University of Southeastern Philippines

College of Governance, Business and Economics Mintal Campus, Davao City

Underdevelopment Of The Philippine Agricultural Sector

A Policy Paper

DONNA VALMORIA ABERGAS
BS in Agricultural Economics Department of Applied Economics

October 2009

Introduction
The Philippine archipelago is renowned for its rich natural resources ranging from the rare species of wildlife to the overwhelming landscapes which are the top reasons why its one of the favorite tourists spot in the Asian region. Existence of numerous agricultural lands in the country since ancient times until the present proves the natural abundance of the tropical country. Yet, despite the evident truth of the country’s capacity to provide agricultural goods for the consumption of its citizens, importation of farm produce continues to abominate the local market. Such presence of agricultural trade is tolerable if only the goods which are shifted in the country are those goods which could not be locally produced through the use of available inputs in the domestic market. Taken for example is the apple crop, such commodity could only be commercially grown in temperate countries that it is necessary to import the said commodity from apple-producing countries to meet the demand for the said product. In the Philippines’ case, even the staple food which is rice have to be imported from other rice-producing countries since total production output of the said crop does not meet the total demand by the populace. The United Nations' Millennium Development Goals (MDGs), as set forth in the Medium-term Philippine Development Plan (MTPDP) for 2005-2010 has anchored the country’s national development goals. Under this plan, the agriculture, forestry, and natural resources (AFNR) sectors make up the three pillars to sustain economic growth and improve the lives of more than 80 million Filipinos. Moreover, everything that has to do with agriculture and its ecosystems is set forth as a national policy in Republic Act 8435, otherwise known as the Agriculture and Fisheries Modernization Act (AFMA) of 1997. The act basically aims for a modernized agroindustrialization that is technology-based, market-driven, and sustainable development-anchored. (Faylon and Cardona, 2007) Philippine agriculture plays a vital role in the economy. This attaches the high priority of transforming agriculture into a modern, dynamic and competitive sector. A sustained expansion of the national economy requires sustained growth in the agricultural sector. Agriculture including forestry and fishery plays a dominant role in the Philippine economy. The country’s population is predominantly rural (70 percent of the total) and two-thirds of this population depends on farming for their livelihood. In terms of employment, about one-half of the labor force is engaged in agricultural activities.

Primarily, Philippine agriculture consisted of rice, corn, coconut, sugar, banana, livestock, poultry, other crops and fishery production activities. The sector’s contribution to the economy has been substantial 23% of gross domestic product in 1995. It registered a growth rate of 3.2%. The growth was mainly due to the expansion of the poultry, livestock, and palay subsectors. Over the past six decades, the agricultural sector was confronted by both internal and external bottlenecks that constrained its performance and growth. Despite the sector’s desire to implement reforms to increase productivity, efficiency, competitiveness, market adaptability, and sustainability of agri-based industries, these reforms were hampered by inadequate resources, limited implementing capabilities of national and local government units (LGUs), and weak coordination among implementing agencies. In addition, the occasional occurrences of natural disasters (e.g., El Ni•o phenomenon and La Ni•a phenomena) and international market crisis (e.g., 1997 financial crisis) exacerbated the real growth of the sector, resulting to contraction in output as observed in 1998. From 1993 to 2004, agriculture, fisheries, and forestry hardly grew on the average by 2.6% (Fig. 1). Real growth in agriculture of 1% in the Philippines from 1980 to 1990 lagged behind the world average and middle-income country average of 2.8% and 3.5%, respectively. Neighboring Asian countries such as China, Vietnam, and Thailand posted very high growth rates during the period. From 1990 to1997, the Philippines improved its real agricultural growth rate to 1.9%, but this is still considerably lower than middle-income countries in Asia. However, during the 1998-2003 period, Philippine agricultural growth was comparable to Thailand and Vietnam. A most notable development in the agriculture sector over the past 15 years was its sectoral transformation into agro-industrial services. From 1990 to 2003, the GDP share of agriculture dropped from 21 to 14%. Thus, it is this paper’s aim to identify the key elements involved in the agricultural sector of the country in order to sort the weak points in the agricultural system which needs support from the government; policies which could further improve the status of agriculture. Indicators were chosen with reference to existing economic theories and principles. Data were gathered from the reputable and credible institution Bureau of Agricultural Statistics (BAS) through its updated online database. Through the utilization of the SPSS software, the data were fitted into a linear regression model. Assumptions were checked to optimize the resulting model’s validity. Transformations of the available data were

done to further refine the resulting linear regression model. The effect of the chosen exogenous variables to the chosen endogenous variable is quantified and appropriate policy recommendations were formulated based on the results derived from the raw data.

