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The Rural Road to Poverty Reduction: Some Lessons from the Philippine Experience
Arsenio M. Balisacan and Ernesto M. Pernia Journal of Asian and African Studies 2002 37: 147 DOI: 10.1177/002190960203700207 The online version of this article can be found at: http://jas.sagepub.com/content/37/2/147

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THE RURAL ROAD TO POVERTY REDUCTION: SOME LESSONS FROM THE PHILIPPINE EXPERIENCE
Arsenio M. Balisacan* and Ernesto M. Pernia** ABSTRACT
This paper examines how government policies and institutional arrangements affect rural welfare outcomes. Reviewing the Philippine experience, it shows that inappropriate policies and institutions stifle the response of the rural sector to agricultural growth, with adverse effects on the rural poor and overall economic development. Besides economic growth, policies that foster rural infrastructure, favorable agricultural terms of trade, and agrarian reform lead to poverty reduction. However, weak institutions slow the implementation of agrarian reform. Thus, unless agrarian reform can be achieved swiftly, rural development strategies should better focus on investments in physical and social infrastructures, research and technology transfer, SME development, and enforcement of contracts.

Introduction The Philippines has lagged behind its East Asian neighbors in economic development and improvement of people's well-being. While its real per capita GDP was higher than in any of these countries (except Japan and Malaysia) in the mid1960s, it became one of the lowest at the turn of the new century. It also had the best human development indicators in the early 1960slongest life expectancy, lowest infant mortality rate, highest primary school enrollment ratio, and lowest illiteracy rate. In subsequent decades, however, the Philippines has been surpassed by these other countries in many aspects of human development and in poverty reduction. The experience of many Asian developing countries (ADCs) suggests a strong link between agricultural growth and overall economic performance. This is not surprising, given that agriculture and agriculture-dependent manufacturing and service sectors represent a large component of the economy at the early stages of development. More importantly, rapid growth in agriculture typically induces rural non-farm growth and, hence, substantial poverty reduction in rural areas. However, this does not appear to have happened in the Philippines. At the height of the "green revolution" (1960s and 1970s), agricultural growth in the Philippines was high by Asian standards, but rural supply response (economic linkages) was weak, leading to poor rural welfare outcomes.
* Department of Economics, University of Phillipines, Diliman, Quezon City, Philippines. ** Economics and Research Department, Asian Development Bank, 6 ADB Avenue, Mandaluyong, 0401 Metro Manila, Philippines. de Sitter Publications JAAS 37(2):147-167

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The post-World War II experience of Philippine rural development illustrates how misguided policies and weak institutional factors can constrain the response in rural areas to the stimulus of agricultural growth, thereby stifling overall economic development. This paper reviews this experience, specifically examining the influence of government policies and institutional arrangements on rural welfare outcomes, with a view to providing some lessons for other developing countries in Asia and Africa. The next section presents a simple organizing framework for understanding the transmission of agricultural growth to rural welfare outcomes. The third section discusses agricultural growth and its link to rural poverty outcomes, while the fourth section looks into the nature of government policies which could have influenced these outcomes. The fifth section then examines the determinants of poverty reduction in rural areas during the 1980s and 1990s, using sub-national (provincial) data. The last section provides concluding remarks. An Organizing Framework In virtually all ADCs, the main locus of poverty is the rural sector (FAO 1999; Lipton and Ravallion 1995; Quibria 1993). Nearly three-fourths of poor people are found in rural areas and most depend on agriculture for employment and income. Accordingly, agricultural growth and rural development are seen as central to a strategy of poverty reduction. Indeed, economic growth in rural areas tends to be more pro-poor than growth in urban areas (Kakwani and Pernia 2000; Ravallion and Datt 1996). Increases in agricultural productivity and farm incomes stimulate the growth of non-farm activities and, hence, employment opportunities. Put differently, while agricultural growth reduces rural poverty and food insecurity directly, the indirect effects on the rural non-farm economy through demand and supply linkages can be even more important sources of food security and rural poverty reduction in the long run. The response of the rural non-farm sector to the stimulus of agricultural growth hinges on certain "initial conditions" in rural areas, such as distribution of assets and incomes, quality of human capital, rural infrastructure, and macroeconomic and political environment (Figure 1). Drawing on the Asian experience, the response of rural non-farm areas (as well as urban areas) and, hence, of rural poverty to agricultural growth, including export or urban demand expansion, requires a number of things. These include investments in rural infrastructure and human capital, removal of public-spending biases favoring large farmers and agribusiness enterprises, promotion of small-scale enterprises, improved access to land and technology, and macroeconomic and political stability.

