INTRODUCTION

The Philippines struggled in the 1980s and 1990s to lower poverty levels amid an inward-oriented economic policy. Poverty levels hovered around 30–40 per cent until the year 2000. The situation can be traced largely to slow economic growth, which averaged only 1.3 per cent annually, and high unemployment, which averaged 9.3 per cent during those decades. In terms of economic structure, the average share of agriculture had fallen from more than 20 per cent in the 1980s to 16 per cent in 2000. Meanwhile, the share of services increased from about 40 per cent to 52 per cent, while that of industry remained largely unchanged. This effectively transitioned the country into a services-led economy without going through an industrialization phase typical in the evolution of similar economies.

As regards international trade, the country’s total trade was equivalent to one-third of the gross domestic product (GDP) in the 1980s, increasing to nearly 100 per cent of GDP in 1998 prior to the Asian financial crisis. Expanding trade was the natural outcome as the country embarked on a trade and financial liberalization policy, coupled with privatization, during this period. This strategy was aimed at increasing investment and export capacities. It included unilateral tariff reduction from the 1980s from up to 100 per cent to a range of 10–50 per cent. The country also participated actively in trade agreements, particularly the ASEAN Free Trade Area-Common Effective Preferential Tariff (AFTA‑CEPT) in 1993, the General Agreement on Tariffs and Trade‑World Trade Organization (GATT-WTO) in 1995, and the ASEAN Trade in Goods Agreement (ATIGA) in 2009. In addition, the country was party to free trade agreements entered into by the ASEAN bilaterally with China, Japan, Korea, and Australia and New Zealand during the 2000s.

Beyond the opening of trade and relaxing of tariffs, the economy also implemented liberalization of industries to attract foreign investments. Annual foreign investment inflows had remained below US$1 billion from the 1980s to the 1990s. Liberalization and privatization reforms in the mid-1990s helped raise investments above US$2 billion, as investments were attracted in telecommunications, water utilities and banks, among others.

INTRODUCTION

Government subsidies have been used to pursue legitimate public interests when markets do not deliver optimal outcomes for society. They are used to promote priority sectors and establish growth areas that are aligned with the government’s development goals (Administrative Order No. 59, Rationalizing the Government Corporate Sector, issued on 16 February 1988 by President Corazon C. Aquino). In the Philippines, the reasons commonly cited for subsidizing the agriculture sector include the need for market stability and food security, as well as to help low-income farmers and aid rural development.

The Philippine agriculture sector has received substantial subsidies over time. Figure 23.1 shows the subsidies to the sector from 2010 to 2015, which averaged PHP3.36 billion annually. The subsectors receiving sizeable subsidies in 2014 were papaya growing, perennial trees (with edible nuts) growing, operation of irrigation systems through non‑cooperatives and seaweed farming; it was dairy farming in both 2013 and 2014. The subsectors of operation of irrigation systems through cooperatives and services to establish crops, promote their growth and protect them from pests and diseases, n.e.c. received subsidies for most years between 2010 and 2015. Such support for the agriculture sector is provided through government-owned and controlled corporations (GOCCs).

The government enacted the Philippine Competition Act (Republic Act 10667) in 2015. Despite the passage of this law, however, the competition environment in the country remains weak because there are other existing laws deemed inconsistent with this Act. For instance, GOCCs have charters providing for both proprietary and regulatory functions. Some of these corporations receive subsidies that affect competition in two ways (Neven and Veroudin 2008). One, they influence the behaviour of competitors as a response to that of the recipient. Two, firms behave relative to how the government reallocates rent via subsidies. These nonneutral policies distort the market. Limited competition slows down economic development and job creation in key sectors (Miralles Murciego et al. 2018). There has been no empirical study that estimates the effects of government subsidies on firms’ behaviour and the business environment. This study bridges this gap by examining the market structure and power of agriculture subsectors that receive government subsidies.

BACKGROUND AND INTRODUCTION

The past seven decades, starting in the 1950s, have seen rapid changes in the population age structure of most countries across the world, notably in the Asia-Pacific region. This phenomenon, known as the demographic transition, had opened a window of opportunity for countries to experience rapid economic growth over a fairly long period, accompanied by poverty reduction. Backed by right policies on human capital, labour market, public health, infrastructure and governance, the demographic transition had accounted for a substantial portion of the economic growth—known as the demographic dividend—experienced by the “Asian tigers” (mainly South Korea, Taiwan and Singapore) from the early 1960s to the 1990s.

