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Agricultural Investments and the Pace of Land Reform

Roehlano M. Briones1

Assistant Professor
Economics Department, School of Social Sciences
Ateneo de Manila University
Katipunan Avenue, Loyola Heights, Q.C.

April 30, 2002

The slow implementation of land reform under the Comprehensive Agrarian Reform
Program (CARP) is allegedly a significant factor behind declining investment in
agriculture. There are two reasons behind this allegation: first, under CARP, traditional
landowner face greater uncertainty in realizing returns to agricultural investment; second,
CARP regulations erode the collateral value of land, thus cutting off bank finance of farm
investment. The evidence for the allegation however has been mostly anecdotal. This
study confirms the hypothesis of adverse investment impact using quantitative analysis of
primary data collected from traditional landowners. It therefore improves on previous
anecdotal evidence for the hypothesis. Moreover, the study identifies the main reason for
the negative impact to be the introduction of uncertainty, rather than the erosion of
collateral value of farm land. The findings buttress the call for faster implementation of
land reform under CARP.

1
I thank Cielito Habito, Joseph Lim, Ponciano Intal, and Arsenio Balisacan for their helpful comments.
Financial support for the study from the Department of Agrarian Reform is gratefully acknowledged. I am
solely responsible for the views presented here, as well as any remaining errors and omissions.
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1. INTRODUCTION

A trenchant criticism of the Comprehensive Agrarian Reform Program (CARP) is

directed not against the land redistribution per se, but rather in its sluggish

implementation. During the lengthy interim until the end of the Program, agricultural

investment is alleged to suffered dramatic decline. Low land valuation and uncertain

timing of acquisition seriously blunts incentives to invest in land productivity. Moreover,

farm investment faces a more severe financing constraint as the collateral value of farm

land is eroded. Aside from anecdotal evidence, there is however little statistical support

for or against the hypothesized adverse impact on investment. Briones (2000) discusses

some of the relevant studies but concludes that their findings are of limited generality.

This papers initiates quantitative, micro-based research on the impact of CARP on

agricultural investments of traditional landowners. Analysis is based on primary data

drawn from a sample of traditional landowners. The analytical method controls for other

factors determining investment. The findings of the paper are therefore supported by

evidence more reliable than what has hitherto been available.

The study confirms that finds that agricultural investment has indeed been

adversely affected by CARP. The main avenue for this effect is the prospective capital

loss inflicted by compulsory acquisition. On the other hand, erosion of farm land’s

collateral value is an unimportant contributor to the decline in agricultural investment.

Nevertheless the confirmation of the adverse impact buttresses the call for faster

implementation of land acquisition and distribution (LAD), even on purely economic

grounds.
2

The rest of the paper is organized as follows: Section 2 provides additional

background and conceptual underpinnings for the investment hypothesis. Section 3

describes the survey frame and the sample respondents. Section 4 presents evidence on

investment impacts of CARP. Section 5 concludes.

2. AGRICULTURAL INVESTMENT AND THE IMPLEMENTATION OF CARP

The CARP, which was implemented from 1988 onward, is the culmination of

several decades of land reform in the Philippines. It restricts landowners to a maximum

retention of five ha. of farm land. The Land Bank is authorized to forcibly acquire

agricultural land exceeding the retention limit for transfer to agrarian reform beneficiaries

(unless landowners themselves negotiate a land sale to their tenants.) Compensation is set

by the Land Bank at prices widely perceived by landowners as a gross underestimate of

actual land values.

Private landowners have therefore resorted various legal (and extra-legal)

maneuvering to avoid or at least delay compulsory acquisition. The process is further

prolonged by waning Congressional allotment to landowner compensation. These help

explain why, out of the total scope of 8 million ha., only 61% has actually been

distributed, 2 years after the legal deadline for completing the program (Table 1). Private

lands (for which the investment hypothesis is most relevant) has an even lower

distribution rate of around 53%; not surprisingly, the distribution accomplishments of

land reform under CARP has been in the form of non-private agricultural land (i.e.

settlements, government-owned estates) as well as public lands.


