Economic structure andchanges in agriculturalprotection in ASEAN

ASEAN-Australia Economic Papers No. 26

Economic structure andchanges in agriculturalprotection in ASEAN

Cristina C. David

ASEAN-Australia Joint Research ProjectKuala Lumpur and Canberra 1986

© ASEAN-Australia Joint Research Project 1986

Published by ASEAN-Australia Joint Research ProjectKuala Lumpur and Canberra

ISSN 0811-1251

National Library of AustraliaCataloguing-in-Publication entry

David, C.

Economic structure and changes in agriculturalprotection in ASEAN.

ISBN 0 86784 616 X.

1. Agricultural price supports -- Asia, Southeastern.2. Agriculture and state -- Asia, Southeastern.3. Agriculture -- Economic aspects -- Asia, Southeastern.I. ASEAN-Australia Joint Research Project, II. Title.{Series: ASEAN-Australia economic papers; no. 26).

338.1'859

Designed by Graphic Design, Australian National UniversityTypeset by Keyset Pty Ltd, Sydney

Printed by Central Printery, Australian National Univelsity

Author

Dr Cristina David is an agricultural economist at the International RiceResearch Institute, Los Banos, The Philippines.The author gratefully acknowledges research assistance by AdelitaPalacpac and Aida Papag.

Contents

Introduction 7

1 Economic growth and structural change 9

2 Structure of and changes in agricultural protection 15

3 Intersectoral pattern of protection 23

4 Conclusions 25

References 27

Tables

1 Trends in growth rates of gross value-added by sector in four ASEANcountries, 1960-65 to 1980-82 9

2 Trends in selected indicators of agriculture's economic importance infour ASEAN countries, 1960-82 10

3 Ratio of value of imports to exports of agricultural products and foodproducts in four ASEAN countries, 1960-64 to 1980-82 11

4 Land endowment per capita in selected Asian countries, 1979-81 125 Trends in nominal protection rates for selected agricultural

commodities in four ASEAN countries, 1960-64 to 1980-82 16

Figures

1 Trends in world prices of rice, corn, sugar, copra, palm oil and rubber,1955-82 18

2 Trends in yields of paddy, corn, rubber and sugarcane in four ASEANcountries, 1955-82 19

Introduction

Two structural transformations are consistently observed throughout theeconomic history of developed countries and in cross-section compari-sons between rich and poor countries. First, the share of agriculture ingross domestic product and in total employment declines as per capitaincome increases {Chenery and Syrquin, 19771. This trend is oftenattributed to the lower income elasticity of food at higher income [Engel's

Lawl_ to the development of synthetic substitutes for agricultural rawmaterials_ and to increases in agricultural productivity in response to agrowing scarcity of land and labour.

Secondly, countries tend to switch from effectively taxing agricul-ture, which they rely on, at low levels of per capita income, to heavilysubsidising agriculture as per capita income grows IBale and Lutz, 1981_Anderson, 1983_ Honma and Hayami, 1986). Anderson, Hayami et al.

{1986) explain this phenomenon in terms of changes in demand for and•supply of protection. As population presses on limited land, agriculture'scomparative advantage declines in favour of manufacturing. Farmproducers demand agricultural protection to reduce rural-urban incomedisparities and minimise the social costs shouldered by the ruralpopulation in the process of intersectoral resource adjustment. At thesame time, as generally higher per capita incomes and the smaller size ofthe agricultural sector in the process of industrial development lower theburden of agricultural protection per capita on the non-agriculturalpopulation, political resistance against agricultural protection is reduced.Reinforcing this is the fact that food self-sufficiency as a means to foodsecurity is a politically desired goal.

The decline in the relative importance of the agricultural sector andthe increase in agricultural protection over time will occur at a later stageof development in countries where per capita endowment of land andother natural resources is greater, the progress of the industrial sector isslower, and technical change in agriculture is faster relative to the rest ofthe world. The interseetoral structure of economic policies in the country{as well as in the rest of the world 1 also directly and indirectly influencethe rate of structural transformation.

The purpose of this paper is to analyse the changes in agriculturalprotection and structural change in the ASEAN economies from 1960 to1982. The causes of change in agricultural protection over time will beexamined to infer the trends in each country's comparative advantage inagriculture. The extent to which domestic economic policies havehindered or promoted the realisation of agriculture's comparative advan-tage and thus hastened or retarded a decline in the relative importance ofagriculture across countries will be evaluated by comparing theintersectoral patterns of protection and exchange rate policies.

