred totenant or labor ownership, there may well be a fall in production. In thecase of large scale commercial operations, there could be a significantdisruption, and in Volume I it is suggested that this risk be carefullystudied (see Appendix 1 to Volume 1). In the long run, we expect the programto have a very dynamic effect in increasing production and income and inbringing about a more equitable distribution of incomes.

22. However, as the recent Bank report pointed out, even an acceleratedland reform program will not by itself solve rural poverty. It is to be hopedthat the strong political appeal and large financial cost of the program willnot therefore obscure the need for a wider and more integrated approach torural poverty alleviation.

4/ See Agrarian Reform Issues in the Philippines: an Assessment of theProposal for an Accelerated Land Reform Program, Report No. 6776-PH,May 12, 1987.

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Page 10

What Can Be Done?

23. The limited progress made in the past in eradicating poverty is atleast partly explained by the poor policies and doubtful commitment to reformof previous political regimes. The new administration has given a high prior-ity to poverty alleviation in its official statements, and has already shownitself willing to take forceful actions--as for instance in correcting pricedistortions and liberalizing fertilizer importation and distribution. How-ever, while the new administration has been quick to point out the deficien-cies of previous policies and programs, it has still to formulate a coherentstrategW,for eradicating poverty or to determine how to proceed on landreform.-

24. There is clearly uto single, simple solution to poverty in thePhilippines. Since poverty is heavily concentrated in agriculture, a largeburden of responsibility falls on agricultural development strategy, policiesand programs to seek out and help the poor. Much of the general strategy foraccelerated agricultural growth outlined in Volume I, while aimed at the wholesector, also contains key elements of any anti-poverty strategy. Theseprograms include most major agriculture services, such as research, extension,credit, irrigation and rural infrastructure, including those specificallytargeted at agrarian reform areas.

25. But a sharper focus on poverty will be required in the future, sinceit cannot be assumed that a general growth-oriented strategy will necessarilyreach the poor. There are two additional approaches that might be followed:

(a) Volume I suggests that if development programs are to have a greaterimpact on the poor, then poverty impact should be a major, andperhaps paramount, criterion of program design. If this principlewere applied to agriculture, it would mean that every developmentprogram should be reviewed for its poverty impact and, wherenecessary, redesigned to more effectively reach and benefit thepoor. Some of the more obvious questions that might be asked are:

5/ The new Government's Draft Development Plan, 1987-92, makes poverty-reduction a major objective, with rural poverty to be reduced from 64% ofall rural families today to 47% by 1992 (56% fell below the poverty linein 1971). The main instrument for combatting poverty, apart from landreform, appears to be vigurous growth of the agriculture sector. Overallgrowth of GDP is targeted at 6.3%, with agriculture to grow at 5.0%,industry at 7.0%, and services at 6.4%. Apart from questions about theeffectiveness of a high-growth 3trategy for attacking poverty, thereseems a basic inconsistency in the plan's 5.0% growth target foragriculture since none of the major subsectors is targeted to grow fasterthan 3.9% (crop production 3.9%, livestock and poultry 1.9%, and fishproduction 3.4%).

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(i) In research: Is there sufficient emphasis on croppingsystems to improve poor families' incomes, health andnutrition? Can poor farmers afford recommended inputs, andif not, is there enough work being done to develop low-costtechnology? Does the scientific community have an appro-priate technology for each identified poverty target groupor is working to develop one? Do recommended practices giveenough emphasis to labor-intensive technology?

(ii) In Extension: Are the extension services reaching the poorand disadvantaged families, including those in remote areas,sub-marginal holdings, women? Is the advice being offeredrelevant to the poor? How can the extension service betterreach the poor (particularly when the extension workers lacktransport)?

(iii) In Irrigation: The provision of (subsidized) water hasgreat potential for raisiTtg farm incomes; is this being usedto narrow income differentials, or do the better-off farmersbenefit most? Can the irrigation design/water managementsystem be skewed to give a large share of available water tosmall farmers? Are irrigation service fees appropriate froma poverty point of view? What is the potential for low-costindividual water systems to increase productivity on smallholdings (see Appendix 1 to Volume 1).

(iv) In Inputs and Credit: Do poor farmers have ready access tothe modern inputs they need to increase productivity andincomes? If not, why not, and what needs to be done toensure they do? (see Appendix 1 to Volume 1).

(b) In addition, agricultural policy makers could draw up comprehensiveprograms for reaching specific poverty target groups such assmallholders in coconut areas (primarily through extension ofintercropping), upland farmers in specific locations, or municipalfisherman.

26. It must be recognized, however, that neither agrarian reform noragricultural programs, by themselves, can overcome rural poverty. A majortheme of this report is therefore the need for development in ocher sectors ofthe economy to take up the slack, and in particular to draw off a largeproportion of the expanding labor force from the land. This subject isdiscussed at some length in Volume I.

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Non-Bank Evaluations of the Sector

1. People interested in the sector have an unusually large number ofrecent studies on which to draw in addition to the Bank's own work. Thosedone by the Bank are not summarized but are listed in Annex 9; this annexsummarizes five non-Bank studies completed in 1985-87. The studies coveredare the following:

(a) Afenda for Action for the Philippine Rural Sector, prepared by a 20-member Agricultural Policy and Strategy Team drawn from theUniversity of the Philippines at Los Banos and the PhilippineInstitute for Development Studies. Six chapters (volumes) plus fourannexes (October 1986).

(b) Price and Investment Policies for Food Crop Sector Growth in thePhilippines, by M. Rosegrant, L. Gonzales, H. Bouis, and J. Sison ofthe International Food Policy Research Institute of Washington, D.C.(one volume, January 1987).

(c) Agricultural Cooperation with the Philippines, by Joseph Ertl, UweOtzen, and Richard Peters (Federal Republic of Germany). One volume(September 1986).

(d) Private Sector Opportunity Assessment (Agricultural Sector): AnOverview of the Philippines and Its Agricultural Sector, AYCConsultants, Inc. (three volumes, November/December 1985).

(e) Crop Diversification in Rice-Based Agricultural Economies:Conceptual and Policy Issues, by Prof. C. Peter Timmer (draft,December 1, 1986, 65 pp.).

