Econologue

CARP Extension

econologue — Sun, 07 Dec 2008 12:57:05 +0000

CARP Extension

By JC Punongbayan

Developing our agriculture sector involves not only the redistribution of land but also the application of productivity-enhancing implements such as fertilizers and irrigation. Neither program can live without the other: lands need to be irrigated and cultivated, but what good would fertilizers be without the land? Here are other economic arguments regarding land reform:

1) Efficiency. Farmers have more incentive to exert their maximum effort in farming if they own their land and their output, leading to more efficient production.

2) Labor market. Landless and landed people are more willing to work after land reform, because landless people now have land assets to cover their basic nutritional needs, while landed people lose some assets and are thus more willing to accept work for some labor income.

3) Credit market. Land reform programs should be mindful of the critical credit links between farmers and landlords, and provide stable and efficient alternative credit sources after land reform.

4) Land market. Allowing beneficiaries to sell their land is okay if the buyers can turn the land into even more productive uses; but it may be bad if farmers sell their land all over, creating shortages in our agricultural land.

5) Scale economies and productivity. Once land reform breaks up large tracts of land, it may diminish the scale economies that could be exploited from efficient large-scale production, unless farmers are required or encouraged to form effective and efficient cooperatives.

6) Income distribution. Land reform may have little effect on income redistribution between landowners and farmer-beneficiaries, unless a confiscatory land reform program is implemented (albeit running into several political and economic complications).

7) Risk-sharing. In prohibiting share tenancy, land reform efforts should keep in mind the risk-sharing benefits that comprise farmer-landowner tenancy relationships, in light of the risky and uncertain nature of agricultural production.

8) Complementary implements. Other than the actual distribution of land, the continual provision of necessary agricultural implements is arguably the important second half the CARP, and will determine the success of the entire land reform effort.

9) Institutional problems. Without strong and mature institutions that can withstand the rent-seeking behaviour of certain stakeholders in society, the future and success of CARP becomes bleaker than ever.

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Land reform can be defended using economic analysis on both efficiency and equity grounds. However, true development of the agricultural sector depends not only on the actual redistribution the land, but also on the provision of the necessary implements – like fertilizers and irrigation – to ensure the productive use of such land.

Efficiency. Imagine a farm worker who for the longest time has been tending the land of someone else. In return, he gets a certain percentage of his own output, and shares the rest with the landowner. Since the poor farmer does not reap and own 100% of his output, he has little incentive to exert his maximum effort into the production process. Especially when the landowner is somewhere else and cannot monitor his efforts, the farmer may shirk on his planting/harvesting duties. In the end, both farmer and landowner get a smaller pie of output, and hence get smaller shares of that pie. With land reform, the farmer gets to own and acquire property rights over his land and therefore his output, thus having the incentive to exert his maximum effort, leading to more efficient agricultural production.

Labor market. Consider a landless farm worker who has no other source of income but his labor. Before participating in the labor market, however, he needs to be assured of a minimum threshold wage that will be sufficient enough to cover his basic nutritional and health needs. Landed people, in contrast, need only to sell-off their land and other non-labor assets to feed themselves when worst comes to worst. Thus, people with non-labor income need not require a minimum threshold to participate in the labor market as those with no non-labor income.

With land reform, non-labor assets are transferred from landed people (the landowners) to landless people (the farmers). Farmers now have assets other than their labor to cover their nutritional needs, and so are more willing to accept work at the going wage rate. Landowners now have less assets to sell in case of emergencies, and so are more willing to accept work at the going wage rate. Both farmers and landowners participate more in the labor market, raising employment and overall output.

Credit market. Farming is generally composed of three periods: the planting season, the harvesting season, and the lean season in between, where farmers are unproductive as they wait for their crops to grow. Having no income source during this season, they need to fund their families’ expenses from other sources, usually through credit.

But in the absence of formal credit institutions in rural areas (largely because of the risky contingencies in agricultural production), farmers usually resort to their landowners for credit. Land reform cuts the credit link between farmers and landowners. In place, the government made land reform attractive by providing credit at subsidized rates, essentially distorting the rural credit markets. Because farmers viewed such credit as subsidies that they don’t have to repay, and because the government are unable to effectively enforce repayments due to administrative constraints, financial institutions like rural banks went under.

With farmers indebted with several outstanding loans, they find a hard time borrowing from other sources, else they suffer ever-accumulating debts. Also, they become exposed to the excesses of other informal moneylenders. Thus, in aiming to develop rural agriculture, land reform programs must appreciate the peculiar economics of rural credit markets, as well as the benefits of arrangements like share tenancy, else several unintended harmful consequences redound to the beneficiaries.

