Can pursuit of food security worsen hunger? The case of rice-sufficiency in the Philippines 1 Philippine Institute for Development Studies Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Outline  Overview  Background  How the Philippines stopped importing a lot of rice  Rice self – sufficiency policy: hits and misses  Recommendation 2

Overview  In the Philippines, the quest for rice self-suffiency is a venerable tradition. President Marcos in his 1968 SONA stated: “We have succeeded in solving our chronic food shortage. The country has attained self-sufficiency in rice and corn one year ahead of the deadline set for it by our administration. This fulfills a historic dream of several generations of Filipinos who equated the solution of the rice problem with the nation’s self-esteem.” 3

Overview  Five presidencies later, President Aquino insisted in his 2011 SONA: “Ang gusto nating mangyari: Una, hindi na tayo aangkat ng hindi kailangan. Ikalawa, ayaw na nating umasa sa pag-angkat. Ang isasaing ni Juan Dela Cruz dito ipupunla, dito aanihin, dito bibilhin.“  Real irony: the pursuit of food security had the unintended consequence of worsening hunger 4

Background 5

Who imports rice? 6 Exports of the top five exporting countries, Top rice imports, For the period 2011 – 2014, the Philippines completely drops off the list; imports fall dramatically to an average of 800,000 tons a year

How to stop importing (almost) anything Strategies in achieving self-sufficiency : 1. Support through domestic production 2. Maintaining barriers to imports, also called “protectionism” The above strategies are often implemented together The second strategy leads to higher domestic prices. Why? Because Protectionism prevents cheap imports from coming in. Case of an import ban: initially a ban will lead to shortages  higher price, stimulating domestic supply, and stifling off some of the demand. Shortage eliminated: consumers pay high cost for self-sufficiency 7

Why is the world price consistently lower than the domestic price in the Philippines? 8 Border and domestic prices, 1991 – 2014, P/kgCost of production of paddy rice, in $US/ton Cost of production per ton of rice is lower in exporting countries Due to geography and endowments

How the Philippines stopped importing a lot of rice 9

How the Philippines imports rice Right to import rice vested on the National Food Authority, by virtue of PD. No. 4. For every other agricultural product, the private sector has the default right to import, subject to compliance with SPS permits, licenses and payment of taxes  consistent with WTO requirement: Agricultural Tariffication Act (RA 8178) But not for rice: The Philippines negotiated and got special treatment for rice until 2005, extended to 2012; got waiver up to end-June Exception incorporated in RA

How the Philippines stopped importing a lot of rice Aquino Administration: rice self sufficiency is to be achieved under a Food Staples Sufficiency Program (FSSP). Direct procurement from farmers (up to 9.5% of palay output) is a means to achieve support price The FSSP is heavy on production support for rice industry, but silent on trade policy 11

Implications of FSSP for trade policy 1.Farmers will receive a support price “at levels that will guarantee farmers reasonable returns.” 2.Government intervention will be limited. As much as possible, marketing functions will be allocated to the private sector. Government will intervene only to “mitigate surges in retail prices.” NFA objective: keep farmgate prices high during stable periods, but prevent spikes in retail prices in unstable periods. 12

Implications Movements in the world price do not systematically influence the domestic price.  Domestic price is determined by domestic supply- demand interaction Ratchet effect: Over time domestic price seldom goes down; when it goes up, it does so in spurts.  If world price is falling: widening gap between domestic and world price. To test the first implication: run a Johansen cointegration test (1984 – 2014) using annual domestic and world prices  Finding: fail to reject the hypothesis of no cointegrating vector  In contrast: in coconut, we reject hypothesis of no cointegrating vector, but fail to reject at most one cointegrating vector. 13

Ratchet effect: 14 World price grows very erratically over time. Domestic price rarely declines. Wholesale prices have fallen only twice, in 1997 and 2001, only by 3% and 0.1%, respectively Average annual growth of 2.5% from ; after price spike in , domestic prices average growth was 3% from , after which price spiked to 15% Growth in annual wholesale and border price, 1992 – 2014, in %

What was the impact on hunger? 15 SWS self-rated hunger incidence, quarterly, 1998 – 2015 (%)

What was the impact on hunger? Based on impulse response function analysis (Mapa et al, 2015) One-time increase in price by 2.8 percentage points (one standard deviation)  raises total hunger by 6.3 percentage points in the next quarter Afterwards the effect decays to zero 16

Rice self-sufficiency policy: hits and misses 17

What government got right  Pursuing production support programs for rice, shifting support away from fertilizer and seed subsidy programs.  Resources shifted to: irrigation, FMRs, farm machinery, postharvest equipment, support for seed producers, market infrastructure, extension, R&D  Large proportion to rice  efficiency of rice support programs is open to debate, beyond the scope of this BB 18

What the government got wrong  Adopting protectionism through quantitative restrictions (QRs) as an instrument for food security and livelihood promotion, limiting intensity of competition from foreign suppliers of rice  Negotiating to extend the special treatment for rice to 2017  Neglect of high value added crops where the country has a competitive advantage  NFA principle of “buying high and selling low” – contingent liability … and is not even that low 19

What the government should have done  Should have lobbied for remedial legislation by 2012 (amending Agricultural Tariffication Act)  Upon expiration of special treatment, convert quantitative restrictions (QRs) to 35% tariff equivalent, same as the AFTA rate  Remove NFA import monopoly and allow free private sector importation; apply SPS permit system  What about farmers? See DP 2015 – 46: Options for Supporting Rice Farmers Under a Post-QR Regime: Review and Assessment 20

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