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Table 1.
Scope and accomplishments of the land acquisition and distribution
component of the Comprehensive Agrarian Reform Progam, as of June 2000

Type of land Scope Distributed Percentage of


(ha.) (ha.) scope

Private lands 2,996,105 1,598,247 53

Non-private lands 1,294,348 1,427,338 110

subtotal 4,290,453 3,025,585 71

Public A&D1 lands 2,502,000 1,141,675 46

ISF and CBFM2 areas 1,269,411 1,164,297 92

subtotal 3,771,411 2,305,972 61

Total 8,061,864 5,331,557 66

1
A & D: Alienable and disposable
2
ISF: Integrated Social Forestry; CBFM: Community-based Forest Management

SOURCE: Presidential Agrarian Reform Council.

It is not difficult to grasp the rationale behind an expected decline in farm

investments by traditional landowners. Farmlands may be though of as assets yielding a

flow of net income. The income flow can be capitalized into a reservation price of the

land, below which a landowner will not voluntarily offer her land for sale. Current

investments, by raising land income over time, can therefore increase the reservation

price for the land. Transfer of ownership effectively truncates the flow of income at the

period of transfer. If landowner compensation is below the net present value of post-
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transfer income (i.e. the reservation price), then the landowner suffers a capital loss.

Hence, landowners are expected to oppose land transfer and scale down their investments

making agricultural land more productive.

The foregoing argument can be easily formalized, e.g. Besley (1995). The

suppression of investment incentives should be detectable by comparison of average farm

assets: that is, other factors constant, landowners who remain threatened by LAD should

have a smaller asset stock per ha. Hence, with adequate controls for other investment-

related factors, differences in asset stock should be discernible in a representative cross-

section of traditional landowners.

Aside from the prospective capital loss channel, land reform can affect

agricultural investment through the financing channel. Conventional wisdom regarding

this channel rests on two premises: First, agricultural investment is heavily dependent on

formal finance. Second, such formal finance is in turn dependent on collateral in the

form of farmland. Ravallo (1999, p. 72) provides an example of this view:

Collateral provides lending institutions a means of mitigating credit risks because of the
exchange value of the collateral itself. In the case of agriculture, the only significant asset
will be the land itself. However once the lending institution forecloses in the event of
default, the lending institution becomes the de facto landowner and automatically falls
under the Comprehensive Agrarian Reform Law (CARL or RA 6657). This creates
enormous complications because the CARL mandates that the foreclosed land must be
disposed only to the government, at a value determined solely by the government and
acted only upon the disposition of the government. Under these conditions, land as
collateral clearly loses its exchange value. As a result, the values of lands that may be
covered by the CARL are drastically eroded in the market. At such low prices, they could
not carry enough market value to be used as loan collateral. [Underscoring in the
original.]

CARP therefore acts to suppress investments via two channels: through

prospective capital loss, and through land decollateralization. The rest of the paper is

devoted to ascertaining the significance of the investment impact through these channels.
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3. THE LANDOWNER SURVEY

The data of the study is obtained from a purposive sample of landowners in areas

planted to rice, corn, coconut, sugar, banana, pineapple, and mango (the country’s major

crops in terms of land area and production value.) Respondents are drawn from provinces

associated with each crop (Table 2).

Table 2.
Provinces in the survey by crop and island group

Luzon Visayas Mindanao

Rice Nueva Ecija Iloilo


Corn South Cotabato
Coconut Laguna, Quezon Davao del Norte
Sugarcane Batangas Negros Oriental
Banana Davao del Norte
Pineapple South Cotabato
Mango Zambales

SOURCE: Author’s data.

A selected province is also characterized by a large amount of land under CARP

coverage, as well as diversity in the size holdings of landowners. The provinces are

distributed throughout the major island groups. Information from the respondents was

elicited using a structured questionnaire. There are 100 respondents, classified by type of

crop accounting for the major source of farm income. The sample includes twenty each

for rice, coconut, and sugarcane, as well as ten each for corn, banana, pineapple, and

mango. They are distributed across the various size categories of the Department of

Agrarian Reform (DAR): small (5 ha. and below), medium (between 5 and 24 ha.), and
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large (24 ha. and above). The sample contains 29 small, 41 medium, and 30 large

landowners. Large landowners include 14 corporate farms, hence the remaining 86

landowners are referred to as proprietors. Note that these farm sizes denote total farm

landholding; for proprietors this would differ slightly from actual owned land (due to

land leasing or rental).

Compliance with land acquisition and distribution (LAD) of the CARP is far from

complete among the affected proprietors (all of whom fall in the medium-large category.)

