New rice technology and comparative advantage in rice production in the Philippines

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New rice technology andcomparative advantagein rice production in thePhilippinesJonna P. Estudillo a , Manabu Fujimura b &Mahabub Hossain ca International Rice Research Institute ,Philippinesb Asian Development Bank , Philippinesc International Rice Research Institute ,Published online: 23 Nov 2007.

To cite this article: Jonna P. Estudillo , Manabu Fujimura & Mahabub Hossain(1999) New rice technology and comparative advantage in rice productionin the Philippines, The Journal of Development Studies, 35:5, 162-184, DOI:10.1080/00220389908422596

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New Rice Technology and ComparativeAdvantage in Rice Production in the

Philippines

JONNA P. ESTUDILLO, MANABU FUJIMURAand MAHABUB HOSSAIN

The aim of this study is to assess the comparative advantage in riceproduction in the Philippines for the past three decades since 1966.We have found that the country gained sharp improvement incomparative advantage in rice production in 1979, when yield roseremarkably due to the diffusion of pest- and disease-resistantmodern rice. Beginning in 1986 however, the country appears tohave slowly lost its comparative advantage due to the decline inrice prices, stagnation in rice yield and rising cost of domesticfactors. By 1990, the country completely lost its comparativeadvantage in rice production.

I. INTRODUCTION

Assessing the nation's comparative advantage in rice production is of amajor academic interest as well as policy significance because riceproduction competes for key production inputs - land, labour and water -which could have been used in alternative production activities. This paperaims to evaluate the comparative advantage in rice production in thePhilippines and identify the factors responsible for the changes incomparative advantage for the last three decades since the introduction ofthe Green Revolution in 1966.

This article is organised as follows. Section II presents the conceptualframework, definition and measurement of prices and exchange rates,sources of data and sample characteristics. Section III describes thetechnological progress in rice production and resource savings and the

The authors are at the International Rice Research Institute, the Philippines; Asian DevelopmentBank, the Philippines; and International Rice Research Institute, respectively. Views expressed inthis article are those of the authors and not of the institutions to which they belong to. The authorswould like to thank Professor Yujiro Hayami for his insightful comments on the earlier draft andFe Gascon for providing the data-set.

The Journal of Development Studies, Vol.35, No.5, June 1999, pp.162-184PUBLISHED BY FRANK CASS, LONDON

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NEW RICE TECHNOLOGY IN RICE PRODUCTION: PHILIPPINES 163

trends in comparative advantage and private profitability. Section IVidentifies the factors responsible for the trends in private and socialprofitability and the impact of government policies. Finally, the conclusionsare summarised in section V.

II. DATA AND METHODS

Conceptual Framework

A well-established method of presenting comparative advantage is tomeasure domestic resource cost (DRC). DRC compares the opportunitycosts or shadow prices of domestic resource used in production with thevalue added that it generates. That is,

Domestic resources and nontraded inputs requiredto produce one unit of the good, valued at shadow prices

DRC = .net foreign exchange earned or saved

by producing one unit of the good domestically

A country has a comparative advantage in the production of a commodity ifthe social opportunity cost of producing an incremental unit is less than theborder price of the commodity {Pearson et al, 1976]. This definition ofcomparative advantage or social profitability is essentially a simplified cost-benefit analysis and is equivalent to the country's potential capability forexport or import substitution.

To bring the numerator and denominator of the DRC to the samenumeraire, we divide the numerator by the shadow exchange rate (SER)and define it as resource cost ratio (RCR). RCR is simply DRC/SER.1 Thevalue of RCR is compared with unity in order to judge the comparativeadvantage of the Philippines in rice production. When we express RCR ina unit value, it becomes net social profitability (NSP). In summary,comparative advantage and disadvantage are defined as

Comparative advantage: DRC < SER or RCR < 1 or NSP > 0Comparative disadvantage: DRC > SER or RCR > 1 or NSP < 0.

RCR is a more convenient parameter to use when we want to see a trend incomparative advantage over time because, being in ratio form, it is notaffected by changes in nominal prices. NSP is more convenient when wewant to analyse causes of changes in social profitability.

We can modify the above construct of RCR and NSP and define the

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164 THE JOURNAL OF DEVELOPMENT STUDIES

private equivalent of comparative advantage and private profitability, inwhich we use market prices instead of shadow prices and official exchangerate (OER) instead of SER. We denote RCR*=DRC*/OER (privateequivalent of RCR) and NPP (net private profitability). In summary,

Private profitability: DRC* < OER or RCR* < 1 or NPP > 0Private non-profitability: DRC* >OER or RCR* > 1 or NPP < 0.

Definition of Terms and Measurement of Prices and Exchange Rates

Rice: The shadow price of rice is the five-year moving average centered oneach survey year of the c.i.f. import price of milled rice five per cent Thaibrokens. To convert the border price of milled rice to rough rice equivalent,we adjust the border price of milled rice for marketing and processing costsof 25 per cent and milling recovery rate of 65 per cent.

Tradable inputs: The market prices of inputs such as seeds, fuel and oil,fertiliser, insecticides and herbicides and those of tractor and thresher areconverted to shadow economic value by subtracting legal tariff rates.

Animal service: The service of the bullock (carabao) is valued based onprevailing custom rate.

Irrigation: The market value of irrigation water is the user fees while theshadow price is the cost of construction per year of the life span of thesystem plus the yearly operation and maintenance expenditure of theNational Irrigation Administration (NIA) per hectare of service area in thewet season.

Interest rates: Annualised interest rate of commercial banks on loans anddiscount is used to impute interest payment on pre-harvest costs forestimating private profitability. For computing social profitability, theshadow interest rate is assumed to be ten per cent plus the inflation rate.

