Agri Econ 23, Why forever Agrarian Reform should stop

I am reposting portions of a presentation by Dr. Raul Fabella made at UPSE in May 2014. I agree with his arguments -- the endless, forever extended deadline of agrarian reform (AR) or forced land redistribution should end. It is now 44 years since the Marcos AR program in 1972, longer if AR programs in the 50s and 60s by previous administrations are counted.

Forever AR is a major source of uncertainty for agri business development and modernization. For instance, you buy and convert a 10 hectares low-productivity farmland, spend huge amount of time, years and money. When the land has become productive and you start earning big to get some returns for your investments and hard work, pay for some loans, the Department of Agrarian Reform (DAR) people can suddenly come in from nowhere to tell you that your land will be forcibly redistributed by the government to your workers. The government will pay of course, but at lower rates and valuation dictated by the state, not at prevailing market rates and prices.
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The Record

* By 2014, CARP shall have distributed 5.05 million hectares, leaving but 321 thousand hectares or an accomplishment rate of 99%.

* 2.6 million farmers shall have gained some form of ownership to an average 1.2 hectares, shall have acquired and distributed 16% of the total Philippine land area of 30 million hectares.

* Japan’s vaunted land reform distributed only 1.76 million hectares of its total 37 million or 4.7%.

* Taiwan distributed 0.5 million hectares of its total of 3.62 million or 14%.

- (Adriano, 2013)

2008 APPC Study: “Land Reform, Rural Development and Poverty in the Philippines: Revisiting the Agenda”

• Per Capita Income: Income of ARC members with land was greater than income of ARC members without land. Income of Non-ARC members with land is greater than income of Non-ARC members without land;  Land ownership seems to matter.

• But when other factors are controlled for, neither being an ARB nor being an ARC member explains differences in income per capita.

• This implies that “land ownership via CARP” is an “inferior type ownership.”

• Our hypothesis: inferiority is associated with Section 27 and Section 6 (the land ownership ceiling of five hectares) of CARP.

• Being an ARB correlates negatively with access to formal credit even though land ownership correlates positively. This shows the property rights frailty of CARP.

• Conclusion of APPC Study

“Twenty years later, the results of the Comprehensive Agrarian Reform Law (CARL) launched in 1988 were below expectations. Productivity growth in agriculture has been low by regional standards and poverty still plagues rural areas. Total agricultural factor productivity has grown only 0.13% per year during 1980-1998, compared to 0.87% per year in Thailand and 1.49% in Indonesia…”

Design Flaws

• Unequal exchange: The productivity of land depends in its capacity to command financing. CARL effectively outlawed that capacity, making the land conveyed to the beneficiaries “effectively inferior” to that bought at market price from the landowner.

• Entrepreneurship Myth – give a tenant a piece of land and he/she morphs into an entrepreneur. Self-selection be damned.

• Coase Theorem be damned! Section 6 (ownership limit) and Section 27 effectively outlaw land asset exchange.

• The market be damned! The state supplants the market as arbiter of efficient use of assets.

• Economic size: If the land (3 hectares) is not “economic size” for a crop and location, it is a high-default risk, loses the capacity to command credit and is worth less than as part of a larger credit-worthy parcel.

The beneficiary is short-changed and condemned to fail! Economically unviable property rights are not stable.

• Size Economies: if economic size farm for a crop in a vicinity is > 5 hectares, consolidation will go underground (up to 100% in some villages) where property rights are unstable.

(India’s land ceiling ranges from 4-21 hectares depending on state; Sri Lanka’s is 20 hectares; and Cuba’s is 67 hectares!)

• Comprehensiveness: Same rules for all crops, whereas successful, templates stopped at rice lands! The Marcos effect?

• Consequences: Private capital flight; Sumilao as parable; a permanent credit crunch in the agricultural sector; low investment rate due to unstable property rights and no scale-up possibility. High rural poverty!

Private Capital Flight from Agriculture

Ratio of Total Bank Lending Share to Share in GDP: Agriculture

 1980, 60%;  1990, 50%; 

2000, 35%;  2010, 19%.

