Value chains for rural development

How much of our recent economic growth benefits the Philippine countryside? Too little, it seems. Agriculture, the most dominant economic activity in rural areas, contributed a mere 0.1 percentage point to the 6.5 percent gross domestic product growth in the final quarter of 2013, while services and industry contributed 3.5 and 2.8 percentage points respectively. This pattern of growth does nothing to make our economy’s overall brisk rate of growth permeate more widely across the country’s economic sectors and geographic areas. With 70 percent of poor Filipinos residing in rural areas, we cannot keep doing things the same way and be content with getting the same results. We simply must get the rural sector to grow and develop much faster than it has over the years.

It’s not for lack of trying; over the years, government and foreign donor agencies have allotted massive resources to assist our rural areas. With the massive leakage of congressional pork barrel funds having come out in the open, we see one reason why rural poverty has hardly fallen in spite of all that. Still, the resources that managed to get through to legitimate projects seemingly failed to have any significant effect. Like other donor agencies, the US Agency for International Development (USAID) has for many years poured millions in development dollars into our rural areas, especially in Mindanao. But with little discernible impact seemingly achieved to uplift the lives of our rural dwellers, USAID is taking a new approach that focuses on regional cities as fulcrums of rural development. Its Cities Development Initiative (CDI) is now premised on the belief that secondary cities hold the key to uplifting socio-economic conditions in the surrounding rural areas that are inextricably linked to them economically.

Forget about the first-tier cities of Metro Manila, Cebu and Davao; they already generate ample resources on their own, and on top of that still receive substantial resources from the national government. But cities like Cagayan de Oro, Iloilo City and Batangas City—the three initial focus cities of USAID’s CDI—can be critical to the development of rural areas around them. This is because by strengthening such cities’ economies, they could in turn pull up surrounding rural local economies closely linked to them through various value chains, whether existing or still to evolve. These value chains mostly begin in rural-based primary production units in farms, forests, fisheries or mineral lands, and converge in regional cities where processing, consumption and export take place. Through these value chain linkages, economic growth in the regional cities could spur growth in the rural economies surrounding them, thereby dispersing the benefits of growth more broadly and promoting inclusive growth.

In particular, the Batangas City, Cagayan de Oro and Iloilo City economies are closely linked to the rural local economies within the regions they are part of, namely, Calabarzon, Northern Mindanao and Western Visayas. These cities host some primary production activities in themselves, particularly in agriculture, livestock and fisheries, and in the case of Cagayan de Oro, some mining as well. But such primary production activities, whose final products after layers of value adding are typically sold and traded in these cities, are more prominently situated in the rural areas surrounding them.

The value chain links of these city economies to the surrounding and outlying areas take several forms. First, they play the role of market assembly center for consolidating primary products from various surrounding production areas, for onward distribution around the region and beyond, and to the rest of the country. Cagayan de Oro, for example, is the dominant produce market center (“bagsakan”) in the northern part of Mindanao, where primary products originating from surrounding provinces are assembled and consolidated for distribution in consumption centers in other parts of Mindanao, in Manila and other parts of Luzon, and in Cebu and other parts of the Visayas. Second, they host firms/facilities that process primary products originating from the surrounding provinces and beyond. Batangas City has feed mills and meat processing firms, Cagayan de Oro hosts fruit processing, coconut oil milling and iron ore sintering, and Iloilo City has enterprises that process poultry and livestock. Third, each city is an industrial base for various nonagricultural manufacturing firms, utilities and construction enterprises.

Fourth, the cities are ports of exit for both primary and processed products from other parts of the region and the hinterlands, destined for other regions of the country, the Southeast Asian region and the world markets. Fifth, they are likewise ports of entry for various primary and processed products destined for consumers in the city and the surrounding region, and for raw materials and inputs feeding into industries in the city, the surrounding region and beyond. Sixth, they are transport and tourism hubs providing a convergence point for passengers moving between other parts of the country and their surrounding areas, apart from being tourism destinations in themselves. And seventh, they are services hubs that provide vital health, education and financial services for residents in surrounding provinces and regions.

Paradoxical as it seems, rural development may yet be better served by boosting city economies around the country. And strengthening rural-urban value chain linkages is key to making the approach work.

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