Wage rates: The shadow price of labour is approximated by the marketwage rate because rural labour markets adjust to changes in labour demandand supply conditions. According to David and Otsuka [1994], the rurallabour market is well integrated by the permanent and seasonal migration oflandless workers from unfavourable production regions, where there is lowdemand for labour, to favourable regions where there is high demand.Thus, wages across regions tend to equalise.

Land prices: Land markets were well developed before the implementationof land reform in 1972. The shadow price of land is the net rent payment

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by share-tenants in 1966 which is 40 per cent of the yield. Based on ourdata, the net rent payment by share-tenants was most commonly in 3 8 ^ 2per cent range.

Shadow exchange rate: SER is computed as (1 + WATR) X OER whereOER is the published official exchange rate and WATR is the weightedaverage tariff rate calculated as the total value of import tariff divided by thetotal value of imports, Weighting thus, occurs automatically [Ward andDeren, 1991}.

Sources of Data and Description of the Samples

The data in this study came from a series of surveys conducted by the SocialSciences Division of the International Rice Research Institute (IRRI) inCentral Luzon, the most progressive rice-producing area of the Philippines.The objective of the surveys has been to monitor changes in farmer's ricetechnology, cultural practices, land tenure, mechanisation, and labourpractices that occurred during the survey period from 1966-94.2 The dataset is called the Central Luzon Loop Survey because the respondents arelocated along a loop of the major highways stretching north of Manilathrough the provinces of Bulacan, Nueva Ecija, Pangasinan, Tarlac, andPampanga (Figure I).3

The respondents are fairly homogeneous, consisting of farmers withfavourable access to technology information and market. The loop surveycovers areas which are either characterised by shallow, favourable rainfedenvironment common in the country or are fully irrigated by gravityirrigation systems. Central Luzon accounts for roughly one-fourth of thecountry's rough rice production [Philippine Yearbook, 1995] thus, thetrends in social profitability estimated from the survey farms may reflect thedirection of change of social profitability in the Philippine rice sector as awhole. The samples used in this study were grouped, based on the surveyyear and production environment (rainfed or irrigated). While we computedthe relevant statistics for both irrigated and rainfed farms, the results shownin the tables refer exclusively to irrigated farms. Proper citation of importantresults obtained from the rainfed farms are included in the text. We focusour discussion mainly in irrigated farms for two reasons: (1) the trends incomparative advantage and private profitability in irrigated and rainfedfarms are similar, and (2) irrigated rice is the more dominant productionmode that accounts for about 70 per cent of total rice production.

The original sample consisted of 55 irrigated rice fanners in the wetseason of 1966 (Table 1). Attrition rate was so high that by 1979 additionalnew samples were added, forming the sample farms from 1986 to 1994.There were two surveys for one crop year extending from the wet season

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FIGURE 1

PHILIPPINES

SURVEYROUTE

'0

NATIONALHIGHWAY

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(July to November of the initial year) to the dry season (December to Juneof the next year) in 1966, 1970, 1979, 1986, 1990, and 1994.4 The dry-season sample is generally smaller than the wet-season sample because onlythose farmers who planted rice in the dry season were included.

TABLE 1NUMBER OF SAMPLE FARMS AND TENURE

CENTRAL LUZON, 1966-94

Sample sizeWetDry

Tenure (per cent area)Ownera

Share-tenantLeasehold13

1966

5517

147115

1970

2213

95536

1979

9181

128

80

1986

5864

81577

1990

5656

159

76

1994

5654

266

68

Notes:a Includes recipient of Emancipation Patentb Includes recipient of Certificate of Land Transfer

In 1966, share-tenancy was the most common form of land tenure. Thetenurial structure has undergone marked changes with the implementationof the government's land reform programme in 1972. The programmeattempted to convert share-tenants to leaseholders, in case the landlordowned less than seven hectares of land, or to amortizing owners, in case thelandlord owned more than seven hectares of land [Hayami and Kikuchi,1999: Ch.4]. A Certificate of Land Transfer (CLT) was issued to amortisingowners, which promises the right to purchase the land by payingamortisation fees over 15 years to the Land Bank of the Philippines. AnEmancipation Patent will be issued to the farmer upon completion of theamortisation payments. As a result of the land reform implementation, therewas a major replacement of share-tenancy by leasehold-tenancy from 1966to 1979. The number of owner-cultivators increased in 1994 because manyCLT holders have completed the amortisation payments and have receivedthe Emancipation Patents.

III. RESULTS AND DISCUSSION

Technological Progress and Changes in Cost Structure

Technological progress in rice production can come in the form of seedtechnology such as modern rices with better genetic traits, mechanical

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technologies such as tractors and threshers, and improved managementpractices in labour application and fertiliser use. In 1966, all of the samplefarmers were planting traditional varieties (TVs) of rice (Table 2). Threemajor breakthroughs in rice research were achieved since the late 1960swith the introduction of the modern varieties (MVs) of rice.5 The first is thedevelopment of nitrogen-responsive, photoperiod-insensitive cultivars witha yield capacity double that of TVs. These varieties - IR5 to IR34 - weresusceptible to attacks of pests and diseases. We call these rice varieties thefirst-generation modern varieties (MV1). This group of varieties wasplanted by our sample farmers in 1970.6

TABLE 2TECHNOLOGY ADOPTIONCENTRAL LUZON, 1966-94

1966" 1970 1979 1986 1990 1994

Adoption of rice variety (per cent adopters)TVb 100MV1C 0MV2d 0MV3e 0

Adoption of machine (per cent adopters)Tractor 14Thresher 71

Notes:a Refers to the wet season sampleb Traditional varietyc First-generation modern varietyd Second-generation modern varietye Third-generation modern variety

The second achievement is the development of cultivars thatincorporated resistance against multiple pests and diseases and shortergrowth duration period of crop maturity. These cultivars introducedstability in yield in modern varieties and some had higher yield levelscompared to the early generation modern varieties [Otsuka, Gascon, andAsano, 1994a]. We call these varieties - IR36 to IR62 - as the second-generation modern varieties (MV2). MV2 were adopted by our samplefarmers in 1979.

