University of Southeastern Philippines

College of Governance, Business and Economics

Mintal Campus, Davao City

Underdevelopment Of The
Philippine Agricultural Sector

A Policy Paper

DONNA VALMORIA ABERGAS

BS in Agricultural Economics
Department of Applied Economics
 October 2009
Introduction
The Philippine archipelago is renowned for its rich natural
resources ranging from the rare species of wildlife to the overwhelming
landscapes which are the top reasons why its one of the favorite tourists
spot in the Asian region. Existence of numerous agricultural lands in the
country since ancient times until the present proves the natural
abundance of the tropical country.
Yet, despite the evident truth of the country’s capacity to provide
agricultural goods for the consumption of its citizens, importation of
farm produce continues to abominate the local market. Such presence of
agricultural trade is tolerable if only the goods which are shifted in the
country are those goods which could not be locally produced through the
use of available inputs in the domestic market. Taken for example is the
apple crop, such commodity could only be commercially grown in
temperate countries that it is necessary to import the said commodity
from apple-producing countries to meet the demand for the said product.
In the Philippines’ case, even the staple food which is rice have to
be imported from other rice-producing countries since total production
output of the said crop does not meet the total demand by the populace.
The United Nations' Millennium Development Goals (MDGs), as set
forth in the Medium-term Philippine Development Plan (MTPDP) for
2005-2010 has anchored the country’s national development goals.
Under this plan, the agriculture, forestry, and natural resources (AFNR)
sectors make up the three pillars to sustain economic growth and
improve the lives of more than 80 million Filipinos.
Moreover, everything that has to do with agriculture and its
ecosystems is set forth as a national policy in Republic Act 8435,
otherwise known as the Agriculture and Fisheries Modernization Act
(AFMA) of 1997. The act basically aims for a modernized agro-
industrialization that is technology-based, market-driven, and
sustainable development-anchored. (Faylon and Cardona, 2007)
Philippine agriculture plays a vital role in the economy. This attaches the
high priority of transforming agriculture into a modern, dynamic and
competitive sector. A sustained expansion of the national economy
requires sustained growth in the agricultural sector.
Agriculture including forestry and fishery plays a dominant role in
the Philippine economy. The country’s population is predominantly rural
(70 percent of the total) and two-thirds of this population depends on
farming for their livelihood. In terms of employment, about one-half of
the labor force is engaged in agricultural activities.
 Primarily, Philippine agriculture consisted of rice, corn, coconut,
sugar, banana, livestock, poultry, other crops and fishery production
activities.
The sector’s contribution to the economy has been substantial 23%
of gross domestic product in 1995. It registered a growth rate of 3.2%.
The growth was mainly due to the expansion of the poultry, livestock,
and palay subsectors.
Over the past six decades, the agricultural sector was confronted
by both internal and external bottlenecks that constrained its
performance and growth. Despite the sector’s desire to implement
reforms to increase productivity, efficiency, competitiveness, market
adaptability, and sustainability of agri-based industries, these reforms
were hampered by inadequate resources, limited implementing
capabilities of national and local government units (LGUs), and weak
coordination among implementing agencies. In addition, the occasional
occurrences of natural disasters (e.g., El Ni•o phenomenon and La Ni•a
phenomena) and international market crisis (e.g., 1997 financial crisis)
exacerbated the real growth of the sector, resulting to contraction in
output as observed in 1998.
From 1993 to 2004, agriculture, fisheries, and forestry hardly grew
on the average by 2.6% (Fig. 1). Real growth in agriculture of 1% in the
Philippines from 1980 to 1990 lagged behind the world average and
middle-income country average of 2.8% and 3.5%, respectively.
Neighboring Asian countries such as China, Vietnam, and Thailand
posted very high growth rates during the period. From 1990 to1997, the
Philippines improved its real agricultural growth rate to 1.9%, but this is
still considerably lower than middle-income countries in Asia. However,
during the 1998-2003 period, Philippine agricultural growth was
comparable to Thailand and Vietnam.
A most notable development in the agriculture sector over the past
15 years was its sectoral transformation into agro-industrial services.
From 1990 to 2003, the GDP share of agriculture dropped from 21 to
14%.
Thus, it is this paper’s aim to identify the key elements involved in
the agricultural sector of the country in order to sort the weak points in
the agricultural system which needs support from the government;
policies which could further improve the status of agriculture.
Indicators were chosen with reference to existing economic theories
and principles. Data were gathered from the reputable and credible
institution Bureau of Agricultural Statistics (BAS) through its updated
online database.
Through the utilization of the SPSS software, the data were fitted
into a linear regression model. Assumptions were checked to optimize the
resulting model’s validity. Transformations of the available data were
done to further refine the resulting linear regression model. The effect of
the chosen exogenous variables to the chosen endogenous variable is
quantified and appropriate policy recommendations were formulated
based on the results derived from the raw data.

