TC:TCP/PHI/2356 TECHNICAL COOPERATION PROGRAMME ASSISTANCE IN AGRICULTURE SECTOR POLICY THE PHILIPPINES Terminal Statement the Food and Agriculture Organization of the United Nations Rome, 1998 |
TC:TCP/PHI/2356 TECHNICAL COOPERATION PROGRAMME ASSISTANCE IN AGRICULTURE SECTOR POLICY THE PHILIPPINES Terminal Statement the Food and Agriculture Organization of the United Nations Rome, 1998 |
1.2 Outline of official arrangements
2.1 Quantitative restrictions vis-�-vis proposed tariffs
2.3 Agricultural protection and impact on the poor
2.4 Competitiveness of Philippine agriculture
3.1 Tariffication of agricultural protection
3.2 Sensitive products and safety nets
3.3 Minimum access commitments
For over a decade, the Philippines has implemented stabilization measures and macro-economic policy reforms which emphasize foreign exchange and trade liberalization, market deregulation, withdrawal of undue government protection, and privatization to correct fundamental structural problems. With stabilization and a new macro-economic framework, sector policy reforms assume greater urgency. Sector adjustment must follow so as to secure the potential gains in output and productive efficiency and to make such gains sustainable.
With increased macro-economic and global linkages of agriculture, the policy environment facing the sector has grown in complexity and dynamism. External and domestic changes require monitoring and periodic assessment in order to attune programme and policy responses and a quick response capacity is needed to assist the Secretary of Agriculture in formulating policy and programme options for Cabinet meetings and decisions, as well as for programme management and implementation.
Given the urgent need to ensure consistency of sector policies and programmes with the macro-economic structure, analyse sector policy and programme options, lay out alternative paths of sectoral reforms, and advocate appropriate positions, the Department of Agriculture (DA) requested FAO to provide assistance in agriculture sector policy.
This assistance was approved by FAO under the Technical Cooperation Programme project, TCP/PHI/2356, Assistance in Agriculture Sector Policy, with a budget allocation of $US 205 000, and the Project Agreement was signed in July 1993. The Department of Agriculture was designated the government ministry responsible for project execution. The project started in July 1994 and ended in December 1995.
The project aimed to assist the Department of Agriculture to conduct quick assessments of priority sector adjustment issues in agriculture and to organize institutional analytical capacity in this field.
The Philippine economy had been heavily protected. Effective rates of protection (ERP) of all sectors in 1988 averaged about 33%, down from almost 50% in 1983, and were quite uneven between importables and exportables. In 1988, the average ERP of importables was estimated at 70%, compared with -8.1% for the exportables sector. Agricultural protection followed the overall pattern, with ERP averaging 45.1% on importables and -6.7% on exportables. The ERP for agriculture was substantially lower at 3.7%, compared to that of the overall economy.
In the 1990s, substantial trade liberalization took place under Executive Order 470 (EO 470). Tariffs were reduced on a large number of items, and made more uniform. Commitments to regional economic groupings, e.g., the Association of South East Asian Nations (ASEAN) and the Asia and Pacific Economic Cooperation (APEC) include trade liberalization. Agreement under the Uruguay Round for Agriculture of GATT, its ratification and accession by the country to the World Trade Organization (WTO) implied further changes in the domestic market and external environment facing Philippine agriculture. Finally, the Tariff Reform Programme (TRP) advocated by the National Economic Development Authority (NEDA) envisages a uniform and low tariff rate of 5% for all sectors by 2004.
In order to face these dynamic changes, the project provided the services of an international senior policy adviser for four man-months, an agricultural trade policy consultant for two man-months, and national consultants in various fields: agricultural policy, economic analysis, and policy and programme management, for a period of 18 man-months. They assisted the Government of the Philippines, in general, and the Department of Agriculture, in particular, in the analysis and management of sector policy options and contributed to policy making by reviewing and analysing the situation of Philippine agriculture vis-�-vis trade, political economy of current agricultural protection, issues relevant to GATT ratification and the system of minimum access quotas, as well as its proposed implementation in the Philippines. In several cases, technical support was provided to the Philippine delegations to APEC and ASEAN meetings and fora for discussing and negotiating provisions governing agriculture in trade liberalization agreements.
An empirical assessment was made of proposed uniform tariff rates for the Philippines, as well as of the proposed differential treatment of agriculture. The project employed formal quantitative techniques in the course of the analysis: spreadsheet simulations, a quadratic Almost Ideal Demand System (AIDS) econometric routine for demand studies, and a Computable General Equilibrium (CGE) model to analyse agricultural trade policy options from a macro-economic perspective.