Quo Vadimus?

• No farm land ownership limit for publicly-owned firms listed with the PSE.

• Allow efficient farmers to own up to x > 5 hectares of agricultural land.

• Allow banks operating in rural areas unlimited ownership of land.

• Finish converting Collective CLOAS to individual CLOAS.

• A progressive farm land tax vice LAD.

State Capacity and Failure

• When a state overreaches, the result is a state failure: actions by government makes market failures look like God’s gifts.

• The Philippines widely recognized as a weak state: does too many things badly; too many windows for waste and corruption; it should do fewer things well.

• Poverty Reduction by sticking to basics: better courts of law, better highways, better overall governance, cheaper and more stable power supply.

The 1662 Book of Prayer expresses best the relation between societal health and state overreach:

“We have left undone those things which we ought to have done; and we have done those things which we ought not to have done. And there is no health in us.”

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See also:

Agri Econ 5: Land Reform Without Timetable is Wrong, July 01, 2010

Agri Econ 9: On Agrarian Reform and Agri Credit, April 29, 2013

Agri Econ 14: NO to Further Extension of Agrarian Reform, July 03, 2014 

Agri Econ 20, On NFA-BOC Campaign for Expensive Rice, May 19, 2015

Agri Econ 21, Rice protectionism as poverty-maximizing policy, September 25, 2015

Agri Econ 22, Why "peak food" hypothesis is wrong, December 25, 2015

Charles Darwin, Science and Society

Four and a half years ago, I attended this forum in UP Diliman. I was invited by a good friend, mathematician Fidel Nemenzo, who was then the Director I think, of the Science, Technology and Society (STS) program in UP, aside from being a Math Professor.

Fidel rediscovered the Closing Remarks he gave that afternoon from his old files and sent it to me. Posting it below.

It was a big audience. And... Ahaa! I also found this from my old files of photos. That day, I was seated next to my former boss, Prof. Randy David. In front of us were Dr. Raul Fabella (left) and Dr. Perry Ong (right). The latter by the way, is among the natural scientists of UP who are non-believers of the "man-made" warming political science of the UN and various environmentalist groups.

Closing Remarks

Dr Fidel Nemenzo

Science and Society Program

Ideally, we ought to have a longer symposium—maybe even a week-long conference. We are after all examining the impact of one of the most innovative and influential scientific theories of all time.

This is our small way of commemorating the 150^th year of the publication of Charles’ Darwin’s groundbreaking The Origin of the Species. We are holding this cross-disciplinary symposium to honor Darwin’s enduring legacy and examine how his ideas have shaped thinking within and beyond biology. Even the controversies that these have provoked have enriched discourse, within and across disciplines.

Dr Perry Ong (Institute of Biology) talked about the three F’s and power of Darwin’s theory as an explanatory framework for biology. I would not go as far as saying that evolution is fact and not merely a theory-  as some declare. A scientific theory, unlike abstract mathematics, is merely a testable, falsifiable approximation of truth, which is discarded once proved to be false, giving way to better theories. But Darwins’s theory of evolution has withstood the test of time and the rigorous scrutiny of the scientific community, supported by a growing body of evidence. And unlike Newton and Einstein who proposed only descriptive theories, Darwin proposed both a descriptive theory and a plausible mechanism—that of  heritable variation with natural selection.

Dr Maris Diokno (Department of History) posed the question: how should historians teach the ideas of Darwin, and science in general? She lamented the trivialization of ideas and the biased and sloppy treatment of science in textbooks, brought about by a misunderstanding of science, and as well as that of science as it develops within history. Both historian and scientist need to dispel these misconceptions, by effectively communicating science and the history of science within our schools and to the general public. The history of science needs scientists, she says. Historians and writers of textbooks, too on the other hand have to study science.

The global economic crisis, as Dr Raul Fabella (School of Economics) reminds us, was a reality check for theorists who viewed the neat formalism such as that of Newtonian physics as appropriate for economics. This mathematization of  economics has led to the worsening exile of much of theory from the reality of financial bubbles and crashes. The turmoil in economics calls for new ideas and alternatives. Dr Fabella asserted that insights from Darwin and evolutionary biology will contribute to the rethinking in economic theory.