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Figure 1 Rural Growth and Rural Welfare Outcomes

149

Agricultural Growth technological change area expansion

Improvement in rural welfare poverty reduction household food security

Non-farm supply response (Rural Industrialization)

Urban/export demand growth

Initial Conditions

Distribution of assets and incomes

Macroeconomic and political environment

Public investment in infrastructure and human capital

In East Asia, where conditions were generally favorable to the emergence of rural non-farm activities, even agricultural households became increasingly dependent on non-farm incomes (Balisacan 1996; Reardon et al. 1998). In other parts of Asia and elsewhere, improvements in living standards of the rural population have been commonly associated with robust rural growth linkages (Ranis and Stewart 1993; Lipton and Ravallion 1995; Rosegrant and Hazell 1999). Nonetheless, given the large differences in initial conditions across countries, the experiences in rural Asia are quite varied. Some rural areas, such as those in Indonesia and India's Punjab, have responded strongly to agricultural growth,

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while in others, such as those in the Philippines, the response has been somewhat muted. Even within a country, large disparities in rural performance are apparent (Datt and Ravallion 1992; Rosegrant and Hazell 1999). Agricultural Growth The agriculture sector in the Philippines continues to account for a sizeable proportion of total employment and, to a lesser extent, national income. In accord with the well-known stylized fact of development, agriculture's share in total employment dropped from 59 percent in the mid-1960s to 40 percent in the late 1990s, while its share in GDP declined from about 32 percent to 18 percent (Table 1). The rather slow decline of the agricultural share in total employment, along with the sluggish absorption of labor in the industrial sector, suggests that the large labor force increases over the last three decades have been mainly employed in agriculture and in the informal services sector characterized by low productivity and flexible wages.
Table 1 Agriculture in the National Economy* 1965 1975 1985 Per capita GDP (1965=100) 100 131 128 1995 143 1999 146

Share of agriculture (%) in: GDP Employment Imports Exports Ratio of agricultural imports to agricultural exports (%) 31.5 58.6 22.2 85.6 26.9 56.7 13.6 66.2 28.6 48.9 12.4 35.8 21.8 43.5 9.8 13.6 17.9 39.8 9.3 7.3

26.8

27.6

38.0 114.0

142.1

* Three-year averages centered on the year shown. Sources: Philippine Statistical Yearbook (various issues); Foreign Trade Statistics (various issues).

The experience of the East Asian newly industrialized economies (NIEs), in particular, shows that development is accompanied also by a declining share of agriculture in total exports, an increasing dependence on food imports (at least for countries with relatively low land-man ratios), and an increasing share of nonfarm income in total income (Oshima 1987). Further, the development process leads to absolute declines in the number of farm workers (Chenery and Syrquin 1975). In the Philippines, the growth of per capita income, albeit slow in compar-

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ison with its neighboring countries, was accompanied by a sharp fall in agriculture's share in total foreign trade. For exports, agriculture's share plummeted from 86 percent in the mid-1960s to 7 percent in the late 1990s; for imports, the fall was from 22 percent to 9 percent. The agricultural sector performed quite well during the 1960s and 1970s, with annual growth averaging 4.6 percent, which was markedly higher than the norm for most ADCs (Table 2). Rising land productivity (i.e., output per unit of land) was the major source of growth in food production beginning in the mid-1960s. At the height of the green revolution, yield increases accounted for much of the growth in agriculture. These gains were brought about mainly by the expansion of irrigation systems, increased application of fertilizers, adoption of high-yielding varieties, and investments in rural infrastructure and education.
Table 2 Agricultural Growth in Asian Developing Countries Average growth rate (% per year) Country Agriculture 1965-80 1980-97 Malaysia Thailand Indonesia Philippines Sri Lanka Pakistan India Bangladesh Nepal China Vietnam 4.6 4.3 4.6 2.7 3.3 2.5 1.5 1.1 2.8 0.8 3.0 3.8 3.2 1.4 1.9 4.1 3.1 2.3 3.3 5.3 4.7 GDP 1965-80 1980-97 7.3 7.2 8.0 5.9 4.0 5.1 3.6 2.4 1.9 6.4 0.8 6.6 7.6 6.7 1.9 4.5 5.5 5.8 4.4 4.8 10.9 6.2 Share of agriculture in GDP (%) 1960 1997 37 40 54 26 32 46 50 58 13 11 16 20 22 26 27 30 43 20 26

Not available. Sources: World Development Report, World Bank (various issues). Asian Development Outlook, Asian Development Bank (various issues). Food and Agriculture Organization (FAO) of the UN.