The third achievement was the integration of traits of resistance to pestsand diseases and improved grain quality that allowed farmers to gain largerprofits through higher prices for their produce. We call these rices - IR64to IR74 and PSBRc series - the third-generation modern varieties (MV3).The most popular MV3 is IR64 which has been repeatedly planted since

010000

4550

00

1000

7742

000

100

91100

000

100

100100

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100

100100

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1986 because it commands a higher price in the market due to its superiorgrain quality.7 These varieties were also of shorter maturity enablingfarmers to increase cropping intensity.

Mechanical technologies substitute for labour thereby changing theinput combination and altering the cost structure. The adoption of tractorspredated the adoption of MVs.8 The proportion of sample farmers who usedtractors increased from 1966 to 1994 presumably because of thedevelopment of the tractor rental market and the increasing maintenancecost of carabaos as a result of the substantial reduction of grazing lands. In1966, most fields in Central Luzon were rainfed, the tractors used weremostly the 70-horsepower four-wheel types which were more effective inbreaking the hard soil. By 1979, when large-scale irrigation infrastructureopened up in Central Luzon, the tractors used were the two-wheel powertillers which were more suitable for the two-cropping system where the soilremains wet before land preparation begins in the next season.

Similarly, thresher was adopted before the advent of MVs. Tilyadora(huge threshing machine) was already being used as early as the 1920s inthe haciendas (large landholdings) to monitor easily the sharing of outputbetween landlords and tenants [Hayami and Kikuchi, 1982]. When thehaciendas were abolished following the successful implementation of landreform, many farmers shifted back to manual threshing in 1979. This wasshown by a decline in the proportion of sample farmers who used thethresher. Tilyadora was completely gone by 1986, when all the samplefarmers adopted the portable axial-flow thresher developed and released byIRRI in 1974.

Labour input in rice production was affected by the introduction of MVsand the adoption of labour-saving technologies. The adoption of MVsincreased the demand for labour particularly in crop care activities -weeding and application of fertiliser - as well as in harvesting and threshingdue to increased yield [Barker and Herdt, 1985]. The adoption of tractordecreased the demand for labour in land preparation while the use ofthresher reduced the labour requirement in threshing.

Total labour input increased modestly from 1966 to 1994, indicating thatthe labour-using effect of MVs has been offset by the labour-saving effectof the adoption of mechanical technologies (Table 3). There was an increasein hired labour input in response to the increase in total labour demand asfamily workers preferred leisure to labour with the increase in familyincome. Family labour input was mostly concentrated in pre-harvestactivities particularly in the application of chemical inputs, an activitywhich is not easy to monitor and is thus, difficult to relegate to hiredworkers [Hayami and Otsuka, 1993].

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TABLE 3LABOUR INPUT IN RICE PRODUCTION (MANDAYS/HA)


Pre-harvest labour13

FamilyHired

Harvesting-threshing labourFamilyHired

TotalFamilyHired

1966a

402119

202

18

602337

1970

533221

213

18

743539

1979

492227

282

26

772453

1986

421428

191

18

611546

1990

401426

295

24

691950

1994

401327

286

22

681949

Notes:a Refers to the wet seasonb Includes land preparation, crop establishment, repair and cleaning of dikes, weeding and

chemical input application.

Pre-harvest labour activities - land preparation, crop establishment,repair and cleaning of dikes, weeding and chemical input application -increased from 1966 to 1979 because more labour is needed for crop careactivities with MV adoption. Pre-harvest labour intensity declined from1979 to 1994 because of several factors: (1) increased adoption of tractor(which reduced labour required in land preparation), (2) adoption of direct-seeding method of crop establishment (which saved labour used in thetraditional method of transplanting the seedlings), and (3) increasedherbicide application (which substituted for manual weeding). There hasbeen an increase in labour application in harvesting and threshingoperations from 1966 to 1979 partly because of higher yields associatedwith the adoption of the pest- and disease-resistant MV2 and the shift fromtilyadora to manual threshing.

Fertiliser use has increased sharply following the advent of MVs.Application of elemental N, P, and K has increased from 9 kg per ha in 1966to 29 in 1970, 62 in 1979, 67 in 1986, 70 in 1990, and 93 in 1994.

New Rice Technology and Resource Savings

Savings in the amount of domestic resources - land and labour - requiredto produce one unit of rice is the major gain obtained from the adoption ofnew rice technology. These savings on domestic resources are primarilybrought about by yield increase. Yield increase saves on land and labourwhich directly reduces the cost producing a unit value of rice thus,increasing the comparative advantage. Following the yield increase, the

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0.45527

0.39329

0.23719

0.25115

0.24216

0.23516


amount of land needed to produce one ton of rice has declined consistentlysince 1966, with the most spectacular decline observed in 1979 with thediffusion of MV2 (Table 4). Land requirement to produce a ton of ricedeclined by about 50 per cent during the 1966-79 period while labour inputdeclined by 30 per cent.