Demographic transition is the link between population dynamics (or changing age structure) and economic development. It denotes a change from a situation of high fertility and high mortality to one of low fertility and low mortality (Figure 12.1). A country that undergoes demographic transition experiences sizable changes in the age distribution of the population, which, in turn, positively influence economic growth, given the right socio-economic policies.

The demographic transition has three phases, each having a different impact on a country’s economic growth and development. The first phase is an initial decline in infant mortality (death rate), with fertility rate (birth rate) remaining high. This leads to an expansion in the number of children, resulting in increased demand for basic education, primary health care, nutrition, and other services. This was the situation in the Philippines in 2000 (Figure 12.2). The country had an increasing youth dependency ratio (population aged 0–14 years to total population), posing a challenge to the economy as scarce resources had to be channelled to consumption spending instead of investment from savings for economic growth (Mapa and Bersales 2008).

In the second phase, the proportion of working-age population (persons aged 15–64 years) is larger relative to the young dependents (aged 0–14 years) and the older population (65 years and above). This was the situation in Thailand in 2000 (Figure 12.3). The policy challenge in the second phase is how the labour market can absorb the increased working-age group, particularly those aged 15–24 years.

This volume is a Festschrift for Arsenio Molina Balisacan – economist, professor, public servant, colleague, mentor and friend. It pays tribute to his work and honours him as an outstanding economist and public servant. Its themes reflect his research and policy interests over his professional career. These interests are central to understanding the development dynamics in the Philippines and elsewhere in Asia. The overarching theme is overcoming poverty through agricultural and rural development and complementary policies that engender a robust and sustainable structural transformation. Competition policy plays a particularly key role in combating cronyism and rent-seeking that impede that development path.

This project was conceived in November 2018 when the editors and the honouree attended the back-to-back Philippine Economic Society (PES) and the Federation of ASEAN Economic Associations (FAEA) conference held in Cubao, Quezon City, Philippines. We planned the surprise launch of this volume in time for his sixty-fifth birthday on 8 November 2022. In the Philippines, this age also marks an individual’s retirement from government service. Thus began the three-year “gentle conspiracy”, as Gerry Sicat aptly describes the project, among the editors, contributors, SEARCA and ISEAS – Yusof Ishak Institute towards the realization of this volume.

This book came to fruition with the help of many people and organizations whose tremendous support we wish to acknowledge. The enthusiastic responses from our forty-six authors from many countries are testimony to the high esteem and affection for Arsi. We thank our contributors for their fine papers and their collaboration as we worked through the refereeing and editorial production processes. We thank Peter Timmer and Gerardo Sicat for readily accepting our request to write the forewords. Special thanks to Anne Krueger for the back-cover endorsement.

A huge thank you to the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), led by Director Glenn Gregorio, for the funding support for this volume. Many thanks to the SEARCA team for facilitating the physical production of this book, especially Benedict Juliano and Arlene Nadres. Thanks to Lily Tallafer, our excellent and meticulous copyeditor who also happens to be one of Arsi’s long-time associates.

INTRODUCTION

The Philippine government liberalized rice imports in 2019, ending the import monopoly of the National Food Authority (NFA) and lowering the effective tariff on imported rice. Earlier studies had generally suggested lifting this privilege of the NFA and allowing private sector importation at lower tariffs, among other reforms (Balisacan, Clarete, and Cortes 1992; Roumasset 1999; David 2003; Balisacan and Sebastian 2006; Dawe, Moya, and Casiwan 2006; Sombilla, Lantican, and Beltran 2006; Clarete 2008; David, Intal, and Balisacan 2009; Briones 2018.) While the proposed reform had long been pushed, Philippine lawmakers in several Congresses had consistently considered it not a priority. Not even the country’s obligation to tariffy all quantitative import restrictions under the World Trade Organization’s (WTO) Agreement on Agriculture in 1996 nor a structural adjustment programme with the Asian Development Bank at the turn of the century had pushed lawmakers to reform the NFA’s role in the rice industry. What finally persuaded legislators to pass the Rice Tariffication Law (RTL) in 2019 was the high food price inflation in 2018, which analysts traced to the NFA.

As soon as the RTL went into effect in the first quarter of 2019, private‑sector importers started to import unprecedentedly large quantities of rice. To a price-taking open economy with perfect competition, the domestic price of rice is expected to fall by the percentage reduction of the import tariff rate. However, wholesale prices of rice fell significantly lower than expected in 2019. Furthermore, consumer rice prices dropped by less than that of wholesale rice prices. To top it all, the farmers bore the largest adjustment to rice import liberalization—that is, farm-gate prices of palay plunged the most in percentage terms.

