Equity effects of rice trade liberalization in the Philippines

Although many developing countries have a history of taxing the agricultural sector, domestic rice prices in the Philippines are substantially above current world price levels, resulting in high effective rates of protection. This has been a chronic situation for the past 15 years. This paper takes a preliminary look at the effects that trade liberalization might have on (1) the rural landless and (2) land-owning rice farmers using various disaggregated data on incomes, expenditures, and production costs and returns. The rural landless are the poorest of the poor in the Philippines and they constitute a large percentage of the population. Higher prices have two effects on this group. First, the landless are net rice consumers, so higher prices reduce their effective purchasing power. Second, high rice prices might raise the demand for unskilled labor, this increasing the wages of unskilled labor. These two effects have opposite implications for welfare, but various evidence suggests that the first effect dominates the second, so that the rural landless would benefit from liberalization. Rice farmers benefit from current policies and would be hurt by liberalization, but the brunt of liberalization would fall on large farmers with higher incomes. Small farmers would be less affected because they have smaller marketable surpluses. However, it cannot be denied that many small rice farmers are also poor ans would be hurt by liberalization. Trade liberalization would likely lead to substantial reductions in dry-season area planted to rice, whereas wet-season rice would be less affected. A reduction in dry-season rice area would facilitate crop diversification into vegetables and would likely lead to increased demand for rural labor, which would help the rural landless. Substantial reductions in domestic rice prices in the Philippines would thus simultaneously increase economic efficiency, improve the welfare of those at the bottom of the income distribution, facilitate crop diversification, and accelerate the transition of the labor force to higher-productivity industrial and service sectors. The Philippines has not made substantial commitments to rice trade liberalization under GATT/WTO, but, if high trade barriers remain in place, conflicts with commitments under the ASEAN Free Trade Area (AFTA) might occur.