TABLE 4YIELD TRENDS (TONS/HA) AND USE OF LAND (HA/TON) AND LABOUR

(MANDAYS/TON), CENTRAL LUZON, 1966-94

1966a 1970 1979 1986 1990 1994

Yield 2.2 2.5 4.2 4.0 4.2 4.3

Use of domestic factorsLandLabour

Note: a Refers to the average of wet and dry seasons.

Yield in irrigated farms rose from 2.2 tons per ha in 1966 when TV wasdominant to 2.5 tons per ha in 1970 when MV1 was adopted. Yield rosesignificantly to 4.2 tons per ha when the pests- and disease-resistant MV2was adopted. Yield, however, began to stagnate in 1986 with the diffusionofMV3.

The decline in the amount of land and labour needed to produce a unitweight of rice contributes directly to the reduction of the cost of domesticfactors in rice production. Factor cost is the sum of the amount of factorinputs multiplied by factor prices. Therefore, any increase in the cost ofland and labour in rice production can be clearly attributed to the increasein factor prices, given the decline in domestic factor usage.

Trends in Comparative Advantage and Private Profitability

Comparative advantage in producing rice is gained if RCR is less than unity,which means that the cost of producing one dollar's worth of ricedomestically is less than the cost of importing rice. The lower the value ofRCR, the higher the potential of the country for import substitution.Similarly, if RCR* is less than unity, rice production is profitable from thefarmer's perspective and thus, there are private incentives to produce rice.Private incentives can be in the form of higher output prices resulting fromrestricted importation of rice; input subsidies such as those for chemicalinputs, machinery, and irrigation water; and control of land rent when yieldsare rising thereby creating a gap between the economic rent and the actualrent paid.

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The trends in RCR and RCR* are shown in Table 5. RCR in irrigatedrice production is above unity in 1966, when TVs were planted, whichmeans that the Philippines has no comparative advantage in producing TVsin irrigated ecosystems.9 In contrast, RCR in rainfed farms is below unityin 1966, implying that the domestic resource cost of producing one unit ofrice in rainfed farms is lower than the cost of importing rice. Thus, thereare resource savings in producing TVs in rainfed ecosystems. In 1970, whenMVl was adopted, RCR in irrigated farms is above unity and the reason forthis is the lower than potential yield achieved by farmers because MVl issusceptible to attacks of pests and diseases.

TABLE 5RESOURCE COST RATIO IN RICE PRODUCTION


Social ProfitabilityRCRDRCSER

Private ProfitabilityRCR*DRC*OER

1966a

1.064.794.52

0.532.073.90

1970

1.208.076.74

0.442.605.91

1979

0.736.448.86

0.483.547.38

1986

1.0023.5423.65

0.489.79

20.39

1990

1.2133.8327.96

0.4210.2124.31

1994

1.5947.9130.11

0.379.77

26.41

Note:a Refers to the average of wet and dry seasons.

Substantial improvement in comparative advantage (sharp decline inRCR) was gained in 1979 when the yield rose remarkably after the diffusionof pest- and disease-resistant MV2. This holds true for both irrigated andrainfed farms, although the decline in RCR in 1979 was much higher forirrigated rice. Most of the MV2 are recommended for irrigated environment,consequently, their yield is higher in irrigated than in rainfed conditions.The yield of MV2 in irrigated environment was 4.2 tons per ha while that inrainfed environment was 3.0 tons per ha only.

Beginning in 1986, the Philippines appears to have slowly lost its gainsin comparative advantage in rice production because yield began to stagnatein the mid-1980s and the cost of domestic factors has gone up, while theworld price of rice declined by about 36 per cent from 1979 to 1986 basedon a five-year average centering on two survey years.10 The Philippines hascompletely lost its comparative advantage (RCR is greater than unity) inrice production by 1990 caused primarily by the substantial increase in thecost of domestic factors." Comparative advantage appears to be lower(higher RCR) for irrigated farms than for rainfed farms because of the high

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cost of irrigation. But the yield between irrigated and rainfed farms inCentral Luzon did not vary substantially in the wet season.

The trends in comparative advantage estimated in this paper are similarto those established by Herdt and Lacsina [1976], Unnehver [1986], andInocencio and David [1993]. Using 1974 farm-level data, Herdt andLacsina [1976] showed that the Philippines had comparative advantage inrice production but its comparative advantage is sensitive to marginalchanges in rice prices. Unnehver [1986] and Inocencio and David [1993],using the loop survey data, showed substantial gains in comparativeadvantage in rice production in 1979 with the diffusion of MV2. Past studiesimply that until 1979, there are foreign exchange savings in producing ricedomestically, although Herdt and Lacsina [1976] argued that possible gainsin foreign exchange can be easily eroded by the downward swing in theworld price of rice.

There has been positive private profitability in rice production since1966 and the trend appears to be an increasing (declining RCR*) beginningin 1979 for both irrigated and rainfed farms even though private profitabilityis slightly higher in the rainfed ecosystem than irrigated one. The majorreasons for this increasing private profitability are the increase in domesticprices of rice, increase in irrigation subsidy, and the shift in land tenurerelations in favour of leasehold-tenancy, where rents are fixed at levelslower than the economic value of the service of the land.

Comparing RCR and RCR*, it is evident that rice production isprofitable to farmers but not to society (RCR > RCR*). The trend since1979 seems to be toward an increase in private profitability but a decline insocial profitability. The finding indicates that the social cost of riceproduction is becoming higher than the private cost because of theprotection extended to rice producers formally (through irrigation subsidies,technology dissemination, and land reform) and informally (through higherdomestic prices of rice brought about by the insulation of domestic marketfrom the international rice market through rice import restrictions).