8 INTRODUCTION

The paper draws on the country-specific analyses of the structure andgrowth of agricultural protection in the four largest ASEAN countries,Indonesia, Malaysia, the Philippines, and Thailand, by Booth {1986},Meyanathan and Sivalingam [1986], David [1986} and Mongkolsmai{1986] respectively. Singapore and Brunei are not covered since theiragriculture is not significant. Furthermore, food prices and food securityare not considered major issues of concern in these two countries, owingto their very small populations, high per capita incomes, and financialcapacity to import food and raw materials.

1

Economic growth and structural change

Among the four largest ASEAN countries, Malaysia has the highest percapita income {$1,840 in 1982}, three times that of Indonesia and morethan double that of the Philippines and Thailand. With the exception ofthe Philippines, overall economic performance of these countries hasbeen relatively high by world standards ITable 1). Malaysia, whichhistorically has been the most open economy of the four, as measured bythe ratio of exports to gross domestic product {GDP), consistently had thehighest growth rate after 1965. Statistically, the poor record of thePhilippines stems largely from its having the lowest industrial sectorgrowth in the region.

TABLE 1 Trends in growth rates of gross value-added by sector in four ASEANcountries, 1960-65 to 1980-82 {at constant prices)

Country andperiod' GDP Agriculture b Manufacturing

Indonesia1960-65 2.0 1.4 2.11965-70 6.5 3.9 6.91970-75 8.1 4.3 12.61975-80 7.4 3.7 13.91980-82 5.0 3.5 5.6

Malaysia1960-65 6.2 4.2 12.11965-70 11.5 9.9 14.41970-75 7.8 5.8 13.01975-80 7.6 4.4 9.41980-82 6.4 5.7 4.4

Philippines1960-65 5.0 3.7 5.21965-70 5.1 4.1 6.81970-75 6.1 4.5 7.51975-80 5.9 4.9 6:31980-82 3.3 3.5 2.8Thailand1960-65 7.9 5.8 10.01965_70 7.8 4.6 10.91970-75 7.3 4.8 11.51975-80 7.3 4.0 9.41980-82 5.2 3.9 5.4

•Except for the 1980-82subperiods, averageof fiveseasons ending in the end year shown.qneludes agriculture,forestryand fishing.Source: Asian Development Bank, Economic Indicators, various issues.

10 ECONOMIC GROWTH AND STRUCTURALCHANGE

In all four countries, the agricultural sector performed remarkablywell, achieving the highest average growth rate among the developingcountries in terms of total and per capita agricultural output. Thegenerally unfavourable world market conditions in the early 1980saffected the whole ASEAN region to only a limited extent, althoughgrowth rates of GDP slowed in all countries during the period. Domesticeconomic and political factors, however, accounted for the overall lessgood performance of the Philippines between 1980 and 1982. Itsagriculture grew at much the same rate as the three remaining ASEANpartners, whereas its manufacturing growth was slower -- about half theannual rate in the other three countries.

TABLE 2 Trends in selected indicators of agriculture's economic importance infour ASEAN countries, 1960-82

i imllll i i

Share of agriculture, in

GDP Labour force Exports

Indonesia1960 54 75 601965 52 70 461970 48 66 471975 37 63 221980 30 60 221982 26 53 12

Malaysia1960 38 58 611965 34 55 571970 32 53 621975 28 49 601980 24 41 411982 24 36 43Philippines1960 26 61 871965 26 55 841970 25 49 731975 25 49 731980 23 51 421982 22 50 41Thailand1960 40 84 891965 36 82 831970 32 79 751975 31 73 701980 25 71 591982 21 74 56

•Includes agriculture,forestryand fishing.

Sources: For GDP and labour force, Asian Development Bank, Key Indicators ofDeveloping Member Countries, various issues; for exports, Food andAgriculture Organisation, Trade Yearbook, various years.

ECONOMIC GROWTHAND STRUCTURALCHANGE I l

Although its share of national income is declining, agriculture stilldominates ASEAN countries' total economies {Table 2}. It continues toaccount for 36 to 74 per cent of total employment and from 21 to 26 percent of GDP. When all ancillary activities in agricultural processing,production of non-farm inputs and marketing are included, the agricul-tural sector broadly defined employs about two-thirds of the labour forceand contributes about half of the national income. The greatest shift instructural employment took place in Malaysia and Indonesia. Indonesiaalso had the steepest rate of decline in the share of agriculture in nationalincome largely owing to the rapid growth of its oil-based sectors. In termsof contributions to GDP and employment, the Philippines had the lowestrate of sectoral shift.

