Chronic

The opinion polls are telling us that a vast majority of Filipinos see high inflation as a priority concern. They expect President BBM’s State of the Nation Address (SONA) to deliver solutions.

This will be a challenge for the President. Although we have managed to bring down the inflation rate to manageable levels, the problem remains chronic in our economy.

Some of the factors fueling inflation are simply beyond our control.

This includes oil prices, controlled by a cartel of producers and vulnerable to geopolitical shocks. When international prices rise, they push up energy and transport costs everywhere.

There are those peddling the delusion that nationalizing the oil industry will bring down prices. We import nearly all our oil. We are a small market that cannot influence the large global trends influencing oil pricing.

All nationalization will do is create a mechanism for subsidizing the product, thereby making its pricing artificial and its usage untamed. Subsidized prices do not encourage prudent consumer behavior. When the country plunged into a crippling debt crisis three decades ago, one major cause was the huge subsidies paid by government to buy inflation relief and win political points.

The pandemic caused breakages in the supply and value chains. Those have not been completely rebuilt. They continue to push costs up in every area of production, thereby fueling inflation.

Houthi attacks in the Red Sea, for instance, have tripled shipping costs for all goods moving from Asia to Europe and back. Cargo ships, fearful of Houthi attacks, take the much longer route around Africa to deliver their goods. This adds to the cost-push keeping inflation up.

Our monetary authorities have done a good job reining in the inflation rate using high interest rates. A regime of high interest rates, however, also discourages new investments and restrains domestic growth. High financing costs also add to domestic production costs – which, of course, feeds inflation.

There is a whole host of factors relating to the inefficiencies of our domestic economy that require structural remedies. Energy costs, for instance, are higher here than in most anywhere else. That discourages domestic manufacturing that might have mitigated expensive imports.

Much of our domestic inflation is caused by higher food prices. We have a high domestic food price regime, a major factor explaining a high rate of poverty. This is because our agriculture is grossly inefficient.

Our agriculture is inefficient because it has been state policy for decades to fragment land ownership, defying the economies of scale and trapping our farms in subsistence mode. Fragmentation of land ownership made our agriculture unattractive to investments that might increase productivity per unit of land. The same also made our farms impermeable to new technologies that might induce more efficient use of the land.

As a consequence, food prices are the leading factor driving inflation. It is the principal factor explaining poverty, malnutrition, stunting and low productivity.

Government intervention in pushing back food prices is, in the main, confined to subsidies. Government programs subsidize farm implements, seeds, milling, storage and distribution. Subsidizing post-harvest components will not solve the basic problem of farm inefficiency owing largely to land fragmentation.

Our land reform program is inherently inflationary. It involves selling and reselling the same units of land. This creates profits for financial intermediaries. It never improved agricultural efficiency. It simply created a class of indebted farmers without any incentive to mechanize production or shift to crops with better returns but longer gestation periods.

We have never had a functioning crop insurance program even as we regularly face natural calamities. When a typhoon destroys the harvest, the farmer is left in deeper debt. That indebtedness should now be seen as a form of enslavement.

Land fragmentation is the root of a high food price regime that keeps inflation chronic. Yet it remains politically incorrect to propose a reversal of the land reform program – even if this is the cause of so much poverty. This program is motivated by good intentions but is founded on bad economics. At some point, we have to see the light on this matter.

Today, the Philippines is the world’s largest rice importer. That is not something to be proud of. It is testament to the generalized failure of our agricultural policies.

Land reform condemns us to be in perpetual subsistence mode. It will keep our agricultural production under-capitalized. But to go against the very root of our agricultural inefficiency is to go against the grain of prevailing ideological orthodoxy.

I do not see President BMM declaring an agricultural revolution of a new type. Doing so will mean rolling back the land reform program implemented by his father.

Unless we reverse land fragmentation, however, there is no way we can bring down the high food price regime that condemns our people to poverty and malnutrition. We pay for the costs of bad agricultural economics with permanently stunted children.

All growth forecasts indicate this year and the next as the high points of our economic expansion. Beyond next year, our growth rate is expected to drop. This is because our economic surge will hit an impenetrable ceiling: the sheer lack of infrastructure to keep the growth going.

To break that ceiling, we will have to invest in new infrastructure like mad. That is not happening. We have devised the perfect bureaucratic trap for delaying infra investments. In the time it took to add two more stations to the LRT-2, China built thousands of kilometers of high-speed rail.