IV. FACTORS DETERMINING THE TRENDS IN COMPARATIVEADVANTAGE

Sources of Changes in Private Profitability

The sources of private profitability of rice production in peso per ton ofrough rice are shown in Table 6. Private profitability is measured by privatesurplus, which is what is retained after deducting from the price of rice thesum of paid-out costs consisting of tradable inputs and domestic factors aswell as the value of family labour and owned capital. If the private surplus

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is positive, there are private incentives to produce rice.12 The existence ofthe surplus is the major motivation for adopting the latest-released ricevarieties. Farmers were quick to adopt the newest seeds as they becameavailable and there was no reversal back to the old seeds [Estudillo andHossain, 1998], which indicates that the newer seeds are much moreprofitable.

TABLE 6PRIVATE PROFITABILITY IN RICE PRODUCTION (PESOS/TON)


Price of riceb [A]Tradeable inputs [B]

FertiliserHired capital0

Other inputsd

Domestic factors [C]LandHired labourHired capital15

Other costsf

Total cost [D = B+C]Residual [E = A-D]

Family labourOwned capital

Private surplus

1966a

44137131410

21413272

28

2511904418

128

1970

51975372018

19210079

112

267252

6634

152

1979

11372471065091

420131221

167

667470

9275

303

1986

2881713210177326

1029388494

5142

17421139

139133867

1990

47911180415302463

1533432804

12285

27132077

316155

1610

1994

64791444516347581

1749462

104314

23031933286

688146

2452

Notes:a Refers to average of wet and dry seasonsb Average farm gate price of rough rice in the wet and dry seasonsc Tractor and thresherd Seeds, fuel and oil, herbicide and insecticidee Animalf Irrigation and imputed interest payment on pre-harvest costs

Private surplus has been rising over time but more evidently beginningin 1979 with the adoption of the pest- and disease-resistant MV2. Theincrease in private surplus can be traced from the sustained increase indomestic rice price while paid-out costs as well as the value of family labourand owned capital did not rise as much. Expenditures on fertiliser have alsohas been rising over time because MVs are more productive (and thus, moreprofitable) with higher level of fertiliser application. There has beenincreasing use of hired capital because of the development of rental marketfor carabao, tractor and thresher. Expenditures on other tradable inputscorresponding to seeds, fuel and oil, herbicides and insecticides increaseddue to the rise in fuel and oil prices and increased application of herbicidesand insecticides.

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Land rent rose but not as much as domestic rice price. The increase inaverage land rent was about threefold from 1966 to 1994, whereas theincrease in domestic price of rice was about fifteen times. One major featureof the Philippine land reform programme is the conversion of share-tenancyto leasehold-tenancy and the fixing of leasehold rent and annualamortisation fees. When rice yield rose in the 1970s following the diffusionof MVs, the fixed leasehold rent and amortisation payments divergedsubstantially from the economic rent accruing to the service of the land.Thus, a gap between actual land rent and true economic rent was created.This gap accrues to leasehold-tenants and amortising owners who wereconverted by the land reform programme from the status of share-tenants.

The cost of hired labour increased over time partly because of increaseddemand for hired labour and rise in wage rates. Other costs consisting ofirrigation fees and forgone interest payment on pre-harvest costs rosesubstantially from 1970 to 1979 due to increased irrigation fee charges asa result of the opening of large-scale irrigation systems in Central Luzon.Beginning in 1986, the increase in other costs was on account of theincrease in pre-harvest cost and the rise in interest rate on loans anddiscounts in commercial banks.13

The value of family labour is imputed using the prevailing market wagerate corresponding to each rice production activity. The value of familylabour increased only marginally until the mid-1980s, but it increasedsharply since then. The opportunity cost of farm labour increased becauseof rapidly increasing migration of Filipino workers abroad and to the citiesto work as construction labourers and domestic helpers. The value of ownedcapital did not increase much because the trend in capital use has mostlybeen in favour of hired capital rather than owned capital. We impute thevalue of owned capital using the most prevalent custom rental rate forcarabao, tractor and thresher.

Private surplus has risen consistently since 1966, but even in 1966private surplus was positive. The conversion of share-tenants to leasehold-tenants or amortising owners and the suppression of leasehold rent andamortization fees at the time when rice yields were rising have been themajor source of private surplus in rice production. The surplus has risenproportionately with yield increase over time but more markedly in 1979with the adoption of the pest- and disease-resistant MV2. While yield wasrising, average land rent (converted to kg of rough rice) declined absolutelysince 1966 partly because many share-tenants were converted toleaseholders from 1970 to 1979. In 1994 many amortising owners receivedthe Emancipation Patents and became owner-cultivators.

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Sources of Gains in Social Profitability

Comparative advantage in rice production exists if NSP is positive, whichmeans that the social opportunity cost of domestic factors of production isless than the value added in world prices. In equation form,

= (u-m)vl-'LvJ, (1)

where

u = border price of rice in foreign currency,

m = total value of tradable inputs at border prices in foreign currency,v, = SERvs = shadow price of the s-th factor of production, andfs = the amount of the s-th factor of production used in the production.

NSP in irrigated rice production was positive in 1979 and 1986 and ahigher value of NSP was achieved in 1979, when rice yield accelerated andrice price increased while the cost of domestic factors and the value oftradables did not increase proportionately (Table 7). The trend however,appears to be that of declining NSP beginning in 1986. By 1990, thePhilippines has lost its comparative advantage in irrigated rice production.In rainfed farms, NSP was positive during the 1966-86 period, which meansthat rice production was socially profitable in the rainfed ecosystem and thatthe Philippines has the potential for import substitution in rainfed riceproduction during the period. As in the irrigated farms, the highest NSP inrainfed farms was achieved in 1979. But in 1986, NSP began to decline andby 1990, production of rice in rainfed ecosystem is no longer sociallyprofitable. The value of NSP in irrigated rice was lower than in rainfed ricebecause of the cost of irrigation.