Agriculture provides a net surplus of foreign exchange in each ofthese countries as 40 to 60 per cent of export receipts is earned from

agricultural exports. The sharp increase in the value of crude petroleumand natural gas exports during the 1970s in Indonesia explains thesubstantial decline in the share of agricultural products in its foreigntrade as the absolute growth rate of its agricultural exports was actually

among the highest in the region during the period. Unfavourable terms oftrade accounted for the marked reduction in the share of agricultural

exports in the early 1980s in all four countries. Nevertheless, the relativeimportance of agricultural exports had been showing a long-term declinein real terms despite the world commodity boom in the 1970s.

Agricultural import values are from 20 to 40 per cent of agriculturalexport earnings, with Indonesia having the highest and Thailand thelowest ratio among the four countries {Table 3). Malaysia, however, hasthe highest agricultural trade surplus as a proportion of GNP and also hashad an improvement in the ratio of agricultural imports to exports overtime. The deterioration in the import ratio in the 1980s which affected allcountries was due to the worsening terms of trade.

TABLE 3 Ratios of value of imports to exports of agricultural products and foodproducts in four ASEAN countries, 1960-64 to 1980-82

Indonesia Malaysia Philippines Thailand

Agric.' Foodb Agric. Food Agric. Food Agric. Food

1960-64 n.a. n.a. 0.52 5.22 0.26 0.53 0.13 0.161965-69 0.48 1.66 0.41 3.91 0.29 0.69 0.20 0.201970-74 0.44 1.87 0.34 1.90 0.26 0.44 0.21 0.131975-79 0.45 1.24 0.29 1.89 0.27 0.40 0.19 0.081980-82 0.54 1.23 0.32 2.55 0.33 0.46 0.20 0.10

•Includesagriculture,forestryand fishing._Excludesanimal and vegetable oilsand fats.

Source: Food and Agriculture Organisation, Trade Yearbook, various issues.

19. ECONOMIC GROWTH AND STRUCTURAL CHANGE

Malaysia and, to a lesser extent, Indonesia are net importers of foodcommodities. Malaysia's agriculture is dominated by rubber and palm off,its leading export earners, and tree crops occupy over 70 per cent ofcultivated land {Table 4). Food crops have become even less important inMalaysia as rising wages have shifted agriculture's comparative advan-tage away from the relatively labour-intensive food crops such as rice, tea,pineapples, and smallholder rubber production towards estate crops,particularly palm oil. By the early 1980s, the contribution of palm oil hadsurpassed rubber. After the end of the colonial period in 1957 thegovernment attempted to promote the production of rice, livestock andother food commodities through various incentives and succeeded inreducing dependence on food imports over the next two decades. By thelate 1970s, however, greater imports of rice and other food commoditieswere allowed as the economic cost of achieving self-sufficiency rose.

TABLE4 Landendowment per c_pita in selected Asian countries, 1979-81

Short-Cultivated cycle Tree

Total_ land crops crops

Indonesia 1.22 0.14 0.10 0.04Malaysia 2.34 0.31 0.07 0.24Philippines 0.61 0.20 0.14 0.06Thailand 1.09 0.39 0.35 0.04Japan 0.32 0.05 0.04 0.01South Korea 0.25 0.06 0.05 0.04

•Including arable land and permanent crops, permanent pastule, forest and woodland andother lands.

Source: Foodand Agriculture Organisation, Production Yearbook, various issues.

In Indonesia, the production of food commodities constitutes almost80 per cent of agricultural gross value-added but net food imports arerequired because of the high population density relative to cultivatedareas. The decline in food import dependence observed in recent years isdue mainly to the increase in self-sufficiency in rice which accounts for50 per cent of agricultural gross value-added and as much as 50 to 60 percent of agricultural imports. In the Philippines, the attainment of self-sufficiency in rice and the expansion of production of non-traditionalimport competing and exportable food crops (corn, coffee, pineapples, andbananas} lowered the food import dependence ratio after 1970.

Thailand has the lowest ratio of agricultural and food imports toexports as virtually all its major agricultural products are competitive inthe world market. The eradication of malaria and rapid expansion ofmarket infrastructure in the Northeastern region, together with theheavy taxation of rice exports over the post-war period, induced a majorcrop diversification away from rice, the leading crop and export earner, to

ECONOMIC GROWTH AND STRUCTURAL CHANGE 13-

a larger variety of crops for export -- cassava, sugar, corn, and otherupland crops. Thailand's rate of trade surplus for food commodities,which increased over time, is greater than that of the other agriculturalcommodities.