In more recent decades, developing countries experiencing relatively high growth rates of agricultural output tended to also have comparatively high GDP growth rates (World Bank 1986:79-80). The correlation is clear for ADCs in Table 2. This observation is, of course, not surprising given that agriculture and agri-

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culture-dependent manufacturing in a typical developing country is a large fraction of the economy. In the Philippine case, the remarkably robust agricultural growth over the period 1965 to 1980 was accompanied by GDP growth that closely matched the average for the ADCs (5.4 percent a year) and for the middleincome developing countries (6.1 percent a year). Similarly, the mediocre growth of agriculture in the 1980s and 1990s mirrored the poor performance of the overall economy. Growth among the major sub-sectors, however, was far from uniform (Table 3). Fishery registered the highest annual growth rate, averaging 5.2 percent a year, during the 1965 to 1980 period. Consequently, the share of fishery in the sector's gross valued added (GVA) rose from 12 percent in the mid-1960s to roughly 20 percent in 1980. The growth of crop GVA, averaging 3 percent a year during the period, also stood out in historical perspective. Growth was particularly robust for corn, banana, and "other crops." This sub-sector accounted for about
Table 3 Average Growth Rates of Agriculture by Sub-Sector*

Sector

1965-80

1980-90

1990-99

Agriculture All crops Rice Corn Coconut Sugarcane Banana Other crops Poultry & livestock Agricultural activities Fishery Forestry

3.7 3.0 4.0 5.7 3.8 4.2 11.8 7.5 2.3 ** 5.2 -1.5

(100.0) (80.5) (14.2) (8.1) (8.8) (4.7) (4.8) (39.9) (7.6)

1.2 0.6 2.6 3.5 -4.6 -1.6 -3.5 1.5 6.0 4.1

(100.0) (29.9) (24.4) (13.6) (-19.9) (-3.0) (-5.1) (20.0) (53.3) (10.3) (46.1) (-39.6)

1.5 1.5 3.8 0.3 -2.0 4.8 2.7 1.0 4.6 0.0 1.5 -19.4

(100.0) (50.3) (29.3) (0.4) (-0.7) (5.5) (3.5) (12.3) (45.0) (1.1) (13.8) (-10.1)

(20.8) (-8.8)

3.9 -7.8

* Figures in parentheses are contributions to the overall growth of agriculture. The agricultural sector comprises crops, poultry, livestock, fishery, forestry, and agricultural services. ** Included in "other crops" category. Source: Philippine Statistical Yearbook, National Statistical Coordination Board (various issues).

four-fifths of the observed growth of total agricultural output. However, output growth for virtually all crops decelerated in the 1980s and 1990s. One reason is the slowdown in the conversion of lands for cultivation. While agricultural land expanded (primarily through deforestation) at a rate of 3.6 percent annually in the 1970s, the rate slowed to only .8 percent a year in the

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1980s and early 1990s. Exogenous factors also contributed to the growth deceleration in the 1980s, including the fall in world commodity prices affecting the traditional export crops (e.g., sugar and coconut), a series of natural calamities and droughts, and the virtual completion of the green revolution by the early 1980s. Then, too, there were such policy-related factors as the uncertainty regarding the Comprehensive Agrarian Reform Program (CARP) and the sharp decline in public investments in agriculture. The poultry and livestock sub-sector emerged as the only consistent performer through the years, growing at an average of 6 percent annually in the 1980s and about 5 percent in the 1990s. Its strong showing contrasts with that of fishery and the diminished role of forestry. The share of poultry and livestock output in agricultural GVA climbed from 14 percent in the mid-1960s to 21 percent in the 1990s. The robust performance of this sub-sector probably explains the similarly strong performance of corn (also used as animal feed)the growth of corn production normally exceeded that of rice up until the 1980s. Despite the macroeconomic difficulties of the 1980s and early 1990s, poultry and livestock evinced the highest rate of expansion among all sub-sectors of agriculture, contributing about 50 percent of the observed growth of the agricultural sector in the 1980s and 1990s. Growth in poultry production (mainly chicken) accounted for much of this expansion, which may be partly attributable to the relatively high nominal protection rate for this product. Rural Welfare Outcomes The rural sector, comprising over half of the total population, accounts for over 70 percent of all poor people nationwide (Balisacan 2001). The overwhelming majority of the rural poor are in agriculture. Poverty incidence in agriculture (60 percent in 1997) is substantially higher than in either industry or services. Based on the official approach to poverty estimation, the level of rural poverty hardly changed during the 1960s through the mid-1980s. The Family Income and Expenditures Surveys (FIES) data show that poverty incidence in rural areas was 55 percent in the mid-1960s, 57 percent in the early 1970s, and 59 percent in the mid-1980s.1 Wage income data from the Labor Force Surveys (LFS) during the 1970s and early 1980s suggest that the average living standard of rural workers changed only little during the period despite a strong performance in national income growth (Balisacan et al. 2000). The extent of poverty reduction could have been attenuated by worsening income inequality, with the poor gaining relatively little from higher average incomes. Furthermore, rural poverty appeared also quite insensitive to agricultural growth itself from the mid1960s through to the mid-1980s (Ranis and Stewart 1993; Balisacan 1993). Poverty incidence from the mid-1980s to the late 1990s was more distinctly on a downward trend, from 53 percent in 1985 to 37 percent in 1997.2 This

