Macroeconomics: Economic Policy and Rice Security in the Philippines

Macroeconomics Formal Assignment Table of Contents Abstract ............................................................................................................................................ 1 Rice: the global landscape ................................................................................................................. 2 Demand and Supply.......................................................................................................................... 3 Growing demand for rice............................................................................................................... 3 Supply: from palay to rice ............................................................................................................. 3 Sensitivity Analysis ....................................................................................................................... 6 Impact of trade policies ..................................................................................................................... 8 Conclusion ........................................................................................................................................ 9 References ...................................................................................................................................... 10 Candidate ID 202735 Economic Policy and Rice Security in the Philippines Abstract “Food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.” United Nations Food and Agriculture Organisation (FAO), 2009 With a 2% population growth rate now approaching 100 million, and with rice being the staple of the Filipino diet, it’s crucial that the government secures a sustainable, accessible and affordable supply of rice for the rapidly growing Filipino population. With the global supply of rice dwindling and the major rice exporting nations imposing export freezes, reports of a rice shortage have fuelled public concern and criticism of the economic policies of President Gloria Macagapal-Arroyo (Palatino, 2008). Whether or not the situation can be appropriately described as a shortage or a crisis, the following observations make it clear that significant challenges remain with regards to accessibility and affordability of rice:  The retail price of locally produced rice rose sharply in 2008, from 10 – 15 pesos per kg in March, to 35 – 45 pesos in June; at 30 pesos per kilo, millions of families suffer from starvation (Integrated Regional Information Networks, IRIN, 2008). The government, through the National Food Authority (NFA), sells imported rice at 18 pesos per kilo; the 50 kilo sacks sell out in as little as two hours at the Farmer’s Market in Quezon City (IRIN, 2008). Imports of rice have increased from 257,000 metric tonness in 1995, to 2.5million metric tonnes in 2008; since joining the World Trade Organisation in 1995, the Philippines is the biggest buyer of rice in international markets (NFA, 2009; Bureau of Agricultural Statistics, BAS, 2008). In 2008, the Philippines imported 2.5 million metric tonnes of rice, up from 1.8 million in 2007 (Department of Trade and Industry, DTI, 2009). Filipinos are spending more than 60% of their income on food, and between 20% and 25% on rice (Ignacio, 2005).     The demand for cheap imported rice continues to grow. In January 2009, the Philippines secured a shipment of rice, between 1 million and 1.5 million metric tonnes, from Vietnam; Vietnam halted trade on the popular grade of rice following the agreement (Reuters, 2009). This paper explores the supply and demand conditions, as well as the economic policies impacting the growing dependence on rice imports to the Philippines. Macroeconomics Formal Assignment Candidate ID 202735 Page 1 of 11 Rice: the global landscape Worldwide, rice stocks are being rapidly depleted and are at their lowest level since 1988. The annual growth in yield, as measured by metric tonnes per hectare, is slowing. In Asia, where the per capita consumption is the highest in the world, there is little room for expansion of the land area available for rice production; compounding this, the demand for rice is growing in Africa, where imports account for nearly a third of global trade in rice (International Rice Research Institute, IRRI, 2008). Economic growth in the world’s most populous countries, China and India, has resulted in highly productive rice fields being converted to housing and industrial development, or to other cash crops. In other words, the demand for rice is growing in the global regions where population and economic growth are highest. Concerns about climate change have led to increased investment in bio-fuels from maize grain or bio-diesel produced from oilseeds. This is increasing pressure on the international trade of grains. Indeed in the long term, it may be tempting for developing nations such as the Philippines to reallocate agricultural land from rice to corn, thus increasing its dependence on rice imports. Rice yields are also vulnerable to extreme weather and pest outbreaks. Typhoons and drought adversely affect rice yields, whilst rising temperatures have compromised the yield of several million hectares of rice fields in Southeast Asia due to pest outbreaks (IRRI, 2008). If human-induced climate change increases the severity and frequency of natural disasters, and contributes to rising temperatures, these non-economic factors will exert additional pressure on the world supply of rice. The impact of pressures on the global rice supply are felt most deeply by the poor urban dwellers and landless rural labourers. For example, for those who spend 30 – 40% of their income on rice, a 25% increase in the price is effectively a 7 – 10% drop in their real income. In the Municipality of Bacagay, Albay Province, a farmer at work harvesting