How to sell economic reforms – BusinessWorld Online

I can sympathize with President Ferdinand “Bongbong” Marcos, Jr.’s dilemma: there are no good answers politically to the problem of food security. On the one hand, it’s nice to project that we won’t rely on food imports, as the previous administration did, and be self-sufficient. On the other hand, there is the reality that domestic supply is short of overall demand and decades-long structural problems in agriculture can’t be fixed overnight.

The result is political waffling: trying to give a nod to the protectionists but without really giving a solution to the domestic supply problem.

My advice is to level with the Filipino people: there’s no quick fix and we face shortages in fish, pork, chicken, corn, sugar, and rice because domestic production isn’t enough. There’s no alternative but to import and to do so quickly at enough volumes to arrest surging food price inflation.

The fact of the matter is that this food insecurity and food inflation are self-imposed: we still impose quantitative restrictions on the importation of fish, corn, pork, chicken, sugar, and other agricultural commodities and impose very high tariffs on the amount that we do allow to come in. In other words, while the masses are going hungry and food inflation is taking off, we are limiting supply! This is an utterly crazy policy, yet the noise is about cracking down on smuggling and increasing interest rates, as if that will bring prices down.

One example of this crazy policy is sugar. Our sugar is the second most expensive in the world, about eight times the price of Thailand’s, and yet we refuse to liberalize sugar importation. Our local producers of beverages, bread, biscuits, candies, three-in-one coffee, and the like pass on this high price of sugar to consumers ostensibly in the name of sugar self-sufficiency. Therefore, our inflation is also self-inflicted and no level of interest rates can cure that problem.

Incidentally, the Bangko Sentral ng Pilipinas (BSP) hints as much in its July 14 press statement, announcing an off-cycle increase of interest rates by 75 basis points. “At the same time, the BSP continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices.”

While the short-term answer to surging food inflation is to allow more imports (abolish quantitative restrictions and impose a low tariff on imports), the long-term answer is even more controversial: amend the 1987 Agrarian Reform Law. This is also why there’s political waffling.

If you listen to the noisy so-called farmers’ organizations that are not really led by farmers, the long-term answer is to increase the agricultural budget, i.e., money, money, money!

However, money isn’t going to solve the problem. Proof? During the time of former President Benigno “Noynoy” Aquino III, the agricultural budget was doubled and corresponded to the total budget of three previous administrations. Let me quote the Department of Agriculture’s own press release at that time: “The DA received a total budget of P339 billion from 2011 to 2015, the highest budget ever allocated to the department in a span of five years. This corresponds to the budget allocated under three previous administrations — from the time of President Ramos in 1994 to the last year of President Arroyo in 2010.”

What was the result? The average agriculture growth during that time when the budget was doubled was 1.2% per annum, even lower than the average population growth and lower than the agricultural growth of the past five years. All that increased money just went down the drain, or is it down to the pockets of agricultural officials despite “walang korupt, walang mahirap”?

There was also that research study done by Melinda Limlengco, formerly of the University of Nagoya and currently at the International Rice Research Institute, which showed an insignificant correlation between the Department of Agriculture’s expenditures and agricultural production. In other words, we might as well abolish the DA because the organization has no effect on agricultural production. Give its budget away directly to the farmers and the farmers will be better off.

Any solution to the problem of food security must confront this bitter reality: the structure of our agriculture is traditional and small scale: the average farm size is one hectare or less, the average age of farmers is 55, and the average educational attainment is Grade 5. Most are part-time farmers because farming isn’t profitable.

More money isn’t going to change this structure. Neither will more protectionism.

The way forward is commercial agriculture or agri-business: the application of science, technology, management, and capital to increase farm productivity.

However, commercial agriculture is hindered by the restrictions in the Comprehensive Agrarian Reform Law (CARL). Agrarian reform beneficiaries (ARBs) are prohibited from selling or leasing their land if they still owe the government money from the land transferred to them. Most (at least 75% of all agrarian reform beneficiaries) are unable to pay (how can they, with small farm sizes, a high debt burden, and no access to financing?) This means that commercial farms can’t get any access to land because of these restrictions on leasing and sale of rural land.

Furthermore, the law prohibits successful farmers from expanding! Land retention limits are capped at five hectares. This is another crazy rule that self-imposes limits on increased supply. The law is telling the successful farmer who is producing say, eight tons of palay per hectare, that he has no right to buy out the neighboring farmer who produces an average of three tons per hectare so that he can increase the yield on the neighboring farm to also eight tons per hectare. No wonder young people are turning their backs on farming — the law is telling them they aren’t supposed to succeed.

The usual argument against amending CARL and promoting commercial agriculture is the bleeding-heart argument: Pity the poor farmer. He will be dispossessed of his land. The fallacy of this argument rests on the assumption that the farmer will become worse off — but will he? First, he won’t be forcibly dispossessed. He will just be given the freedom to sell or lease it. If he chooses to lease it, he will have a lease income. It’s possible for the lease income to increase over time as the land becomes more productive under commercial farming. Second, he will probably be better off as a farm worker on a commercial farm, entitled to minimum wages and social security benefits than if he were on his own, earning marginal incomes and facing weather-related and biosecurity risks.

How to sell reforms then? Perhaps, the Rice Tariffication Law and the CREATE (Corporate Recovery and Tax Incentives for Enterprises) bill give us the template: compensate the losers or give some, take some. In the Rice Tariffication Law, the tariff revenues went into a competitiveness fund. In CREATE, the rationalization of fiscal incentives was accompanied by a reduction in the corporate income tax rate. Not everybody is happy, but at least not everybody is unhappy.

In the case of amending the CARL, perhaps the give is the debt condonation to agrarian reform beneficiaries amounting to P58 billion. However, this won’t result in cash losses to the government, but is a mere write-off in its books (the debt is not being paid anyway.) Instead, it will serve the public good: the farmers will invest more now that they have been freed from the debt, but more importantly, it will free them to sell or lease their land — if they so choose. A freer rural land market is a necessary condition for commercial farming (and increased productivity) for the country to prosper.

This template can also be used for labor market reforms. Package portability of pensions, for example, in exchange for amending the labor security provisions in the Labor Code. Establish labor employment zones with no minimum wages in areas of high unemployment in exchange for a closed shop rule (mandatory membership in unions).

It would be a mistake to only give one part, say debt condonation, without using the opportunity to amend the CARL.

The status quo is untenable. But motherhood statements alone won’t make the problems go away. There must be a disruption of the status quo, so some will be unhappy. The vested interests are probably the noisiest. President Bongbong Marcos and his economic team will be tested, not by their technical know-how, but by how they sell the reforms and get them done.

Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).

[email protected]