The total number of affected landowners is 53 (63% of the sample proprietors). Affected

landowners who have complied with land acquisition and distribution are referred to as

LAD-compliant, while those who have not complied are LAD-pending. The majority

(57%) of the affected proprietors are LAD-pending, For some, negotiations with the DAR

are already underway; other cases are not being acted upon by the DAR due to

unresolved ownership disputes; in a few cases the LAD-pending landowners have

reported no contact at all with agrarian reform officials.

Of the affected proprietors, close to a third claim to have escaped coverage due to

subdivision of the land, whether through the CARP itself (i.e. children are the identified

beneficiaries) or by judicial means. Despite legal or pending subdivision of title, we have

classified these as under a single landowner if one person (the identified proprietor)

assumes all decision-making regarding the use of land.

As for the commercial farms, the survey covers four corporations each for banana

and sugarcane, three for pineapple, two for mango, and one for corn. Except for the

sugarcane farms and the corn farm, all have complied with CARP by entering leaseback

or contract growing arrangements. During field interviews it was the sugar planters who
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were most vocal in their objections to CARP. They were nevertheless open to the

leaseback arrangement as the best compromise under the realities of an agrarian reform

regime.

4. INVESTMENT IMPACTS OF LAND REFORM

The discussion now moves to a detailed consideration of the investment

hypothesis. After describing how data on productivity and investment are computed, the

section then presents some data summaries, undertaken separately for corporate farms

and proprietors (due to the large differences between these two categories). This is

followed by a multivariate analysis for measuring the investment impact of CARP.

The adopted measure of productivity is net income per ha. per year, equal to

revenue less out of pocket costs (and is therefore gross of the opportunity costs such as

the foregone capital and labor income). Data on incomes and costs all pertain to the crop

year 1999-2000. Meanwhile, accumulated investments are measured by capital intensity

or assets per ha. Assets include farm equipment (at current market value), land

improvement (at current cost of investment), and trees (at current price of equivalent

timber wood, or valuation of such trees by the municipal assessor). Only assets attributed

to the current landowner is summed up to total assets (hence, for example, trees planted

by previous landowners are excluded from total assets.)

Corporate farms

To present the productivity and asset stock of corporate farms (except for corn),

the classifications banana, other fruit (pineapple and mango) and sugarcane are adopted.

Net income of banana farms is highest in banana farms, at 119,024 pesos/ha. This is
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followed by other fruit at 50,364 pesos/ha., while sugarcane had the lowest net income

per ha. at 29,974 pesos/ha. These figures are much higher than the net incomes per ha. of

proprietary farms. Meanwhile, capital stock is also largest in the banana farms, at

593,000 pesos/ha.; other fruits needed only 117,000 pesos/ha., while sugarcane needed

only 65,000 pesos/ha. These figures also dwarf the farm assets for proprietors.

Interestingly, financing of fixed capital formation and working capital

requirements typically does not involve borrowing from banks. For five of the farms,

financing was undertaken by internal capital of the company conglomerate (though

admittedly this may also be bank financed); in one corporate farm, the collateral used was

urban commercial property of the conglomerate. One sugarcane farm owner reported the

use of chattel mortgage, while three corporate farms who exported their produce used

their marketing agreements (i.e. the flow of prospective revenue) as collateral. Hence

“decollateralization” would seem to be only a minor setback for these corporate farms.

Proprietors

As for the sample proprietors, the following crop categories are adopted for the

tabulations: cereal (rice and corn), fruit (nontraditional export crops, composed of

banana, pineapple, and mango); and traditional (coconut and sugarcane). Table 3

presents productivity and assets of the sample proprietors by size category and LAD

compliance. The greatest capital intensity and farm incomes per hectare are found among

the small landowners (with the exception of income for the traditional category). LAD-

pending landowners are usually characterized by the lowest capital intensity and net

incomes.
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Table 3.
Net income and assets in pesos per ha. of sample proprietors, by LAD status
All Small LAD- LAD-
compliant pending

Net income (per annum):

Cereal 10,504 16,232 8,405 7,669

Traditional 8,515 7,915 9,425 8,416

Fruit 23,099 46,648 9,538 3,491

All categories 12,747 22,042 8,405 7,669

Assets

Cereal 18,816 34,619 8,519 4,808

Traditional 15,330 25,900 16,004 10,040

Fruit 17,525 22,668 11,538 29,890

All categories 16,823 24,616 11,967 9,794

SOURCE: Author’s data.