The Agricultural Policy and Strategy Team (APST) Report

2. This Agenda for Action is probably the best single document for acomprehensive introduction to the sector. It was prepared at Governmentrequest by a 20-member team lead by Dr. Cristina David and composed of 16professors mainly from the University of the Philippines at Los Banos (UPLB)plus four other experts. The study is impressive not only for its analysesand specific policy recommendations but equally for the richness of thehistorical, institutional, and statistical information which it provides.Each chapter also includes a bibliography.

3. The report's six chapters are entitled "An Agenda for PolicyReform", "Addressing Rural Poverty", "Traditional Food Sectors", "AgriculturalExports", "Rural Credit, Agricultural Inputs and Services", and "Research,Extension and the Delivery of Government Services to Agriculture." The four

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(relatively short) annexes deal with (i) the National Agricultural InvestmentCompany and the Agricultural Incentives Act of 1986, (ii) the case for removalof export taxes on agricultural products, (iii) rural organizations (mainlynon-governmental organizations, NGOs), and (iv) alternative procurement andrelease prices for rice and their impact on the operations of the NationalFood Authority (NFA).

4. The rural poverty chapter assembles much good data, although thedata-bases for both poverty-mapping and land reform appear relatively weak.The prescriptive advice on how the Government should pursue anti-poverty goalssuggests that much further work remains to be done before good intentions areconverted into implementable programs. Similarly, the land reform objectivesare not spelled out very clearly. The chapter on traditional food sectorscovers rice, corn, livestock and animal feeds, fisheries, and upland agricul-ture (including forestry). The coverage of rice, fisheries, and uplandagriculture is particularly good (despite weakness in the recommendations for.,le). The coverage of corn is better on white corn (used for human consump-

thp, on yellow corn (used for animal feed). The livestock/feedstuffsK iai weak. Not surprisingly, the chapter is stronger at problem-idet ifil. lon than on policy advice and program recommendations (this is incont ~st to the IFPRI study summarized below). The chapter on agriculturalexpor4s focuses on coconuts, sugar, and nontraditional exports (conventionallydefined as individual exports totalling less than US$5 million in 1968). Thegeneral view of coconuts and sugar is that they are not "sunset industries"but can be brought back to viability with suitable reforms. The difficult butcrucial problem of the market outlook for coconut products is not handled withmuch depth; supply-side reforms are given more attention. Sugar will have tobecome smaller, be exposed to world markets, and undergo land reform. Thereport's coverage of nontraditional exports reflects a strong bias againsttransnational corporations and large-scale plantations and a belief that smallprivate farms and small-scale traders can provide the healthiest institutionalbasis for growth, with Government concentrating on the prcvision of infra-structure and information. Chapter V on credit, inputs, and services coverscredit, irrigation, pesticides, fertilizer, and postproduction systems forgrains and perishables. The latter section is particularly effective inhighlighting nontechnical factors that might improve quality and reduce waste(considerable emphasis is put on the development of quality premiums in theprice structure). The final chapter, on research, extension, and governmentservices, is especially usieful on institutional material; the section on theDepartment of Agriculture (DA) organization is less clear and convincing (themain thrust is to shift from the Ministry's present commodity organization toa functional organization).

5. The report's policy advice is divided into six longer-tei-m"principal thrusts" and a dozen "immediate steps" that the Government shouldtake. The longer-term policy imperatives are to:

(a) adopt an anti-poverty focus in rural areas;

(b) implement comprehensive land reform;

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(c) eliminate the bias against agriculture to induce growth andefficiency in the rural economy;

(d) strengthen support services to increase productivity, improve marketefficiency, and expand market size. (The key services are irriga-tion and infrastructure, credit, -iiput supplies, research, exten-sion, training, and post-harvest technology);

(e) protect lo:2g-term agricultural potential by strengtheningconservation policies; and

(f) increase the effectiveness of government agricultural institutionsand promote the participation of NGOs.

The "immediate steps' recommended are:

(a) launch a massiz'c rural infrastructure program;

(b) implement land reform immediately in the poorest areas;

(c) restore the availability of production credit by using monetarypolicy to bring interest rates down generally (but not selectivelyin favor of agriculture);

(d) continue the dismantling of government-supported monopolies;

(e) maintain the domestic prices of rice, corn, and sugar "close tolong-run world price levels;"

(f) abolish export taxes on all products except logs;

(g) remove the P 10 surcharge on fertilizer;

(h) relax the ban on interprovincial transport of carabaos and theslaughter of male carabaos;

ti) mobilize research and extension systems, with greater roles forregional state colleges and universities, NGOs, and farmers'organizations;

(j) reduce constraints on seed supplies, particularly for open-pollinated corn; and

(k) abolish the Agricultural Incentives Priorities Plan (which benefitsonly large agribusiness and promotes capital-intensive production).

6. In general, the APST report is strongly in favor of free enterpriseand market guided decision-making. The main exception is the need to maintainminimum prices (but close to estimated long-run world prices levels) for rice,corn, and sugar (at the time of report writing, world prices of thesecommodilies were 30-50% below their long-run trend levels).

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The 1987 IFPRI (International Food Policy Research Institute) Study

7. This simulation study investigates what changes would have to bemade in government price and investment policies and in national croppingpatterns, if the recent rate of agricultural growth (3.2%) is to rise to the4% level judged necessary for agriculture to play a lead role in economicrecovery and growth. It is an impressive study, not least because of theclarity with which its methodology and policy recommeniations are explained.The work was commissioned by ADB as part of a 15-country study; althoughprimarily a modelling exercise, the study draws heavily on empirical work donein a Phase I study which IFPRI did jointly with IRRI in 1983/84.

8. The study uses estimates of domestic resource costs (DRCs) of 29crops to establish whether or not the Philippines has a comparative advantagein each crop. Excluded from the study are coconuts and sugar. The country isfound to have enough of a comparative advantage in rice, corn, soybeans, andcottof so that it can compete iith imports at modera17 levels of protection,even at the low world prices of 1985 and early 1986.- But costs are not lowenough to permit competition in export markets for any of these crops. Of the19 other crops examined, only four showed good export potential: tobacco,garlic, onions, and abaca (all are current exports, although their volume issmall). Six additional crops show high farm-gate profitability at worldprices but lack export potential (string beans, sweet peas, tomatoes, water-melon, turnips, and pineapple). Achieving the target 4% growth rate willdepend on what happens in rice, corn, and livestock production, since thecombined weight of all other crops (including coconuts and sugar) is rela-tively small compared to the staple grains and livestock (which consists ofpork, poultry, and eggs--cattle are relatively unimportant). Consequently thestudy's main attention is on pricing and investment policy as they affect thethree key subsectors (rice, corn, and irrigation).