Theoretical Framework
Generally, Theory of Production in economics is an effort to explain
the principles by which a business firm decides how much of each
commodity that it sells (its “outputs” or “products”) it will produce, and
how much of each kind of labour, raw material, fixed capital good, etc.,
that it employs (its “inputs” or “factors of production”) it will use. The
theory involves some of the most fundamental principles of economics.
These include the relationship between the prices of commodities and the
prices (or wages or rents) of the productive factors used to produce them
and also the relationships between the prices of commodities and
productive factors, on the one hand, and the quantities of these
commodities and productive factors that are produced or used, on the
other. (ENCYCLOPEDIA BRITANNICA 2009)
In economics, factors of product io n (or productive inputs) are the
resources employed to produce goods and services. They facilitate
production but do not become part of the product (as with raw materials)
or are significantly transformed by the production process (as with fuel
used to power machinery). To 19th century economists, the factors of
production were land (natural resources, gifts from nature), labor (the
ability to work), and capital goods (human-made tools and equipment).
Recent textbooks have added entrepreneurship and "human capital"
(labor's education and skills). "Land" can include ecosystems while
sometimes the overall state of technology is seen as a factor of
production. In any event, it is the scarcity of the factors of production
which poses humanity's economic problem, often forcing us to choose
between competing goals. The number and definition of factors varies,
depending on theoretical purpose, empirical emphasis, or school of
economics.
Differences are most stark when it comes to deciding which factor
is the most important. For example, in the Austrian view -- often shared
by neoclassical and other "free market" economists -- the primary factor
of production is the time of the entrepreneur, which, when combined
with other factors, determines the amount of output of a particular good
or service. However, other authors argue that "entrepreneurship" is
nothing but a specific kind of labor or human capital and should not be
treated separately. The Marxian school goes further, seeing labor (in
general, including entrepreneurship) as the primary factor of production,
since it is required to produce capital goods and to utilize the gifts of
nature. It is unlikely that this difference of opinions between the
"Austrians" and the Marxists will be ended soon. But this debate is more
about basic economic theory (the role of the factors in the economy) than
it is about the definition of the factors of production. (WIKIPEDIA, 2009)
With reference to the production theory, the dependent variable
shall be the Philippines’ Gross Domestic Product (GDP) since a huge
portion of the GDP is accounted to the said sector.

Empirical Regression Model

GDP = β0 + β1 Agricultural Loans + β2 Irrigation + β3 Employment + β4
Fertilizer Supply + β5 Land + ε

Developed Regression Model

Log GDP = β0 + β1 (1 / Agricultural Loans) + β2 (1/ Irrigation) + β3 log
Employment + β 4 Fertilizer Supply + β5 Land‚ + ε

Where:

