Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Catching Up in ASEAN Agriculture (Part 2)

           How did our ASEAN peers achieve higher productivity improvements in agriculture and thus reduce their poverty incidence more successfully than the Philippines?  An article by Marie Annette G. Dacul, Agribusiness Specialist of the Center for Food and Agribusiness, proffered some answers, thus giving some very important suggestions to the Duterte Administration about agricultural development in the next six years. 

          The key success factors for each country were identified.  For Indonesia, the leading products were oil palm, rubber, coffee, cacao, and shrimp. Key factors were foreign direct investments, nucleus-smallholders program, crop diversification and availability of long-term financing.  For Malaysia, which concentrated on oil palm and rubber, key factors were foreign direct investments, effective government land agencies such as the Federal Land Development Authority (FELDA) and the Federal Land Consolidation and Rehabilitation Authority (FELCRA) and availability of long-term financing.  In fact, FELDA was so successful in helping reduce poverty among small holders while at the same time achieving high profitability that when it issued an IPO several years ago, it raised the largest ever capital in stock market history and had its record broken only a few years later by Alibaba of China. The nucleus-small holders program which Malaysia transferred to Indonesia was largely responsible for reducing the poverty line of Malaysia to zero or near zero, the lowest in Southeast Asia and in the world.

          For Thailand, the leading export crops were rice, rubber, cassava, pineapple and shrimp.  The key factors were infrastructure development (farm-to-market roads, irrigation, post-harvest facilities), crop diversification, and research and development.  What is notable is that the Thais learned a significant portion of their agricultural technology from research institutes in the University of the Philippines School of Agriculture in Los Banos, Laguna.  The good rural infrastructure of Thailand also contributed significantly to the growth of tourism.  Vietnam was the latecomer that made up for lost time by efficiently mobilizing state resources in helping farmers achieve rapid productivity gains in such crops as rice, coffee, rubber, cashew, pepper and catfish.  In less than five years of excellent government support, Vietnam became the largest exporter of coffee in the world, surpassing Brazil.  The key factors were sustained productivity drive, crops diversification and adaptive research. 

          The factors that were common to these four ASEAN countries that outclassed the Philippines in agricultural and rural development were a) clear, consistent policies; b) responsive research and development; c) quality rural infrastructure; d) an inclusive strategy; and f) sound resource allocation.  Since poverty in the Southeast Asian region is primarily a rural phenomenon, it is no surprise that the relative success in agricultural development of these four nations compared to the Philippines led to their having a much lower poverty incidence than the Philippines.  Poverty line in Malaysia is close to zero, Thailand is 8 percent, Indonesia is 12 percent and Vietnam is 15 per cent.  The Philippines has a 25 percent poverty line.  To probe further the correlation between certain policy variables and poverty reduction, Ms Dapul did a multiple regression analysis with eight explanatory variables/determinants of poverty.  These were Gross Domestic Product (GDP) per capita, agricultural total factor productivity, regulatory quality, government effectiveness, foreign direct investments, agriculture contribution to GDP, services contribution to GDP and manufacturing contribution to GDP.  The results of the correlation analysis showed that there is moderate to high negative correlation between poverty and all the determinants except for GDP per capita growth and agriculture contribution to GDP.

          The significant variables in reducing poverty were agricultural total factor productivity, regulatory quality, government effectiveness, services contribution to GDP and manufacturing contribution to GDP.  To determine the best regression results from different combinations of variables that contribute to poverty reduction, stepwise regression, specifically forward stepwise selection, was used.  By adding one by one the determinants to the regression of poverty, the best results were obtained with the following factors: foreign direct investments, services sector contribution, government effectiveness and agricultural productivity.  These four factors are then the biggest contributors to poverty reduction for the four countries studied.

          In simpler language, poverty can be reduced with higher FDI inflows since these will allow for the adoption of more advanced technology and know-how, as has been amply demonstrated in the banana and pineapple industries in Mindanao.  FDI in agriculture translates to higher productivity.  At the same time, sectoral contributions to GDP have a positive impact on poverty eradication.  This is especially true with growth in labor-intensive industries.  Likewise, the jobs in the services sector provide employment outside the agricultural sector, thus increasing rural incomes.  Meanwhile, when there is better governance, poverty is lessened because of better use of resources and more timely project execution.  Lastly, increases in agricultural productivity translates to higher incomes which can lead to a reduction in poverty.

         It is heartening to note that the Duterte Administration is strongly committed to removing the many restrictions to FDIs that still remain in our laws and the Constitution itself.  Thanks to policies left in place by the previous Administration, the contributions of manufacturing and services to GDP are on the upswing.  A manufacturing renaissance has begun.  IT-enabled services, retailing, logistics and educational institutions are moving to regions outside the National Capital Region. With the elimination of the pork barrel system and greater political will in executing the numerous infrastructure projects left undone by the previous Administration, we can realistically expect better use of resources and more effective project execution.  It would not be too much to ask the Duterte Administration to bring down poverty incidence to 15 percent by 2022. Over the longer term, the Philippines can expect to transition from a middle-income economy to a First World country as long as we do not do anything foolish to lose our greatest treasure:  a young, growing and English-speaking population.  For comments, my email address is bernardo.villegas@uap.asia.