Turning now to constraints on formal finance of agricultural credit: Table 4

profiles borrowing behavior of the affected landowner-proprietors from formal sources.

(Note that the first column summarizes data for all proprietors while the next two

columns refer only to affected proprietors.) Contrary to expectation, a large minority of

affected proprietors have never borrowed from formal sources, even well before CARP

(the average farming experience of all proprietors is 32.6 years). Meanwhile, of those that

did borrow, the last credit episode occurred on the 5 years ago on the average. Neither do

even LAD-compliant landowners frequently rely on farmland collateral; it is actually the


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Table 4.
Credit availment and potential collateral of sample proprietors, by LAD status

All proprietors LAD-compliant LAD-pending


For all crops:
Percent investments financed
by borrowing
(all sources) 20.1 23.1 18.4

Never borrowed 36.5 12.8 9.3

Years since last formal loan,


for borrowers 5 1.9 6.9

Percent of borrowers who


used farm land as collateral 5 1.2 4.7

% of farm assets in real property

By type of crop grown:

Cereal 4.0 3.6 0.9

Traditional 9.9 0.3 7.0

Fruit 8.0 11.3 6.8

All categories 7.4 5.8 5.1

SOURCE: Author’s data.

LAD-pending landowners who most often do so.2 Rather, collateral put up by borrowers

usually takes the form of residential property. To buttress this point, the bottom part of

Table 4 presents the ratio of total farm assets to total residential and commercial

properties of the affected landowners. On the average farm assets amount to less than a

2
On a case-to-case basis farmland within the retention limit of the borrowing landowner can be accepted
by some banks as collateral for an agricultural loan.
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tenth of total nonfarm properties; this diminutive ratio holds consistently across crop

categories and LAD status.

Furthermore, most of the borrowings are used primarily to finance working

capital; based on the survey data, only one fifth of the assets of the average proprietor

were financed by borrowing. Note that this figure applies to the entire history of asset

formation of the landowner, most of which began in the 1970s and 1960s, far earlier

than the implementation of land reform in areas outside rice and corn. The bulk of actual

farm investments were actually financed by savings, for any type of proprietor (and even

for some corporate farms). The proportion is slightly higher for LAD-compliant

proprietors, and slightly lower for the LAD-pending proprietors.

To summarize: landowners facing the prospect of LAD have accumulated a less

capital per ha. than other landowners and have lower net farm incomes per ha. This is

probably not due to the fact that formal finance has become more difficult due to land

reform. It may be attributed to land reform’s threat of inflicting a capital loss; such

attribution cannot yet be rigorously supported. For one, low asset and productivity figures

for LAD-pending landowners, who are also the bigger landowners, may simply be a

reflection of decreasing returns to scale combined with a negative size-capital intensity

relationship. A well-documented stylized fact on agricultural productivity is that yield

and area are negatively correlated (Heltberg, 1998), hence it is not surprising to observe a

negative relationship between income and area or even capital intensity and area.

As simple data comparison based on LAD status obscures multiple factors determining

investment (such as farm size and type of crop), the paper now turns to multiple
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regression analysis in our attempt to control isolate the significance of LAD status in

determining asset stock.

Multiple regression analysis

The study adopts the ordinary least squares method to isolate the significance of

LAD status on farm investment. On the left hand side of the OLS equation is assets per

ha. On the right hand side are explanatory variables, the most important being a dummy

variable of noncompliance with LAD, denoted by PENDING. Consistent with the

hypothesis of adverse CARP impact on investment, the PENDING coefficient is expected

to be negative and significant.

Other variables on the right hand side are the following:

PROPRIETOR proprietorship dummy (corporation omitted)

AGE proprietor’s age, in years

SCHOOLING years of formal education of proprietor

HHSIZE number of members in the proprietor’s household

YRFARM years that a landowner has been engaged in farming

NFPROP proprietor’s nonfarm real property, in pesos

NFINC proprietor’s income from nonfarm sources, in pesos

SHARE percent of landholding under share tenancy

CEREAL cereals dummy

FRUIT fruit crops dummy

AREA size of farmland, in ha.