The agreement on agriculture under GATT involves improved market access, reduction of domestic and export subsidies, and harmonization of sanitary and phytosanitary measures. Improved market access calls for tariffication of quantitative restrictions imposed on agricultural products, binding of tariffs on agricultural products, and gradual reduction of tariffs according to an agreed schedule. Disciplines on domestic and export subsidies involves quantification of these measures of support and subsequent reduction under agreed schedules.
An economic model was created to examine the replacement of quantitative restrictions on imports by the tariff rate quota mechanism proposed under GATT. The model was used to illustrate the mechanics of tariffication and to compare market outcomes under tariffs versus quantitative restrictions (QRs). The results yielded useful insights into the consequences of changing proposed tariffs and minimum access commitments (MACs). Applied to examine minimum access commitments for pork, simulations revealed sharp market price increases when QRs prevented imports, with demand growing faster than supply. A small increase in imports, initially equal to minimum access commitment, was associated with proposed tariff rates. With growth in demand relative to supply, domestic prices would make imports profitable above quota tariff by 1998. Population and income growth, and declining above quota tariffs by 1998 could lead to rapidly expanding imports over time.
The analyses demonstrated a rather small impact of the proposed reductions in minimum access commitment under debate at that time. Minimum access commitments constitute a very small fraction of demand. Above quota tariffs were identified as more important policy instruments than minimum access commitments.
A finding consistent in many previous studies was that agriculture received little protection relative to manufacturing, and was even penalized in the case of exports. Value added in agriculture was implicitly taxed in contrast to manufacturing. By 1995, the average implicit tariff rate of all sectors was 16%, with implicit tariff averaging 32.5% for importables, and -2.5% for exportables. In agriculture, implicit tariff was estimated at an average of 2.3%, with 28.6% for agricultural importables and -4.3% for agricultural exportables.
ERP using book rates of tariffs for 1995 was estimated at 21.8% for the whole economy (47% for importables and -6.4% for exportables), while for agriculture it was 1.6% (31.2% for agricultural importables and -5.8% for agricultural exportables).
While the above information might suggest that agriculture has had a substantially lower rate of protection than non-agriculture, findings by the project implied otherwise. The negative bias identified in earlier studies has been ameliorated by recent macro-economic adjustment and liberalization of the foreign exchange regime. Strict quotas for agricultural importable products resulted in domestic prices that exceeded border prices by amounts much larger than the book rates of tariff. Actual nominal rates of protection for some major agricultural products were found to be much higher than the book rates of tariff. Similar findings have been reported by some local economists. There is ample evidence to believe that, in fact, in many cases agriculture had higher protection than non-agriculture.
Under EO 470, about 80% of tariff lines would be modified within a five-year period. The average reduction was 28% percent. By 1996, about 9% of the tariff lines would have tariff rates of 3, 10, 20, or 30%. The remaining 10% of tariff lines would have rates of 5, 15, 25 or 50%. Only 208 tariff lines would have tariffs equal to or in excess of 50%. EO 470 was deemed to have brought weighted average book tariff rate on agricultural products to 28.6% in 1996, compared with 16.6% for non-agricultural products, down from 33.2% and 23.9%, respectively, in 1991. Tariff rates bound by the Philippine Government under the WTO for agricultural products formerly characterized by quotas are very large (in most cases 100%) and much larger than previous book tariffs. Tariffs for agricultural imports under the minimum access commitments are set at EO 470 tariffs.
What is not clear is whether various structural features which turn the domestic terms of trade against agriculture have been mitigated, in particular the potential monopoly or inefficiency in the marketing chain from farmers to final consumers. Little is yet known about the system and structures of marketing where a lot of the potential benefits to farmers from protection might be dissipated.
Poverty in the agriculture sector is considerable. In 1988, 54.1% of rural farming families were classified as poor, a relatively larger proportion than in urban areas (40%) or in the nation as a whole (49.5%). In this regard, an issue of substantive social and political significance is the distribution of benefits from agricultural protection.
Using data from the Farm Family Survey of the Bureau of Agricultural Statistics (BAS) and the Family Income and Expenditure Survey of the National Statistical Office (NSO), the income and expenditure patterns were examined for rural households classified by size, income, region and source of livelihood. The aim was to determine whether poor farm households were net buyers of food, and to assess the relative impact of high/low food prices for different household types, considering that some households bought and sold food during the year.