Theoretical Framework
Generally, Theory of Production in economics is an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves some of the most fundamental principles of economics. These include the relationship between the prices of commodities and the prices (or wages or rents) of the productive factors used to produce them and also the relationships between the prices of commodities and productive factors, on the one hand, and the quantities of these commodities and productive factors that are produced or used, on the other. (ENCYCLOPEDIA BRITANNICA 2009) In economics, factors of product io n (or productive inputs) are the resources employed to produce goods and services. They facilitate production but do not become part of the product (as with raw materials) or are significantly transformed by the production process (as with fuel used to power machinery). To 19th century economists, the factors of production were land (natural resources, gifts from nature), labor (the ability to work), and capital goods (human-made tools and equipment). Recent textbooks have added entrepreneurship and "human capital" (labor's education and skills). "Land" can include ecosystems while sometimes the overall state of technology is seen as a factor of production. In any event, it is the scarcity of the factors of production which poses humanity's economic problem, often forcing us to choose between competing goals. The number and definition of factors varies, depending on theoretical purpose, empirical emphasis, or school of economics. Differences are most stark when it comes to deciding which factor is the most important. For example, in the Austrian view -- often shared by neoclassical and other "free market" economists -- the primary factor of production is the time of the entrepreneur, which, when combined with other factors, determines the amount of output of a particular good or service. However, other authors argue that "entrepreneurship" is nothing but a specific kind of labor or human capital and should not be treated separately. The Marxian school goes further, seeing labor (in general, including entrepreneurship) as the primary factor of production,

since it is required to produce capital goods and to utilize the gifts of nature. It is unlikely that this difference of opinions between the "Austrians" and the Marxists will be ended soon. But this debate is more about basic economic theory (the role of the factors in the economy) than it is about the definition of the factors of production. (WIKIPEDIA, 2009) With reference to the production theory, the dependent variable shall be the Philippines’ Gross Domestic Product (GDP) since a huge portion of the GDP is accounted to the said sector.

Empirical Regression Model
GDP = β0 + β1 Agricultural Loans + β2 Irrigation + β3 Employment + β4 Fertilizer Supply + β5 Land + ε

Developed Regression Model
Log GDP = β0 + β1 (1 / Agricultural Loans) + β2 (1/ Irrigation) + β3 log Employment + β 4 Fertilizer Supply + β5 Land‚ + ε Where: GDP Agricultural Loans Irrigation Employment Fertilizer Supply Land = = = = = = Gross Domestic Product of the Philippines Amount of loans released by the government for agricultural utilization the summation of National Irrigation for the wet and dry season the total number of the populace who is employed in the agricultural sector the total volume of fertilizer available for utilization of the Philippine agricultural sector the summation of amount of land in hectares utilized for the production of Palay, Corn, Abaca, Banana, Cabbage, Calamansi, Camote, Cassava, Coconut, Coffee, Eggplant, Garlic, Mango, Mongo, Onion, Peanut, Pineapple, Rubber, Sugarcane, Tobacco and Tomato.

INTERPRETATIONS and RECOMMENDATIONS
The above model showed the highest Durbin – Watson score at 1.601 among all tested variables which is also within the 1.5 to 2.5 boundaries and shows that the data doesn’t qualify for negative or positive serial correlation. VIF scores also didn’t go beyond the 10 point mark which means no violation of collinearity. On the aspect of linearity, a strong relationship could be seen between the employment variable and the land variable at 74.4% which is beyond the 50% mark, the presumed acceptable region limit. Elimination might be done yet, it would result to a downward movement of the Durbin – Watson score which would be below the 1.5 mark. Transformations were also done yet, the resulting Pearson – r score still reveals a high correlation between the two variables. On the aspect of analysis of variance, the model would still be significant considering the assumption that having a level of significance below 10% can still be considered as acceptable. The model’s level of significance after statistical processing is at 0.057. Based on the resulting model, the inverse of Agricultural Loans and of Irrigation have negative effects to the dependent variable which is the logarithm of GDP at negative 13926.469 and negative 0.000002076. Among all the identified variables, the inverse of the Agricultural Loans showed that it has great influence to the GDP of the country considering that a large portion of GDP is contributed by the agricultural sector. It is therefore my recommendation that the Agricultural Loans programs of the country be further intensified by the government. Intensified agricultural loans in the country would mean more available monetary capital for farmers. On the aspect of irrigation, the government should also continue to implement irrigation projects for all the areas in the country which have high

agricultural potentials since its one of the major factors which helps optimizes the productivity of the agricultural sector. Land, on the other hand at 0.000000000000005766, shows theoretical consistency considering its positive relationship with the dependent variable. In order to help increase the GDP of the country, more wastelands and other physical supply of land with high agricultural productivity rate should be added to the economic supply of agricultural land in order to increase agricultural production though it shouldn’t be prioritized as of the moment since policies imposing agricultural land expansion only have minimal effects to the output of the agricultural sector. The results shows that fertilizers supply have negative relationship to the dependent variable. It could only mean that the development of the agricultural sector does not depend on the supply of fertilizer in the market and should not be prioritized by the government. With a numerical coefficient of negative 0.0000001165, it would simply mean that a continuous increase in the supply of fertilizer would just increase the cost of production but not the output derived from the agricultural sector. Employments negative relationship to the endogenous variable (- 0.539) could imply that the available labor force doesn’t have the skills to produce efficiently. Therefore the government should strengthen policies on

agricultural trainings and extensions projects to members of the agricultural labor force. Instead of focusing on enticing members of the populace on engaging in the agricultural sector, the government should instead strengthen the sector’s current human resources.