9. The following four quotations contain the study's majorrecommendations (Bank views are not fully in agreement with them):

(a) On irrigation: "The current irrigation program by the NationalIrrigation Authority (NIA) is inadequate to meet growth in domesticdemand. Substantial increases toward the level in the 1983 NIA planwould be appropriate. Increase in levels of investment should beconcentrated on new system construction, which in general providemore production for a given level of investment compared torehabilitation. Finally, results are supportive of an increasedemphasis on investment in low productivity regions. The resultsindicate that investments in these regions can improve regionalequity without reducing the impact on production growth."

1/ Because of a further drop in world market prices for corn and rice in thesecond half of 1986, high tariff protection wps required to maintaincompetitiveness with imports.

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(b) On protection: "The basic strategy for growth is to maintainmoderate protection of rice and corn in the short term, sharplyincrease investment in technology-enhancing projects and programs,and reduce price protection on a phased basis as productivityincreases. Reduced prices in turn boost domestic demand and realincomes, generating further incentives for agriculturalproduction. The key elements of the strategy are price policy,technology development policy, and irrigation investment policy."

(c) On technology priorities: "Rapid technological change is the key togenerating agricultural growth sufficient to induce price declinesadequate to boost consumption, while maintaining producer incentiveswith lowered cost per unit of output. A major effort must be madeto maintain long-run growth rates in rice yields, and to sharplyincrease the growth rate in corn yields."

(d) On corn productivitiy: "Generating increased productivity for cornis likely to be more difficult than for rice. The research,extension, and seed production and distribution systems for corn aremuch less developed than for rice. Improved varieties of corn coveronly about 10% of total corn area, compared to nearly 90% for modernvarieties of rice... Based on the results of the policy impactmodel, in order to reath about 4% annual growth in production, thearea devoted to improved varieties would need to reach 40-60% oftotal corn area harvested by 2000, depending on the balance betweenhybrids and improved yellow open-pollinated (OP) varieties. Thiseffort would require sharp increases in funding for research,extension, and seed production and distribution for corn. Researchon corn has been too low, with the percentage of total agriculturalresearch funds devoted to corn only about half the percentage ofcorn in gross agricultural value added. Funding of seed productionand distribution programs is even more inadequate. The current cornseed production and distribution system can meet only about 10% ofpotential demand for improved seed."

1986 Federal Republic of Germany (FRG) Study ofGerman/Philippine Agricultural Cooperation

10. This summary report provides an excellent overview of the sector'sproblems and potential. Despite favorable natural conditions and a well-developed research network, the sector is found to have three serious struc-tural weaknesses (skewed land distribution, a weak marketing system, and weakagricuitural services) plus a recent policy environment that has resulted in"skimming off" surpluses for the benefit of the industrial and urban sectors(this was done through marketing monopolies, product-specific levies, thetaxation of agricultural exports, price controls, export quotas, and an over-valued exchange rate). Yields are relatively low, the credit system has"virtually collapsed", and agricultural incomes have fallen since 1980 whilerural malnutrition has increased. But the sector does have the potential ofachieving a 4% growth rate, and can regain its function of being the No. 1employment-generator, if reforms are made in nine specific areas. The overallkey to reform is "liberalization" (greater reliance on market forces); the

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ANNEX 2Page 6

Aquino Government has already taken, or is preparing, a number of steps inthis direction (e.g., liberalization of agricultural imports, abolition oftaxes on agricultural exports except logs, and abolition of foreign trademonopolies in coconuts, sugar, maize, soya flour, wheat and rice).

11. The nine key areas where reforms are believed needed are thefollowing:

(a) Centralization of sector planning. There is a history of ill-defined, conflicting responsibilities among the multiple agenciesinvolved in decentralized sector planning.

(b) Agricultural pricing policy: The Central Bank's liberalization ofalmost all agricultural imports has met with resistance in thie MAPwhich wants to maintain protection and price supports for rice andcorn. Fertilizer prices are being forced down by removal of importrestrictions.

(c) Agrarian reform. The Marcos Government did not accomplish more thanhalf its first-phase 1972 program of distributing holdings of over25 ha. of rice and corn lands to tenants; very slow progress wasmade in the second-phase program of giving tenants on smallerproperties secure tenure arrangements. Nor was any seriousconsideration given to redistributing large holdings of land undersugar, coconuts, pineapple, or bananas.

(d) Agricultural credit. The virtual collapse of the formal creditsystem for agriculture has led to a rapid expansion of private orinformal money-lending (which now accounts for 60Z of outstandingcredit, with concentration among smallholders).

(e) Food processing and marketing. Raw material shortages have led tounderutilization of capacity. Poor storage capacity is partly toblame. Government favors expansion of contract farmingarrangements. Expansion of the presently weak co-ops could help.

(f) Training, Extension and Applied Research. Although the appliedresearch institutions are quite good, the tradition of product-specific extension workers is unsound. The pay and morale of the12,900 field agents are low, and their number too high. Governmentplans to shrink their nuw er through attrition and to raise theirpay from P 1,600 to about P 3,000 per month.

(f) Protection of Agricultural and Fisheries Resources. Timberresources have been rapidly depleted as the result of predatorypractices; "drastic legiolattion" is needed to end these. There isan obvious need for widespread reforestation. There has also beenmuch destructive fishing (e.g. the dynamiting of coral reefs).

(g) Sugar: structural reorganization. The distress in the sectorfollowing the price collapse of 1981/82 has led to reorganizationproposals from the World Bank (most are embodied in the Sugar

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Rehabilitation and Diversification Project, soon to be appraised),as well as a series of private and local-government proposals forNegros, the most seriously affected island. But those localproposals need the support of a national land reform program.