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decline is particularly noteworthy given that, in contrast with the steady economic growth during the 1960s and 1970swith poverty remaining stable at a high levelgrowth from the mid-1980s through the 1990s was somewhat erratic. Hayami and Kikuchi (2000) argue that the rise in incomes of the landless poor during the 1990s derived mainly from increased employment opportunities in non-farm economic activities. These in turn resulted from both the greater integration of the rural into the urban labor markets and the increase in non-farm income opportunities within rural areas (such as petty trading and local transportation services). Overall, this implies that, although growth was not as robust as in the 1960s and 1970s, it may have been more pro-poor in the 1990s (in the sense that the poor benefited relatively more from higher average incomes than in the 1960s and 1970s). Nevertheless, on the whole, the pace of the poverty reduction over the past four decades in the Philippines has been disappointing compared to that in other East Asian countries. Using the internationally comparable "$1 a day" poverty line, poverty incidence at the national level in the Philippines fell from 36 percent to 26 percent between 1975 and 1995. Over the same period, poverty reduction was far more impressive, for example, in Indonesia where poverty dropped from 64 percent to 11 percent, and in Thailand where it fell from 8 percent to near zero (Table 4).
Table 4 Standard of Living and Human Development in the Philippines, Indonesia, and Thailand Real GDP per capita (1995 PPP dollar) 1965 1995 Human Development Index 1995 1975 Poverty incidence

1985

1995

Thailand Indonesia Philippines

1,570 817 1,736

6,723 3,346 2,475

0.838 0.679 0.677

8.1 64.3 35.7

10.0 32.2 32.4

<1.0 11.4 25.5

Sources : Real GDP per capita and poverty incidence, Ahuja et al. (1997); Human Development Index, UNDP (1998).

Based on official estimates, poverty reduction in South Korea was particularly steep in the 1990s owing to improving income inequality besides rapid economic growth (Kakwani and Pernia 2000). In the same vein, poverty reduction in Thailand would have been even more dramatic if not for worsening inequality. The experience in Laos indicates that economic growth in rural areas has been more pro-poor than growth in urban areas. Changes in welfare of the rural population cannot be captured solely by changes in income and consumption profiles. Equally important are access to resources needed for leading a long and healthy life and opportunities to acquire and use knowledge. Considerable improvements in literacy, life expectancy, and

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child health occurred in the Philippines from the 1960s to the 1990s. But, as with income growth and poverty reduction, the pace of these improvements somewhat paled in comparison to that in neighboring countries, whose social indicators were generally lower in the 1960s and 1970s (Table 5). Just over half of the rural population in the Philippines had access to safe water and sanitation services in the 1980s, but this situation substantially improved in the 1990s, though less so in the case of sanitation services (Balisacan et al. 2001). Rural-urban disparities in access to services have also somewhat narrowed over time. Access to safe water used to be available to a greater proportion of the rural population than of the urban population, while the opposite was true in the case of sanitation services. Government Policies Affecting Rural Development Development Strategy and Economy-Wide Policies There is now a consensus among economists that the failure of the Philippine economy to experience rapid and sustained growth and, hence, significant poverty reduction over the past four decades largely stemmed from the absence of an "effective allocation mechanism" that allows the true comparative advantage of various industries to emerge (Bautista, Power and Associates 1979; Bautista and Tecson 2000). Instead, past governments introduced distortionary economic policy measures, which often made socially undesirable investments attractive to investors and desirable ones (i.e., promising and efficient activities) relatively unprofitable. Such policies not only hampered economic growth at the national level but also spawned side effects deleterious to rural development. From the 1950s to the 1980s, an array of policies meant to push the economy along an import-substituting industrialization track inadvertently stunted the development of the rural sector by creating a bias towards large-scale, capitalintensive manufacturing industries located in urban areas (especially Metro Manila). This harmed rural enterprises which are inherently smaller in size, employ more labor and make greater use of local materials (Medalla et al. 1995; Ranis and Stewart 1993). These policies also created an incentive structure that was heavily biased against agriculture, the backbone of the rural sector. Trade and exchange rate policies distorted the relative prices of agricultural inputs and outputs, preventing an efficient allocation of resources, and strongly favored the manufacturing sector over agriculture, non-tradable over tradable goods, and import-competing goods over exports. Over time, resources moved away from agriculture and export sectors, and new investments into these sectors were discouraged. Since agricultural production is more labor-intensive, less importdependent, and more efficient in earning (or saving) foreign exchange than industrial production (especially of import-competing consumer goods), the premature shift of resources from agriculture to industry constricted the growth of employ-

