If food producers and consumers are left on their own, they should be able to adjust among themselves. If food prices are high because there are too many consumers and few farmers, and there are minimal or no barriers to farming, some of the consumers will be encouraged to become food producers too, or at least become food traders -- and pretty soon, food prices can go down as food supply expands. If food prices go down so low to unprofitable levels, some farmers will shift to high-value food products where profitability remains high, while other farmers will stop producing and find other work. The resulting food supply reduction will result in upward adjustment in food prices, and the dynamics between food production and food consumption continue.
Some bright men and women, however, think that farmers and consumers are too poor or too stupid to be left on their own -- that government, both national and local, plus multilateral institutions and NGOs, should guide how farmers and consumers should behave. This interventionist thinking has become widespread that agriculture bureaucracies and interventions in many countries have become huge. Naturally, the taxes and fees needed to sustain them, plus their endless conferences and activities will be big too. High taxes plus huge army of agriculture regulators, bureaucrats and statist activists would mean higher food prices too.
Last October 16, World Food Day was celebrated. National bureaucracies like the Department of Agriculture, multilateral institutions like the UN Food and Agriculture Organization (UN FAO), and big international NGOs like Oxfam, seized the occasion to preach for ever-bigger government intervention and politicization of agriculture. Among the advocacies they promoted were the following.
More tax money, xx billion pesos more on top of existing budgets and subsidies, for Philippine agriculture for the country to avoid the recent “rice crisis” and huge food price hikes. Two, do not rely on private entrepreneurship in agriculture because the market will prod farmers to produce more pineapples and bananas for exports, even biofuels and other cash crops, instead of more rice and corn. Three, agriculture trade liberalization is wrong and must be slapped with high tariffs and non-tariff barriers; instead, food “self-sufficiency” should be pursued.
These are myths that need to be corrected. Here are some reasons why they can be considered myths.
One, every year, there is no dearth of reports and stories of wastes and inefficiencies, if not corruption and robbery, in Philippine agriculture. Among the publicized ones involved the fertilizer scam, the government’s Quedan and Rural Credit Corporation (Quedancor) involving the swine scam, and politicians’ unaccounted political accounts in the same government corporation.
Subsidizing farmers look humane, rationale and advancing social equity. However, the practice may encourage some of them to continue farming not because they like doing it and they are earning from it, but because they are getting certain subsidies which makes farming “profitable”. Such redistribution of money from consumers and taxpayers to farmers is not simple, the procedures can be bureaucratic, which will require lots of paper work. Thus, farmers who want to get the various subsidies have to devote time and resources away from farming and into submitting documents and papers in their respective governments’ agriculture ministries and agencies.
In a rice farming village in Pangasinan province, north of Manila that this writer regularly visits, the following were gathered:
* The municipal government last year or two years ago, distributed hand tractors that can also work as water pumps, plus PVC hose for irrigation, to selected farmers who are members of a local cooperative.
* Farmer beneficiaries are supposed to pay nearly PhP 7,000 (around US$148 at P47/$) per year for 10 years.
* After a year, only about 15% of the farmer-borrowers have paid.
* No sanctions were imposed on the non-paying farmers, such as taking back the tractors and giving these to other farmers who did not qualify in the earlier selection process.
The “standard” belief and practice among farmers in many municipalities and provinces in the country is that they pay only on the first three years of the 10-year payment period. No one went to prison or had his tractor or any form of support taken back by the government for negligence in payment. The dominant thinking is that if it is a government program, farmers believe it is a dole-out and they are not supposed to strictly follow the terms in the contract, like regularly paying the loan or tractor or seeds/fertilizers extended to them.
Two, it escapes the mind of many anti-market activists that farmers themselves, big or small, are private entrepreneurs driven by the dual desire to produce food for their household consumption, and to produce a surplus for profit. The Philippine population is increasing by 1.8 million people every year, net of death and migration. The rice land area has remained static at 4 to 4.2 million hectares in the last two or three decades. There is not much land to devote for rice as there is large land conversions going on -- initially from forest to non-forest use like rice and corn land, then from agriculture to residential or commercial/industrial land. And many parts of the country are mountainous that only a few ingenuous Filipino farmers can secure regular irrigation sources from somewhere.
