Monday, April 29, 2013

Agri Econ 9: On Agrarian Reform and Agri Credit

Below are some exchanges that I and some friends made last January 18-20, 2013 in my facebook wall. Posting their comments with their permission.

Tibs Filbert Arsenal Arceño Hi noy, for me one main factor why local harvested rice have higher prices compared to other asian countries is land ownership. As practiced, most land planted w/ rice are being owned by absentee landowners. Since these lands are cultivated by tenants, workers or renters—a portion of price of produces are considered before taking into account the base price for the market. While in Vietnam majority of rice farmers are landowners. So we end up paying absentee landowners a part of the rice we eat even though they do not take part of the actual production. i believe that agrarian reform is still key to development in the countryside. 

Nonoy Oplas Not really Tibs. Local rice production simply cannot keep pace with rising population (1.7 million a year net of death and migration). Rising rice prices -- along with prices of tilapia, chicken, galunggong, pork, house rental, school tuition fees, etc. -- are natural. Rice farmers themselves want higher price for their palay too as they have rising needs for their households. What is objectionable is using more tax money for agri cronyism like what the NFA is doing.

On agrarian reform, it is among the main sources of agri business instability. You develop an ugly, marginal, cogonal land into a mango orchard or banana, pineapple, rambutan, etc., and when you succeed in making that land productive, DAR people will come to you to say that they will forcibly redistribute your land to your workers. You will not be happy when that happens, so many agri business ventures are postponed, or kept at low key levels.

Shakaru Macht Well, Nonoy, Tibs has a point. For more information, please read Henry George. He has an elegant book entitled Progress and Poverty. Its premises explain how poverty exists despite economic growth. Inequality of access, possession and ownership of natural resources - in particular land is emphasized here.

By the way, I fully agree with you not having forced land transfers, nor practicing the agri-cronyism done by the SUPER-REGULATORY BUREAUCRACIES of our government, who are given virtually divine powers who uses or benefits to what. It's not only inefficient - but also gives undue advantage to the special interests like the big farms and haciendas...

Tibs Filbert Arsenal Arceño yet it could be an additional income for the rice farmers if they own the land. just imagine about 15-25% of the income goes to the absentee landowner.

noy how about a discussion on the rise of the bombay/turko sector and its effect on our economy especially on our SME's. one day you see a turko collecting 5/6 among market stall owners riding a motorcycle. after 5 months he's already using a brand new adventure or a vios. after another 5 months, he is now riding a high-end hi-lux pick-up. how come they end up successful in their business? how come that turkos----who cannot speak our dialect and are oftentimes held-up--- succeed?

Nonoy Oplas Some absentee landlords extract exorbitant rents, some simply lose their lands to land grabbers, rich and poor alike. Squatting for instance, is land grabbing. If a land owner is seldom seen in his property, chances are that farmers won't pay the regular rent while other people will start building houses, other structures in the land.

About the Bombay/Turko lending, they fill up certain sectors of the credit market. In formal sectors like banks, borrowers like those in palengke must go to them, fill up certain forms, present a collateral, convince the bank officers that they have the capacity to pay back, do transactions only on weekdays and non-holidays. In the Bombay system, it's the entire opposite: the lenders go to the borrowers, do not require loan application form, do not require collateral, only word of mouth recommendation from other borrowers, do transactions 7 days a week incl holidays. The bank officers are holed up in air-con, fully guarded place, the Bombay endure heat, dust, rain, traffic, muggers and hold uppers. The admin cost of lending and collecting to each small borrower is high. I am not justifying that their 20% per month interest rate is good, it's just how the lenders would value their effort and risks endured. Which also reflects the failure of the government banking regulation system that force the formal lenders like banks to become extra careful, resulting in their inability to serve the micro but numerous borrowers.

Carlos C Tapang I agree with your analysis Noy. The price that Bumbays charge for their money may seem exorbitant, but that's the market price. If you regulate that, it will not improve things, it will make it worse because then there would be less lenders, and only the bad guys will engage in the business of micro-lending. As I have been saying, there is nothing wrong with 5/6 per se. The reason the price of money is that high is not because those micro-lenders are bad, it's because the market is distorted by government rules.

If people want to improve the situation and are against 5/6, why don't THEY try the business and lend at a lower rate? Compete, instead of complaining to the government! If you let the government act on it, it will become worse.

Nonoy Oplas And for some really industrious and lucky palengkero/ra, 20% per month (or 0.7% per day) can be reasonable. They have zero cash for the day, the banks and other formal lenders won't lend to them, the Bombays do. A P2,000 loan can become P2,400 at the end of the day or a 20% gross ROI per day, the full month interest payment is covered already in one day. The important thing is for the borrowers to have access to credit when they need it, whether from formal or informal sources.

Carlos C Tapang As for landowners, I am a landowner myself, so I understand the situation. I have hectares of land in Mindanao that are not used to full capacity. Why? I am afraid that if I hire tenants, the government would come in one day and expropriate the land to the tenants. I am better off leaving the land untilled, which does not benefit anybody, including myself. My father has given up hectares of land to the tenants. What happened? The tenants managed the land not differently from what my father did, in fact even worse. Some of them hired tenants themselves and risked some capital, and some of them sold the land to somebody else at a great profit. Land reform does not work! It works only in the imagination of the people who crafted that law. It has been with us for decades (land reform), and what kind of progress have we achieved with it? We have moved backwards instead of forwards with land reform.