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Also included are the following provincial dummies: LAGUNA (Laguna-Quezon),

DAVAO, NEGROS, ILOILO, ZAMBAL, (Zambales-Pangasinan), BATS (Batangas),

and NECIJA (Nueva Ecija); South Cotabato is omitted from the regression.3

The variables AGE, SCHOOL, NFINC, and NFPROP are applicable only for

proprietors and are set at zero for corporate farms; these variables may therefore be

regarded as interacted with the PROPRIETOR dummy. The rationale for the proprietor-

specific variables is to incorporate alternative asset types (including human capital) and

sources of income, that could assist in financing farm investment, given borrowing

constraints. On the other hand, YRFARM incorporates the time factor in the build-up of

capital stock. Finally, HHSIZE increases consumption ceteris paribus and constrains

financing of capital build-up further.

The SHARE variable accounts for depressed incentives to invest in those land

portions where the owner is not a residual claimant. The crop dummies are intended to

adjust for differences in capital requirements across the major crop categories, owing to

differences in the technology of producing different crops. The province dummies

introduce conditions common to a location but differing across locations; among these

conditions are the relative prices prevailing in a locality. Finally, AREA incorporates the

size and scale factor in determining the capital-land ratio, to account for non-

homotheticity in the production function.

Variables (in addition to PENDING) expected to have to be negative coefficients

are: PROPRIETOR, HHSIZE, and SHARE. The others are either positive or are

ambiguously signed a priori.

3
Among the dummy variables pertaining to location, it is a standard technical requirement to drop one of
the locations so as to avoid linear dependence. The choice of South Cotabato for omission is arbitrary.
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Results of the regressions are reported in Table 5. The first column pair contains

the coefficients and t-values from the least squares regression. The estimated model has a

high goodness-of-fit. The variable of main concern, PENDING, has a negative and

significant coefficient, consistent with the investment hypothesis. The t-value is high

enough to pass a significance level of 5%. According to the regression, all other factors

constant, a landowner with facing LAD has a capital intensity lower by 54,475 pesos/ha.

on average.

As for the other explanatory variables: a proprietary status implies lower capital

intensity compared to a corporate status. None of the demographic variables, save for

years of farming, are significant; interestingly, years of schooling has a negative

influence on capital intensity. Likewise counterintuitive is the sign of the coefficient for

NFPROP (though the coefficient is insignificant). CEREAL and FRUIT coefficients are

positive and significant, suggest that investment tends to be lowest in traditional farms.

Neither share tenancy nor farm size matter exert a statistically discernible effect on

capital intensity.

For cross-section data though, the assumptions of least squares regression for

statistical inference are suspect, particularly the one imposing homoscedasticity. A Cook-

Weiberg test yields a χ2-value of 184.09, forcefully rejecting the constant variance

assumption. The second column of Table 5 presents a White “sandwich” recalculation of

the standard errors and t-values. The t-values of the coefficients rise (except for a few

province dummies), including the t-value of PENDING, which becomes significant at the

1%-level.
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Table 5.
Regression results

OLS White- Proprietors only,


VARIABLE corrected White-corrected
Coefficient t-value t-value Coefficient t-value

PENDING -54,475.0 -2.44** -2.88*** -11065.6 -1.701*

PROPRIETOR -223,069.8 -4.54*** -3.23*** -

AGE 221.37 0.25 0.30 -31.4 -0.09

SCHOOL -1,328.4 -0.90 -1.48 -251.1 -0.71

HHSIZE -2,162.6 -0.52 -0.97 768.1 0.51

YRFARM -770 -1.95 -2.42** 42.6 0.15

NFPROP -.00065 -0.29 -0.63 0.0002 0.27

NFINC 0.0038 1.04 0.90 0.03 1.56

CEREAL 13,5587.7 2.37** 1.92* 4600.0 0.24

FRUIT 975,745.0 2.25** 1.69* -15273.8 -1.35

SHARE 111.3 0.30 0.69 -108.1 -1.17

AREA 0.91 0.11 0.12 -40.9 -0.39

CONSTANT 126,217.3 1.90* 1.37 11128.9 0.55

Adjusted R2 0.54 0.63 0.20


(unadjusted) (unadjusted)

Prob(F>FC) 0.00000 0.00001 0.0000


*
-signficant at 10 percent level;
**
-signficant at 5 percent level;
***
-significant at 1 percent level

SOURCE: Author’s data.


