The Price of Rice Protectionism

By V. Bruce J. Tolentino
Sunday, April 14, 2008

The global price of rice is soaring, and for the Philippines – the world's largest importer of rice annually – that's bad news. Food queues and fears of riots are real fears. But this is a problem of Manila's own making.

Alone among World Trade Organization member nations, the Philippines imposes quantitative restrictions on rice imports, implemented by a government monopoly. Since the 1970s, the state-owned and controlled National Food Authority (NFA) has maintained tight controls on rice imports. This policy has stood in sharp contrast to other countries such as Vietnam, Indonesia and Bangladesh, which have abolished, privatized or sharply reduced the authority and scale of their food monopolies – and enjoyed more efficient production and cheaper consumer prices.

Not so in Manila, where succeeding presidents and NFA administrators have defended the NFA as necessary to shield rice farmers from low world prices and ensure stable supplies for consumers. Unfortunately, this policy has had exactly the opposite effect: The incomes of the Philippines's rice farmers have consistently ranked in the lowest quintile of the population, and domestic consumer rice prices are roughly double world prices. Worse, the NFA is now one of the largest drains on the nation's already precarious fiscal resources, requiring an annual subsidy of at least 1.2 billion Philippine pesos ($29 million) from national coffers, not to mention uncollected tariffs and opportunity losses due to price premiums borne by Filipino consumers.

It wasn't always so. In previous decades, thanks to low world and high domestic prices of rice, the NFA lost money when procuring from Filipino farmers, but turned a profit on imports. To finance growing imports, it drew against larger credit lines with commercial banks, backed by national government guarantees. Philippine rice policy increasingly became dominated by price interventions, in contrast to Thailand, Vietnam and Indonesia, which placed more emphasis on public investments in irrigation, technology and infrastructure.

Now, world rice prices have doubled in less than five years, due to a combination of increased demand from rapidly growing countries like India and China, production shortfalls in key food-producing countries such as Australia and Bangladesh, and a shift of many farmers to bio-crops such as corn in response to high fuel prices. Today the margin between the Philippines's imported and domestic rice prices has shrunk to around zero from an average of 100% of domestic prices, and the NFA's accumulated debt has mounted to at least 50 billion pesos. Should the banks stop lending to the NFA, it is doubtful that the government can effectively come to its rescue.

There are two reasons this policy has persisted for so long: a short-term outlook in governance of the agricultural sector since the 1980s, and financial interests embedded in current rice policies.

Philippine politics have been volatile for more than three decades, and a result is a highly politicized bureaucracy. Like other ministries, the Department of Agriculture has had more than a dozen secretaries, with average tenures of less than 20 months. This is not sufficient time to learn the job and focus on long-term, sustained productivity. Instead, price interventions have been designed for near-term political gain, with rice policy serving as a priority arena for visibility and so-called "high impact" interventions.

This kind of short-term policy making is particularly damaging to farmers. Public irrigation projects take about seven years from inception to operation. In addition, high-yielding rice varieties may require decades to bring to farmers' fields, and the upgrading of production technologies and farmers' skills require the strengthening of entire agricultural extension systems. The achievement of long-term productivity simply requires more years than allowed by the short tenures of Filipino bureaucrats.

The NFA has also been used by succeeding administrations as a convenient tool for the public distribution of commodities, including fertilizer. In 2006, the Senate Blue Ribbon Committee and the Committee on Agriculture and Food released a report that stated that in 2004, proceeds arising from fertilizer procurement and distribution helped finance the election campaign of President Gloria Macapagal Arroyo.

The NFA finds approval among its key constituencies, including of course the well organized NFA Employees Association. Politicians often use the NFA to distribute low-priced rice and farm inputs to constituencies; some farmers are favored by its targeted procurement operations; commercial banks lend to it; and a host of wholesalers, retailers, warehouse owners and transporters count on its supplies and contracts.

It's not all a bad news story: In early April, President Arroyo announced the suspension of the NFA's monopoly on rice imports, and private traders are now allowed to import. However, total private imports are still a fraction of requirements and importers require licenses issued by the NFA. Moreover, private importers are expected to pay full tariff, whereas tariffs on the NFA's imports are likely to be waived or deferred. Given its relatively weak revenue base, the government cannot readily waive customs revenues on private imports. The NFA, worried about repaying its huge credit lines, knows it can hardly compete with private traders on a level playing field.

The Philippines's food supply challenges can only be met through determined, long-term efforts to rebuild domestic agricultural productivity – specifically through major investments in irrigation and agricultural technology. The rice trade must be fully opened to all players, with the NFA's regulatory role severely reduced and its operations tightly focused on the targeted distribution of food to impoverished communities.

If not, the Philippines will need to import ever-growing amounts of rice, at an ever-greater cost. As that cost starts to eat into government finances, it could hobble the Philippines's efforts to achieve fiscal health. It's time for Manila to ditch its iron rice bowl once and for all.