APPE NDICES
Descriptive Statistics N Statistic log_gdp inv_loans inv_irrigation log_employment Fertilizer Supply sq_land Valid N (listwise) 13 13 13 13 13 13 13 Skewness Statistic -.228 -.278 .664 -.943 .196 -1.316 Std. Error .616 .616 .616 .616 .616 .616 Kurtosis Statistic -.976 1.027 -1.167 .137 -.453 4.404 Std. Error 1.191 1.191 1.191 1.191 1.191 1.191

Correlations Fertilizer log_gdp inv_loans inv_irrigation log_employment Supply Pearson Correlation log_gdp inv_loans inv_irrigation log_employment Fertilizer Supply sq_land 1.000 -.199 -.801 .358 .031 .539 -.199 1.000 .002 -.123 -.465 -.209 -.801 .002 1.000 -.362 .003 -.450 .358 -.123 -.362 1.000 .473 .744 .031 -.465 .003 .473 1.000 .411 sq_land .539 -.209 -.450 .744 .411 1.000

Model Summary Adjusted R Model 1 R .853
a

b

Std. Error of the Estimate Durbin-Watson 1.601

R Square .728

Square .534

.12973

a. Predictors: (Constant), sq_land, inv_loans, inv_irrigation, Fertilizer Supply, log_employment b. Dependent Variable: log_gdp

ANOVA Model 1 Regression Residual Total Sum of Squares .315 .118 .433 df

b

Mean Square 5 7 12 .063 .017

F 3.745

Sig. .057
a

a. Predictors: (Constant), sq_land, inv_loans, inv_irrigation, Fertilizer Supply, log_employment b. Dependent Variable: log_gdp

Coefficients Unstandardized Coefficients Model 1 (Constant) inv_loans inv_irrigation log_employment Fertilizer Supply sq_land B 10.617 Std. Error 10.687

a

Standardized Coefficients Beta t .994 -.218 -.689 -.061 -.161 .296 -.961 -3.017 -.194 -.620 .935 Sig. .354 .369 .019 .851 .555 .381

Collinearity Statistics Tolerance VIF

-13926.469 14497.876 -2.076E6 687967.188 -.539 -1.165E-7 5.766E-15 2.773 .000 .000

.754 .745 .392 .575 .389

1.325 1.342 2.551 1.740 2.569

a. Dependent Variable: log_gdp

Year 1994

Y (GDP) 1,692,932.00

X1 (Agri Loans) 74,335.70

X2 (∑ Irrigation) 883,265.00

X3 (Employment) 11,289.00

X4 (Fertilizer) 2,267,192.00

X5 (∑ land) 11,515,546.00

log_Y 6.23

inv_X1 0.000013

inv_X2 0.000001

log_X3 4.05

sq_X5 132,607,799,678,116.00

1995

1,905,951.00

82,571.10

848,227.00

11,147.00

2,627,346.00

11,255,521.00

6.28

0.000012

0.000001

4.05

126,686,752,981,441.00

1996

2,171,922.00

564,718.80

876,109.00

11,645.00

2,809,595.00

11,643,131.00

6.34

0.000002

0.000001

4.07

135,562,499,483,161.00

1998

2,665,060.00

115,078.60

870,014.00

10,091.00

1,968,627.00

10,338,565.00

6.43

0.000009

0.000001

4.00

106,885,926,259,225.00

1999

2,976,905.00

170,479.70

831,283.00

10,774.00

2,390,059.00

11,613,477.00

6.47

0.000006

0.000001

4.03

134,872,848,029,529.00

2000

3,354,727.00

114,506.20

932,207.00

10,181.00

2,401,370.00

11,487,245.00

6.53

0.000009

0.000001

4.01

131,956,797,690,025.00

2001

3,631,474.00

122,596.20

949,918.00

10,850.00

2,232,515.00

11,480,701.00

6.56

0.000008

0.000001

4.04

131,806,495,451,401.00

2002

3,883,230.00

123,460.30

978,737.00

11,122.00

2,236,205.00

11,427,542.00

6.59

0.000008

0.000001

4.05

130,588,716,161,764.00

2003

4,316,402.00

135,158.40

949,038.00

11,219.00

2,699,701.00

11,477,914.00

6.64

0.000007

0.000001

4.05

131,742,509,791,396.00

2004

4,871,555.00

167,956.90

953,584.00

11,381.00

2,884,968.00

11,766,588.00

6.69

0.000006

0.000001

4.06

138,452,593,161,744.00

2005

5,444,039.00

108,935.90

966,465.00

11,628.00

2,492,205.00

11,600,147.00

6.74

0.000009

0.000001

4.07

134,563,410,421,609.00

2006

6,032,835.00

93,228.00

972,692.00

11,682.00

2,216,936.00

11,958,481.00

6.78

0.000011

0.000001

4.07

143,005,267,827,361.00

2007

6,648,245.00

153,832.20

964,710.00

11,786.00

2,431,277.00

12,216,200.00

6.82

0.000007

0.000001

4.07

149,235,542,440,000.00

Source: Bureau of Agricultural Statistics

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