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ment opportunities and output in rural areas. Many authors point out that the bias did not come principally from measures aimed directly at agricultural commodities, although government interventions in the form of taxes, customs duties, subsidies, quantitative trade restrictions, import prohibitions, price controls and monopoly control in international trade had, up until the late 1980s through the mid-1990s, also affected agricultural incentives. Rather, it was the indirect effect of the overall development strategy that accounted for a substantial part of the policy bias against agriculture (e.g., Intal and Power 1990; Bautista 1987; Bautista and Tecson 2000). The primary channel was the overvaluation of the domestic currency, which in turn had its roots in the industrial protection system and in the fiscal, monetary, and exchange rate policies, specifically those adopted to promote import substitution and accommodate current account imbalances. Estimates of the overvaluation of the domestic currency in the 1970s and 1980s were on the order of 20 to 30 percent much higher than those for Thailand (16 to 24 percent) and Malaysia (less than 3 percent) (Bautista 1990). Sectoral Policies In the early 1970s, the government began to directly intervene in agriculture in a large way, including agricultural production, marketing and international trade. The intervention in the rice sector was precipitated by the rice crisis of 1971 to 1972 resulting from both climate-related factors and international price shocks. Intervention was in the form of price controls on rice and a massive program to achieve rice self-sufficiency. Dubbed Masagana 99 and launched in 1974, the program called for government assistance in terms of credit, irrigation, extension services, and fertilizer subsidy. Moreover, the National Grains Authority (NGAthe government's rice and corn agency) expanded its control over the food sector to include the effective monopolization of wheat (beginning 1975) and soybean (beginning 1978) imports. Marketing controls included all food commodities by the early 1980s when the NGA was transformed into the National Food Authority (NFA) as the government's food price stabilization arm. The NFA financed its expanded operations partly from price margins on its duty-free imports. In the case of the export crop sector, the government's intervention shifted from its traditional role of allocating domestic sugar quotas, collecting minor export taxes and undertaking research and extension in tandem with the private sector, to one of monopolizing domestic and export marketing. The economic consequences and cost of government interventions in the 1970s and 1980s were considerable. Yet, in most cases, the interventions were either ineffective or yielded results contrary to the avowed intentions. In the case of rice, for example, while increased government intervention during the 1970s reduced seasonal fluctuations in palay (paddy) prices, the intervention was inade-

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quate to maintain producer prices at the official floor price. This meant that the opportunities to sell at the official price had to be rationed, often to the disadvantage of small farmers. While the 1970s saw an unprecedented rise of government interventions in agriculture in the form of price and quantitative controls, levies and taxes, as well as entry into activities for which the public good argument was lacking, the late 1980s saw the undoing of these policies towards a market-oriented agricultural economy, relieving it of the burden of explicit and implicit taxation. The deregulation that commenced in 1986 included the following: Lifting of the export ban on copra and export taxes on copra (10 percent) and coconut oil (5 percent); Abolition of monopsonistic agencies and arrangements in sugar and coconut trading and the dismantling of government monopoly control over international trade in coconut oil, corn, soybeans, soybean meal and the marketing of sugar; Liberalization of fertilizer distribution and importation; Removal of price controls on rice, poultry products and pork; Opening up of import trade in wheat, flour and animal feeds to the private sector; Divestment of the National Food Authority (NFA) from non-grain activities and the reorientation of its primary function to price stabilization of rice and corn; and Consolidation of commodity-specific funds into the Comprehensive Agricultural Loan Fund (CALF) to unify various agricultural lending programs and minimize government participation in these programs.

Despite these reform measures, however, the deregulation of agriculture was left largely incomplete. Reforms undertaken did not include the abolition of the remaining restrictions such as: NFA monopoly of international trade and domestic market operations in rice and corn; Import controls on sugar; Import prohibitions on onions, potatoes, garlic, cabbage, coffee and seeds; Hectarage controls on banana production; Centralized importation of ruminants (for breeding and/or slaughter) and beef; Bans on buntal and ramie planting materials; Export restrictions on animal and animal products; and Licensing and/or registration of production and domestic trade for some agricultural goods.

