M. A. P. Insights Rolando T. Dy

Posted on June 20, 2017

In 1998, the income per capita of Vietnam was $330 at current prices versus $1,050 for the Philippines, some 70% lower. In 2015, it was $2,100 for the former, and $2,900 for the latter, only 30% lower (World Bank).
In 1993, the total poverty at national poverty lines for Vietnam was 50.9%, with rural poverty at 57.2%. The 1994 figures for the Philippines were 40.6% and 53.1%. By the 2014, Vietnam’s total poverty was 13.5% with rural poverty at 18.6%. The Philippine numbers went down but remained very high at 21.6% and 30% (2015). Vietnam’s rural poverty reduction was dramatic: 38.6% age-points or 1.8% age-points a year. The Philippines managed only 1.1% age-points a year. If the Philippines had done the same, rural poverty would have been minimal by now (See Table 1).

Why is rural poverty incidence in the Philippines so high? It is primarily due to an underdeveloped agriculture. Nonfarm jobs have not also increased. There are four metrics to compare: total factor productivity growth, specific crop productivity, crop diversification, and agri-food exports. Average farm size in the Philippines was 1.29 hectares (ha.) in 2012 (Census). By contrast, it is smaller in Vietnam. It averaged 0.74 ha. for the whole country and 2.3 ha. in the rice bowl of Mekong Delta (Nguyen 2010).

AGRICULTURE PRODUCTIVITY
During 2001-2013, total factor productivity (TFP), an overall measure of agri efficiency, rose by 2.53% a year for Vietnam and 1.87% for the Philippines. The numbers were derived from the difference between agri production growth and agri inputs growth. The Philippines lagged in both output and input growth. It is also behind in total agriculture output (See Table 2).

CROP PRODUCTIVITY
Of the 15 crops common to the two countries, Vietnam was far ahead of the Philippines in 13 out of 15. On the four major crops — rice, corn, coconut, and sugarcane — Philippine productivity trailed. The most glaring differences are in coffee (7.4x) cassava (4.7x) rubber (2.8x), coconut (2.3x) and mangoes (2.1x). The median difference in productivity is 1.8x.

Vietnam is the second lowest cost rice producer in Asia after India. China, Indonesia, and the Philippines are high cost producers (International Rice Research Institute/Philippine Rice Research Institute Study, 2016). (See Table 3)

CROP DIVERSIFICATION
Vietnamese agriculture is highly diversified. Of its major 15 crops, the three top crops by area accounted for 79% for Vietnam as compared to 85% for the Philippines. As to the five top crops, the corresponding numbers were 88% and 92%, respectively.

There were nine crops covering over 200,000 hectares each for Vietnam. Five of these were heavily export-oriented: rice, rubber, coffee, cassava, and cashew. By contrast, there were seven for the Philippines, of which only three were exported-oriented: coconut, banana, and rubber. The Philippines’ rubber exports are miniscule compared to Vietnam’s (See Table 4).

EXPORT COMPETITIVENESS
In 2015, Vietnam’s agri-exports reached $23.7B in 2015 as compared to about $5B for the Philippines. The former had eight products with over $1-B export a year versus only two for the Philippines. For all products that earned $250M or more a year: Vietnam had 14 versus only five for the Philippines.

On per hectare basis, Vietnam exports 5 times more at $1,960 per ha versus $370 per hectare for the Philippines. These were rice, natural rubber, coffee, fish fillet, cashew nut, and black pepper. Other exports were fish fillet, prepared shrimp, and frozen shrimps. The Philippines had coconut oil and bananas.

What is so important about agri-food exports, which some sectors discount as poor development strategy? Exports expand markets and, therefore, raise incomes and job opportunities for the poor. Focusing on the domestic market alone severely limits market-product size and diversity as well as competitiveness (See Table 5).

DEVELOPMENT INSTITUTIONS
The widely read book Why Nations Fail by Massachusetts Institute of Technology (MIT) economist Daron Acemoglu and Harvard political scientist James Robinson (2012) showed that political and economic institutions underlie economic success. The authors theorized that there are two types. “Extractive” institutions exist when a “small” group of individuals do their best to exploit the rest of the population. “Inclusive” institutions include “many” people in the process of governing.

To paraphrase Thomas Friedman, a noted writer:

Inclusive economic institutions enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions. The latter are structured to extract resources from the many by the few.

Conversely, extractive political institutions that concentrate power in the hands of a few reinforce extractive economic institutions to hold power (New York Times, March 31, 2012).”

Why is the Philippines’ rural poverty incidence much more than Vietnam (30% vs. 16.8%)? As cited in an earlier article on Thailand, the following are my hypotheses:

First, the political elite has long tolerated that rice self-sufficiency is the gold standard of success of any administration, and not rural poverty reduction. While rice-farming families comprise about a quarter of rural population, the three quarters have been relatively neglected. Among others, this led to long-term neglect of many tree-crops development that drove growth in places like Indonesia, Malaysia, Thailand and Vietnam. Coconut is a sad story with 3.5M ha of heavily underutilized lands.

Second, the rural development institutions have been weakened by the sustained discontinuities in programs, constant changes in personnel, and promotion by political connections. It has demoralized the bureaucracy and severely failed to attract young talents.

Third, the general lack of appreciation of strong research, development, and extension service. Farmers need new techniques to increase incomes. The 25-year old, municipality-centered extension service is massive failure. Many experts, including the Coalition for Agriculture Modernization in the Philippines (CAMP) has long espoused province-centered extension service for skills scale and management effectiveness.

Fourth, the quality of rural infrastructure, especially linking farms to highways are poor and ill-maintained. Add to this is the cost of shipping. Vietnam has also the natural advantage of one land-mass and the cheap water of Mekong River.

Fifth, land distribution is the overriding development goal and land reform, and not investments that will create products in the competitive market, promote robust agri-manufacturing that, in turn, create stable jobs.