Disastrous for the economy

It was a disastrous third quarter for agriculture, hunting, fisheries and forestry (AHFF), according to the latest National Income Accounts estimates—a minus 2.7 growth rate (meaning a contraction). Disastrous for whom?

Disastrous for the people who make a living in the sector, or about 11.7 million Filipinos. When agricultural output contracts, everything else remaining the same, it means income contracts.

Disastrous for our poverty targets, because 70 percent of poor households are in rural and agricultural areas. When incomes contract, they become poorer, or the nonpoor fall into poverty. The opposite occurs when incomes increase. Empirical evidence shows that “the effects of growth originating in agriculture is on the order of three times more effective at reducing poverty than growth originating in nonagriculture.” What is more, among the poorest, the effect of agricultural growth is approximately six times greater than nonagricultural growth.

Disastrous for the other sectors (industry, services) as well, and therefore for the whole economy. This is what a lot of people don’t, or can’t, get. I hear businessmen and, alas, some economists, discuss industrialization as the answer to the problems of agriculture, agricultural poverty, and even land reform. “We’ll just educate them, and industrialize, so they can get jobs out of agriculture—therefore no need to focus on agriculture.” What they’re saying, in other words, is that the agricultural sector has little connection with economic growth. But our third-quarter data show that this sector pulled down the growth of the economy; the GDP growth rate would have been 5.5 percent, but agriculture contraction pulled it down to 5.3 percent.

The link between agriculture and other sectors was described 60 years ago by W. Arthur Lewis, Nobel Laureate and a pioneer in economic development. “Industrialization is dependent upon agricultural improvement: It is not profitable to produce a growing volume of manufactures, unless agriculture production is growing simultaneously. This is also why industrial and agrarian revolutions always grow together, and why economies in which agriculture is stagnant do not show industrial development.”

Why so is explained thusly (drawing heavily on Perkins, et al., “Economics of Development,” 7th Edition, the text I use in my class): “In the absence of increasing agricultural productivity, the withdrawal of labor from agriculture eventually or immediately results in reduced food supply, increased food prices, and thus lower real wages in industry. To continue to attract labor from agriculture under such circumstances, industrialists would have to pay continually higher nominal wages, thus undermining the incentives for continued industrial expansion.”

Further research, particularly by Johnston and Mellor, shows additional indirect intersectoral linkages, both forward and backward, that increase agriculture’s contribution to growth, such as that agricultural incomes create demand for domestic goods produced by the nonagricultural sector. This gave rise to efforts to quantify these effects. Bottom line: These growth multipliers range from 1.3 to 2.88, although in Asia they are closer to 1.7 and 1.8—meaning, an additional peso of income generated in agriculture stimulates an additional 0.70 or 0.80 centavos of income in nonagriculture sectors.

For our purposes, let us note three interesting things:

• An attempt by Stephen Block to compare growth multipliers in agriculture and industry in Ethiopia resulted in an agriculture multiplier of 1.54 versus an industry multiplier of 1.22 to 1.34. The agriculture multiplier is larger than industry’s.

• Given the controversies involving agrarian reform and the failure of successive administrations, including the present (no mention of it in the proposed 2015 budget priorities), to fully support and implement it, the agriculture multiplier is greater when land ownership is relatively evenly divided.

• Our Philippine Development Plan (PDP) implies a growth multiplier of 1.9 (translation: A P1 increase in agricultural incomes generates an additional 90 centavos of nonagricultural income).

The PDP, as well as its recent midterm update, talks great talk on agriculture (the chapter is titled “Competitive and Sustainable Agriculture and Fisheries Sector”). But there seems to be a great divide between the talk and the walk. The StatDev indicators in the National Statistical Coordination Board website—in all the sectors and areas covered by the PDP—show agriculture as the worst performing.

It looks like the appointment of Francis Pangilinan as presidential assistant for food security and agricultural modernization last May hasn’t done much to improve food security (given the third-quarter data) or increase modernization. Maybe it’s early days, but don’t count on it.

The PDP says there are 1.61 million fisherfolk, 1.4 million coconut farmers on 3.33 million hectares, 1.35 million rice farmers on 2.47 million hectares, and 0.68 million corn farmers on 1.35 million hectares. If we prioritize agricultural objectives on the basis of number of farmers and number of hectares, coconut farmers should be the No. 1 priority—also because they earn a lot of foreign exchange. But the budget expenditures show an almost obsessive focus on rice (one study shows that 60 percent of the agriculture budget is spent on rice). The coconut farmers are left to themselves, and the fisherfolk are in an even worse position.

No wonder inclusive growth is so elusive.