Accordingly, reform opponents claim that the domestic rice market is imperfectly competitive and has remained that way despite import liberalization. With the NFA no longer providing a countervailing check to keep retail prices down, large importers and traders control not only the local supply but also the volume of imported rice.

The policy divide surrounding the RTL has spilled into competing claims on the incidence of gains and losses from the reform.

INTRODUCTION

Informal lending is one of the more common sources of household financing in many developing countries, including the Philippines. Informal finance arrangements through business counterparts and extended family members, pawnshops, rotating savings and credit associations (ROSCAs), and informal money lenders often prove more efficient than their formal counterparts around the globe (Adams and Hunter 2019). Despite the wide acceptance and integration into society of these informal financing institutions, studies on them are few, especially in the context of developing countries (see, e.g., Agabin et al. 1989; Agabin 1993; Nagarajan, David, and Meyer 1992; Floro and Ray 1997; Adams and Hunter 2019).

Surveys by the Bangko Sentral ng Pilipinas (BSP, Central Bank of the Philippines) point to a growing share of informal money lenders among households’ funding sources in recent years, despite the regulators’ push to encourage a more inclusive financial sector, such as utilizing microfinance institutions and digital banks and easing regulatory requirements to entice households to join the formal financial system (Karlan and Morduch 2010; Kritz 2013; BSP 2018, 2020). The 2019 Financial Inclusion Survey of the BSP shows that informal money lenders held a significant role in various financing decisions of households (BSP 2020).

The expansion of the informal financing channel does not refer only to the increased client base, but also to product innovations that money lenders introduce. For instance, collaterals accepted by money lenders have evolved from goods, jewelries, land titles and household appliances to, recently, automatic teller machine (ATM) or debit cards.

This study takes a close look at a newly emerged credit arrangement called Sangla ATM or debit card pawning. Sangla ATM is an informal loan arrangement where a borrower uses as collateral an ATM card linked to an account that receives a regular salary or other forms of income. The borrower surrenders the ATM card and its personal identification number to the lender, who then uses the card to withdraw the loan repayment (principal and interest) on a regular frequency (typically twice a month) until the entire amount is fully repaid.

The popularity of debit card pawning in the Philippines has reached a broad range of borrowers who have access to an ATM‑linked bank account—from conditional cash transfer recipients of the government to private-sector employees and even government personnel (ABS‑CBN 2018, 2020).

INTRODUCTION

No controversy in the history of agricultural economics has been more perennial than the relationship between farm size and productivity. From the days of Chayanov (1926) to the present, the dominant view has been the inverse relationship (IR) between farm size and productivity, particularly when productivity is measured by physical yield or gross value of production per hectare (e.g., Barrett, Bellemare, and Hou 2010; Larson et al. 2014; Delvaux, Riesgo, and Paloma 2020). Feder (1985) theoretically demonstrates that large farms tend to be less productive than small farms because they tend to use hired labour more intensively than small farms, and because hired workers do not work as hard as family workers. Based on this IR, Lipton (2012) advocates redistributive land reform as it is supposed to be conducive to both efficiency and equity.

However, Otsuka (2007) argues that the IR is partly a consequence of land reform programmes that suppress land rental transactions between less productive large farmers and more productive small farmers. He points out that the IR is found primarily in South Asia, where land reform programmes were widely implemented, but not in Southeast Asia, where they were not implemented rigorously, except in the Philippines. Otsuka (2013), Estudillo and Otsuka (2016) and Otsuka, Liu, and Yamauchi (2016a) also maintain that by nature, small farms in Asia employ labour-intensive production methods. Since the wage rate has been rising sharply in many high-performing Asian countries, the production cost of small-scale farming has been increasing also. This has resulted in agriculture’s loss of comparative advantage in this region. This argument suggests that the IR has been weakened in Asia because small farms’ labour-intensive production is no longer advantageous. Using cross-country data from 1980 to 2010, Otsuka, Liu, and Yamauchi (2013) confirm the decline in the efficiency of smallholder agriculture. Thus, Asia as a whole may become a major importer of food grains unless farm-size expansion and large-scale mechanization take place (Yamauchi, Huang, and Otsuka, 2021).