And yet for such steady increase in the number of rice consumers while rice land has remained static, there is only one important conclusion: rice productivity is increasing over time. If this is not true, food riots and mass starvation would have happened many years ago, but it never did. Credit goes to private entrepreneurs in agriculture – farmers and traders, millers and processors, etc. – not so much the NGO activists and often unproductive agriculture bureaucracies.
Three, food imports by the Philippines from its rice-exporting Asian neighbors have covered up for any food supply deficit due to various reasons (strong typhoons, drought, pest attack, earthquakes, and so on). Since the 90s until today, Philippine imports averaged 8% to 10% of annual consumption. Besides, the country’s rice-surplus neighbors really have the natural “comparative advantage” in growing rice than the Philippines. Take Thailand and Vietnam, the world’s top two rice exporting countries, for example.
First, these two countries have wide, contiguous rice land areas of between seven to 10 million hectares, compared to the Philippines’ four million hectares scattered in various provinces and islands around the archipelago. Second, these two countries have huge rivers as main irrigation source like Mekong River, courtesy of their being a contiguous land mass. Third, these two countries have no or very little typhoons, only about 10 per year perhaps, versus the Philippines’ 20 typhoons per year on average.
Interventions like the provision of farm equipment, seeds and fertilizers, credit and marketing network, entrepreneurial spirit, are not included yet. The natural geography of those two countries alone gives them enough comparative and competitive advantage to grow rice. The Philippines’ comparative advantage is more on tourism, not agriculture.
Thus, instead of continuing agricultural trade protectionism, the various tariff and non-tariff barriers in agricultural imports, especially rice, should be slowly removed. Poor households who cannot afford to buy some local grains, vegetables, animal and fishery products in large amount for their families’ daily consumption, should be given respite by giving them access to otherwise cheaper food imports from the country’s Asian neighbors.
The market, the interaction between producers and consumers, not between bureaucrats and statist activists, can provide reliable information and signals for both producers and consumers to adjust with each other. Hence, statist interventions for more tax money for more subsidies, more tax money for dishonest and corrupt politicians and bureaucrats, and more agricultural trade restrictions and protectionism, should be slowly reduced, ultimately abolished. There is nothing wrong with a social system that allows the lazy and irresponsible to go hungry and poor, while allowing the hardworking, the entrepreneurial and responsible people to flourish and become rich.
Related papers I wrote recently:
(1) More Food Producers, Less Food Bureaucrats
September 08, 2008
Agriculture is often an emotional subject when it should not be. Mention farming and farmers and images of poverty and economic difficulty would more often than not, come up in the minds of the public. Hence, various forms of subsidies, crop insurance, trade protectionism and other “incentives” were cooked up and implemented by many governments and generally supported by the public.
That should not be the case because everybody in this planet is a food consumer. Hence, there is a big demand for food, and there is big incentive for farmers and other food producers to grow more food, both for their own household consumption and to produce a surplus for various consumers and make a profit.
If food producers and consumers are left on their own, they should be able to adjust among themselves. If food prices are high because there are too many consumers and there are few farmers, and there are little or no barriers to farming, some of the consumers will be encouraged to become food producers too, or at least become food traders, and pretty soon, food prices can go down as food supply expands. If food prices go down so low to unprofitable levels, some farmers will shift to high-value food products where profitability remains high, while other farmers will stop producing and find other work. The resulting food supply reduction will result in upward adjustment in food prices, and the dynamics between food production and food consumption continue.
Some bright men and women, however, think that farmers and many consumers are too poor or too stupid to be left on their own, that government, both national and local, should guide them how they should behave, so that everybody will have access to good food at a good price. This interventionist thinking has become widespread so that bureaucracies in agriculture ministries or departments and related or supporting agencies have become huge and wide in many countries. Naturally, the taxes and fees needed to sustain them all, including their conferences, meetings, travel and other activities will be big too.
Bureaucracies in agriculture-related foreign aid institutions also expand as these institutions become more efficient in convincing the taxpayers in richer countries that they should continue paying high taxes because part of it is being used to subsidize farmers in poorer countries. Of course they do not mention or tone down the fact that a big portion of the foreign aid money goes to the politicians, agriculture and infrastructure bureaucracies of recipient countries first, before reaching the poor farmers, if any is left.