Land market. Land reform aims to give farmers property rights over their land and their output. However, due to poverty and the inability to start and maintain productive operations, some beneficiaries find it beneficial to sell their new land instead, and use the income for other productive purposes. This essentially renders the purpose of land reform futile, because the farmers do not end up owning their land.

As such, the CARP prohibits such sale by beneficiaries, effectively killing the land market in rural agricultural settings. On the one hand, being able to sell the beneficiaries’ land may be good as long as the new establishments are more productive than what the farmers can produce. On the other hand, this may result in farmers selling their land left and right, leading to a shortage of agricultural land, endangering and protracting the development of our agriculture sector.

Scale economies and productivity. One problem with land reform relates to scale economies, or the idea that lesser costs come with larger-scale production. Dividing tracts of land into smaller ones may reduce the gains from scale economies that could otherwise be exploited from highly efficient expanses of land that harvest more output. Land reform could be consistent with scale economies if the beneficiaries are encouraged or required to form cooperatives, where they can band together, pool their resources, and engage in production collectively, whether in marketing, planting, harvesting, or accessing credit. There is some question about which of these activities can result in scale economies the most, but this depends largely on the specific environmental conditions of the production process. Also, there should be some mechanism for selective land distribution, whereby land will be redistributed only to farmers who can be shown to be able to make the most productive use out of their new land. Otherwise, giving land to incapable farmers who cannot maintain operations or join cooperatives may be a waste of resources.

Income distribution. With land reform, huge tracts of private land are broken up and redistributed to farmer-workers, who then own the land. The landowners, in turn, are compensated by the government, who in turn expect payment from the amortizing farmers. Thus, this ‘compensatory’ type of land reform gives and takes something from the farmers, leaving their income generally unchanged.

In fact, it has been observed that the most successful land reform programs were ‘confiscatory’ in nature, where landowners are not repaid for their land. Hence, the beneficiaries do not have to worry about paying the government in turn, keeping their newfound income and assets to themselves. However, this strikes a deeply political issue, because landowners do have legitimate property rights over their land, which cannot be discounted easily. Nevertheless, the current CARP setup eventually requires the landowners to sell their land to the government (at least in paper), valuated below market prices.

Risk-sharing. Land reform aims, among other things, to prohibit the employment relationship called share tenancy, because it is seen as an oppressive and inequitable setup. However, share tenancy can have desirable economic properties. In an agricultural production setup that is highly dependent on weather and seasonal factors that are unpredictable and risky, share tenancy allows employees to share the risk with their employers. For even if farmers are industrious, typhoons, floods, and infestations can have a catastrophic impact on their output.

Had they worked under a lease-hold setup, where they pay a fixed amount and got the rest of their output to themselves, there is the risk they could get nothing; but under a share tenancy setup, they get a positive output regardless of what happens. Employers also find share tenancy preferable to giving wages, where workers are most likely to shirk from their duties because whatever happens, they get a fixed amount anyway.

Land reform essentially banned share tenancy along with the benefits that explain why it is such a prevalent form of employment relationship in rural areas. As such, farm employers and employees resort to alternatives like permanent labor contracts, that are essentially similar to share tenancy but are just called differently, to escape the prohibitions of land reform.

Complementary implements. Perhaps just as important as the actual redistribution of land is the commensurate application of implements in agricultural production. Land alone cannot yield bountiful harvests, because implements are important production inputs as well: notably irrigation, fertilizers, and farm-to-market roads.

Aside from this, our traditional agricultural production methods involve complementary inputs (in the form of L-shaped isoquants) such that increasing one input cannot increase output without commensurate increases in the other input. However, beneficiaries usually cannot purchase their implements by themselves alone, unless they can exploit scale economies by banding together and forming effective cooperatives. As such, the government, especially the LGUs, plays a pivotal role in providing the complementary inputs for the beneficiaries, if they are sincere in seeing the success of land reform.

Other than the actual distribution of land, implement provision is arguably the second most important component of the CARP, and will determine the success of the entire land reform effort. However, allegations of corruption involving the disbursement of the implements, notably the Fertilizer Fund Scam, hints on the apparent failure of government in completing the second phase of the CARP. Without these essential implements, land reform falls short of its promise of bettering the lives of our farmers and developing the agriculture sector of the Philippines.

Institutional problems. Lastly, the problem with CARP is in part institutional by nature. First, there are the political families seeking to exclude themselves from the coverage of the CARP, families that can ironically be found in the very halls of Congress where talks on extending the CARP take place. Second is the lacking commitment of both national and local government in addressing the needs of beneficiaries once they get a hold of their land — productive agriculture does automatically result from owning the land. Thus, without strong and mature institutions that can withstand the rent-seeking behaviour of certain stakeholders in society, the future and success of CARP becomes bleaker than ever.