(h) Coconut reorganization. Over one-quarter of the country's croppedarea is under coconuts, which have typically contributed 17-20% oftotal export earnings. Until recently, coconut export earningscovered 80-90% of the country's debt service requirements. Thepresent depressed state of the industry, plus the change inGovernment, has stimulated proposals for recovery. Increasingproductivity and much wider adoption of intercropping appearessential. But there is a question about how large a replantingprogram would be wise.

12. The last third of the report assesses the prospects for German/Philippine cooperation in the sector, with emphasis on the market prospectsfor Philippine exports to the FRG and the European Community (EC). Theoutlook for sugar and coconut oil/cake/meal is unfavorable; the only hope (nota significant one) lies in the development of processed products. Tropicalfruits look more promising but the long distance to Europe makes dried fruits,and fruit juices, better prospects. Cashew nuts hold promise. Coffee,already fairly well established and with the export quota recently doubled,has good prospects, particularly if it can find a place in FRG imports.Cocoa, a fairly recent introduction, will have difficulty competing withlonger-established suppliers but may find a modest market in importsubstitution. With good growing conditions, the country's large net importsof pepper suggest an import-substitution opportunity; ginger might grow wellalso. Ramie, the textile fiber that does well in cotton and synthetic blends,can probably expand moderately. Tobacco can probably hold its present exportmarkets but cannot look forward to much expansion in world consumption.Carrageenane, an algae extract used as a jellying agent, will continue to dowell as a Philippine company is the market leader in Asia, the center of worlddemand. Timber and its products are likely to diminish in export volumebecause of falling supplies. The dairy industry deserves exploration as asubstitute for the present large dairy imports, but there will need to be muchattention to technical factors to establish economic feasibility. Meat andits delicatessen products deserve study, with special attention todecentralized abattoirs specializing in finished products. Feedstuffs "couldplay an increasingly important role, possibly even advancing to the exportstage..." Finally, fish and marine products are a subsector that has notsuffered much from the depression. The municipal (inshore) sector serves thedomestic market; the commercial (offshore) sector is already well organized--it is almost exclusively a tuna industry; the biggest potential probably liesin aquaculture for raising shrimp, prawns, mussels, and oysters. A big needis cheap fishfood (a potential product of the animal feed industry).

13. According to the study the most promising area for increasedFRG/Philippine cooperation may be FRG help in reviving agriculturalcooperatives. Only about 7,200 of the 17,179 registered co-ops are active andthere is a big need for the functions they could perform. "Entry points" fordirect private German investment are noted--"primarily in the processing and

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packaging of agricultural produce for export, refrigeration (refrigerationchain), the domestic and ex;ort marketing of marine products, and theproduction of feedstuffs (basic products and protein concentrates."Additional possibilities exist in ti,nber, meat processing, and the siloindustry.

The 1985 USAID-Sponsored Study by AYC Consultants, Inc.

14. This three-volume report is part of a larger multi-sector assessmentof investment opportunities in the private sector. The core of the report isa detailed assessment of the performance of 72 crops in each of the country's12 regions. "Performance" was assessed in terms of (i) past profitability,yields, and regional specialization, (ii) past and potential markets, bothdomestic and foreign, and (iii) linkage potential. The result is a weightedranking of the 72 crops with respect to future promise, both nationally and ineach region. The four existing major crops (rice, coconuts, sugar, and corn)did well, mainly because of their present size and consequent ability toaffect rural development. Of the remaining crops, 36 showed "strongpotential" in different regions; three of these are examined in some depth(corn, coffee, and cacao).

15, Establishment of a new Philippine company is proposed forchannelling US aid (and other funds) to the private agricultural sector. Thenew program/institution (PAID--Private Agricultural Investment for Develop-ment) might lend to entrepreneurs, take equity positions, or make directinvestments on its own account for eventual resale to private investors.Similar institutions are said to have been established in Jamaica, theDominican Republic, and Costa Rica.

16. The regional data assembled for the 72 crops are useful (especiallythose on corn) and the results of the rankings are su}gestive. But themethodology appears somewhat simplistic (especially the market analyses andagronomic assessments) and the results therefore unconvincing.

Prof. Timmer on: Low Commodity Prices and Diversification

17. The decline in what appear to be long-term prices of agriculturalcommodities has strengthened Bank interest in crop diversification. To helpit assess the possibilities and instruments for achieving greater diversi-fication, the Bank's Agriculture Department has commissioned a number ofconsultant studies. One that focuses specifically on Southeast Asia is apaper by Prof. C. Peter Timmer of Harvard, "Crop Diversification in Rice-BasedAgricultural Economies: Conceptual and Policy Issues" (draft, December 1,1986). The paper reviews experience with rice price policy in the leadingrice-growing countries of the region, including Japan. Timmer's general viewis that regional governments have acted sensibly in using rice price stabili-zation schemes to insulate farmers and consumers from the swings of worldprices, made volatile by the thinness of the international market. Thispolicy has succeeded in expanding domestic production of the staple cerealgrain, decreasing or eliminating the need for rice imports and releasingforeign exchange for other imports of higher development priority. Diversifi-cation was not much of an issue while countries were still net importers; the

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diversification issue has arisen only since self-sufficiency has been attainedand surpluses (actual or potential) have emerged.

18. Faced with this new situation, Timmer's advice is to continue withprice stabilization programs but to avoid 'i) setting floor prices too muchabove world prices or (ii) continuing such support too long. If support is"too high" or "too long" the strain on the budget will become intolerable.Thus price stabilization should be viewed as a short-run policy. For the longrun, diversification must be encouraged. Successful diversification is notlikely to result from government attempts to "pick winners" among possiblealternative crops, however. No one can know enough to pick winners. A muchsurer route to successful diversification is to think of the process as agradualistic adjustment to market forces. This means trial-and-error changesin cropping patterns by farmers kept under pressure by rice stabilizationprograms that provide only a minimal "safety net." The most effective helpgovernments can provide is to allow market signals to function and to providecost-reducing infrastructure improvements that will expand farmers' access tonew market opportunities. Timmer puts great emphasis on infrastructureimprovements (especially roads) and on strengthening research and extension,areas which are of special importance for the Philippir.es.

19. Prof. Timmer's analysis makes several points that are relevant toBank appraisal methodology and policy advice. Among the more important ofthese points are the following:

(a) It is impossible to forecast the future world price of rice with anyconfidence. Neither econometric models nor attempts to read trendsfrom past price data provide good enough guides to future prices tojustify using their results for project justification or policy-setting. The best one can do, he writes, is to use current marketprices.

