Economic development requires continuous introduction of new and better technology to an existing industry. Most households in the Philippines depend on agriculture for their livelihood. Improvements in agricultural technology are then necessary to increasing farmers’ income and reducing poverty. At the same time, economic development also requires continuous diversifying and upgrading from existing industries to new, more capital-intensive ones.
A feature of development then is structural transformation, which leads to a declining share of agriculture in value added in the economy (share of GDP) and employment (share of the labor force). Without such a structural transformation, the scope for sustained increase in per capita income will be limited. Hence, innovation and structural transformation are two elements of the same pod.
The Philippines has actually embarked on structural transformation program, which had been the source of much of the growth in the last few years. Named the Manufacturing Industry Roadmap, this program has identified industries viewed as crucial to the resurgence of the manufacturing sector. However, despite its laudable achievements, this program seems to equate growth with industrial expansion. While strides have been made in reducing discrimination against agriculture, particularly through social protection programs, the current manufacturing program of this administration would appear to support the industrial and urban bias that has itself produced a very large economic distortion.
Like previous attempts of industrialization in the country, the main weakness of the road map is its refusal to recognize that the basic cause and effect of a sustainable transformation is a rising productivity of agricultural labor. Advocates of industrialization mistake the relative decline of agriculture as a signal to ignore the sector and starve it of investment resources and policy attention. However, history tells us that the only sustainable path out of poverty and into sustainable development is higher agricultural productivity coupled with a dynamic nonagricultural economy. Failure to invest in agricultural research and development, and in rural health and education has been a major weakness of many countries’ development strategies.
For this reason, the food security of the Aquino administration would have made a lot of sense. Like other importing countries, the Philippines embarked on food-security programs, particularly in rice, comprising mainly of public investments in irrigation, research and extension, input subsidies on seeds and fertilizer, postharvest facilities and farm-price supports. This program can potentially contribute to the structural transformation if it leads to further agricultural production and establishes a process of income convergence between urban and rural areas, and between poor and nonpoor households. In other words, food-security programs are more successful when it raises agricultural labor productivity, and thus, complement structural transformation.
Unfortunately, the reality is far from the expectation. Instead of creating a more dynamic rural economy, a decline in the share of agriculture in the country’s total output was observed. Furthermore, labor productivity in agriculture remained largely constant and significantly lower than the other sectors.
What explains this phenomenon? The answer lies in the objectives of the program. A central aim of the food-security program was to limit import dependency on rice. The recent volatility of international food prices has reinforced the mistrust felt within many food-importing countries, such as the Philippines and Indonesia, toward international markets as suppliers of affordable food. One response then is to become less reliant on food imports. Concern about food security, thus, became transformed into concern about food self-sufficiency. But food security and food self-sufficiency are different things and they can be in conflict.
One of the instruments of the rice-sufficiency program was precisely to establish quantitative restrictions (QR) on rice imports. The private sector can import rice only if permission has been granted from agencies implementing the QR. The goal was to ease the pressure on rice farmers to compete with subsidized and cheaper rice imports. Eventually, these restrictions have to be diminished because they have resulted in higher prices for the consumers (which includes farmers themselves) and greater market power for private rice importers.
Apart from hurting consumers and raising income inequality, this protectionist stance created a disincentive to create, engage and adopt better technology. Even up to now, the rice farmers rely mainly on Green Revolution types of technologies whose more modern variants have proven to be less productive and less lucrative than its original varieties. Given that farmers are already on the frontier of this technology and that agricultural labor productivity remains low, the government should encourage further agricultural innovation as a way of increasing productivity and mitigating the likely adverse effects of reducing QR in the long term.
More important, the innovation of innovation needs to be pursued, as well. The emerging reforms and changes in knowledge structure of agriculture explicitly indicate that the traditional agricultural research and extension system (which is heavily dependent on public research and extension institutions) cannot sufficiently address the challenges of the new trends. Instead, an agricultural innovation system approach should offer a holistic and multidisciplinary approach to innovation and processes, and incorporate emerging reforms and approaches for agricultural development. Several other relevant macroeconomic and meso-level factors, such as policy and legal frameworks, nature of human capital, physical infrastructure, finance and investment conditions, climate change, information and knowledge flows and, finally, food security and structural transformation, should be considered as important inputs of this agricultural innovation system.
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Leonardo Lanzona Jr. is director of the Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.