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The development of our agriculture sector requires nothing less than the effective confluence of land distribution and the commensurate provision of agricultural support services. As such, the government should appreciate the interdependence of these two halves of the CARP, for neither can succeed without the other: land needs to be irrigated and cultivated, but what good would fertilizers do if there’s no land in the first place?

Hence, if the government is truly sincere in extending CARP, it should seek to extend its efforts to what happens once beneficiaries receive their land, for without government initiative and strong political will in seeing the continual provision of agricultural implements, the progress of our agricultural sector (and possibly that of the entire nation) could be protracted all the more.

Are monopolies always bad?

econologue — Sat, 26 Jan 2008 13:52:18 +0000

Monopolies are commonly associated with notions of overcharging, anti-competitive behavior, and excessive profits. But setting aside such issues, monopolies aren’t always that bad. At times they may even be preferred to competitive market structures.

Natural monopolies

Take the case of public utilities, such as water and electricity services. Firms in such industries are called natural monopolies because they are inherently more efficient than when there are many firms providing such services. Imagine several firms, each setting up its own pipelines or electrical wires throughout the metro: all utilities and infrastructure will needlessly double and lead to inefficiency. All these give rise to the need for natural monopolies. Society is better off restricting the market to one firm because by producing more it is able to reduce its costs, something many firms cannot do by themselves.

Of course, as in all imperfectly competitive settings, natural monopolies have some bad sides. They still have the incentive to reduce their sales and charge at a higher price than in a competitive market, leading to losses to society and profits for them. Also, they may engage in activities that seek to maintain their market position – activities known as rent-seeking.

Research & development

Perhaps the most recognized benefit of monopolies deals with research and development. In perfectly competitive settings, long-run profits are nil. Therefore there is very little opportunity for them to venture into R&D – which is an inherently risky business. If firms are protected from competition for some time, they may be able to enjoy some profits and therefore be able to invest in innovation – as in the case of industries concerning pharmaceuticals, telecommunications, subways, and computer technology.

However, take note that this R&D benefit does not justify the proliferation of monopolies in society, but instead proposes that innovators must be accorded some market power for them to recover their costs and benefit, for some time only, from the fruits of their labor, which may or may not eventually lead to a monopoly. Here market power comes mainly in the form of intellectual property (e.g. patents, copyrights).

Regulating natural monopolies

But remember that natural monopolies aren’t completely desirable institutions. Although they are preferable at times, they still pose some social waste and may get ahead of themselves and exploit their market power. This is why governments find ways to regulate natural monopolies. But by forcing them to approximate a competitive outcome, regulation schemes may bring forth rather disputatious distributional issues (as it may need much subsidies and more taxes) and various pricing mechanisms, that have long been the bone of contention in policy debates around the world.

The Impending US recession

econologue — Wed, 23 Jan 2008 12:45:07 +0000

Irrational anxiety. That’s how Prof. Solita Monsod (aka Mareng Winnie) of the UP School of Economics appraised the current panics and crashes at the NYSE and other stock markets around the world (including our very own PSE), sparked by talks about the coming US recession.

In an interview with Mike Enriquez this morning on dzBB, Mareng Winnie informed the public that there was nothing to worry about the impending US recession, and that all the panicking and sell-offs at stock markets worldwide are merely the result of too much worrying on the part of stockholders. It’s like losing your head in the movies simply because someone cried “fire!” when there’s really none. In effect, the stock market panic is a self-fulfilling problem. And given its inherent instability and volatility, the stock market reacts very much to exogenous events, even though they’re purely speculative.

Although the recession has not fallen upon the US economy yet, chief economists and policymakers there are wary about its coming. They admit that their economy, the largest in the world, is very much heading for a recession, an event it last experienced in 2001 right after the 9/11 tragedy. In fact, the impending recession has been the hottest new topic in the ongoing presidential debates and sorties there. Both Democrat and Republican parties have come up with tax packages and preemptive programs against the recession.

The Federal Reserve has cut its interest rates

Why is the reduction of interest rates important? Because during recessions the economy becomes less productive than before. Firms find it unprofitable to continue their businesses, their production halts and entire industries falter, leading to massive lay-offs and unemployment. By reducing interest rates the Fed aims to revive the economy by enticing businesses to continue their production, spend more, and make more investments.