Darwinism of course continues to provoke controversy, as all great ideas do.  Current debates rage between scientists like Richard Dawkins, author of The God Delusion,  and critics on the side of religion, who cannot accept purposeless natural selection as the shaping mechanism behind evolution.

Dr Michael Tan (Department of Anthropology) discussed how science developed in the context of history and culture, arguing that modern science, in a way, emerged from religion and cultures that grew around religions. He cited as example the spirit and methods of inquiry of ancient Muslim scholars, whose scientific and mathematical contributions are part of the foundations of modern science. The problem, according to Dr Tan,  is  that the voices that ring loudest are those of the religious fundamentalists and the atheist scientists, whose narrow views merely feed each other. Equating science with the abandonment of religion fits the prejudices of advocates of intelligent design and creationism.  A deeper look at science and culture show that there is much room for dialogue. It is only when assertions are made beyond the legitimate boundaries of these non-overlapping realms of knowledge that the theory of evolution and religion seem antithetical.

In behalf of the college of science, I would like to thank our four speakers, for their generosity, for sharing their views on Darwin with a broad public audience such as this. We thank the School of Economics for co-sponsoring this symposium, and the Diliman Interactive Resource Center for setting up the equipment to record this event and beam it overseas, and make it available online as podcast. This symposium grew out of a reminder by Dean Noel de Dios (School of Economics) that 2009, Darwin’s bicentenary, and 150^th anniversary of his theory, was about to end. And how wonderful to end the year with a forum like this one, where we get together to share and debate ideas. We may come from different colleges but occasions like this remind us that we belong to   a community of scholars, and that while we do our research in our respective disciplines, we also need to explore the many ways in which our disciplines interact. We hope that we have more of these in the future. Thank you for coming, and good day to everyone.

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See also:
An ever-expanding universe, June 25, 2010
Pilipinas Forum 12: Origin of Zero, Nothingness, Big Bang..., September 25, 2011
Pilipinas Forum 14: Math, Infinity and Limit, October 04, 2011
Pilipinas Forum 20: Turbulence, Chaos Theory and the Stockmarket, November 13, 2011
Pol Ideology 40: On Social Darwinism, May 23, 2013

Inequality 18: Piketty, Fabella, Equity-Efficiency Nexus and EPIRA

A good artice from my former teacher at UP School of Economics. The italics-red highights are mine, meaning I like them. The italics-blue highlights after the article are observations that I am skeptical or disagree with. Enjoy.
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Power and the pursuit of equity

Introspective

Raul V. Fabella

Posted on June 08, 2014 08:09:32 PM

INEQUALITY is back. The trigger is the book Capital in the Twenty-First Century by Thomas Piketty. Three allusions to the book have appeared in the BusinessWorld opinion section in the last month alone. Piketty claims that ever-rising income inequality is the inevitable harvest of unimpeded market economies. And the market cannot heal itself of this infirmity. Piketty flies in the face of the venerable Kuznets (1955) who claimed that in the process of development, income inequality first rises, reaches an apex and then falls as income per capita rises. Inequality was already the focus of the widely cited 2011 Ostry and Berg piece Inequality and Unsustainable Growth: Two Sides of the Same Coin? They showed that income inequality shortened the duration of growth even after taking on board other factors.

The Piketty thesis is being subjected -- as it should -- to a spirited academic debate. But whatever the final verdict on the thesis, the inequality aversion it triggered is now a global staple. We can expect this aversion in the West to wash up the shores of developing countries and recalibrate development policy. There is great promise but even greater risk here for developing countries.

 If equity must be served, how should it be pursued? In the past, many attempts to level the income distribution took the form of shackling the market. The most popular form is administered prices: price controls on basic commodities, productivity-divorced minimum wages, rent controls, and usury laws. Another is making illegal certain markets, such as for farm land in the rural areas. What they mostly accomplish is an empty cupboard that leaves most everyone but especially the poorest worse off. These efforts turn pro-poor intentions into anti-poor outcomes. This lesson has a long history.

