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Financing our farmers

/ 01:32 AM February 09, 2016

AGRICULTURE, NO doubt, has been our worst performing economic sector through the years. Over the last 16 years, industry and services grew at an average annual rate of 4 and 4.3 percent, respectively, while agriculture averaged only 1.4 percent, not even enough to catch up with population growth. Last year alone, it grew a negligible 0.2 percent against industry’s 6 percent and services’ 6.7 percent. At the same time, the sector actually lost 446,000 jobs, even as hundreds of thousands of new jobs were generated in industry and services. The sector has literally been a drag on the rest of the economy, pulling its aggregate growth rate down.

Agriculture’s miserly performance is key to why our recent comparatively faster economic growth relative to Asia and the world has hardly touched the Filipino poor, i.e., has not been inclusive. It also largely explains why we have been so unlike our Asian neighbors in the way we have made little progress in reducing poverty in the past decades. Clearly, the next president must give preferential attention to this sector and somehow get it out of its perennial slump.

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Why have our farms, and our farmers, been doing so badly through the years? It can’t be the weather, as its impacts through the years have mostly been localized (except perhaps in El Niño years), and are normally not year-round in effect. It can’t be for lack of fertile soils, given the country’s rich biodiversity in both plant and animal life; we are in fact known to be among the most biodiverse countries in the world. It’s certainly not for lack of technological capacity, as our country has long been a knowledge center in the agricultural sciences, where many of our neighbors’ leading farm scientists had trained. I have come to the conclusion that the single most critical factor that has made our agriculture sector fall behind the rest of the economy, and the rest of the region, is our failure to provide our farmers ample access to credit.

In the 1960s through the 1980s, the conventional wisdom was that land reform is the key to unlock rural poverty. Among the key arguments cited was that once tillers own their land, they would have a bankable asset that would permit them access to bank credit, so vital to improving their productivity and incomes. But it didn’t quite turn out that way. Not long after the Comprehensive Agrarian Reform Program (CARP) opened all agricultural lands to agrarian reform, banks began refusing to accept farmland as loan collateral. The reason was simple enough: A bank would not want to end up accumulating large areas of farmland from loan defaults (which were seen likely, given historical experience)—assets that would be very difficult to sell, given the way CARP had given the jitters to the most likely buyers. Furthermore, no bank welcomed the prospect of becoming a “CARPable” landowner in the process, and it wasn’t clear that they would be CARP-exempt.

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And so, rural land markets became inoperative, and the only transactions that occurred were undocumented, informal and illegal ones (as when beneficiaries sold the use of their newly acquired land, which, while against the law, proved common). The bottom line was that CARP did nothing to improve small farmers’ access to bank credit, rendering them unable to appreciably improve their productivity, incomes and general welfare. And in the absence of an active rural land market, agricultural investment slumped.

Could we have been barking up the wrong tree all along? When we thought it was land ownership that mattered, wasn’t it access to finance that was the real key after all—and that’s where we continued to fail? Access to land—whether as tenants, leaseholders or owners—is vital, but lack of access to farm credit appears to me to have been the real culprit that kept our small farmers mired in poverty.

It hasn’t helped that the Land Bank, the government financial institution mandated to serve the financing needs of farmers, is under constant pressure from its mother agency, the Department of Finance, to remit profits to the national treasury. With profits rather than responsiveness to farmer’s credit needs as performance yardstick, it was naturally led to behave like a universal bank, to the neglect of its avowed mission and primary clientele. It is time that we recognized effective small farm finance as a public good that benefits all, through the inclusive growth that it would help achieve. As such, it is arguably deserving of taxpayer support (translation: subsidy).

That bad “S word,” long shunned by our finance managers and doctrinaire economists, has in fact been routinely provided by more successful countries around us to small farmers. It’s important to note, though, that they avoided doing it via below-market interest rates for farmers, which historical experience has proven to be unsustainable, expensive and distortive. Farmers, after all, have faced far higher rates from informal lenders. A study on Thailand’s experience noted how financing flows to small enterprises greatly expanded when government removed caps on interest rates years ago. This is because banks became more willing to lend to small borrowers when they could account for risk in their interest charges. For more successful countries, it was the credit delivery mechanism for small producers that they effectively subsidized, usually by constant recapitalization of the government financial institutions set up to perform the task.

With the Bangko Sentral’s avowed focus on financial inclusion, I’m looking forward to new, “out-of-the-box” approaches to empowering our small farmers with the credit financing they’ve always been starved of.

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TAGS: agriculture, CARP, Comprehensive Agrarian Reform Program, Farm, farmer, Farming, opinion, sector
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