So with more intervention and subsidies, agriculture departments or ministries and their attached agencies naturally have huge budgets, directly or indirectly. With lots of money to administer, tinker, if not play around, the agriculture bureaucracies would normally attract robbers and opportunists among men and women. Cases of inefficiencies and wastes of tax money are widely reported in many rich countries like the EU’s Common Agriculture Policy (CAP) and the US.
Here in the Philippines, there is no lack of large-scale robbery scandals. Among the most prominent were the fertilizer scam in 2005, then the swine scam this year involving the government’s Quedan and Rural Credit Corporation (Quedancor) and politicians’ unaccounted political accounts in the same government corporation.
Subsidizing farmers look humane, rationale and advancing social equity. However, the practice may encourage some of them to continue farming not because they like doing it and they are earning from it, but because they are getting endless subsidies which makes farming “profitable”. Such redistribution of money from consumers and taxpayers to farmers is not simple, the procedures can be bureaucratic that will require lots of paper work. Thus, farmers who want to get the various subsidies have to devote time and resources away from farming and into submitting documents and papers in their respective governments’ agriculture ministries and agencies.
In a rice farming village in Pangasinan province that I regularly visit, I learned of the following. The municipal government last year distributed hand tractors that can also work as water pumps, plus PVC hose for irrigation, to selected farmers who are members of a local cooperative. Farmer beneficiaries are supposed to pay nearly PhP 7,000 (around US$152 at P46/$) per year for 10 years. After a year, only about 15 percent of the farmer-borrowers have paid. There are no sanctions done to non-paying farmers like taking back the tractors and give to other farmers who did not qualify in the earlier selection process.
The “standard” belief and practice among farmers is that they pay only on the first 3 years of the 10-years payment period. No one went to prison or his tractor or any form of support taken back by the government for negligence in payment. And the thinking persists that if it is government program, it is a dole-out and people are not supposed to strictly follow the terms in the contract, like regularly paying the loan or tractor or seeds/fertilizers extended to them.
The issue of non-productive use of agricultural extension workers employed by the provincial and city/municipal governments is another case of wastes. The extension workers are supposed to be the “bridge” between new results in agricultural R&D and modern farming practices, and the farmers on the field, especially the subsistence farmers. But the right incentive for the extension workers to do their job well is not there. Whether they perform their work or not, they are already assured of their monthly salary and allowances. They are accountable to the Mayor, or other local politicians who recommended them and/or approved their employment in the local government. So when the provincial Governor or city/municipal Mayor assigns them in any work except agricultural extension work, they do it.
Efforts by multilateral bodies and bureaucracies to expand foreign aid in agriculture in poorer countries purportedly to stabilize food prices in the future are likely to create more wastes and inefficiencies than good results. The better options are: One, leave the farmers and consumers alone to adjust and adapt to changes in food supply and demand as reflected in food prices. Two, abolish, or at least consolidate, certain agricultural programs and agencies which have been clearly burdensome to taxpayers for a long time now with no clear and consistent positive results. And three, abolish or at least consolidate, certain regulations that make life more difficult, more complicated, for people engaged in food production and distribution. Let us have less agricultural and economic bureaucrats and more agri-businessmen and women.
(2) State Intervention in Agriculture Production and Distribution
July 07, 2008
A number of observers and policy makers blame "market manipulation" and "market failure" as reasons for the current food price spikes around the world. Hence, existing government regulations, taxation, and intervention should be retained, if not expanded, in agricultural production and distribution.
Below are a some of these interventions and regulations being practiced by governments in many countries around the world. I have identified no less than 10 various government interventions in the sector, but due to space constraints, will discuss only seven of them here. A longer paper covering and discussing all those interventions that I have identified will be posted in our website, http://www.minimalgovernment.net/.
After enumerating these interventions and their purported rationale, my comments and critic of these measures follow. The "farmers" being referred in the foregoing discussions refer to both small and big/commercial farmers.
One, subsidize farmers to produce more food for "self sufficiency" . The goal here is self-explanatory.
Two, subsidize farmers to produce less food in times of bumper harvest. The goal is to stop prices from going too low that will make farming unprofitable, which might prompt some farmers to stop farming and move elsewhere.