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Rather than expanding the scope of deregulation, which could have had a positive impact on the welfare of rural population, the government moved instead to strengthen the regulation of agriculture, especially over the international trade of agricultural products. In 1992, the Magna Carta of Small Farmers was passed which barred importation of agricultural products produced locally in sufficient quantity. Another major government program launched in the late 1980s was the Comprehensive Agrarian Reform Program (CARP). Unlike the earlier agrarian reform program initiated in the early 1970s, the CARP covers all agricultural lands, regardless of commodity produced and type of tenurial arrangement, and includes the provision of support services for farmers. The CARP intends to redistribute about 580,000 hectares of rice and corn lands (covered under the previous program) and over 2 million hectares of privately-owned non-rice/corn lands (not previously covered) over a period of ten years. However, the huge budgetary requirements of the program, together with the limited capacity of the implementing agencies, stood in the way of swift implementation. The uncertainty surrounding program implementation served to discourage the flow of private investments into agriculture as well as encouraged nonplanting and premature conversion of agricultural lands into non-agricultural uses, a trend exacerbated by weak monitoring and absence of a comprehensive land use policy (e.g., Medalla and Centeno 1994). The CARP also diminished the collateral value of agricultural lands by constraining private land sales. This has caused the demise of private markets for agricultural lands. Indeed, the amount of loans (at constant prices) granted by private and government banks in the early 1990s was only half of that in the early 1980s. A change in the policy environment had been anticipated with the country's accession to the World Trade Organization (WTO) in 1995, since this required opening up local agricultural markets to competition as well as enacting laws prescribed by the trade treaty.3 Political negotiations to win public support for this policy thrust severely weakened the drive towards greater openness in the farm sector. Rice, for example, has been exempted from the trade commitments for a period of ten years. In 1996, Congress passed a law lifting all quantitative restrictions on agricultural imports (except rice) but replacing non-tariff barriers with the highest possible tariff protection of 100 percent (i.e., the ceiling or binding tariff rates).4 Clarete (1999) points out that the manner of "tariffication" resulted in tariff levels that exceeded the corresponding equivalent quantitative rates for most products. After sustaining the bias of the import-substitution industrialization strategy of the 1950s through to the 1980s, agriculture was largely relieved of such bias in the 1990s. The effective protection rates for agriculture became roughly equivalent to those for manufacturing, following major changes in the economy's tariff structure over the last ten years. Clarete (1999) and Medalla et al. (1995) suggest that the tariff reform program has moved the economy towards a lower,

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sector-neutral and trade-neutral effective protection policy. Along with the sweeping reforms in the non-agricultural sectors, this led to a rise in the relative prices of agricultural products in the domestic market, thus partly explaining the pickup in agricultural growth during the 1990s. Determinants of Poverty Reduction in Rural Areas Rural welfare outcomes vary substantially not only across regions and economic sectors but also across provinces (Figure 2). We now attempt to assess the impact of certain time-varying factors, such as policy regime, and initial conditions related to infrastructure, distribution of physical and human assets, income, and institutionson the performance of the various provinces in poverty reduction. The analysis covers the period between the late 1980s and late 1990s, for which comparable nationwide household survey data disaggregated by province are available.5
Fi g ure 2 P o verty R ed ucti o n, 19 8 8 -9 7: I nci d ence
60

Change (in percentage point)

40 20 0 0 -20 -40 -60 -80 2000 4000 6000 8000

Province

10000

12000

-100

1988 per capita expenditure

We estimate reduced-form functions relating to changes in the proportion of the rural population deemed poor,6 using poverty estimates (1988 and 1997 FIES) based on comparable provincial poverty lines reported in Balisacan (2001). In each function, we include the following initial-condition variables: poverty level at the start of the period; land inequality, given by the landholding Gini ratio which has extreme values of one (perfect inequality) and zero (perfect equality); average farm size; irrigation, expressed as the ratio of irrigated land to total farm area; road wealth, defined as quality-adjusted road length per square kilometer of land; and Pinatubo, a dummy variable indicating provinces devastated by the Mount Pinatubo eruption in the early 1990s. In addition, we include variables representing the political environment, namely: dynasty, defined as the proportion of local officials, related to each other by blood or affinity, to the total number of

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elective positions; political party, a dummy variable indicating whether the provincial governor belonged to the political party of the country's President; and MILF, a dummy variable indicating whether the province had problems with Muslim insurgency. To capture the effects of time-varying factors on the evolution of poverty, we add the changes in the following explanatory variables: agricultural terms of trade, defined as the ratio of the price of agricultural to non-agricultural products; electricity, defined as the proportion of households with access to electricity; functional literacy, defined as the proportion of adult population who can read, write, and execute simple messages; and CARP, proportion of cumulative agrarian reform accomplishments to total potential land reform area; and per capita regional gross domestic product (RGDP). The land-inequality variable reflects access to land and, given imperfections in credit markets, serves to proxy for household ability to smooth consumption during shocks. This variable is expected to be negatively related to poverty reduction. The irrigation variable, a proxy for land quality, is expected to positively influence poverty reduction. Road wealth denotes access to markets and offfarm employment. The functional-literacy variable reflects the quality of human capital and is expected to, among others, improve returns to labor and, hence, reduce poverty. The terms-of-trade variable reflects the relative price incentives for agriculture. RGDP is an indicator of the general condition of the regional economy. The political-dummy variables reflect the quality of local governance and access to fiscal resources. The dynasty variable captures the extent of participation (competition) in local politics. We expect that political dynasty inhibits economic growth through its negative effect on the efficient operation of markets (i.e., restricting competition in local markets and creating rents for the political clan) and, hence, slowing poverty reduction.7 The political-party-affiliation variable reflects access to the national coffers for local economic development. The regression results are given in Table 6. The models explain roughly three-fourths of the observed differences in poverty reduction across the 73 provinces between 1988 and 1997.8 As expected, the initial level of poverty influences the speed of poverty reduction, for instance, provinces with initially high poverty levels tend to experience relatively rapid poverty reduction, ceteris paribus. This has to do partly with the fact that the distribution of living standards is invariably skewed to the left. Thus, for a given growth rate and income distribution, poverty reduction would be faster for provinces with initially lower mean income (and hence higher poverty). Put differently, the marginal return (in terms of poverty reduction) to an investment that raises mean income is larger the higher is the initial poverty. Initial landholding inequality appears not to be significant, but the CARP variable is, suggesting that in provinces where the implementation of the agrarian reform program was relatively rapid, poverty reduction tended to be correspondingly fast. This result supports the finding of Deininger et al. (2000), demonstrating that CARP beneficiaries achieved higher household incomes than comparable