(b) Tie expansion of off-farm income opportunities is the surest way tocompensate for low rice prices, He says little about how tostimulate such opportunities; the expansion of rural infrastructureprograms would certainly seem one way--perhaps the fastest, surestway.

(c) The concept of "comparative advantage is not a very useful conceptfor discussinig crop diversification." Timmer defines comparativeadvantage only "as it is traditionally used by economists"--aqualification that excludes some economists, who overwhelmingly usethe term as a synonym for competitive advantage.

(d) Although market forces are the surest guide to successfuldiversification, markets do not always work efficiently or fairly.Policy-makers need to understand more about how markets work and theroles and needs of private actors, including "disfranchisedelements" such as small farmers, the rural landless, and the urbanpoor. After warning against policies that reflect a "cozyrelationship between large corporations and a handful of governmentofficials", Timmer also suggests that much of the nationalistic

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rhetoric against multinational companies is unhelpful, since thosefirms can sometimes offer the easiest access to external markets.And without markets, he notes, there can be no diversification.

(e) As noted, Timmer gives his blessing to price stabilization pr^grams(at least for rice; he is silent on how many additional crops, ifany, he would also protect). He relies on pragmatism, not formaleconomic principles, to determine the level of support. The dominantconsideration is bound to be the potential drain on the budget. Toencourage diversificaiton, support prices should not deviate "toomuch from border prices for too long a time, where 'too much' and'too long' cain be determined only relative to budgetary flexibilityand the seriousness of any spillovers from zice price stabilizationto other commodities or other countries."

(f) Japanese experience carries lessons for other Asian countries.Until 1960. Japan's rice farmers were competitive with imports,which were permitted. After that date, the government decided tolink returns from rice farming to industrial wages; this was done bytanning imports and guaranteeing farmers a support price. Theformula used included the cost of land--a "mistake" that spilledover into the whole sector as higher rice prices made land morevaluable, which further pushed u? rice prices, etc. As riceproduction and prices both rose, consumers began to eat less riceand a rice surplus emerged. The surplus stocks could be exportedonly by subsidizing them; this was costly to the budget and toJapan's relations with other rice exporters. So the governmentturned to diversification from rice. Pork and poultry expandedsuccessfully, and without protection, so long as feed grains wereavailable at international prices (those quasi-industrial productsneed cheap feed more than they need land). But attempts to moveinto other products (e.g. wheat, soybeans, barley, hay) requiredlarge subsidies since these are land-based crops and land (builtinto the rice price formula) had become very expensive. While therice surplus fell, the budgetary burden from alternative cropsremained. To ease that burden the government promoted beef andoranges, using high protection to make consumers, not the budget,pay the high costs. Thus "the secondary effects of rice pricepolicy continued to haunt the cost structure of nearly all ofJapanese agriculture. Protecting rice farmers from foreigncompetition causes extensive spillovers into the competitiveness ofother crops." "Poorer countries", he warns, "cannot afford thebudget costs or the resource misallocations of the Japanesemodel." Timmer then cites, much more briefly, Thailand's successwith diversification, a market-produced result that has receivedrelatively little explicit policy support from the government,

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Coconuts

1. With some 3.27 million ha of coconuts in 1985 21 (about a third ofthe total farm land area), the country is the world's largest producer andexporter of coconut products. Although this accounts for over two-thirds ofcombined world exports of copra and coconut oil, it amounts to less than 5% ofthe world's fats and oil market. Because of the lower production costs inother countries of competing vegetable oils such as palm, soy bean andrapr.seed oil, the outlook for Se coconut sector is not promising. There isthus a distinct need for increat.lng the productivity of standing trees and forimproving crop area productivity through diversification and intensificationby intercropping with annuals and perennials.

2. Area and Yield.!' Between 1950 and 1970 the total coconut areadoubled from 905,000 to 1,884,000 ha, then increased to 2,200,000 ha in 1975and 3,126,000 ha in 1980, with little growth in the 1980-85 period. About 1/3of the trees were planted since 1975. It therefore appears that the oftenquoted area of senile trees (a third) may be overestimated. Production(yield) statistics are for a mix of copra, dessicated coconut, and fresh nutsand are therefore difficult to interpret. Based on these statistics there wasa significant yield increase between 1965 and 1980 from 956 kg/ha tol,462 kg/ha, but a decline to about 905 kg/ha in 1985. In the Landell Mills'Oils and Oilseeds report of March 1987, the 1985 copra yield was shown as 570kg/ha, indicating that about 60% of the yield will be in the form of copra.Declining yields in the last few years are due to low prices which induced adeteriorating crop management (almost no input use in even the most favorableyears) and indicate that substantial production increase is possible if itbecomes worthwhile for farmers.

3. Regional growth has been strongest in Mindanao, while the Luzoncoconut area has declined quite sharply since the late seventies as indicatedin Table 1l

1/ Area and yield statistics are from the 1986 Philippine StatisticalYearbook, issued by NEDA. The total-area of coconuts in that document isshown to be larger than that obtained by the Philippine Coconut Authority(PCA) from aerial photography, which indicates that the total area maynot exceed 2.8 million ha.

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Table 1: REGIONAL COCONUT AREA ('000 ha)

Region 1960 1978 1983

Luzon 589 747 298Visayas 398 407 527Mindanao 495 918 1,661

Source: Philippines Statistical Yearbook, various issues.

There are also regional differences in production per tree. In 1982 Mindanaopalms averaged 47 nuts/tree, while the rest of the country averaged only 34nuts/tree/year. Coconuts are a major crop in 64 of the country's 72 prov-inces, with greatest concentration in coastal areas. The number of holdingsand holding size distribution is provided in Table 2 for a total area of 2.8million ha.

Table 2: NUMBER AND SIZE DISTRIBUTION OF COCONUT FARMS

Under 5 ha 5-20 ha Over 20 ha Total

No. of holdings 653,380 (91%) 50,300 (7%) 14,300 (2%) 718,000Total area (ha) 915,600 (33%) 628,300 (22%) 1,256,100 (45%) 2,800,000

Source: Philippines Statistical Yearbook, various issues.