Consumer welfare effects of protection for agricultural products with price inelastic demand (e.g., rice, corn, sugar) are unambiguously negative. Together with all meats (beef, poultry, pork), live animals, potatoes and coffee, these commodities are considered sensitive products. Results suggest that the incidence of negative welfare effects may be regressive for poorer households (rural as well as urban). On the production side, although protection is often justified on behalf of small farmers, micro-economic evidence indicates that benefits from protection accrue primarily to large producers. The distributional impact of the domestic price increases resulting from import quotas of agricultural products is very uneven, with large producers being the main beneficiaries of quota protection. Small farmer and low income households, which are generally net buyers of food, bear the cost of protection. Imperfections and inefficiencies in the domestic marketing system also contribute to the maldistribution of benefits and welfare transfers from poor to big producers.
The appropriate degree of agriculture sector protection is a fundamental issue in the context of development in the Philippines over the next ten years. Some quarters have argued for a delay in agricultural liberalization, and for a 30% average tariff rate for agricultural products in place of the 5% advocated under the TRP.
The Philippines' push for an export oriented internationally competitive agriculture may be inherently inconsistent with high domestic protection. Protection forces up domestic costs of production, and helps keep inefficient farms, as well as inefficient marketing structures.
Wage was found to be a significant source of income, particularly of urban households. Constraining food imports by protectionistic policies unduly raises domestic prices, which creates clamour for an upward adjustment in wages. Inflationary bias arises when wage increases exceed productivity gains and erodes the competitive advantage of the Philippine labour intensive export oriented sector.
The analysis of implicit protection rates (IPRs) on agricultural commodities and inputs to food production examines the price effects of trade restrictions to help assess equivalent tariffs in the light of commitments under WTO, AFTA and the impending TRP. Relating estimated IPRs to various combinations of tariff rates, restrictiveness of controls, imports, and local supply, showed that the price response to trade policy was not straightforward. Other forms of intervention also affect prices. Only when price differences are attributable to trade policy, can estimates of IPRs be converted to equivalent tariffs to ensure that the same protection as before is accorded to food commodities.
Nevertheless, analytical results also suggest that actual protection, although quite variable, is considerably higher than nominal tariff levels. Given also the regressive impact and significant maldistribution of benefits from protection, no compelling reason exists to justify the institution of high tariff rates. Excessive protection ought to be reduced and the causes of negative rates removed to even out protection. Such measures are suggested as a transition step towards the 5% uniform tariff.
Project findings suggested that large crop farmers, livestock producers and large intermediaries constitute the main groups which might be largely affected by trade liberalization. The groups seem to have benefited considerably from previous protection policies. Poor segments of the population appear not to have benefited and might even have incurred the bulk of the cost of the protection. In this light, the `sensitive' products can hardly be considered sensitive in the real sense. It is also quite inequitable to consider safety nets for wealthy and previously benefiting farm groups.
In the event that the lack of infrastructure creates large marketing margins, which when decreased result in improved producer prices, then any extra public revenues, including funds designated for safety nets, would be most effective if allocated for infrastructure improvement, especially the type which would reduce farm to market costs such as farm to market roads. Also, a careful analysis and examination of the whole farm to retail market process from an integrated systems perspective would seem to be warranted.
To the extent that this is still possible, importation of agricultural products under the MACs should be auctioned. In-quota tariff should be as small as possible, preferably zero. Even under the envisaged management of MACs, it is still desirable to have the lowest possible tariffs. Annual MACs should be variable, with the amount bound under WTO as a lower limit. As large a quota as possible will help the DA collect more of the potential rent, thus maximizing its revenues.
Above quota tariff should be reviewed carefully, in view of the fact that in many years it will determine the amount of protection for domestic agricultural products. While there are no universal guidelines for setting tariffs on individual products, factors to be taken into account include the degree of overall protection to agriculture, the desired degree of protection of individual products given the general domestic objectives of product incentives, the degree of domestic monopoly in the marketing chain, and the amount of revenue that is to be collected.
Empirical investigation of the overall agricultural protection strategy based on the computable general equilibrium model showed that the policy of unilateral trade liberalization advocated by NEDA seems an appropriate one for the Philippines, if it is combined with higher levels of domestic effective taxation. Otherwise, even though the GDP will rise in the short term, domestic savings and investment will decline, with adverse consequences on medium and long-term growth.
The analysis also showed that there does not appear to be reason for a differential treatment of agriculture under the TRP. The exemption of sensitive agricultural products and the maintenance of high tariffs for agriculture will only retard growth.
Philippine Agriculture after GATT: Trade and Agricultural Policy Implications. P. Abbott.
Implicit Protection on Agricultural Commodities. Lorelei de Dios.
Philippine Households' Response to Price and Income Changes. Gilbert Llanto.
Agricultural Trade Policy and Options for the Implementation of the Agricultural Minimum Market Access Commitments of the Philippines. A.H. Sarris.
Philippine Agricultural Trade Policy after GATT Ratification: Issues and Options. A.H. Sarris.