Over the last two decades, the Philippines has been sliding down the ASEAN ladder. Tony Lopez recounted this in his column a few weeks ago.
From being second only to Singapore among the core ASEAN economies, the Philippines fell to last place. We were overtaken by Vietnam about three years ago. If we remain unwilling to radically alter some of our most fundamental policies, we will eventually fall behind even Cambodia and Laos.
The principal reason why we are struggling to build national productivity and attract investment flows into our economy is our tightly held orthodoxy regarding land. I will call this our “land fetish.”
Decades earlier, it became politically correct to equate land ownership with social justice. Foolish as that may be, we enshrined it as national policy. For decades, against the basic teaching of economic science regarding “economies of scale,” we proceeded to break up landholding. This involved tremendous amounts of financing from government – diverting from major infrastructure investments.
“Land reform,” as we love to call it, was not designed to increase agricultural productivity. It was principally a “social justice” program impervious to economic science.
By breaking up landholding into small family-sized plots, we trapped our farmers in subsistence mode. It made no business sense for them to capitalize their farms. There was no means for them to invest in higher value crops that might have multi-year gestation periods. They did not have the means to mechanize farming nor build better logistics linking their farms to the market.
“Land reform” guaranteed our farms will be primitive. They had higher costs of production and could not meet the food needs of a growing population. That set the stage for the agricultural crisis we are now enduring where we import some of the most basic commodities we could have very well produced.
The agricultural crisis produced widespread rural poverty. It forced massive rural-to-urban migration – and eventually the creation of a large army of migrant workers deployed all over the globe.
This crisis in farm production resulted in a comparatively high food price regime. Every food item, it seems, is more expensive for Filipino consumers than it is for our regional neighbors. Many farm items are more expensive here than they are in Singapore, which has no agriculture to speak of.
The high food price regime in turn created widespread malnutrition and a significant level of stunting. The intellectual capabilities of the next generation of Filipinos is threatened by this food price regime.
Our high level of poverty is principally a function of food inaccessibility. If our farms were more efficient and the money spent to subsidize farmers to save them from starvation instead spent on building an efficient logistics system, our population should be more prosperous today.
Instead of challenging the land fetish, government after government took the more politically convenient route of distributing subsidies to keep our small farmers afloat. This is not the way to build a thriving economy. Subsidies do not lead to cumulative improvement of our farm efficiency. Only the consolidation of our agricultural units will do that.
Subsidies for small farmers, in the dominant orthodoxy of liberals and the nationalist Left, is an act of abdication on the part of the state. It is a measure of political cowardice and the failure of the imagination of our ruling elite.
We even passed a law requiring all banks to lend a portion of their portfolio to agriculture-related activities. This is called the “Agri-Agra Law” – one of the most useless pieces of legislation we have in the books.
Our small farmers were high risk borrowers. A major storm could wipe out their crops and render them bankrupt. We do not have a functioning crop insurance system in place to protect them. At any rate, our small farmers will probably resist paying insurance for their meager crops.
The banks, for their part, would rather pay the penalties for violating the “Agri-Agra Law” that assume the great risks of lending to subsistence agriculture. Year after year, our banks pay billions in penalties to protect their risk profile. That makes our banking system less efficient and less able to lend to economic activities that will help our economy develop.
Our agriculture is handicapped to begin with. We are an archipelago of over 7,000 islands. Transporting crops across the sea requires a superior domestic shipping system – not the inefficient and protectionist system we have in place.
Our smaller islands have little slivers of arable land between the mountains and the sea. They have small rivers insufficient for irrigation. Samar island, in particular, has highly mineralized soil unsuitable for high yield agriculture. It has a lot of minerals, however, but environmentalists frown on exploiting that natural wealth.
A solution to this was the “nautical highway system” initiated during the presidency of Gloria Macapagal-Arroyo but abandoned by the administration of Noynoy Aquino. This system was spearheaded by the DBP – the bank now unable to meet its minimum capital requirements after being forced to contribute to the Maharlika Investment Fund.
As a result of the “land fetish” that inspired our policy for years, we forbid foreigners to own land. That has proven a disincentive for major industrial projects funded externally.
We have spent years doing legislative acrobatics to get around the ban on foreigners owning land – the Condominium Law is an example – to little avail. We are last among our regional peers in attracting investment flows.
Apart from the “land fetish,” there are other unproductive orthodoxies plaguing our policies. See the next column.