The continuing importance and trade surplus position of agriculturein the ASEAN region indicate a measure of comparative advantage inagricultural production {Tyers and Anderson, 1985). In contrast to EastAsia which is a net importer of food and raw materials, with agriculturecontributing only 4 to 16 per cent of GDP and employing 12 to 20 per centof the labour force by 1980, ASEAN is a group of resource-rich countries(Table 4). indonesia has the lowest cultivated land per capita in the regionbut this still is almost three times greater than in East Asia. There isconsiderable potential for expanding agriculture outside lava, where thepopulation is presently concentrated, as Indonesia's endowment of totalland per capita is even more favourable than that of Thailand and thePhilippines.

The fact that tree crops constitute a major part of agriculture inMalaysia and, to a lesser extent, in the Philippines and Indonesia meansthat Engel's Law may not be an important factor limiting demand.Thailand does specialise in food crops but being largely export-oriented,global demand for their products tends to be more elastic. Also, rapiddiversification in agriculture during the past three decades was towardsproduction of those food crops which display greater elasticity of demand.

In the next section, the analysis of the structure of and changes inagricultural protection will allow further assessment of ASEAN's com-parative advantage in agriculture. Moreover, we evaluate the extent towhich agricultural incentives have been affected by intersectoral patternsof protection, as determined by commodity-specific and exchange ratepolicies.

2

•Structure of and chanes in agriculturalprotecuon

Government intervention in agriculture has been intended to achievemany different and often conflicting objectives: cheap food and rawmaterials to promote industrialisation, greater government revenue, foodsell-sufficiency, stable prices, and higher farm incomes. Export taxes,import tariffs, trade quotas, price controls and marketing operations ofnational marketing agencies are typical commodity-specific policiesdriving a wedge between domestic and border prices. The effect of theseagricultural policies is measured by nominal protection rates (NPR), thepercentage difference between domestic and border prices at the samepoint in the marketing chain. While government policy determines thesize of the price difference, the sign or direction of this difference dependsupon whether or not the country has a comparative advantage in theproduction of a commodity. NPR would be positive for an import-competing product but may be zero or negative for an exportable or non-traded commodity. Changes in NPRs over time, therefore, may be causednot only by exogenous policy changes but also by shifts in comparativeadvantage. Policy changes may in turn be responses to shifts incomparative advantage as a result of improvements in productivity,factor price changes, or changes in world market conditions.

Structure of agricultural protection

Table 5 summarises NPRs for the major agricultural commodities from1960 to 1982. The series for Indonesia started only in 1970 because of thedifficulty of choosing the appropriate exchange rate during the 1960s, aperiod of great instability in its history. To facilitate inter-countrycomparison, new NPRs estimated by using a common methodology areshown for Indonesia, Malaysia, and Thailand.

The average NPR for the region is generally low because of the largeshare of exportable and non-traded agricultural commodities particularlyin Malaysia and Thailand. For the period 1980-82, average NPR forIndonesia and the Philippines is marginally positive {3to 5 per cent) but isnear zero if livestock products are excluded. Average NPR for Thailandand Malaysia is slightly negative (-5 to -7 per cent). These average figures,however, conceal wide variations in nominal protection rates by countryand by commodity with exportables receiving less protection thanimport-competing commodities.

16 STRUCTURE OFAND CHANGES IN AGRICULTURALPROTECTION

TABLE 5 Trends in nominal protection rates, for selected agriculturalcommodities in four ASEAN countries, 1960-64 to 1980-82

AsRice Corn Sugar Rubber specified Beef Pork Chicken

Indonesia c1970-74 -1 -18 42 -28 -33 -46 n.a.1975-79 -6 23 22 -29 -18 26 n.a. 161980-82 -4 33 71 -19 _31 37 n.a. 87

Malaysia d1960-64 8 18 17 -31 32 42 n.a. n.a.1965-69 2 14 27 -29 -9 19 24 1001970-74 20 19 17 -28 -12 7 n.a. 661975-79 19 17 20 -33 -6 42 7 361980-82 16 14 39 -40 -5 42 6 41

Philippines b e1960-64 21 46 32 0 0 45 54 971965-69 15 38 174 0 0 -4 50 1221970-74 7 20 36 -4 -12 -32 18 551975-79 1 20 -16 --4 -22 17 -3 581980-82 -1 20 4 -4 _30 57 6 85Thailand f1960-64 -29 0 n.a. --20 0 -35 35 -31965-69 _31 0 37 -16 0 -35 61 411970-74 -28 0 -11 -17 0 -31 33 201975-79 -24 0 6 -13 0 -17 -2 -11980-82 -17 0 0 _31 0 --31 n.a. n.a.