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The finding is rather strong, hence further checks for robustness are warranted. A

Ramsey Reset test on the least squares regression finds that the null hypothesis of “no

patterns in the residual” is rejected with 0.000 probability, i.e. near certainty. Hence the

findings in columns 1 and 2 are suspect; inspection of the residual plot reveals a great

deal of dispersion in the computed error term at high levels of capital, i.e. for corporate

farms.

Hence, the least squares regression is re-run only for proprietors. That is, to

eliminate correlation between corporate status and the error term, all corporate farms are

dropped from the regression. For this specification, the Ramsey reset fails to reject the

null. The third column pair reports the results of the regression with White-corrected

standard errors. The variable PENDING remains negative and significant, though with a

lower t-value.4 The finding appears robust to alternative specifications.

Summary

Data tabulation suggests that traditional landowners whose compliance with land

reform under CARP is pending do tend to have lower capital intensity in their farms.

Lower capital intensity suggests lower accumulated farm investments among such

landowners, which is consistent with the hypothesis of the paper.

Such a difference in accumulated investment is however not likely to be caused

by erosion of land collateral value. The two premises of conventional wisdom that posit

the importance of the decollateralization are inconsistent with the data from the

landowner survey. First, agricultural investment are typically not financed mainly by

4
For the regression in the third column pair of Table 5, dropping insignificant demographic variables AGE,
SCHOOL, and HHSIZE increases the t-value of the the negative PENDING coefficient, making it
significant at the 5 percent level.
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formal loans, but rather by alternative means such as internal capital. Formal loans are in

fact more often relied upon to finance working capital rather than asset formation.

Second, when formal loans are obtained, the collateral used is typically not farmland, but

other real properties of the landowner, which are unaffected by land reform. Hence, if

land reform is indeed the cause of the differences in accumulated investment, then the

channel must be through the uncertainty of investment returns inflicted by impending

expropriation.

We must however first confirm that the difference is indeed caused by land

reform by isolating other factors that could affect capital intensity using multivariate

regression analysis. Noncompliance with land reform is incorporated in the regression as

a dummy variable. We find that the noncompliance dummy is significant and negative,

and that this finding is robust to alternative regression specifications. This confirms the

hypothesis of negative impact of CARP on investment. Landowner and farm

characteristics are mostly not significant, except for (in the White-corrected run) some

crop categories and years of farming, as well as the proprietor dummy.

5. CONCLUDING REMARKS

The study has confirmed the hypothesis of a negative impact of delayed land

reform on farm investment. The impact is attributed to the uncertainty of investment

returns, rather than to the erosion of farm land collateral value. As this is the first time

that quantitative evidence has been produced to confirm a well-known conjecture, it is

strongly recommended that further data gathering and analysis be undertaken to replicate

or refute the finding.


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Further confirmation of this finding should motive policymakers accelerate LAD

implementation, so as to arrest the decline of investments in the productivity of

agricultural land. Within the existing land reform strategy, delays are due to low

budgetary allocations to landowner compensation, as well as an underdeveloped land

administration framework. Given overall fiscal and administrative constraints, alternative

approaches to land redistribution ought to be explored. One such promising alternative is

the progressive agricultural land tax, universally recommended by experts, but with

weak advocacy in Congress. Whatever the difficulties facing accelerated land reform, this

study underscores the urgency of attending to these difficulties right away, or face

continuing deterioration in the flows of investment to agriculture.

REFERENCES

Besley, T. (1995). "Property Rights and Investment Incentives: Theory and


Evidence from Ghana," Journal of Political Economy 103 (5): 903-37.

Briones, R. (2000). "Property Rights Reform In Philippine Agriculture: Framework For


Analysis And Review Of Recent Experience". Philippine Institute for
Development Studies Discussion Paper Series 2000-29.

Heltberg, R. (1998). “Rural Market Imperfections and the Farm Size-Productivity


Relationship: Evidence from Pakistan.” World-Development; 26(10): 1807-26.

Ravallo, J. (1999). “The value and role of agricultural credit in the design of a sustainable
development program.” Rural Finance Symposium Proceedings: Small Farmer
Credit Delivery After the 1980s Reforms. Agricultural Credit Policy Council.