According to Lactantius (300 AD), in the late 3rd century AD, Emperor Diocletian issued the Edict of Maximum Prices in an attempt to limit prices of commodities by law. As a consequence, much blood was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the law, after having proved destructive to many people, was from mere necessity abolished.” Unfortunately, Will and Ariel Durant’s famous paean to human frailty still holds: History teaches but man never learns.

 The fact of the matter is that equity could be pursued without stultifying the market. The main lesson of microeconomics venerable Second Fundamental Theorem of Welfare is that equity can be pursued without sacrificing efficiency. While this may be an unattainable ideal itself, the residual rule remains wise: Employ equity-pursuing policies which give the market the widest berth. Thus, wealth taxation is preferred to income taxation and income taxation when duly collected is preferred to commodity taxes.

 If you want to help the poor, give cash transfers to the targeted poor; don t artificially keep prices of commodities low. Artificially low prices, say, of electricity, are leaky buckets that benefit Forbes Park more than the poor. In general, fiscal transfers to expand opportunities for the targeted poor and their children, such as education, are the best equity strategy.

 It is now fashionable to attract investment through public-private partnerships (PPP). But the state must be ready to respect the pricing provisions of the contract despite populist pressure. The government, for example, has lately buckled on the treatment of corporate income tax in the concession contract for water in Metro Manila. This sours the PPP climate and will raise the cost of future procurements. As part of the original come-on for bidders, the tax treatment provision has been priced into the calculation and should be respected by the state.

 Currently, the government via the Energy Regulatory Board has embarked on a creeping administration of the Wholesale Electricity Spot Market (WESM) and bilateral contract prices on the pretext of market failure and abuse of market power. At the root of periodic spikes in electricity prices in the recent past and the highest electricity prices in the region is the dearth of new lower-cost baseload generation capacity coming on stream since Electric Power Industry Reform Act (EPIRA) became law. This makes the energy market a sellers market. If administered pricing becomes the rule, private investment in new capacity envisioned in EPIRA will be even less forthcoming.

 The Energy Secretary recently said that there is enough power for 2014 and 2015. If this is as much assurance as the government can give, potential investors in the Philippines will look elsewhere. The government can step in to procure new capacity to forestall a looming power crisis, but EPIRA prohibits the government from directly procuring new units unless there is a declaration of a power emergency by the President. Shouldn t PNoy seriously consider declaring a power emergency now and sign contracts for delivery of new baseload to ensure growth beyond 2016? After all, a zero or negative GDP growth is peerless in growing inequity.

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I am skeptical of the observation that  if you want to help the poor, give cash transfers to the targeted poor.

Yes, but if government must invent new welfare programs for the poor, government should also shrink or abolish other welfare programs that do not work. Have a spending-neutral welfarist policies.

I do not like this part, Shouldn t PNoy seriously consider declaring a power emergency now and sign contracts for delivery of new baseload to ensure growth beyond 2016?

There are many baseload plants on stream, they need to be assured that NO unnecessary delays be imposed, like the usual bureaucratism (about 100+ signatures from barangay to DOE to BIR needed to get a power plant constructed to running).

Also, price control is now practiced by ERC at WESM. The original ceiling price of P62/kWh has been reduced to "primary ceiling" of P32/kWh. And last April-May, a "secondary ceiling" of P6.+/kWh was imposed. And ERC is considering of extending that secondary price ceiling to June-July, or even longer.

Bureaucratism + price control are good formula to discourage new power investors and hence, formula to court  brown outs in the future.

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See also::

Inequality 14: 99 Percent to Support the 1 Percent, October 20, 2012 

Inequality 15: SM, Henry Sy and Class Envy, October 20, 2013  

Inequality 16: Inclusive Growth and Central Planning, October 21, 2013 

Inequality 17: The Koch Brothers and Their Critics, April 04, 2014

The Pope and Capitalism, December 03, 2013 
Are Markets Moral?, January 05, 2014 
Globalization, Mobility and Inequality, February 18, 2014
EFN 38: Report on Globalization and Inequality, Jeju Forum 2014, June 02, 2014