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Growing Agriculture to Reduce Poverty: The Simple Math

Opinion

Growing agriculture to reduce poverty: The simple math

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M. A. P. Insights
Rolando T. Dy

Posted on February 21, 2017

The poverty incidence remained very high in the Philippines at 21.6% in 2015, down from 26.3% in 2010. The Duterte administration wants to bring this level to 14% by 2022.
High rural poverty is attributed to slow agriculture growth: about 2.8% a year during Arroyo years (2001-2010) and only 1.2% during Benigno Aquino III years (2010-2016).

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The former reduced poverty incidence at the average rate of 0.74% age points a year while the latter by 0.78% age points a year. Duterte’s target reduction rate will be accelerated at 1.27% a year.

There are no precise estimates of rural poverty incidence today, but it would be in the region of 33% as compared to about 10% urban incidence.

Low productivity and narrow diversity of agricultural raw materials limit the scale of agri-food processing industries that create steady jobs.

Development analysts agree about the need for agriculture to grow at 3.5% to 5% over long periods to reduce poverty, especially rural poverty. Rural poverty in the medium term cannot be reduced by lower income taxes, employment in BPOs (business process outsourcing) and the 4Ps (conditional cash transfers).

First, lower taxes will mostly benefit the middle class only given that the poor pay no income taxes.

Second, BPO jobs require mainly a college education or at least proficiency in English. Most rural youth barely finish elementary school.

Third, the 4Ps amount to at best P1,400 per family per month, which is way below the poverty threshold of over P9,000 per family.

How will agriculture and fishery grow at least 3.5% a year? Not through growing rice alone. Not even with five crops.

There is a need to grow other commodities. But it is not automatic. Supply can be up-scaled but demand (market) drivers and competitiveness are key.

Agricultural growth is measured by growth in production. The Philippine Statistics Authority (PSA) uses year 2000 constant prices (inflation-adjusted) value added structure. In 2016, all crops accounted for 48% of total agricultural output, livestock 14.7%, poultry 11.8%, fishing and aquaculture 17.4%, agriculture services 8.1% and forestry, a paltry one-half percent. Agri services cover activities like contract plowing, threshing, others.

Of the crops’ 48%, palay (rice) contributed 19.3%, corn 5.5%, banana 4.6%, coconut 3.7%, and sugarcane, mango and pineapple 2% each. The rest (7%) are spread among coffee, cassava, rubber, cacao, oil palm, fruits and vegetables, and others.

During the Aquino years, 2010-2016, when agriculture averaged barely 1.2%, less than half the rate of the Arroyo administration, despite double the annual budget. The growth drivers were: poultry, rice, livestock, and agriculture services, with barely 2% to 3% gains a year. Fishing was in negative territory. Corn, sugarcane and other crops posted single-digit gains while coconut headed south.

Common sense tells us that even if rice grows by 5% a year — a tall order given the past record — and the rest of the 80% by only 2%, the weighted agriculture growth would be only 2.6% a year.

The heart of the matter is that the non-rice sector is strategic in driving agri-based industries and non-farm jobs. That is where future growth in agriculture and agri-manufacturing will emanate. And yet, the country invests much less in other crops.

Growth will be determined by demand drivers, such as population growth, local demand, overseas demand, income growth, among others. Export is the option if the domestic market is already oversupplied. By contrast, imports are needed when local producers cannot supply. Exporting commodity rice is a losing business.

Let us take a few examples.

Rice: Demand will slow down as population declines and hopefully, poverty is reduced.

Corn: Demand will be mainly driven by demand for meat, especially pork, chicken and eggs. Yellow corn technology is in place. North Asia imported over 33 million tons in 2015, and ASEAN over 15 million tons. Can the Philippines compete?

Coconut: The market prospects are rosy given the diversity of products: coconut oil, desiccated coconut, oleo-chemicals, coconut water, virgin coconut oil and coco sugar. But then, the country has been debating regarding coconut and the coco levy for 30 years now. As a result, coconut productivity and farm diversification suffered.

Coffee: The country imports about 70% of supply (beans, sachets and all). Farm yield is abysmal at 0.3 kilos per tree, way below Vietnam’s two kilos per tree.

Cacao: Mars, the chocolate giant, wants to buy 100,000 tons of fermented beans a year. In 2015, the country exported only 1,900 tons! The country is a net importer. Major producers, like Ivory Coast, are getting half a kilo beans per tree. Model Davao farmers can upscale to two kilos per tree.

Palm oil: About 70% of the supply is imported, a large part smuggled, to the detriment of local investors. Yields are very low.

Livestock and poultry: Meat is responsive to income. Smuggling and high poverty have hobbled local producers. In 2012, the poorest (lowest 20%) of families spent only P1,220 versus P21,790 for the upper 20%, an 18-times difference. Poverty is a demand killer.

The demand disparity can also be observed for fish, fruits, soft drinks and juices, coffee and sugar-based goods. It goes without saying that markets are not vibrant when there are many poor.

Where to? Growth must be broad-based. Growth and poverty reduction should not rely on two or three products. There are markets and market constraints to consider. Reality checks are paramount why investments in agriculture have not taken off.

Land reform, NPA taxation, and poor infrastructure, among others, have been flagged by the private sector. Investments require economies of scale to attract investors. The five-hectare retention limit is way below investors’ threshold, like it or not. Indonesia, Malaysia and Thailand had no comprehensive land reform but managed to dramatically reduce poverty. Sobering lessons.

Strategy guru Richard Rumelt once said: “The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action.”

Unilever CEO Paul Polman said in World Economic Forum Annual Meeting 2012: “Investing in agriculture brings one of the highest returns you can have.”

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the M.A.P.

Rolando T. Dy is the vice-chair of the M.A.P. AgriBusiness and Countryside Development Committee, and the executive director of the Center for Food and AgriBusiness of the University of Asia & the Pacific.

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