•Defined as the percentage bywhich domestic price exceeds border price. Domestic price isrepresented bydomestic wholesale prices. Borderprice is usually c.i.f, import unit values£orimportables and f.o.b, export unit values for exportables. For livestock products, thesame border price was used in the four countries, i.e. c,i.£,import unit value of Hong Kong(pork and chicken}and ofthe US Ibeefl,Borderprice of rice for Indonesia is based on Thaiworld price quotations £or25per cent brokens plus 1Sper cent for insurance and freight.NPR for corn and cassava in Thailand isassumed zero as there is no export tax on theseroduets.

_elected exports including abaca, bananas, pineapple products, tobacco, molasses, shrimpsandprawns.cCoffee.dpalm oil.°Copra.fCassava.

Sources: For border prices, Food and Agriculture Organisation, Trade Yearbook,various issues; for domestic wholesale prices, official country sources.

Penalties to traditional major exports have been as high as 20 to 40per cent for rubber, rice, coffee and copra. About 20 to 30 per cent of the

implicit tax on rubber, however, is a cess for research and replanting.NPRs are much less for the non-traditional and minor export crops. Forexample, the domestic price of palm oil is only about 5 per cent below theborder price in Malaysia, and in the Philippines the export tax on non-traditional exportsis 4 per cent. Taxes on exports are typically levied toraise revenue, promote agricultural processing and stabilise prices. Theaim of high export taxes on rubber in Malaysia, rice in Thailand, andcopra in the Philippines, however, has been partly to extract perceived

STRUCTURE OF AND CHANGES IN AGRICULTURAL PROTECTION 17

monopoly rents from the world market. Exports of these countriesaccount for a significant share of intemational trade m these commodi-ties but many scholars have shown that domestic farmers do in factshoulder most of this tax {Booth, 1980J.

Developed country policies have provided protection for a fewASEAN exports. Between 1960 and 1974, Philippine access to the UnitedStates sugar market raised domestic prices for its producers to about 80per cent over world prices. The European Community's protection of itsfeedgrain industries raised the value of cassava pellet exports of Thailandand Indonesia. This premium is not reflected in Table 5 but oneindication of the impact of the European Community's feed policy onThai domestic cassava prices is the 20 per cent NPR derived for cassavastarch, the altemative use of cassava in ASEAN countries.

Except for livestock products, NPRs for import-competing foodcommodities are generally modest because the objective of maintaininglow food prices continues to be an important policy goal. Since livestockproducts are typically consumed by the relatively higher income segmentof the population, protection rates are generally higher than for foodcrops. NPRs for import-competing food crops are generally in the order of20 per cent. An exception is the domestic price of rice in Indonesia whichhas been kept slightly below or at import parity. The high NPRs for sugarin 1980-82 in Indonesia and Malaysia were due to the sharp drop in worldprices.

Changes in agricultural protection

Trends in nominal protection rates over time in the ASEAN region do notindicate the same consistent pattern of change from effectively taxing toheavily assisting agriculture observed in East Asia during the post-warperiod. With the exception of rice, NPRs for agriculture in Indonesiaappear to be rising. In Malaysia, protection of rice and sugar increased butnot the rates for other commodities. In Thailand, the penalty for rice wasreduced and protection in sugar, pork, and chicken declined sharply.Protection rates generally declined in the Philippines.

There are at least three reasons why a decline in agriculture'scomparative advantage in the ASEAN countries could be expected tooccur later than in East Asia. As mentioned earlier, its land endowmentper capita is much more favourable. Related to this is the significantshare in ASEAN agriculture of tree or commercial crops which have amore elastic long-term demand than food crops. Finally, the level andgrowth rate of per capita income of ASEAN countries in the 1980s is stillrelatively lower than were those in East Asia in the 1960s. In particular,the 17 to 20 per cent annual growth rate of the industrial sector in EastAsia in the 1960s was more rapid than the 6 to 14 per cent achieved inASEAN during the past two decades.