A recent meta-regression analysis of roughly 1,000 cases by Delvaux, Riesgo, and Paloma (2020) shows the following results: (1) a strong IR tends to be found when gross value of output per hectare or physical yield is used to measure productivity;

INTRODUCTION

The Philippines has a complex development history. Initially regarded as one of Asia’s prospective stars, by 1980 it had clearly failed to live up to such a lofty expectation. It parted company with its dynamic East Asian neighbours during the 1980s, and experienced prolonged and deep twin crises, both economic and political. Popular commentary over this period labelled it “the sick man of Asia”, “the East Asian exception”, a “crony capitalist economy”, “Asia’s Latin American economy” and various other unflattering descriptors. It appeared at that time that poverty and inequality were deeply entrenched, that agriculture lacked the resilience of its neighbours, that the ethno-religious conflict in Mindanao was beyond resolution, and that macroeconomic adventurism was consigning the country to a bleak period of recurring debt crises. Many of its best and brightest citizens relocated abroad; the prospect was that the Philippines would become a “remittance economy”.

However, just as the earlier optimistic prognostications proved to be mistaken, subsequent developments have been unkind to the 1980s doomsayers. The Philippines transitioned to a workable, decentralized democracy with governments that (mostly) enjoyed electoral legitimacy. Economic reforms introduced in the wake of the 1980s’ crises resulted in economic recovery and a return to growth, which, in turn, generated significant improvements in living standards. Prior to the COVID-19 pandemic, the country had enjoyed more than 70 quarters of continuously positive economic growth. Moreover, from 2000 to 2019, its growth was not far short of those of Asia’s most dynamic economies. Viewed from the crisis decade of the 1980s, both these outcomes would have been unimaginable.

Just as this renewed prosperity appeared to be durable, the COVID-19 pandemic struck with unexpected ferocity. The Philippines experienced one of the most severe economic downturns, with its 2020 decline in gross domestic product (GDP) almost three times the global average. It introduced one of the world’s most severe lockdowns, partly in recognition of the weak capacity of the country’s under‑resourced public health system. Poverty and inequality have increased substantially as many of the poor and near-poor have been unable to sustain their livelihoods, and social protection measures have limited reach.

INTRODUCTION

Effective international cooperation can bring enormous benefits to developing countries, such as by providing access to markets and facilitating technology transfer and investments for development. With much deeper global economic integration, there is an even greater need for coordinated policy actions by countries to avoid beggar‑thy‑neighbour policies and adverse spillovers and, instead, create conditions to lift global welfare. Achieving international cooperation that serves development, however, is not always forthcoming nor easy to promote in existing international forums. A key challenge for policymakers in developing countries is to extend their attention beyond implementing national policies to also finding the means to influence support for international measures that serve their respective countries’ interests.

This paper explores the interplay of national policies and international regimes in the areas of trade policy and corporate tax policies to illustrate how international cooperation has shaped their impact on development. It draws on the substantial body of analytical work on these areas to highlight some key challenges faced by developing countries in reflecting their interests to influence international rules and practices. The first part discusses lessons from the rules-based international trading system. The second part reflects on the challenges of reforming the international corporate tax system, especially from the perspective of developing countries. The third part considers other policy areas where international cooperation will be important for developing countries.

LESSONS FROM A RULES-BASED INTERNATIONAL TRADING SYSTEM

The textbook economic case for international trade—the law of comparative advantage—says that two or more countries can gain from specialization and trade of goods. Free trade also offers dynamic benefits, such as from the pressure on companies to be more productive to be able to compete internationally. History shows, however, that countries also have incentives to limit imports to protect local production in specific sectors, gain terms of trade advantage and/or raise fiscal revenues. Countries have used trade agreements as mechanisms to seek reciprocal commitments to reduce barriers to trade and provide greater access to markets.

Evidence shows that the world has benefited from the rules-based international trading system.

INTRODUCTION

It has been understood, at least since Plato’s Republic, that trade between two entities can be beneficial to both. The reason why that applies to countries was made very clear two centuries ago by Ricardo (1817) with his theory of comparative advantage. Yet most countries have restricted their international trade in products at various times. True, in the mid‑19th century following the repeal of Britain’s protective Corn Laws, the richest countries of Europe began opening their national markets, especially in farm goods, as they took more advantage of agricultural development opportunities in their colonies to secure food and fibre supplies. That globalization wave came to an end with World War I, and trade suffered further in the 1930s and early post-World War II. But during the lifetime of Arsenio M. Balisacan, empirical analyses of the effects of trade policies—including in the Philippines—have added to theoretical reasons for opening up to international trade. Arguably they have contributed to reforms of these policies since the 1980s, and thereby to the accompanying latest globalization wave.