Our perennial problem with rice is because of land reform and price control. Land reform is anti-property. It allows the government to run shod over property rights. In essence price control is the same thing: it allows government to expropriate the profits of landowners. If you don't want to allow landowners to make profits, then nobody would risk their capital to plant anything. And if nobody plants rice, of course prices would go up. It's really as simple as that. The thing is, we look at profits as if it were a bad thing. It is good! The reward for efficiency is profits. If you don't allow profits to be made, then there can be no efficiency, and resources and capital will be allocated inefficiently.

Nonoy Oplas Thanks for sharing that Carlos. A former Congresswoman and friend many years ago told me that a big rubber plantation in Basilan was expropriated and land ownership was given to the rubber workers. The local politicians, NGOs and DAR guys were clapping and congratulating each other. Then comes the ugly reality. The rubber workers know how to take care of the trees and extract rubber but not in the financial and scientific aspect of the business. What many of them did? Cut down the mature rubber trees and planted bananas and other food crops, and back to subsistent farming. Some later sold the land and became tenant workers again. End of story.

Shakaru Macht Nonoy, squatting would not be a problem once the absentee land possessors get back to PRODUCTIVELY USE their own land... Otherwise, they just deserve to lose it...

However, I disagree with CARP which is forcibly taking some unabandoned properties... However, we can encourage land ownership among farmers via land taxes with a homestead deductible... Have some fixed value of the land tax-free. (This is similar to the personal and family deductions we have with our current personal income tax.) We can have progressive taxation of land as well.

Eugene Dy That is why the landed oligarchy likes agrarian reform. Its their own version of sleight of hand magic. Their real threat is free trade.

Nonoy Oplas Confiscation and squatting of privately owned land is wrong, whether the land is idle or productive. If you want to encourage productive use of land, reverse the property tax. If the land is productive and has structures in it, no tax will be paid. If the land is idle, tax it high, so that the owner will be forced to develop it, or sell it to someone who can make it productive. But socialistic politics of envy will not do this. The more productive, the more useful and more job creating the land is, the more tax is imposed by the LGUs.

Shakaru Macht Nonoy how about if the structures are also idle??? Look at Manila - we have many abandoned buildings???

Eugene Dy They are so effective on distracting us from the real issue, which is free trade.

This also reminds me of a quote from Garry Allen in his book "None dare call it Conspiracy"

"If one understands that socialism is not a share-the-wealth program, but is in reality a method to consolidate and control the wealth, then the seeming paradox of superrich men promoting socialism becomes no paradox at all. Instead it becomes the logical, even the perfect tool of power-seeking megalomaniacs. Communism, or more accurately, socialism, is not a movement of the downtrodden masses, but of the economic elite."

Shakaru Macht Nonoy, perhaps a flat tax on land value would suffice... If the land itself is idle, then it produces very little, but the possessor would still pay tax - which is a disincentive in and of itself if they decide to keep it...

Eugene Dy They are very shrewd. What was the raging issue during the impeachment trial of CJ Corona? Isn't it that one of the issue is how much WE have to pay the Cojuangco's Hacienda? Would it be 100M or 10B?

But the real issue is whether the Cojuangos acquired the property through moral means. I say moral because they obviously made it look legal. They took a loan from a government institution (GSIS) which is an immoral act.

We have to ask, why they did not take a loan from a private bank? The answer is simple. Private banks are stricter and they are answerable to their depositors and shareholders and they cannot make a risk of giving loans to people or businesses that cannot produce profit.

The Cojuangcos instead use the government because they know they can manipulate the system.

Eugene Dy Shakaru, there is nothing wrong with capitalism. what PRC and USSR did is what I can describe as corporatism. But if you look at it, communism, fascism, socialism, crony capitalism, corporatism are the same animal. They just don't agree on who to control the money

Shakaru Macht Well, I agree with free-market capitalism... Not with government kowtowing to special interests, like the ones we have today...

Nonoy Oplas If the building is idle, then the building owner is losing huge money in unearned income, that's his malady, not the rest of society's.

Eugene, agree with you on GSIS loan and that's one more reason why the GSIS and SSS should be deregulated if not privatized. Private and government employees should have the freedom to whom they will put their pension savings, not to a government-owned monopoly.

Eugene Dy True Nonoy. They have to be privatized, so as other government agencies.

Nonoy Oplas Two more short stories about AR.
Story 1:In Bukidnon, a geneticist and plant scientist with PhD who just loves planting and planting various high value fruits and crops, and make good money in the process, was once adviced with concern by some DAR region 10 staff, "Stop planting Doktor. Your land might be covered with AR."

Story 2: an uncle of my friend bought several hectares of an ugly, cogonal and marginal land in Nueva Ecija more than a decade ago. He transformed it into a lush, productive mango orchard. After a few years of good harvest, DAR region 3 office suddenly popped out of nowhere and told him that his land will be subject to AR and be forcibly redistributed to his workers. A common friend of ours has a relative who was a high DAR official in the central office. My friend sent signals to the DAR region 3 office that if they do not stop their harassment, the head of DAR will be moved to DAR in Tawi tawi or Sulu. The harassment stopped, at least temporarily.

Lesson: Endless, no time table AR is a good opportunity for harassment and corruption by some bad eggs in DAR. And good agri businessmen who can develop ugly and marginal lands but have little political connections will be intimidated by this no timetable, no deadline policy of forcible land confiscation and redistribution.

I want to blog this exchange, so permission to quote some of your comments Eugene, Carlos, Tibs, Shakaru. Silence means ok, cheers.

See also:
Agri Econ 7: Bt Eggplants vs Environmentalism, December 20, 2010 
Agri Econ 8: On Rice Price Stabilization, January 16, 2013

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