Government and Taxes: Free Trade 38: Liberalize Rice Imports and Demonopolize NFA

Sunday, September 28, 2014

Free Trade 38: Liberalize Rice Imports and Demonopolize NFA

This is the 2nd part of my paper published by the Stratbase Research Institute (SRI) last April 18, 2014. The first part is about energy deficit in the Philippines. The full paper is posted in slideshare.
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(2) Rice prices. PNoy said (SONA 2014),

“…some greedy rice hoarders are stockpiling their supplies in order to sell them when prices eventually rise…. Our immediate solution: import more rice, supply it to the markets, reduce the prices and keep them at a reasonable level, and ultimately drive those who took advantage of the Filipino people into financial ruin.”

Last November, we imported 500,000 metric tons… all of this had arrived by March of this year. This February… additional 800,000 metric tons,... This July we approved the immediate importation of 500,000 metric tons of rice through open bidding…. Standby authority to import an additional 500,000 metric tons…”

The anomaly actually here is the Philippine government's continuing rice protectionism policy and monopolization or heavy regulation of rice imports, that largely explains for high rice prices.

Rice protectionism via (1) National Food Authority (NFA) rice importation monopoly and (2) maintaining quantitative restrictions (QRs) of our rice imports, and (3) forcing rice "self-sufficiency" policy, are wrong policies that contribute to expensive rice. They are anti-liberal policies that the Liberal Party should in fact discard while PNoy Aquino is still in power.

Below is a picture of how big our neighbors Vietnam and Thailand are as rice exporters. They simply have huge production relative to their consumption.

Table 2. Rice Production, Trade and Consumption in East Asia, in ‘000 Metric Tons

Myanmar and Cambodia are fast catching up as major rice producers and consumers, which is a good thing.

These four countries – Vietnam, Thailand, Myanmar and Cambodia – plus Laos, are all in Southeast Asia mainland. The rice import-dependent countries – Indonesia, Malaysia and Philippines – are all archipelagic and are outside the Southeast Asia mainland. Is this coincidence or not, that there is an explanation for this?

A paper from Dr. David Dawe of the Food and Agriculture Organization (UN FAO) and reposted in IRRI magazine, “Rice self-sufficiency: A question of geography?” says the answer is No. It is not coincidence.

Chart 5. Rice Production per Capita vs. Share of Crop Area Devoted to Rice, ASEAN

Source: IRRI. http://irri.org/rice-today/rice-self-sufficiency-a-question-of-geography

Countries on SE Asia mainland have dominant river deltas that provide huge water and flat lands, they get big irrigation from Mekong River (water flowing from China down to Laos, Cambodia, Thailand, Vietnam), also from Ton le Sap river (mainly in Cambodia). This flat lands plus huge irrigation are highly suitable for rice cultivaton.

Rice land in particular, Vietnam has almost 2x while Thailand has almost 3x that of Philippine rice land area.

Productivity wise, Filipino farmers’ is actually larger than that of their counterparts in Thailand, although lower than those in Vietnam. If Vietnam has the same number of typhoons per year as the Philippines, its productivity would possibly be similar to the Philippines. Vietnam has only about 5 typhoons a year or less, vs. the PH's 19 typhoons a year on average, about half of which make actual landfall and knock down thousands of hectares of often harvestable rice, resulting in high crop losses.

Table 3. Rice Land and Output, Comparison among the Philippines, Thailand and Vietnam

If we combine those natural factors – being in SE Asia mainland, have huge and wide flat lands, have huge irrigation water – those in the mainland have high rice output relative to their consumption and hence, rice prices are lower than those in the Philippines. Why should the Philippine government insist on expensive rice via trade protectionism?

Chart 6. Comparative Wholesale Rice Prices, Philippines, Thailand and Vietnam, 2000-2014

A report from PhilRice also noted this,

"According to the two PhilRice economists, domestic price of rice was up to 75% higher than average global rice prices in 2000. The gap reduced in 2008, but price differential widened again to around 30% in 2012 mainly due to higher import tariffs (of about 50% beyond quantitative restrictions quota) and higher production costs.' (source: http://oryza.com/.../philrice-calls-rice-competitiveness...)

To bring down rice prices and stabilize rice supply, the following modest proposals are advanced.

1. Government should liberalize rice trade and importation, abandon rice protectionism. Remove National Food Authority (NFA) monopoly in rice imports.

2. End the quantitative restrictions (QRs) and convert it to low tariff, ultimately leading to zero tariff, especially for rice imports from our neighbors in the ASEAN.

3. In exchange for rice trade liberalization and removing NFA import monopoly, its accumulated debt, around P155 billion, may have to be assumed by the national government. This means taxpayers including those who do not buy NFA rice, will pay for its debt.

4. Certain NFA assets like some warehouses should be privatized. Proceeds from such privatization should be used entirely to retire some of its debt and not be used for any old or new food subsidy programs. This way, NFA debt that will be passed on to the national government and will be paid by taxpayers will be smaller.