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households not covered by the program, other things remaining the same.
Table 6 Determinants of Poverty Reduction Explanatory variable Parameter Full Model t-ratio Final Model Parameter t-ratio

Initial Conditions: Late 1980s Incidence 0.790 8.48 0.820 10.55 Land inequality 0.521 1.01 Farm size -0.375 -0.21 Irrigation 9.301 0.97 15.348 1.85 Road wealth 12.700 2.72 12.250 2.90 Dynasty -7.186 -1.09 Political party 1.206 0.41 Pinatubo 6.265 0.87 MILF 1.922 0.33 Change between 1988 & 1997 Terms of trade 41.945 1.74 45.59 2.32 (Pa/Pna) RGDP 0.001 3.15 0.002 4.77 Electricity 0.308 2.46 0.277 2.31 Functional literacy -0.174 -1.02 CARP 4.444 2.31 3.057 2.19 Constant -85.843 -2.55 -61.160 -5.148 Adjusted R squared 0.713 0.721 F-ratio 11.26 22.01 Note: Dependent variable is change in poverty incidence between 1988 and 1997. Data pertain to 73 provinces.

Initial farm size is also not significant, but irrigation is (at least in the final model). This suggests that it is the endowment of land quality, not farm size per se, that tends to influence the speed of poverty reduction. Road wealth and electricity are positive and highly significant in all equations, suggesting that provinces with favorable access to markets and off-farm employment tend to have faster poverty reduction. The result confirms the common assertion that public investment in rural infrastructure, especially rural transport and electricity, generates economic linkages and externalities critical to sustained growth and development of the local economy (ILO 1974; World Bank 2000a). The overall climate for rural growth, as indicated by RGDP variables, likewise proves to be a significant factor which influences the speed of provincial poverty reduction. This is consistent with Balisacan's (1999) observation that overall growth represents the main source of national poverty reduction in recent years. Also in accord with expectations, the terms-of-trade variable is positive and significant, indicating that changes in the price of agriculture relative to the price prevailing in other sectors of the local economy have a profound impact on the speed of poverty reduction. As noted above, the overwhelmingly large majority of the poor are dependent on agriculture for employment and income. Surprisingly, functional literacy is insignificant in all regressions. This result appears to contradict the popular observation emanating from the East

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Asian miracle story that improvements in human capital formed part of the building blocks for sustained economic growth and poverty reduction (Ranis 1995; World Bank 2000; Herrin and Pernia 2000). Note, however, that the result may have been unduly biased by the rather short interval (five years) chosen for this variable due to data limitations. The dynasty variable, as well as the variable representing political party affiliation of local government executives, is not significant in all regressions. This is intriguing considering the usual claim that dynasty in local politics inhibits economic performancethrough its effects on economic efficiencyand hence poverty reduction. It is possible, however, that these variables do not adequately reflect the quality of local governance. For instance, the dynasty variable may not capture all the possible networks of blood/marriage relationships running from the provincial governor to municipal officials. Concluding Remarks Agricultural growth in the Philippines during the 1960s and 1970s was quite robust. Much of this growth resulted from increases in productivity, specifically from the adoption of high-yielding varieties, increased use of fertilizers, and public investment in rural infrastructure (especially irrigation). Nevertheless, the dent on rural poverty appeared to be weak, compared to, for instance, the experiences of Thailand and Indonesia. One reason may have to do with the history and social structure of rural Philippines, including the rising incidence of landlessness during the period. Moreover, it is well documented that the economy-wide importsubstituting industrialization strategy (via, e.g., overvalued domestic currency, protectionist trade, and industrial policies) from the 1960s through the 1980s penalized agriculture by, inter alia, depressing the relative price of agricultural products, and encouraged capital-intensive industrialization, thereby constricting labor absorption. Further, policy interventions in the agricultural sector were essentially anti-small farmer and, thus, anti-poor. For example, small farmers were basically rationed out of the credit market due to the subsidized credit programs that tended to favor large farmers, fertilizer subsidies were ineffective, and public investment in infrastructure and research tended to disproportionately benefit larger farmers. The poor performance of agriculture in the 1980s and early 1990s resulted from a combination of factors, including the decline of world commodity prices, stagnation in public investments (especially in rural roads, irrigation, and research), exhaustion of the potential of high-yielding varieties, and uncertainty arising from the slow implementation of the land reform program. On the policy front, the overvaluation of the domestic currency persisted throughout the 1980s and, consequently, the negative (indirect) protection on agriculture remained high. Policy measures with anti-small farmer biases introduced in the 1970s were reformed, though incomplete, in the 1980s. Meanwhile, despite the marked