Over 90% of the holdings are thus below 5 ha and occupy a third of the coconutarea. Some 45% of the coconut area is held by 2% or 14,300 large owners, withan average of 87.8 ha/holding. The average farm size of 3.9 ha disguises askewed holding size distribution where farmers in the category under 5 haaverage only 1.4 ha/holding, in the 5-20 ha category the average is 12.5 ha,and the over 20 ha category averages a large 87.8 ha/holding.

4. It has been estimated that each farm provides, on average, incomefor about two families, divided between owners, resident workers/sharecroppers, and laborers. Most of the larger coconut farm owners havesubstantial off-farm incomes and do not live on the property. The corporatefarm area has been increasing and with it the number of hired laborers. Thetenurial status of the coconut subsector is complex as indicated in Table 3(from a comprehensive 1978/79 NEDA survey):

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ANNEX 3Page 3

Table 3: COCONUT FARM TENURE STATUS, 1978

AverageFarms Area area/farm(x) (Z) (ha)

Owned and operated 71.0 60.0 3.3Share tenanted (operator sharescrop with owner) 22.3 25.0 4.5

Partly owned (operator cultivatesboth owned and tenanted parcels) 4.2 5.0 4.4

Lease tenanted (operator pays fixedrent to the owner) 0.3 1.0 8.3

Managed (usually plantationssupervised by person other than owner) 0.8 6.0 29.0

Others 1.4 3.0 8.2

All farms 100.0 100.0 3.9

For many owners, coconut farming involves no more than arranging forharvesting by contract laborers, drying the copra and selling it. They employ"caretakers" who protect the crop from pilferage and may share in theharvest. Caretakers sometimes sharecrop non-coconut areas of a farm andannual crops interplanted between rows of coconut palms. It is probable thatthe percentage of share tenants and area under tenancy is higher thanindicated because both partly-owned and managed farms often have part of theirland under tenancy arrangements, and because many landowners, fearing thepossibility of land reform, refuse to recognize a tenancy relationship betweenthemselves and their workers. Thus the actual share of tenanted farms variesfrom 50:50 to 90:10 (in favor of the landlord). In some of the more isolatedareas a de facto land reform is in progress with the New People's Armyextorting "taxes" from tenants, although the owners, mostly living in thecities or overseas, retain official title.

5. The annual income of a coconut farm was P 7,640 (US$546) in 1983.Divided among two families this income was below the 1983 rural povertyline. Since 1983 copra prices have declined to a very low level in 1986, buthave somewhat increased since then. Early (1983) data indicated that some 57Zof coconut farming families fell below the poverty line, and this situationhas continued or even worsened. It is therefore extremely important toincrease the productivity and incomes in coconut areas. This is possible by(a) improving the nutritional standard of the trees by nitrogen and chlorideapplication as indicated by foliar analysis; (b) intercropping annuals,biennials (e.g. pineapple) or perennials (coffee, cocoa, black pepper, etc.);and (c) under grazing with sheep or goats. Farmers or share croppers usuallyare reluctant to fertilize their trees although there is experimental evidencethat it is possible to increase production and income. Therefore increasedproductivity and incomes can most likely be generated from intercropping which

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is possible due to the general wide spacing and a high leaf canopy for treesolder than 20 years. Presently nearly 20% of all coconut farms have bothannuals and perennials as intercrops, which indicates the possibility forexpanding the area of intercropping or "multistorey" cropping. Recentlyplanted hybrid semi-dwarf palm stands are generally not suitable forintercropping once shading becomes excessive.

6. The Governmer.t is already actively promoting intercropping andgrazing under coconuts which also leads to coconut yield increases (from soilaeration and fertilizer application). At present, there are two small creditschemes available:

(a) PCA's National Coconut Intercropping Program (NCIP) which reachedonly some 2,035 farmers (owners or tenant farmers with a writtenconsent of the landlord) in 1985. The loan amount is based onactual costs for establishing the intercrop (P 2,100 for mung bean,P 5,400 for hybrid corn, P 15,100 for black pepper and P 16,800 forcacao (over a 4-year period for perennials)). For 1986 some 7,000participants averaging about one ha per intercropped area wereanticipated (funds from PCA are available).

(b) The Countryside Economic Development Program, piloted in 1987 fororganized groups of farmers, with the participation of a trader andthe Coconut Development Officer. This program is jointly sponsoredby the United Coconut Planters Bank (UCPB) and PCA. Eligibility,range of crops, and loan amounts are similar to that under the PCAprogram.

7. Commercial plantations in Mindanao have introduced intercroppingalready on a significant scale, in particular cocoa and coffee. Attracted byhigh raw fiber prices in 1986, a large number of smaller farmers, in the mostevenly distributed rainfall areas of Mindanao, have recently introduced ramie,a good quality fiber intercrop (which may compete with palms, much the same asgrasses do, for nutrient uptake). There are substantial smallholder coconutareas in Cavite province (south of Manila) where successful intercropping andmultistorey cropping can be observed. This indicates that there is muchpotential for these practices if the market is available. DA's croppingsystem research on farms, and Farm Systems and Soil Resources Institute's(FSSRI's) work, together with research by other SCUs, has provided a base formaking crop and methodology recommendations with a considerable degree ofconfidence. Despite these ongoing efforts there remains a very large area ofunderutilized coconuts, where productivity and incomes could be greatlyincreased. However, one of the most potent reasons that this is not beingexploited is the tenancy problem. Large areas of coconut lands are owned byabsentee landlords and it is difficult to arrange formal cropping or sharearrangements. Moreover, due to the isolation of many coconut areas, it may bedifficult to arrange for substarlLial areas of intercropping there unless thepeace and order situation improves.

- 26 -ANNEX 3Page 5

8. Based on presently available credit schemes (para. 6) forintercropping (or under grazing), costs (excluding labor costs for cropmaintenance and harvests) and benefits are estimated as follows:

Table 4: INnICATIVE INTERCROP PRODUCTION COSTS AND BENEFITS

Available Annualcredit amount returnsfor crop es- Intercrop Producer before labortablishment yield price Annual costs forand immature at full early production crop mainte-maintenance production 1987 cost /a nance & harvest

(p) (kg/ha) (P/.g) (P/ha) (P/ha)

Cocoa 169800 750 25 6,000 12,750Coffee 11,800 600 30 4,500 13,500Black pepper 15,100 1,000 50 4,000 46,000Ramie 23,000/b 1,600 30 27,500/c 13,500Grazing 4,300 250/d 20 2,000 3,000Upland rice 2,600 1,400 3 2,860 1,340Mung bean 2,100 50 12 2,310 3,690

/a Inclusive of credit repayments.7i No credit scheme--actual establishment cost in Mindanao in 1986/87.Th Four harvests per year of 400 kg/ha brushed fiber.73 Live weight gain per year. Grazing goats is preferred in coconut areas.