GDP = Gross Domestic Product of the Philippines

Agricultural Loans = Amount of loans released by the
government for agricultural utilization
Irrigation = the summation of National Irrigation for the
wet and dry season
Employment = the total number of the populace who is
employed in the agricultural sector
Fertilizer Supply = the total volume of fertilizer available for
utilization of the Philippine agricultural sector
Land = the summation of amount of land in
hectares utilized for the production of
Palay, Corn, Abaca, Banana, Cabbage,
Calamansi, Camote, Cassava, Coconut,
Coffee, Eggplant, Garlic, Mango, Mongo,
Onion, Peanut, Pineapple, Rubber,
Sugarcane, Tobacco and Tomato.
INTERPRETATIONS and RECOMMENDATIONS
The above model showed the highest Durbin – Watson score at 1.601
among all tested variables which is also within the 1.5 to 2.5 boundaries and
shows that the data doesn’t qualify for negative or positive serial correlation.
VIF scores also didn’t go beyond the 10 point mark which means no violation
of collinearity. On the aspect of linearity, a strong relationship could be seen
between the employment variable and the land variable at 74.4% which is
beyond the 50% mark, the presumed acceptable region limit. Elimination
might be done yet, it would result to a downward movement of the Durbin –
Watson score which would be below the 1.5 mark. Transformations were
also done yet, the resulting Pearson – r score still reveals a high correlation
between the two variables.
On the aspect of analysis of variance, the model would still be
significant considering the assumption that having a level of significance
below 10% can still be considered as acceptable. The model’s level of
significance after statistical processing is at 0.057.
Based on the resulting model, the inverse of Agricultural Loans and of
Irrigation have negative effects to the dependent variable which is the
logarithm of GDP at negative 13926.469 and negative 0.000002076. Among
all the identified variables, the inverse of the Agricultural Loans showed that
it has great influence to the GDP of the country considering that a large
portion of GDP is contributed by the agricultural sector.
It is therefore my recommendation that the Agricultural Loans
programs of the country be further intensified by the government. Intensified
agricultural loans in the country would mean more available monetary
capital for farmers.
On the aspect of irrigation, the government should also continue to
implement irrigation projects for all the areas in the country which have high
agricultural potentials since its one of the major factors which helps
optimizes the productivity of the agricultural sector.
Land, on the other hand at 0.000000000000005766, shows theoretical
consistency considering its positive relationship with the dependent variable.
In order to help increase the GDP of the country, more wastelands and other
physical supply of land with high agricultural productivity rate should be
added to the economic supply of agricultural land in order to increase
agricultural production though it shouldn’t be prioritized as of the moment
since policies imposing agricultural land expansion only have minimal
effects to the output of the agricultural sector.
The results shows that fertilizers supply have negative relationship to
the dependent variable. It could only mean that the development of the
agricultural sector does not depend on the supply of fertilizer in the market
and should not be prioritized by the government. With a numerical
coefficient of negative 0.0000001165, it would simply mean that a
continuous increase in the supply of fertilizer would just increase the cost of
production but not the output derived from the agricultural sector.
Employments negative relationship to the endogenous variable (- 0.539)
could imply that the available labor force doesn’t have the skills to produce
efficiently. Therefore the government should strengthen policies on
agricultural trainings and extensions projects to members of the agricultural
labor force. Instead of focusing on enticing members of the populace on
engaging in the agricultural sector, the government should instead
strengthen the sector’s current human resources.
 APPE NDICES

Descriptive Statistics

N Skewness Kurtosis
Statistic Statistic Std. Error Statistic Std. Error

log_gdp 13 -.228 .616 -.976 1.191

inv_loans 13 -.278 .616 1.027 1.191
inv_irrigation 13 .664 .616 -1.167 1.191
log_employment 13 -.943 .616 .137 1.191
Fertilizer Supply 13 .196 .616 -.453 1.191
sq_land 13 -1.316 .616 4.404 1.191
Valid N (listwise) 13

Correlations

Fertilizer
log_gdp inv_loans inv_irrigation log_employment Supply sq_land

Pearson log_gdp 1.000 -.199 -.801 .358 .031 .539

Correlation
inv_loans -.199 1.000 .002 -.123 -.465 -.209

inv_irrigation -.801 .002 1.000 -.362 .003 -.450

log_employment .358 -.123 -.362 1.000 .473 .744

Fertilizer Supply .031 -.465 .003 .473 1.000 .411

sq_land .539 -.209 -.450 .744 .411 1.000

b
Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson
a
1 .853 .728 .534 .12973 1.601
a. Predictors: (Constant), sq_land, inv_loans, inv_irrigation, Fertilizer Supply,
log_employment
b. Dependent Variable: log_gdp
 b
ANOVA