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slowdown of agricultural growth in the 1980s and 1990s, rural poverty appeared to decline somewhat faster. A main explanation may have to do with the expansion in the non-farm income earning opportunities in rural areas. In addition, the policy reforms of the 1980s and the 1990s may have made economic growth more "pro-poor" (i.e., the poor benefiting relatively more than the non-poor) compared to the earlier period. In the 1990s, there have been both accelerated policy reforms (e.g., liberalization of foreign exchange markets, trade liberalization, privatization in the service sector) and increased protection for the agricultural sector (e.g., high tariffs overcompensating for the lifted import quotas). Consequently, the effective protection rate for agriculture became roughly equal to that for manufacturing. Land reform aimed at reducing inequality is a crucial aspect of rural development and poverty reduction. Since the early postwar period, efforts at reforming agrarian relations have not been lacking. However, results thus far have not been encouraging. Indeed, the unduly long period of land reform implementation has bred unintended effects harmful to agriculture and rural development. (Successful land reform programs elsewhere in East Asia were implemented swiftly under authoritarian regimes.) The uncertainty surrounding the program has discouraged the flow of investments into agriculture and encouraged premature conversion of agricultural lands into non-agricultural uses. Moreover, the program has effectively caused the private market for agricultural lands to cease, thereby diminishing the collateral value of agricultural lands and, hence, discouraging lending to agriculture, especially by private financial institutions. Rather than making land reform the centerpiece of the strategy for rural development and poverty reduction, priority should perhaps be given to investments in physical and social infrastructures, agricultural research and technology transfer, small and medium enterprise development, and enforcement of contractual arrangements and property rights. As the East Asian experience demonstrates, these, along with sound macroeconomic fundamentals, are critical to sustained broad-based growth and poverty reduction. NOTES
1 Conducted every three years since 1985, the FIES provides the only nationally representative surveys for poverty comparison in the Philippines. Unit record data are available for these surveys. Earlier surveys covering 1961, 1965, and 1971 are available only in published forms. While surveys covering 1975 and 1979 are also available, these are beset by serious technical problems (see Balisacan 1994). The official approach to poverty measurement does not capture well the changes in standard of living of the poor. This is so since the official poverty lines applied for various regions, areas, and years imply different living standards, tending to

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ARSENIO M. BALISACAN AND ERNESTO M. PERNIA systematically underestimate (overestimate) the reduction (increase) in absolute poverty in economically more progressive (backward) regions or sectors, or during periods when the overall economy is expanding (contracting). The problem arises because of the use of region-specific (and, within region, area-specific) poverty line based on the prevailing consumption pattern of that region (area). See Balisacan (2001).

Commitments of the Philippines with regard to agriculture include a prohibition on the use of (additional) non-tariff measures, conversion of all existing quantitative restrictions to tariff measures (except for rice, the tariffication of which has been deferred for 10 years), binding tariffs at ceiling rates, tariff reductions (aver age cut of 30 percent) and harmonization of sanitary and phytosanitary measures. These binding (tariff) rates are slated to go down to a range of about 40 to 50 percent for the various crops in 2004 in accordance with the WTO agreement. The choice of province instead of region as unit of analysis permits the use of a much larger number of observations (73 as opposed to 13) for econometric work. In this section, "rural areas" pertain to all provinces outside of major cities (Metro Manila, Cebu, and Davao). Results for two other regressions involving the depth and severity of poverty (not reported, for brevity, in this paper) are qualitatively similar to those reported below. Put differently, local governance by political dynasty may make feasible the concentration of economic controls to a few hands, thereby leading to (perpetuating) high income inequality. High income inequality, in turn, may inhibit subsequent growth in the local economy, as suggested by recent development literature. For ease of interpretation, poverty reduction is specified in the regressions as poverty in the beginning year (1988) less poverty in the ending year (1997).

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