The border price of rice in domestic currency has increased over timemainly because of the depreciation of the exchange rate. Meanwhile theworld price of rice increased markedly in 1979 but stagnated in the mid-1980s as a result of the increased world supply of rice made possible by thedevelopment of irrigation infrastructure, the diffusion of MVs in major rice-producing countries in Asia, and the introduction of institutional reforms inChina. A spectacular growth in rice production in China and in the worldwas observed during the 1978-84 period. The cost in domestic currency oftradables rose - but rather slowly compared to the cost of domestic factorssuch as land and labour - because of the depreciation of the exchange rate,the increase in fertiliser application, and acceleration in mechanisation. Theincrease in the cost of land and labour was attributed to the rise in prices of

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TABLE 7SOCIAL PROFITABILITY IN RICE PRODUCTION (PESOS/TON)


Price of rice [A]b

Tradable inputs [B]FertiliserCapital0

Other inputs'1

Domestic factors [C]LandLabourCapital"Other costs'

Total cost [D = B+C]Social surplus [E = A-D]

1966a

3713614149

3561761132047

392-21

1970

53267272713

55720614332

176624-92

1979

1630301

9710697

966454312

13187

1267363

1986

2791757142284331

20251157633

14221

27829

1990

41101202280447475

351019201139

31420

4712-602

1994

45171445361482602

488826201730

22516

6333-1816

Notes:a Refers to the average of wet and dry seasonsb Five-year average centered on the survey year of the border price of rice adjusted for 25 per

cent marketing costs and 65 per cent milling recovery and converted to pesos/ton by SERc Tractor and thresherd Seeds, fuel and oil, herbicide and insecticidee Animalf Irrigation and interest payment on pre-harvest costs.

these factors rather than to increase in factor usage. A consistentlydownward trend in the amount of land and labour required to produce a tonof rice was observed until the mid-1980s (Table 4). Technological change,which shifted the production function outward, was the major factor whichbrought about resource savings in land and labour. However, no furthertechnological gains have been achieved since 1986..

To identify the major sources of change in NSP between two surveyyears, we take the total differential of Eq. (1) and, using the mean level ofprices and exchange rate, we evaluate the change in NSP as follows:

ANSP = V,AM - ViAm + (« - m) Av, - Z.vsAfs - ZAvsfs (2)

where A indicates the difference in a variable between adjacent years andthe terms u, m, vj, vs and/s are as defined earlier. The change in NSP is afunction of the changes in world price of rice, value of tradable inputs, SER,and value of domestic factors such as land, labour, capital and other costs.Increase in the world price of rice and depreciation of the exchange rate willincrease NSP, while increase in the value of tradable inputs and domesticfactor costs will reduce NSP.

The NSP declined in 1966-70 because of the increase in other costs,

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specifically irrigation (Table 8). The NIA started to increase its investmentsin the construction of irrigation systems in 1970. The change in NSP waspositive and largest for 1970-79, the principal cause of which was theincrease in the world price of rice and the depreciation of the exchange rate.

TABLE 8SOURCES OF CHANGE IN NET SOCIAL PROFITABILITY (PESOS/TON)


Change in NSP

Due to:Social value added

Rice priceb

Value of tradable inputs0

Exchange rateSocial costs

LandLabourCapitalOther costs'1

1966-703

-71

132-17-11160203

323012

129

1970-79

455

863819

-187231408247169-19

11

1979-86

-354

705-1072

3217461059703321

134

1986-90

-611

874748

-283409

1485763506

17199

1990-94

-1214

16387

-145221

1377699591-996

Notes:a Refers to the average of wet and dry seasonsb Five-year average centered on the survey year of the border price of rice adjusted for 25 per

cent marketing costs and 65 per cent milling recovery and converted to peso/ton by SERc Fertiliser, tractor, thresher, and other inputs such as seeds, fuel and oil, herbicide and insecticided Irrigation and interest payment on pre-harvest cost

The change in NSP was negative for 1979-86 because the increase in thecost of domestic factors was not, in general, equally compensated for by theincrease in value added. The decline in NSP in 1979-86 was brought aboutmost importantly by the decline in rice price and the increase in the socialvalue of land. NSP declined during 1986-90 because of the increase invalue of tradable inputs as well as the increase in domestic factor costsconsisting of land and labour and other costs. Other costs increased in 1990because interest payments rose as a result of the increase in inflation rate.For 1990-94, the decline in NSP was fundamentally on account of theincrease in domestic factor costs. In brief, the rise in social cost of land andlabour, which was brought about by increase in prices of these inputs, wasthe main factor responsible for the decline in comparative advantage in riceproduction beginning in 1986.

Impact of Government Policies

Domestic prices of rice and tradable inputs differ from their border pricesbecause of trade regulations such as tariffs and import or export quotas.

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Factor prices differ from their social opportunity costs due to governmentintervention in factor markets such as land rent and interest rate ceilings andvarious market failures. In 1966, the domestic rice price was above theworld price due to strong farmer's lobby in the legislature which delayed theapproval of funding for government-controlled imports [Bouis, 1982](Table 9). The domestic price of rice did not follow the sharp rise in borderprice in the early 1970s due in part to the rapid increase in domestic ricesupply as a result of the diffusion of modern rices. In the late 1970s andearly 1980s, domestic prices fell faster than world prices because of robustgrowth in rice production and limited external market for low-qualityPhilippine rice. By the late 1980s, domestic rice prices rose higher thanworld prices because of the deceleration of production growth and of thegovernment's policy to provide incentive prices to farmers through controlon rice imports. The principal cause of the severe rice shortage in 1994 wasthe failure of government to anticipate a shortfall in domestic productionand to plan imports in time to make up for the shortfall.