Model Sum of Squares df Mean Square F Sig.

a
1 Regression .315 5 .063 3.745 .057

Residual .118 7 .017

Total .433 12
a. Predictors: (Constant), sq_land, inv_loans, inv_irrigation, Fertilizer Supply,
log_employment
b. Dependent Variable: log_gdp

a
Coefficients

Unstandardized Standardized Collinearity

Coefficients Coefficients Statistics
Model B Std. Error Beta t Sig. Tolerance VIF

1 (Constant) 10.617 10.687 .994 .354

inv_loans -13926.469 14497.876 -.218 -.961 .369 .754 1.325

inv_irrigation -2.076E6 687967.188 -.689 -3.017 .019 .745 1.342

log_employment -.539 2.773 -.061 -.194 .851 .392 2.551

Fertilizer Supply -1.165E-7 .000 -.161 -.620 .555 .575 1.740

sq_land 5.766E-15 .000 .296 .935 .381 .389 2.569

a. Dependent Variable: log_gdp
 Y X1 X2 X3 X4 X5
Year
(GDP) (Agri Loans) (∑ Irrigation) (Employment) (Fertilizer) (∑ land) log_Y inv_X1 inv_X2 log_X3 sq_X5

1994 1,692,932.00 74,335.70 883,265.00 11,289.00 2,267,192.00 11,515,546.00 6.23 0.000013 0.000001 4.05 132,607,799,678,116.00

1995 1,905,951.00 82,571.10 848,227.00 11,147.00 2,627,346.00 11,255,521.00 6.28 0.000012 0.000001 4.05 126,686,752,981,441.00

1996 2,171,922.00 564,718.80 876,109.00 11,645.00 2,809,595.00 11,643,131.00 6.34 0.000002 0.000001 4.07 135,562,499,483,161.00

1998 2,665,060.00 115,078.60 870,014.00 10,091.00 1,968,627.00 10,338,565.00 6.43 0.000009 0.000001 4.00 106,885,926,259,225.00

1999 2,976,905.00 170,479.70 831,283.00 10,774.00 2,390,059.00 11,613,477.00 6.47 0.000006 0.000001 4.03 134,872,848,029,529.00

2000 3,354,727.00 114,506.20 932,207.00 10,181.00 2,401,370.00 11,487,245.00 6.53 0.000009 0.000001 4.01 131,956,797,690,025.00

2001 3,631,474.00 122,596.20 949,918.00 10,850.00 2,232,515.00 11,480,701.00 6.56 0.000008 0.000001 4.04 131,806,495,451,401.00

2002 3,883,230.00 123,460.30 978,737.00 11,122.00 2,236,205.00 11,427,542.00 6.59 0.000008 0.000001 4.05 130,588,716,161,764.00

2003 4,316,402.00 135,158.40 949,038.00 11,219.00 2,699,701.00 11,477,914.00 6.64 0.000007 0.000001 4.05 131,742,509,791,396.00

2004 4,871,555.00 167,956.90 953,584.00 11,381.00 2,884,968.00 11,766,588.00 6.69 0.000006 0.000001 4.06 138,452,593,161,744.00

2005 5,444,039.00 108,935.90 966,465.00 11,628.00 2,492,205.00 11,600,147.00 6.74 0.000009 0.000001 4.07 134,563,410,421,609.00

2006 6,032,835.00 93,228.00 972,692.00 11,682.00 2,216,936.00 11,958,481.00 6.78 0.000011 0.000001 4.07 143,005,267,827,361.00

2007 6,648,245.00 153,832.20 964,710.00 11,786.00 2,431,277.00 12,216,200.00 6.82 0.000007 0.000001 4.07 149,235,542,440,000.00

Source: Bureau of Agricultural Statistics