his plentiful rice crop (IRIN, 2009) Macroeconomics Formal Assignment Candidate ID 202735 Page 2 of 11 Demand and Supply Growing demand for rice Against this global backdrop, the Philippines faces growing demands for rice; that she needs to manage its high population growth rate averaging 2% annually is indisputable. Adding to this, the per capita consumption of rice is also growing. The table below summarises population, per capita and aggregate rice consumed from 1995 to 2008, and the growing dependence on imports as highlighted by the import to consumption ratio. Table 1. Growing demand and dependence on imports, 1995 - 2008 (BAS 2008; CIA World Fact Book, 2009) 1995 Population (million) Per capita rice consumption (kg) Total rice consumption (million metric tonnes) Local Production (million metric tons) Imports (million metric tons) Import to consumption ratio 68 86 6.6 6.8 0.263 4.01 2008 96 120 11.9 16.8 2.8 23.5 Supply: from palay to rice In the Philippines, rice is produced from palay (referred to globally as paddy), which is milled to produce rice; the typical yield of palay to rice is approximately 65% (BAS, 2008). Palay fields are either irrigated or rain-fed, with irrigated palay fields producing much higher yields as measured by metric tonnes per hectare. Whilst irrigated palay fields typically produce a yield of more than 4 metric tonnes per hectare, rain-fed farms produce a yield of around 2.5 metric tonnes per hectare (BAS 2008). With the aggregate harvested area of irrigated palay fields at 2.92 million hectares, and 1.36 million hectares for rain-fed palay fields, the average overall yield in 2007 for both irrigated and rain-fed was 3.8 metric tonnes of palay per hectare. Both productivity and yield have risen steadily since 1998, as shown in Figure 2 below (BAS, 2008). Moreover, data from the BAS also shows that, with the exception of 1998 during which tropical storms severely compromised the harvestable fields, local production has exceeded local consumption. Figure 1. Palay production and yield, 1998 - 2007. Palay which goes through the milling process produces rice, typically at a yield of 65%. Source BAS, 2008. Macroeconomics Formal Assignment Candidate ID 202735 Page 3 of 11 Figure 2. Rice production, consumption and importation trends, 1980 - 2003 (Ignacio, 2005) For a nation whose rice production exceeds its rice consumption, why, then, is the Philippines the top importer of rice in the world, whilst neighbouring nations Thailand and Vietnam are the number one and three exporters of rice, respectively? In the Philippines in 2007, 1 hectare yields approximately 3.8 metric tonnes of rice in one season. Public opinion often cites crises in productivity, modern agricultural methods, and government policies in agriculture and land use as the focal points for the debate. In order to evaluate these arguments, a comparative analysis between the Philippines and its rice producing neighbours in Southeast Asia, namely Indonesia, Thailand and Vietnam, provides insight into production, yield and land area. Figure 3. 1961 – 2007. The yield of palay production in the Philippines (orange) is below the world average; the total production in the Philippines has remained lower than its neighbours in Southeast Asia since 1961, with the gap widening (UN FAO, 2008). The graphs above highlight that, whilst the yield per hectare has always exceeded that of Thailand since 1975, the production in the Philippines has remained significantly lower than in Thailand, implying that Thailand is dedicating a greater area of land to rice fields. Indeed, further data from the UN FAO quantify the area of land dedicated to paddy production in Southeast Asia: Macroeconomics Formal Assignment Candidate ID 202735 Page 4 of 11 Figure 4. Relative to its neighbours in Southeast Asia, land area for paddy production in the Philippines has grown little since 1961. Figure 4 also shows that whilst land area dedicated to paddy production in Indonesia and Thailand fluctuates significantly over any given two year period, land area in the Philippines and Vietnam is relatively smooth. This could indicate different agricultural techniques such as crop rotation, which are suitable subjects for further research. Table 2 below shows the overall growth in land area dedicated to paddy production in Southeast Asia from 1961 – 2007. Table 2. Per cent growth in land area dedicated to paddy production, 1961 – 2007 (UN FAO, 2008). The Philippines has grown its land use dedicated to rice production by only 33.7%, compared to 77.4% in Indonesia, 69.3% in Thailand and 54% in Vietnam. Thus, whilst yields may be lower in Thailand, it is in a much stronger position to sustain its position of rice security in the face of the global demand for rice, and in fact is at the time of writing the world’s biggest exporter of rice. Table 3. Paddy production in Southeast Asia, 2007 (UN FAO, 2008) Table 3 above provides further insight as to how Thailand and Vietnam have become the world’s leading rice exporters, whilst the Philippines is the world’s biggest importer. With per capita production exceeding per capita consumption by more than two fold, Thailand and Vietnam can export half of their rice production whilst still maintaining reserves. Whilst the per capita production exceeds per capita consumption in the Philippines, it is not by a margin sufficient to ensure a secure supply in the case of a global rice crisis; indeed securing these reserves is the pre-occupation of Arthur Yap, the Agriculture Secretary under President Magacapal-Arroyo. Of equal if not greater Macroeconomics Formal Assignment Candidate ID 202735 Page 5 of 11 concern is that the imports from Vietnam and Thailand are far more affordable than the locallyproduced rice (IRIN, 2008). When considering the data above, several questions come to mind. Firstly, what is the cost involved in achieving a