TABLE 9NOMINAL PROTECTION RATEa

THE PHILIPPINES, 1966-94

Riceb

UreaHerbicide and insecticideFuel and oilTractor

Two-wheelFour-wheel

ThresherTilyadoraAxial-flow

1966

18331013

97

10*

1970

-3421513

97

10*

1979

-30232010

30*c

100

1986

3442022

30*

*0

1990

17372020

30*

*0

1994

43401020

30*

*0

Notes:a Ratio of domestic price to the border price minus 1b Border price refers to the five-year average centered on the survey yearc *The item is no longer used or there is negligible number of adopters

Sources: World Rice Statistics (1995), International Financial Statistics (various issues),Provincial Rice Statistics (1995), Unnehver (1986), Rola and Pingali (1993), Herdt andLacsina (1976), Key Indicators (1997), and Philippine Tariff Commission Office.

The domestic price of fertiliser has traditionally been higher than theborder price because of quantity restrictions on imported fertiliser [Habitoand Manasan, 1992]. The domestic prices of other tradable inputs such asherbicides and insecticides, fuel and oil, tractors, and threshers are alsohigher than their border prices due to tariffs.14 The nominal protection rate

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for axial-flow threshers was zero because they are manufactured anddistributed locally.

The sources of discrepancy between private and social surplus areidentified in Table 10. In general, the difference is positive and hasincreased over time (except in 1979), which means that there have beenincreasing private incentives to produce rice. Private incentives appear to becoming mainly from higher domestic rice prices, lower land rental ratesthan the social opportunity cost of land, and irrigation subsidies. On thecontrary, the effect of domestic rice policy during the 1970s was to reducethe producer's revenue (negative values) because domestic rice prices werelower than border prices. The sharp rise in the difference between privateand social revenues in the 1990s was caused by higher domestic rice prices.The depreciation of the exchange rate tended to increase both private andsocial costs of tradable inputs. The effect of depreciation was morepronounced beginning in 1979 when the application of imported chemicalinputs and mechanisation accelerated. Tariffs on tradable inputs increasedprivate costs, while suppression of land rent by land reform laws andirrigation subsidies decreased private costs. Interest rate regulations reducedprivate costs but its impact was almost negligible.

TABLE 10DECOMPOSITION OF THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS

AND RETURNS IN RICE PRODUCTION (PESOS/TON)CENTRAL LUZON, 1966-94

Private surplus [A]Social surplus [B]Difference [C = A-B]

Effect of policy onRevenueCosts

Exchange rateTradable input cost

FertiliserCapital15

Other inputs0

Domestic factorsLand rentalIrrigation fees

Interests

1966a

128-21149

69-82

-45410

-72-44-28-11

1970

152-92244

-14-255

-5181521

-236-106-130

-32

1979

303363-60

-492^ 3 2

-49602427

9-385-323

-62-58

1986

8679

858

91-768

-97177924837

-867-769

-9819

1990

1610-6022212

681-1531

-1662581546242

-1596-1488

-108-27

1994

2452-1816

4268

1962-2307

-171309206

6638

-2364-2158

-206-81

Notes:a Refers to the average of wet and dry seasonsb Tractor and thresherc Herbicide and insecticide and fuel and oil

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Government intervention in the market helped sustain privateprofitability since the mid-1980s when social profitability has been eroding.In spite of artificial regulation of producers' incentive through the pricemechanism, the Philippines has not succeeded in sustaining the self-sufficiency in rice production achieved in the late 1970s. During the1985-94, population grew at 2.2 per cent per year, while growth in riceproduction slowed down to 1.3 per cent per year from the 3.8 per centachieved during the 1967-84 period [Narciso, Hossain and Palacpac,1996]. As a result, earlier gains in raising per capita rice availability fromdomestic production have gradually eroded, and the Philippines againbecame a net importer of rice starting in the mid-1980s. The average yearlyimport of rice has been growing, reaching 270,000 tons in 1995, an increaseof about 30 per cent between 1993 and 1995.

The factors behind the drastic deceleration in rice production growth aremainly technical and structural in nature. As the diffusion process is almostcomplete with MVs being grown in more than 90 per cent of the rice land,there is limited scope for further increase in yield through technologicalprogress unless there is a further shift in the yield potential. Prime rice landaround major cities is being diverted to growing non-rice crops and to non-agricultural uses in response to economic opportunities. Rice is grown underrainfed conditions in a large proportion of areas in the Visayas and Mindanaowhich receive year-round rainfall. But yield is low and unstable due to erraticmonsoons and frequent droughts brought about by the El Nino phenomenon.The area under such low-yielding rainfed rice production has been growing tocompensate for the loss of irrigated rice land in Central Luzon and SouthernTagalog regions. The most important factor has been the reduction in publicsector investment for the expansion of irrigation infrastructure andmaintenance of existing irrigation facilities because of limited success inrecovering the investment and operation and maintenance costs from farmerbeneficiaries [Kikuchi et ah, 1998]. As a result, much of the existing irrigationinfrastructure has been degraded and this has led to a reduction in rice yield.In some areas where underground water is available, fanners have startedinvesting in small-scale pumps to sustain yield. It thus appears that priceintervention alone would not be sufficient to address the food self-sufficiencyissue. Government policy should also be directed to research anddevelopment activities including water resource development andmanagement and improving the efficiency in the use of agricultural inputs.