Three, impose high agricultural tariffs to discourage importation of food that are cheaper than those locally-produced. The goal here is to protect local farmers from foreign competition, never mind the consumers who demand cheaper food.
Four, subsidize farmers to produce more crops for biofuels and away from food. The goal is to help "fight global warming".
Five, have an agricultural insurance where farmers will get subsidy when the price of their produce declines in the future. The goal is to prod farmers to continue producing certain crops even when it may look unprofitable to do so.
Six, impose "community preference" of high health and sanitation standards, animal welfare and labor standards, for imported food products; otherwise, the tariff will be very high.
And seven, impose rice "export ban" at the height of high world rice prices. The goal is to protect local prices from rising further when some of local output will be diverted for the world market.
For me, these are misguided public policies that do not result in more food for more consumers at more or differentiated price levels. Their negative consequences are as follows.
First, maintaining food "self-sufficiency" policy invites agricultural protectionism in order to shield local farmers from foreign competition, which may turn them off from continued farming, which can result to "food insufficiency" someday. Some countries produce particular agricultural commodities more efficiently than others by virtue of their geography (wide flat lands, few mountains, lots of lakes and rivers, away from usual typhoon path, and so on), soil condition, conservation practices and entrepreneurial spirit of farmers, etc. Hence, it will give justice to both local consumers to avail of such natural and social advantages in other country that allow them to produce cheaper food than what local producers can provide. A good example of what food autarky can do is North Korea.
Commodities that often experience huge price spikes are those that are least-traded. Rice that is traded internationally is only about six percent of global food production. So when certain countries experience supply shortfall for whatever reasons, the leeway for emergency supply from imports is small, resulting in huge price spikes and hence, economic difficulty for poorer consumers of those countries.
Second, encouraging farmers to produce less food when they are capable of producing more prevents local food prices from falling, which should have benefited consumers. This perverse use of taxpayers money then making the same taxpayers pay more for food that could have been made available at a lower price is insensitive public policy.
Third, as discussed above, food protectionism penalizes consumers, including many farmers themselves who experience crop damage or small harvest (due to strong typhoons, pest or insect attack, prolonged drought, civil conflict, etc.). A better option is to cut, if not abolish, those tariffs on food products, have full free trade in food and other commodities and services. Producers of food-surplus countries will benefit through higher income, while consumers of food-deficient countries will benefit through lower price.
Fourth, encouraging production of more biofuels through tax money has contributed to the recent food price spikes, even if at a minor level. If farming for biofuels production is indeed profitable, then there is no need for subsidies.
Fifth, encouraging farmers to continue producing particular commodities even if their prices have gone down (due to big local harvest due to improved productivity, due to big harvests abroad and imported cheaply, etc.) to non-profitable levels is not good. Taxpayers should be spared from shelling out more money for price differential subsidy. With current high prices of many food products, farming is becoming more profitable. But when governments maintain, if not increase, various farm insurance and price subsidy, this means those governments have no intention of allowing cheaper farm production in the future.
Sixth, those strict health, sanitation, environmental, animal welfare, and labor standards were imposed by farm lobbies and bureaucracies of rich governments, not so much by consumers. If some rich consumers want these strict regulations, they can do so by demanding labeling and purchasing only those products (local or imported). Poorer consumers who may not be too strict with those standards and just want cheaper and safe food, need not be forced to pay ore. If food products are indeed unfit for human consumption, they should be banned, not over-taxed to make it very expensive for consumers.
And seventh, export bans by some governments have worsened the difficulty of net rice importing countries through even higher rice prices. Global supply is disrupted and some farmers in rice-surplus countries are discouraged from higher production since the opportunity to earn higher at exporting rice was killed. Allow freer trade, have few or zero restrictions, in mobility and trading of commodities that experience high price increases so that producers will have more incentives to produce more.
There is no substitute to allowing the individuals – food producers, traders, processors, and consumers – determine what is good for them. More government intervention in agricultural production and distribution is creating more problems than solutions.
Agri Econ 1: Food Prices and Government, April 13, 2008
Agri Econ 2: Rice Laissez Faire vs. Subsidies, May 06, 2008
Agri Econ 3: Dr. Samran Sombatpanit and WASWC, July 03, 2008