This chapter surveys the findings of these empirical studies as they affect incentives in agricultural markets. A focus on policies affecting farm products is warranted because they adversely affect food security globally, and in particular the world’s poorest households, which are mostly found in rural regions of developing countries.

More specifically, the chapter traces the impacts of these trade, farm and food policy developments since the 1950s, particularly in East Asia. It does so by subdividing the period into the years to the mid‑1980s, which were characterized by anti-trade policies that added to the volatility of international food prices and to poverty and inequality in most developing countries, and the subsequent two decades, which saw the gradual undoing of these price- and trade-distorting policies. The chapter looks at both the extent of interventions insofar as they alter prices, and the market and welfare effects of these policies at home and abroad. During the most recent dozen years, international prices of farm products spiked and the government of the Philippines and of many other countries reacted in ways that aimed to insulate their domestic markets.

INTRODUCTION

A notable feature of the Philippine economy post-Asian financial crisis and until fairly recently had been the slow response of income poverty to fairly robust economic growth (Balisacan 2011; Balisacan 2010; Balisacan 2009; Ducanes and Balisacan 2019; World Bank 2011; ADB 2009). This contrasts with the experience of China and Vietnam (Balisacan, Pernia, and Estrada 2003), where poverty markedly declined as their economies grew in the decade following the Asian financial crisis, as well as with other countries in the region whose economies grew even earlier, such as Thailand and Malaysia. The income elasticity of headcount poverty was estimated to be only −1.3 in the Philippines, compared with −2.3 for East Asia as a whole (World Bank 2011).

We argue in this paper and show empirically using regional-level data that the reason for the slow response of income poverty to economic growth in the Philippines is the erstwhile pattern of economic growth, which had been dominated by higher-end services. From 2012 to 2015, as the pattern of economic growth began to favour industry, a strong poverty response has been observed.

The transformation of rural employment from a largely informal to a largely formal sector activity as the root cause of modernization and development follows the Ranis-Fei model (Ranis and Fei 1964). The Ranis-Fei model of growth envisions a dual economy with, on one hand, a backward economy serving as a sink for surplus labour and with a low fixed wage level and, on the other, a modern sector with rising productivity and high wages, courtesy of modern technology, large capital complement and scale economies. The transfer of labour from the backward sector to the modern sector underpins economic growth and the rise in income. As the process unfolds, average incomes of households in the backward economy are pulled up and poverty drops. A clear case is Taiwan’s development in the 1960s, where rural incomes rose and rural poverty incidence fell with the increasing availability of rural non-farm employment (Anderson and Leiserson 1980).

Another development paradigm apropos the relationship between industrial structure and poverty reduction is development progeria, which applies to low-income countries.

INTRODUCTION

Many developing countries have adopted competition law in the recent few decades. There are more than 130 competition law regimes in the world today (Cheng 2020). Competition agencies in developing countries tend to emphasize that their competition policies aim at contributing to economic development and social inclusion (Evenett 2005). For example, Arsenio M. Balisacan, the first chairperson of the Philippine Competition Commission (PCC), stresses that “the PCC, a young competition agency, has to quickly develop its enforcement capacity, in light of expectations for enforcement to contribute to sustaining rapid economic development and achieving inclusive development” (Balisacan 2020, 13).

The competition agencies of Korea and Japan have traditionally acted against late payment by large firms to small and medium enterprises (SMEs) in retailing and wholesaling, as well as subcontracting. In 2011, the European Commission (EC) strengthened its Late Payment Directive by including a provision that if firms do not pay their invoices within 60 days, they will be forced to pay interest and reimburse the reasonable recovery costs of the creditor. The policy was adopted because a number of SMEs have gone bankrupt each year while waiting for their invoices to be paid and because late payment deprives jobs and stifles entrepreneurship (European Commission 2011). The government of the United Kingdom has been intensifying its efforts to bring about a culture change in payment practice. Few studies have been conducted on payment practices in the developing world, however, and the competition agencies and governments in these countries seem not to be determined to combat late payment to enhance inclusive development.

This chapter presents the case of late payment practices in the shoe industry in the Philippines circa 2000, using interview materials and survey data of shoemakers. In those days, shoemakers did not have the option of using digital platforms to sell goods directly to customers; their direct buyers were retailers and wholesalers. Although none of these buyers dominated the entire domestic market for shoes, it seems that they had buyer power, allowing some of them to delay payment to shoemakers for an extended period, which could be more than a year.