V. SUMMARY AND CONCLUSION

Using 30-year farm survey data collected in the most progressive rice-growing region in the Philippines, this study found that the Philippines has

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increased its comparative advantage in rice production with the diffusion ofthe new rice technology in the 1970s, but this advantage started to erodebeginning in the mid-1980s. Initial trends appear to show a gain incomparative advantage from 1966 to 1979 most importantly because ofyield increase associated with the adoption of pest- and disease-resistantMVs. Beginning in 1986, comparative advantage consistently declined as aresult of the downward trend in world rice price, stagnation in yield asfarmers reached the technological plateau in rice production, and increase inthe price of domestic factors such as land and labour. The countrycompletely lost its comparative advantage in rice production by 1990.

With the rapid growth in the productivity of labour and capital in thegrowing non-farm sector, the Philippines may further lose its comparativeadvantage in rice production in the future. This implies that if thePhilippines were to continue producing rice domestically, the country willincur large forgone social costs because rice production competes for scarceresources which could be more profitably used for other economicactivities. But should the Philippines rely to a large extent on imported riceto satisfy domestic demand? While importing rice is an alternative, self-sufficiency in rice production appears to be a better option to guaranteedomestic food security. The world supply of rice is very unpredictablebecause rice is primarily a subsistence crop. Production fluctuates due tovariable natural factors, droughts, floods, and typhoons, and less than fiveper cent of global rice production is traded internationally. If the Philippineswere to depend on the world rice market for domestic supply, the country'sfood security will be likely threatened in case of rice production failure inmajor rice-exporting countries. To become self-sufficient in rice and toreverse the trend of eroding comparative advantage, the government mustaccelerate efforts to increase yields through development and adoption ofmodern rices with higher yield potential, such as hybrid rice for the tropics,and improve efficiency in input use through better crop managementpractices and better quality irrigation.

final version received August 1998

NOTES

1. The numerator of the DRC is expressed in domestic willingness to pay numeraire, whereasthe denominator is expressed in the foreign exchange numeraire. Assuming a small openeconomy, shadow prices of tradable goods are equal to their border (world) prices. The SERor shadow price of foreign exchange used in cost-benefit analysis measures how many unitsof non-tradable goods are exchanged for one dollar's worth of tradable goods. Therefore, itconverts the world price of tradable goods into the value of domestic willingness.

2. Household income from different sources has also been collected but for four survey years

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only in 1966, 1986, 1990, and 1994 [Estudillo and Otsuka, 1999].3. See Herdt [1987] for a comprehensive description of the data-set.4. We did not include data from the 1974 survey because it was considered an abnormal year

(a big typhoon hit the Central Luzon).5. The reader may refer to IRRI [1985] for the history of the IRRI rice breeding programme and

IRRI [1997] for the direction of the current breeding programme.6. The very first MV was IR8 released in 1966. But the more popular MV1 in Central Luzon

in 1970 was IR5. IR5 was the variety then recommended for rainfed environments, whichwere common in the region in the early 1970s before the development of large-scaleirrigation infrastructure. IR8 was more suitable for irrigated conditions.

7. Our classification of MVs corresponds to the three decades of the Green Revolution. Thevarieties falling under MV1 were released from the mid-1960s to the mid-1970s representingthe first decade of the Green Revolution. Those varieties falling under MV2 were releasedfrom the mid-1970s to the mid-1980s representing the second decade while those fallingunder MV3 were released from the mid-1980s to the mid-1990s representing the thirddecade.

8. While there is concurrent progress observed in the adoption of labour-saving technologiesalong with the diffusion of MVs [Lipton and Longhurst, 1989], statistical evidence points tothe contrary - the adoption of MVs did not induce the adoption of labour-saving technologiessuch as tractors, threshers, and direct-seeding [David and Otsuka, 1990; Otsuka, Gascon,and Asano, 1994b].

9. Our finding was similar to Unnehver's [1986]. It seems most likely that the Philippines didnot possess a comparative advantage in the production of TVs in irrigated environment.

10. According to Pingali et al. [1997], Hossain et al. [1995] and Cassman and Pingali [1995],the yield frontier in rice production has already been exhausted as of the mid-1980s not onlyin the Philippines but in other rice producing countries of Asia as well. This is attributed tothe decline in the international price of rice and the decline in production efficiency in termsof yield output per unit of input.

11. Simple trade statistics can relate the trends of RCR with the direction of rice imports andexports. The Philippines was mostly self-sufficient in rice during the late 1960s, turning intoa moderate importer in 1971-76 [World Rice Statistics, 1995]. This change coincides with aslight loss in comparative advantage in this period; there was a rise in RCR in 1970 (Table5). The Philippines has become a moderate net exporter of rice in 1978-83 as reflected in again in comparative advantage (a decline in RCR in 1979). The country then became a netimporter from 1984 to the 1990s as reflected in the decline in comparative advantage (risingRCR beginning in 1986).

12. Private surplus refers to 'profits' in perfect competition which is the return to intangibleassets such as land quality, new technology, human capital and special rights.

13. Loans and discount rates rose from five per cent per annum in 1966 to eight per cent in 1970to 12.7 per cent in 1979 to 17.3 per cent in 1986, and to 24.3 per cent in 1990 but declinedto 15 per cent in 1994 [Key Indicators, 1997].

14. The weighted average tariff rate has been no more less than 20 per cent thus, SER is 14-20per cent higher than OER during the survey years.

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New rice technology and comparative advantage in rice production in the Philippines

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