Poverty traps

Boo Chanco beat me to the punch with his column yesterday reporting on the economic effects of the agrarian reform program. His report is based on a discussion paper put out by Dean Raul Fabella of the UP School of Economics and circulated among fellows of the Foundation for Economic Freedom.

The Fabella paper musters the economic information necessary for a conclusive verdict on our agrarian reform program. In summary, the paper concludes the program proved to be costly for the national economy and failed as a means to alleviate poverty.

Research data show a 54% poverty rate in the agrarian reform communities, much higher than the 35% poverty rate in all farming communities. What this says is that the agrarian reform program, despite the billions poured into it, fails as a method for economic emancipation of the rural poor. Better results for all that money might have been achieved over the past few decades if they were invested in improved education for the rural poor.

The agrarian reform program ends this year. A key policy question to be resolved in the next few months involves the extension of the program and the provision of more public funds to support it. The Fabella paper will be a decisive input to the political debate.

As usual, the Aquino administration has adopted no clear position on this key policy debate.

The higher poverty rate in agrarian reform communities is understandable. The program suffers from a design flaw. By cutting up land for redistribution, the program produces a mass of undersized family farms insufficient to support the economic needs of a farming family. It simply runs against the cardinal law of the economies of scale.

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There is a second reason for the higher poverty rate: most of the agrarian reform communities are committed to cultivating rice.

Rice cultivation, especially on a small plot, is a poverty trap. For the amount of land cultivated and the cost inputs required by the crop, including an unsustainable volume of water, rice yields the lowest return. Any other crop will yield higher value per square meter of farmland than rice.

It is possible for the small farms to be economically sustainable for the families that cultivate them. That will, however, require allowing rice prices to rise. Expensive rice, however, is politically explosive for any regime.

There are other economic costs to the agrarian reform program more difficult to measure.

The program produced decades of uncertainty over ownership of scarce agricultural land. That uncertainty inhibited investments in our agriculture. The foregone investments translate into opportunity costs in terms of higher agricultural productivity and lower poverty incidence.

Several iconic investments in modern farm systems were hindered by protest actions undertaken by groups who claimed the land was subject to redistribution. The contested land remained committed to subsistence farming, which produced poverty instead of wealth.

Being an archipelago, our available arable land is limited — especially in the face of rapid population growth. The only way for our ancient farm systems to survive in an era of pervasive trade and competition is to dramatically increase capital inputs to our agriculture, reflecting eventually in dramatically higher productivity.

With an agrarian reform program in place for several long decades, our agricultural productivity remained stagnant. In an emerging region, our agricultural sector is most unprepared for trade and competition.

When the Asean common market kicks in next year, our terribly inefficient agricultural sector will be most vulnerable. The things that should have been done the past few decades to prepare our economy for international competitiveness were not done. Blame that on our weak bureaucracy and the infantile nature of our politics. -Alex Magno (The Philippine Star)