And according to studies, a large part of corrective measures against recessions is accounted for by reductions in interest rates by the central bank; fiscal policy from the government – where the government uses its control on spending and borrowing to revive the economy – is considered only a “last resort” and a “strategy of desperation” once monetary action from the central bank does not work too well. Here’s how economist Paul Krugman put it:

When monetary expansion is ineffective, fiscal expansion…must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, “priming the pump” and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.

The US is in for a big economic event that will inevitably affect the world at large in the coming weeks. Let’s see how the problem gets debated on and solved not just by US politicians and economists but also by actors from around the world (possibly including the Philippines) as well.

The Economy in Retrospect

econologue — Fri, 28 Dec 2007 14:43:18 +0000

Highlights of the Philippine economy this 2007:

Robust Macroeconomy

1. Strong currency supported by:

steady inflows from OFWs
portfolio and direct investments
export earnings
income investments abroad

2. Strong rally of peso against dollar shielded domestic prices from rising because of escalating world oil prices (which should’ve fanned a rise in the inflation rate).

Money and Inflation

3. Strong flow of foreign exchange fueled acceleration in domestic liquidity. More pesos in the system led to rise in domestic demand, higher probability of rise in prices, rise in inflation (inflationary pressure).

4. Growth in domestic money supply surged, led to easing of monetary policy by several basis pts. and threatened possible runaway inflation. BSP kept all policy settings unchanged and introduced special deposit accounts to trust entities for first time. Immediate result was decrease in liquidity.

5. US credit market trouble developed into a full-blown crisis. Fed cut its key policy rates to ward off economic recession from US credit crisis. BSP also cut its rates.

Strong Peso at Expense of Exporters

6. Peso appreciated to seven-year high with very modest real increase. Effects included:

allowed treasury (public sector) to clean up NG debt portfolio
private sector also prepaid much of their foreign obligations
casualties out of very people funding the economy since 1970s when first OFWs deployed
eroded income of OFWs
exporters & BPO enterprises losing competitiveness, loud in complaining about their tightening margin

7. Strong peso beginning to cause stress to RP economy, would require immediate intervention. Remittances, in particular, could be contributing the most to negative side of strong forex inflows.

8. Exporters and operators of BPO enterprises/firms complained about their losing competitiveness and their tightening margin at the strengthening peso. Asked the government to intervene because industry is taking a beating and it’s becoming steadily expensive to do business in the country – might discourage businessmen from investing in the country.

9. Billions of pesos lost by exporters per month as:

local goods become more expensive for foreigners
missed opportunities and foregone orders arise

10. Small and medium-sized firms cut their orders to cope with the exchange rate. Also, as selling abroad became more expensive as costs rose, firms in the food and esp. the handicraft export business laid off jobs as much as 30%. Industries mostly affected by strong currency include:

food exports
handicraft exports
semiconductor exports

11. Attempts of the government to curb the effects of the strong currency on the exporters included:

lowering the power (generation) costs imposed on semiconductor industries in economic zones
creation of a hedge fund facility managed by the DBP to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions and to help at filling in orders

But only big firms have availed the hedge. Small firms find it too complicated, so there are efforts at making it less so. Hedge still not enough to help the entire industry. Government should look at decreasing foreign borrowing, paying foreign-denominated debt, and strengthening the country’s reserves.

Negative Side of Strong Peso

12. Early studies indicate economy showing symptoms of the Dutch Disease which, if not addressed properly, could result in sharp contraction of the economy. Dutch Disease refers to harmful effects of strong forex inflows (from investments and remittances) starting with loss of competitiveness that could trigger a decline in the manufacturing sector, which engages in export activities.

13. Signs of real appreciation of peso against basket of currencies of competitors in world export market; also, a relative reduction in external price competitiveness.

14. BSP resisted urge to interfere with forex market to peg the rate to a level less harmful to both exporters and OFWs, like increasing interest rates or establishing a special exchange rate. In the end it will mean subsidizing the difference between the market-determined exchange rate and whatever different sectors want it to be — there are no funds to subsidize such and BSP is not even allowed by its mandate to peg the peso. Instead:

BSP might help families to learn how to hedge against movements and volatilities in forex rates and how to invest earnings instead of using it for consumption.
Exporters must resort to fundamental business of increasing productivity and efficiency to compete with rest of the world, instead of relying on shield of forex rate. This depends on capability of NG to provide infrastructure advantage lost by RP industries to other countries with better infrastructure support.