In addition to the benefits from the intercrop, copra yields would alsoincrease from intercropping by about 100 kg/ha/year, resulting in anadditional income of about P 2,700/ha/year (before additiotzal labor costs).

9. From Table 4 it is clear that intercropping perennials can result insignificantly increased income if markets are available. Before substantial.investments are made in intercrops with a long immature period a carefulmarket analysis should be uone. Olt hilly terrain preference should be givento perennials to avoid soil erosion losses. Annuals are less profitable andrequire new plantings each season, and should therefore be mostly consideredin food deficit areas. With average coconut yields of some 800 kg/ha atP 2.70/kg, providing a gross benefit of P 2,160/ha, all intercrops exceptupland rice would out-perform the base crop coconuts.

10. The following possibilities for increasing the area of intercroppingcoconuts with long-term crops should be urgently pursued:

(a) Evaluate PCA's ongoing NCIP and, if found viable and in need ofadditional funding, support the program. Evaluate the potentialimpact of UCPB and PCA's Countryside Economic Development Program

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ANNEX 3Page 6

and determine if there are technical, organizational and financingconstraints. The above efforts support both individual andorganized groups of coconut farmers; and

(b) Review private proposals for financing Nucleus Estate type opera-tions for producing high quality coffee and cocoa and possibly othercrops such as spices, ramie, etc. by farmer cooperatives withparticipation of a so-called anchor-firm. The latter would beestablished jointly by private investors and the cooperative, whichwould set up clonal nurseries, provide technical assistance, arrangefor credit, establish post-harvest processing facilities (wet-processing and drying of coffee and fermentation/drying of cocoa,ramie decortication and degumming, etc.) and contract to purchasefrom participating growers all produce for final processing andsale. A proposal for intercropping coffee in the Calinan-BaguioDistrict in the Davao City area appears to be a model for review andpossible adoption.

11. The Nucleus Estate type of development appears particularly appro-priate and attractive since it organizes farmers to produce and process a highquality product while sharing in the full benefits on an agreed basis.However, it is not clear how areas with various ownership-tenancy arrangementscan participate, and this should be a clear target for furtherinvestigation. One of the attractions of a Nucleus Estate type of developmentis that it will also increase coconut production (as a side effect offertilizing and tending the intercrop) and it should increase copra qualitythrough using the central drying facility.

12. If another 20% of farmers/property owners on farms larger than 5 hawould participate in intercropping perennial crops over a 10-year period, anadditional area of about 380,000 ha could be covered. With a distribution of40% cacao, 30% coffee, 10% ramie, 10% spices (black pepper and others), and10% miscellaneous crops and grazing, incremental production at full productionwould amount to some 142,000 mt cocoa, 68,000 mt coffee, 60,000 mt ramiefiber, 19,000 mt of spices (pepper equivalent) and some 6,000 mt of meat. Atearly 1987 prices this could then amount to an incremental annual benefit ofP 8.5 billion at full production.

Recommendation

13. The Government should arrange for a review of present and proposedcoconut intercropping operations, and possible new initiatives, within thenext six months by a team comprising an agro-economist, a land-tenancy expert,and a tree crop/processing expert. In particular the tenancy problems shouldbe addressed, and an indication should be given of the area of coconut landthat could become available in reasonable homogeneous blocks for intercroppingon a nucleus estate or cooperative farming basis within the next 5-10 years.This review may then lead to the preparation of either a coconut developmentproject or a subsector loan based on an agreed development/on-lendingproposal.

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ANNEX 3Appendix 1Page 1

Cocodiesel

1. The possibility of long-run increases in world petroleum prices andlong-run decreases in the world price of coconut oil are a double source ofconcern for the Philippines, or should be. If, however, coconut oil canbecome a substitute for some petroleum products, the country may be able toconvert adversity into an advantage. Work on this possibility began about1981, when the petroleum price was still above US$30/bbl.; the fall of coconutoil prices from their 1981 historic peak, with ensuing domestic gluts, inten-sified Philippine interest in finding new outlets for coconut oil. But whenworld oil prices also fell, and copra prices improved somewhat, interest inpromoting cocodiesel weakened. Today, only a weak effort remains (mainly as aminor program in the Philippine National Oil Company's (PNOC's) Nonconven-tional Energy Center).

2. The possibility of substituting coconut oil for petroleum (eitherdiesel, bunker C, or industrial fuel oil) depends on relative prices and onsolving certain technical problems. These problems are linked. The maintechnical problem has been the development of fungal bacterial growth whencrude coconut oil is mixed directly with diesel. The fungal contaminationinterferes with proper performance of the cocodiesel mixture, contributing toclogging of the injection jets, degradation of the engine's lubricating oil,and injury to motor gaskets. If an economic biocide can be found that willkill the bacteria, these problems will either disappear or be open to muchsimpler solution (i.e. not all the technical problems arise from fungalcontamination). An alternative, more expensive solution is to refine crudecoconut oil into an esther, which does not suffer from fungal contamination.Partial estherification (refining the crude into "kuchin" oil) adds roughly50% to the crude price; complete refining adds another 10-15%. In early 1987,the pump price of motor diesel (including all taxes) was P 4.76/ltr; crudecoconut oil was P 3.97, but fully-refined coconut oil was P 6.29 (kuchin oilfell somewhere between the P 4.76 and 6.29 figures). These are financial ormarket prices, which may not measure the true value of imported petroleum orcoconut oil to the Philippine economy ("economic" prices).