per capita production output comparable to those of Thailand and Vietnam? If the Philippines raises its per capita rice production to 400kg, it will need to produce 36 million metric tonnes of rice annually. Increasing yields can be achieved by:     Improving irrigation through investment (recall, irrigated fields have much higher yields than rain-fed fields) Making fertiliser i.e. urea more affordable through government subsidies By planting seeds which are bred or genetically engineered to produce higher yields that are more stable under more severe and frequent climactic variations Improving milling and harvesting techniques to improve the overall palay to rice yield currently at 65%. How much will it need to invest in irrigation, fertiliser, seed and modern milling and harvesting techniques to achieve incremental growth in output? The marginal cost of increasing yields beyond 200kg per capita is likely too high for the Philippines to ever achieve the rice exporter status of its neighbours. However, it should focus its policies on not just increasing local production to ensure adequate supplies, but to reach a supply target whereby prices will equilibrate at a level which is affordable to the nation’s poorest, so that locally produced rice is within the means of all citizens and rice imports are used to augment national reserves in the event of a global rice crisis. How achievable is this target? Will increasing both yield and land area dedicated to rice production result in the Filipino government’s target of achieving self-sufficiency by 2013 (Remo, 2009)? Sensitivity Analysis Assuming that a target of 200kg per capita of locally produced rice will increase the supply sufficiently for prices to stabilise at a level comparable to those of imported rice, and will meet the Department of Agriculture target of maintaining a 90 day supply of rice for the entire nation, we further make the assumptions listed in Table 4 below as a basis for a preliminary sensitivity analysis. The analysis shows that, given the average historic growth in yield per hectare and growth in land area dedicated to rice production, unless the population growth rate is dramatically reduced to levels comparable to those in developed countries by 2010, actual output will not meet required output in the foreseeable future. Table 4. Base and Optimistic assumptions in annual growth rates of population, yield and land area, based on historical averages from 1961 – 2007, and what can be realistically sustained through 2042. Macroeconomics Formal Assignment Candidate ID 202735 Page 6 of 11 Figure 5 (left). Base case: Assuming that annual growth in yield and land area can be sustained through 2042, and that the government reaches its target population growth rate of 1.9% in 2010, shortfall in production output will remain at 14 million metric tonnes at 2042. Figure 6 (below, right). Optimistic Case: Shortfall in output remains at approximately 4 million metric tonnes per year through 2042, assuming that the government target of 1.9% population growth rate is achieved and historical averages in yield and land use are maintained. The optimistic scenario holds growth in yield and land area constant at historical averages, whilst assuming a 1.0% population growth rate after 2010. This is still greater than that of former colonial powers Spain, 0.072%, and the US, 0.975%, as well as Southeast Asian neighbours Thailand, 0.67% and Vietnam, 0.98% (CIA World Fact Book, 2009). Given that the Philippines, whose current population growth rate is at 1.97%, has a negative net migration rate i.e. emigration exceeds immigration, a target of 1.0% population growth by 2010 is theoretically possible although not necessarily probable. Even assuming these optimistic assumptions, we nevertheless see that shortfall in output remains. A fundamental problem facing the Philippines is that the population of poor people is growing more rapidly than the general population (IRIN, 2008); it is these Filipinos who are finding it increasingly difficult to afford the rice that they need, and who are driving the demand for the cheaper imports from Vietnam and Thailand. For the target of self-sufficiency to be reached by 2013, growth rates in both yield and land area dedicated to rice production will need to be more than doubled to 2% annual growth. If population growth is held at 1.9%, it is only by doubling the growth rates in yield and land area dedicated to rice production that the Philippines can ensure its rice security within the next decade. Macroeconomics Formal Assignment Candidate ID 202735 Page 7 of 11 Impact of trade policies Throughout the past 60 years, trade policies have fluctuated from regulation to importliberalisation programs (ILP). Regulation on rice imports has in turn typically fluctuated from tariff to non-tariff policies, as described in the table below: Tariff-based Regulation Non-tariff Regulation  Minimum access volumes (MAV), beyond which higher import tariffs are applied Centralised importation through government agencies such as the National Food Association (NFA), effectively creating a monopoly on rice imports Quantitative restrictions (QR)  On the other hand, ILP measures eliminate quantitative restrictions, reduce the number of imports which are regulated, decrease maximum import tariffs, and have also included policies to eliminate export taxes. Recently, public debate has centred around the issue of tariff versus non-tariff regulation, in other words whether rice imports should remain in the centralised control of the NFA, or whether they should be open to the private sector and regulated via tariffs. Classic economic theory tells us that trade liberalisation and reduced tariffs tend to lead to growth in GDP (Miles and Scott, 2005). Indeed, Liberalisation has resulted in productivity gains for the manufacturing sector, but losses in agriculture (Cororaton and Corong, 2006). Proponents of trade liberalisation argue convincingly that the frequent reversals in policy have undermined efficiency gains in agriculture, as well as the credibility of the Philippine government in the World Trade Organisation (WTO) and the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (AFTA) (World Bank, 2005). They further argue that policy uncertainty has resulted in an agriculture sector that responds to commercial competitive pressure by lobbying the government for protection, rather than responding to the competitive pressures by increasing productivity and efficiency. When the government responds to such pressures, it loses its credibility in committing to long term strategic reform. Comparative advantage, they argue, will only be achieved in a liberalised trade environment. On the other hand, supporters of QR argue that fully liberalised trade will flood the market with cheap imports, displacing the more expensive domestic rice and resulting in a complete dislocation of the local rice sector (Ignacio, 2005). The shift from quantitative restrictions on imports, where imports were controlled by the NFA, to tariffs imposed on private sector imports, is a short-term fix to a long term problem; by attempting to make rice more affordable to the nation’s poorest through the unrestricted availability of cheap imports, the Philippine government is making local production less profitable. Supporters of QR further argue that it’s irresponsible to assume that the presence of cheap imports will make local farmers more competitive; in fact, it’s the rising costs of fertiliser and farming equipment, together with incentives to convert farm land into rent-seeking activities, which are compromising productivity growth in rice production. Macroeconomics Formal Assignment Candidate ID 202735 Page 8 of 11 Indeed, both arguments present elements of truth, and neither approach is immune to institutionalised corruption; tariffs can provide a convenient flow of income from which civil servants can siphon funds, whilst centralised control of imports through the NFA introduces the risk of anti-competitive government monopoly. Liberalised trade policies can improve productivity when farmers have access to modern technology. They can foster comparative advantage when there are favourable alternatives, low barriers to pursue entrepreneurial activities, and a culture which stimulates growth from value creation rather than from rent-seeking activities. However fully liberalised trade may still yet be premature in the wake of ongoing recovery following the Marcos dictatorship. Disagreement will inevitably persist as to which policy will be most effective, to what degree and how imports should be regulated. Nevertheless, the nation has the potential to redefine uncertainty as an opportunity to agree on a common cause, to ensure that everyone in the nation can always afford to eat rice. Conclusion In this fragile and developing economy, when is appropriate to maintain an outwardly-facing policy of free trade, and an inward-focussed policy which fosters food security, controls population growth, builds necessary infrastructure and provides practical, accessible education? How does the growth of the Philippine economy, focussing on manufacturing and services, compare to one that focuses on agriculture? What is the optimum relative investment and growth in these two approaches, to achieve the most sustainable long-term growth? How can the Philippines increase its social capital – its trust in government institutions, so as to further foster growth in total factor productivity? These are the larger questions for the forthcoming decade and beyond. To be sure, the Philippines should continue to develop its strengths in the electronics, textile, mining and newly-formed business process outsourcing services sectors, where it is enjoying considerable growth. Whilst growth in these areas can and do contribute to overall economic growth in absolute terms, the strategies need to ensure that trade liberalisation and GDP growth do not result in greater inequality, and do not undermine national integrity. Dependence on rice imports renders the Philippines vulnerable to political imbalance and domestic unrest. Natural disasters may indeed leave the Philippines more susceptible to fluctuations in rice production; this is not an excuse for dependence on rice imports. It is in fact a strong case for the argument that a commitment to long-term reform addressing productivity and affordability of rice, is more relevant and urgent in 2009, than an outside interest in stimulating growth from FDI in the manufacturing and services sectors. In conclusion, a global perspective is crucial in maintaining awareness and in providing education to allow the Philippines to replicate and benefit from economic wisdom integrated into policies of more developed countries. However, it is the view of the author that an inward policy of strengthening the integrity of the nation as regards stability, security and social capital, needs to precede a fully liberalised trade policy. A direction which upholds a larger proportion of growth from total factor productivity, over capital and labour accumulation, has the potential to shift the GDP of the Philippines to a new growth curve, as opposed to heedlessly moving it along its existing one. Macroeconomics Formal Assignment Candidate ID 202735 Page 9 of 11 References United Nations Food and Agriculture Organisation (2009). “About FAO” Accessed 27 April, 2009, http://www.fao.org/about/about-fao/en/ “Vietnam rice trade halts on reported Manila buy” (14 January, 2009), Reuters. Accessed 30 April, 2009. http://www.flex-news-food.com/pages/21380/rice/Vietnam/vietnam-rice-trade-haltsreported-manila-buy.html IRRI (International Rice Research Institute). 2008. 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