Stock Market Boom
15. Return of boom of IPO market sent local stock market to record levels. Causes were:

strong and growing economic conditions, GDP growth (6.6% for Q3)
robust remittances
low interest rate regime
bullish sentiment of investors
market’s vigor and resilience
market reforms to assure integrity and efficiency
improvements in government’s fiscal position
growing maturity of political leaders in handling differences

16. PSEi, the main barometer for local share price movements, rose 21% year-on-year.

17. US subprime credit problem prevented local bourse from further reaching new highs, investors opted to lock in gains and stay on sidelines before taking positions. But IPO mania likely to stay barring any collapse in the global markets given the liquidity crisis in US financial markets.

18. Nine companies that went public this year from 4 last year, raising P18.7B in fresh capital. Overall new capital raised increased 57% from last year.

19. Prices of stocks listed on PSE also on a roll. Total market capitalization of all listed companies up 14% from last year. Investors also generating higher earnings per share; jumped 18 times from 2004-2007.

20. Local market’s share of ASEAN market grew from 1% to 3.5% October this year.

21. Can entice investors to bring more funds to the stock market, lead them to sell shares to the public, and improve confidence to tap the capital market for funds if a more enabling business environment is put in place. PSE plans to expand its menu of stocks and develop new products and services for investors.

22. PSE actively supports enactment into law of a capital market-friendly legal and regulatory framework and plans to introduce more global best practices.

23. Value turnover more than doubled this year, and seen to significantly increase with the approval of the securities borrowing and lending program. Securities lending can bring in as much as 30% more value turnover to our stock market. They’re also strengthening market education programs and conducting seminars to increase awareness in benefits of investing in the stock market and to expand their domestic investor base.

24. PSEi expected to reach anywhere between 4,000-5,000 next year as listed stocks continue to lag that of neighboring bourses in terms of price earning multiples (PEMs).

Promising Telecom Industry

25. The telecom industry continued to be among the biggest, most promising and fastest-growing industries in the country, registering significant growth rates throughout the year and coming up with major innovations for their customers. The Philippines remains the top texting capitals of the world, with 53 million cellular phone subscribers sending messages everyday. Cut-throat competition among major telecom players have brought prices down to record lows to the benefit of their consumers.

Very interesting

econologue — Sun, 23 Dec 2007 05:35:00 +0000

A fresh way to look at presidential elections and their impact on economic growth (from US data, though). Notice the strong positive correlation between the percentage vote share of the incumbent party (Republican or Democrat) and average economic growth for the past four years.

This implies that the voter share of the incumbent party has a seemingly significant impact on the way the economy is run. This makes sense, because a bigger share implies higher confidence in the incumbent party’s legitimacy, leading to political stability, and less adverse political shocks to the economy.

The Philippines, however, is a different case. Here we have a multiparty system, a shift from our formerly two-party system (Nacionalista and Liberal). A multiparty system complicates things a bit because it creates many problems, including the possibility of a minority president arising from a minority party.Consider the case of a 5-party system, with vote shares as follows: 30%, 25%, 20%, 15%, 10%. A two-party system, meanwhile, has voter shares of 75%, 25%, respectively.

Clearly, the party with a 75% share wins, and since it gets a considerable share of the votes, its legitimacy is rarely questioned.

But in the case of the 5-party system, the winner only amasses 30% of the votes, meaning that the other 70% didn’t really want that party to win. This creates legitimacy problems and constant protests that may pose threats to economic stability and integrity.

Happy Holidays!

econologue — Tue, 18 Dec 2007 12:18:38 +0000

Some ideas for future posts are already brewing in my mind, including:

Correcting the public view on inflation
The economics of the telecom industry
Are churches public goods?
Rival views on globalization and trade today

And some timely pieces on:

Diagnosing and treating the “Dutch disease”
Proposed special OFW exchange rate: silly and futile
Economic implications of the Cheaper Medicines Bill

In the meantime, let me watch and enjoy Season 1 of Heroes. Happy Holidays!!!

Hello World!

econologue — Sat, 15 Dec 2007 09:30:03 +0000

Hello there!

This is an experimental blog to feature observations, musings, and commentaries regarding current economic events and the seeming unawareness and lacking appreciation of Filipinos in general about relevant economic concepts.

Mundane as they may seem (many thanks to the overuse of technical and complex explanations) these basic economic principles affect our lives in such fundamental ways we often tend to overlook them. Yet we make stubborn complaints or ignorant comments without really understanding them. And by not seeing their significance, society’s attitudes and discussions toward economic news and happenings tend to be apathetic or badly informed.

It is therefore the mission of this blog to give an overview of this issue and give suggestions on how to improve economic appreciation among our people, in order to enable them to make informed economic choices, apply economic thinking in their everyday lives, and develop a certain global mindset in them, toward a future well-informed and economically well-spoken citizenry.