3. The Government's earlier interest in promoting a cocodiesel programresulted in the launching of a national program in the fall of 1982. A pilotproject the year before had proved the feasibility (if not the popularity) ofusing a 30% coconut oil 70% diesel blend. The program was seen primarily as away of helping the coconut oil milling industry rather than as an energydevelopment program. A Presidential Decree issued on 1 September 1982 madethe cocodiesel program part of the rationalization program of the coconutindustry. The production of intermittent exporters of coconut products andthe excess production of those primarily producing for the domestic market wassupposed to be channeled to the cocodiesel program. To implement thedirective, PCA promulga-t d rules and regulations and indentified the oil millsand desiccators that should participate in the program. The program did notsucceed, however, and was virtually shelved four months after it began. Themain reason appears to have been resistance to cocodiesel by its intendedusers (whether their objections stemmed from problems associated with fungalcontamination is unknown). One other program appears to have been much more

- 29 -ANNEX 3Appendix 1Page 2

successful; this was the use of crude coconut oil (preheated but reportedlyused without mixing) in power generation by the National Power Corporation.There appeared to be far fewer technical problems in using crude coconut oilas a boiler fuel than as an automotive fuel. But even at the low coconut oilprices that ruled during that (brief) period, the product had to be subsidizedto make NPC willing to use it.

4. There has been one evaluation of the cocodiesel program (by Aramasand Clyde, in September, 1984); they concluded that "the volume of expectedforeign exchange foregone due to the use of coconut oil in the cocodieselprogram seems large enough to question the economic wisdom of the project."That judgment and the analysis on which it is based appear questionable,however, as the authors worked entirely with market prices in a fairly narrowrange. What seems needed is a more broad-based analysis of various options ofa program whose costs are low but whose potential benefits could be sizeableif and when petroleum product prices experience sizable increases.

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Sugar

1. The sugar subsector has long played a significant role in thePhilippine economy. During 1973-82, sugar exports averaged some 1.4 milliontonnes p.a. and accounted for an average 12% of the total value of merchandiseexports. This declined to 5% in 1983 and 1984 and to 4% in 1985. Until 1984the sugar industry employed about 500,000 worker3 annually in sugarcaneproduction (90%) and processing (10%). Given an average family size of sixmembers, approximately three million people out of the estimated 1985population of 55 million have thus depended on the sugar industry.

2. Beginning in 1984, world sugar prices dropped sharply. At about thesame time, the country's acute financial problems emerged. The Philippines'lucrative long-term export contracts for sugar also expired in late 1984. Allthese problems led to a drasti: decline in sugarcane area and production inthe country. Compared to the five-year average (1979/80-1983/84) sugarcanearea of 442,000 ha (harvested) and raw sugar production of 2.4 million tonnes,the area and production in 1984-85 declined to 384,000 ha and 1.7 milliontonnes respectively and to 321,000 ha and 1.5 million tonnes, respectively, in1985-86. The projection for 1986-87 is 310,000 ha and 1.4 million tonnesre3pectively, a decline of 30% in area and 42% in production over the five-year average through 1983-84.

3. There are some 30,000 sugarcane growers in the country, of which 77%operate small farms (below 10 ha), 18% operate medium-sized farms of 10 to50 ha and 5% operate large farms (above 50 ha). However, small farms accountfor only about 22% of the sugarcane area while medium and large farms accountfor 35% and 43%, respectively. Land distribution is thus highly skewed.Currently 38 sugar mills are operating with a total annual milling capacity ofabout three million tonnes of raw sugar. The five-year average (1979/80-1983/84) capacity utilization was 70%, declining to about 50% by 1985/86 and aprojected 47% in 1986/87.

4. The Philippines, which was exporting about 60% of its total rawsugar production in the 1970s and early 1980s, cannot profitably export sugar(except under thI US quota of about 160,000 tonnes) at current world prices of6-7 US cents/lb.- The adjustment in sugarcane area and production (para. 15)is thus in the right direction. However, several problems have emerged in theadjustment process, some of which entail high economic and social costs. Someof the problems are:

2/ The average cost of production of raw sugar in the Philippines isestimated at 14-15 US cents/lb.; however, some efficient mill districtscan profitably export at 9-10 US cents/lb.

- 31 -ANNEX 4Page 2

(a) A serious unemployment/underemployment problem has emerged,involving about 100,000 sugarcane workers who were already part of amajor poverty group;

(b) Some sugarcane land is lying idle;

(c) Sugar mills are operating at low capacity; and

(d) Crop loan arrears have increased.

5. In the period 1977-1986, the Philippine Sugar Commission (PHILSUCOM)had been responsible for policy-making and regulation in the sector. Duringmost of 1977-85, the National Sugar Trading Corporation (NASUTRA) had been thesole agency involved in domestic trading and export of sugar. In late 1985the Government established the Philippine Sugar Marketing Corporation(PHILSUMA) as the single buying and selling agency to replace NASUTRA. Also,the Government, agreed under the IMF standby program to implement severalimportant institutional changes that would have contributed to the sector'sstreamlining and adjustment. Specifically, it committed itself to undertakeaudits of NASUTRA and PHILSUCOM, prepare a p; of divestiture of PHILSUCOM'ssubsidiaries, issue operating guidelines for ".ILSUCOM, and issue mandatoryguidelines to PHILSUCOM and PHILSUMA on public disclosure requirements.However, no significant progress was made on any of these commitments underthe old administration.

6. Since early 1986 the new Government has introduced a number ofinstitutional and policy changes. The new Government abolished the exportmonopoly of PHILSUMA and consequently export marketing has been liberalized,except for allocation of the US export quota by the Sugar RegulatoryAdministration (SRA). The new Government also dissolved PHILSUCOM,established SRA as the regulatory agency, and attached it to DA. The SRAcom?rises three members (including a Chairman), two representing planters andone representing millers. The Government is considering what SRA's functionsshould be, particularly whether it should handle research and extension, asPHILSUCOM did; its staffing, funding and organizational structure; and whatshould be done about the retrenchment/redeployment of PHILSUCOM staff.

7. The institutional and policy changes made so far are clearly in theright direction. They have resulted in reduced regulatory control and alesser degree of Government intervention. However, further changes arerequired to support longer-term productivity and income growth in the subsec-tor. These have been discussed with Government in connection with a Banksector report "Philippines Sugarlands Diversification Study" (Report No. 6042-PH, May 30, 1986) and a proposed policy-based lending operation.

8. The proposed Bank loan (appraisal scheduled for August 198