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Farm Consolidation: Saving the Filipino taxpayer P18 billion

farm consolidation saving the filipino taxpayer p18 billion - Farm Consolidation: Saving the Filipino taxpayer P18 billion

The Philippines has secured a loan of $370 million intended to finance SPLIT (Support to Parcelization of Lands for Individual Titling), the Department of Agrarian Reform (DAR) program to subdivide Collective Certificate of Land Ownership Award (CLOA) into individual titles. The Collective CLOAS cover 1.36 million hectares of the 4.9m hectares awarded by the Comprehensive Agrarian Reform Program (CARP). It covers 750 thousand agrarian reform beneficiaries in 78 provinces.

There is a good reason to be dissatisfied with Collective CLOAS — the beneficiaries do not have secure land titles which facilitate many formal transactions; they have little incentive to adopt in-place technologies (such as irrigation) and new cultivation (say, tree planting) since one’s parcel today may be someone else’s tomorrow. A participating beneficiary under Collective CLOA cannot put his parcel up as collateral for a crop loan. No real property tax payment is made by beneficiaries without titles. Collective ownership is the open door to the tragedy of the commons. Financing will thus mostly come from informal lenders who are willing to accept risky usufruct payment in case of loan default. Needless to add, informal lending comes at an exorbitant interest rate which guarantees continued poverty.

It is hoped that when individual titles are finally constituted, beneficiary behavior will change towards greater productivity. But hard evidence that beneficiaries with individual land titles behave significantly differently is still scant for the Philippines. The evidence to the contrary are from foreign climes where CARP strictures do not apply (see e.g., Galang 2020). And there are reasons to believe that the behavior of titled small holders will not be any different here. First of all, access to formal banking sector financing at a lower interest rate will still be hampered because ownership of more than five hectares of farm land by banks or by anybody is legally prohibited by the  Comprehensive Agrarian Reform Law (CARL). Banks will not accept as collateral titles to lands they cannot own in case of loan default. So titled small holders still have to resort to informal lenders. Since technology adoption is costly and risky and cannot be home-financed away from the formal banking sector, no significant technology adoption will be forthcoming. This is an interesting area for research: the hypothesis being that, given the land ownership ceiling by CARP, titled small holders and as well as individual CLOA holders will fare no better than collective CLOA holders in terms of access to formal bank financing and overall land productivity!

A suggestion to this effect is clear from the result of the survey by the Philippine Statistical Research and Training Institute Survey (PSRTI, 2016) of agrarian reform beneficiaries (also cited to by Galang 2020, p. 15): the average farm income and average total household income of agrarian reform beneficiaries (ARBs) under Collective CLOAs are actually higher than the average farm income and total household income of ARBs under individual CLOAs! Galang’s own results contradict those of the PSRTI so the jury on the benefit of titled parcelization for which we are spending P17 billion is still out.

The biggest problem in the agricultural farm sector today is that most farms are too small to be economically viable and private capital is fleeing the sector because of the uncertainty and scale limitations imposed by CARP. Private capital will not weigh in when competitive scale requires hundreds, perhaps thousands, of hectares and none is available. As a result, the farm sector has become the ward of the state and/or of the informal lenders when it comes to capital. A prescription for persistent poverty!

Consolidation is now the byword in Asian agriculture (see, e.g., Le Thanh K 2017). The romantic Jeffersonian notion of small independent yeoman farmers, the cradle of virtue and morality, is now very costly baggage from the past. The People’s Republic of China, Taiwan, Vietnam, and Malaysia have programs to consolidate small landholdings into bigger more viable farm enterprises to attract formal sector financing and young and more dynamic actors to replace aging or dead farmers (see, e.g., Fabella, 2014). As usual, the Philippines, being more mired than most to old dead ideas is, to paraphrase Alexander Pope, “the last to put the old aside.” In 2021, aided and abetted by the World Bank, we are digging deeper into the old rabbit hole of parcelization which CARPER (Comprehensive Agrarian Reform Program Extension with Reforms or the Republic Act No. 9700) of 2009 explicitly mandated.

Former LANDBANK President Alex Buenaventura was ahead of his time in trying to make LANDBANK the intermediary between foreign investors and local ARBs to engender larger estates where ARB family members are first on line for hiring. But Buenaventura was fired before the program could meaningfully take off. Do not expect the private investors to do the consolidating: they would like to sign a long-term lease contract with one — repeat, one — credible consolidator like the Land Bank of the Philippines (LANDBANK) which will first iron out all the kinks with the ARBs and fashion a contract that protects the security of tenure and rights of farmers and their children. And the most convenient jump-off point for consolidation is lands awarded under Collective CLOAS.

Parcelization and titling is costly and painstaking because it involves much more than a cadastral survey. Stakeholders and claimants will dispute who gets what parcel. Features such as closeness to water, distance from the road, mabato or mabuhangin (rocky or sandy soil), all have profound economic implications for farming. In the process of parceling and titling, some, rightly feeling envy, will instigate roadblocks.

Unequal outcomes for households was why Deng Xiaoping was booted out by Mao Zedong in the 1960s in the wake of the Great Leap Forward debacle. That is why the government needs a P17-billion loan from the Wolf Bank to negotiate the parcelization route.

An alternative route to higher productivity is just to offer the whole consolidated Collective CLOA-covered farm for lease to a private firm. A consolidated area of 1,000 hectares from 1,000 ARBs may go for P25,000 per hectare per year and every farm household in the list gets an equal and riskless P25,000 per year, the equivalent of much more in risky returns. Equal allocation is what economists call “envy-free.” On top of that, the family members get hiring priority for stable jobs that open up. The 1,000 hectares will produce much more as a single unit than when cultivated as separate 1,000 one-hectare units (see Adamopoulos and Restucia 2018 for how shrinking farm size due to CARP reduced farm productivity). Formal bank financing will now flock the land. A LANDBANK or NDC can do this service.

LANDBANK writes long-term contracts with ARBs specifying their and their children’s rights and obligations and the private firm pays the land rental directly to LANDBANK with which LANDBANK pays the listed ARBs their rental claims and the real property tax to the municipality. If one reflects on this seriously, one realizes that this is no more than the famous Coase theorem in action.

And, voila, the Filipino taxpayer saves 17 billion!

References:

Galang, M. 2020. “Boosting agricultural productivity through parcelization of collective Certificate of Land Ownership Awards” PIDS Discussion Paper Series 2020-26.

Philippine Statistical Research and Training Institute Survey of Agrarian Reform Beneficiaries. 2016

Adamopoulos, Tasso and Diego Restuccia. 2019. “Land reform and productivity: A quantitative analysis with micro data,” NBER working papers 25780, National Bureau of Economic Research Inc.

Fabella R. 2014. “Luizhuan: Small steps to farm efficiency,” Businessworld Introspective, Dec. 16, 2014.

Le Thanh K. 2017. “Amending policies and laws to speed up land accumulation,” Vietnam Law and Legal Forum, Sept. 10, 2017 http://vietnamlawmagazine.vn/amending-policies-and-laws-to-speed-up-Land-accumulation-6044.html

The author thanks the FEF Agriculture Team for hints and comments. Errors are the author’s alone.

 

Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from bicycling and tending flowers with wife, Teena.

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