The implication of the analysis that Indonesia may be losingcomparative advantage in agriculture earlier than the other three ASEANcountries is consistent with its having the lowest cultivated area per

18 STRUCTURE OF AND CHANGES IN AGRICULTURAL PROTECTION

Price (US $ per metric ton)600

400 !l RICE200

200-., CORN _ _ _0

600 -

- SUG400 -

200 -

0

600-400

_

°°°--I400 1

200 -I-__1 --

1600-

1400 -

1200 -

1000

80060O

4OOT

'''' '' '_' 6'_' 6'7' '9' ' '_ '''' '_'9' '1955 57 59 61 3 6 71 3 75 77 81

FIGURE 1 Trends in world prices of rice, corn, sugar, copra, palm oil and rubber, 1955-82Source: International Monetary Fund, International Financial Statistics, various issues.

STRUCTURE OF AND CHANGES IN AGRICULTURAL PROTECTION 19

Yield (tons per heotare) Yield (tons per hectare)

/PADDY CORN

3- Indone_/._

Malaysia J :...

,x.._s'_,.,,,j. :._//i" Thailand .; '.:,,-,/ ",,.,::-,...,2- ;,,: . /... :'.. 9: .....'"... - : :""',-, , • ..r-.....-..,: .... ": '.."v"

/___'%,%# I I" T'hallltnd :: _'/'"", ":° ";. i./

•.../....."..: _-

.. ......."_""_ s'*_ Philippines

'%...-_" " Indonesia1

Philippines

0 , _ i f , f _ , , _ , r7 _ 0 _"I I I l I I I I 1 I l I I I I I I I I I I I I f 1 I I I T 1 1 I _] I I I I

2 Yield (tons per hectare Yield (tons per hectare)

SUGARCANE

RUBBER BOJ ^ Alndonesia_ "_

./ ^ .. /

1 '

• ,o} W.;;::;&:' "::MalaYsia...'- .... / !": t/\/ "f_- ...-'" .-

Indonesia

,=._r_ -_ .................... "'t(_....... 20""" .... Thailand

T

0 _l I It I I !111 ! I ill Ill I i I I I I | 0/' I I I i I I I I I I I I It II Illl!rlrr

1955 60 65 70 75 80 1955 60 55 70 75 80

FIGURE 2 Trends in yields of paddy, corn, rubber and sugarcane in lout ASEAN countries,1955-82

Source: Food and Agriculture Organisation, Production Yearbook, various issues.

20 STRUCTUREOFANDCHANGESINAGRICULTURALPROTECTION

capita. Because Indonesia also has the group's lowest per capita income,the price of rice has been kept at or below border price. The substantial oilrevenues generated in the 1970s financed the accelerated public expendi-ture for irrigation, farm extension services, credit and fertiliser subsidiesin rice up to the early 1980s. Between 1960 and 1980 the country's riceself-sufficiency ratio increased in spite of a rise in per capita consumptionfrom about 100 to 134 kilograms. By raising the profitability of bothfertiliser and irrigation investments, the introduction of modern varietiesin the late 1960s lowered the cost of achieving self-sufficiency in rice.This strategy of intensification in the rice sector, however, instead ofopening new land outside Java, may have hastened the decline incomparative advantage in other crops in Indonesia.

In Malaysia, which has the highest per capita income and the besteconomic performance of the four countries, the rapid growth in wageshas led to a decline in comparative advantage in the labour-intensiveproduction of food crops and in the smallholder rubber sector. Havingabundant land resources, growth in agricultural production has beensustained by the successful shift to palm oil and the introduction oflabour saving innovations in the rubber sector. Having also beenhistorically a relatively open economy with a small population, increas-ing food import reliance was politically acceptable. A modest amount ofprice protection and input subsidies continue to be provided to the ricesector, primarily for ethnic equity rather than food security consider-ations, as rice farmers, almost all Malays, typically belong to the poorestsegment of the population.

The Philippines registered the poorest national product growthrecord, especially in the manufacturing sector where growth in produc-tivity was much less than in agriculture [David, Barker and Palacpac,19841. Real wages declined. This simultaneously raised agriculture'scomparative advantage and the political demand for lower food and rawmaterial prices for the urban sector.

Two other main reasons why protection rates generally declined inagriculture in the Philippines and in selected commodities in the othercountries relate to changes in world market conditions and to increases inproductivity. Unprecedented increases in world prices of ASEAN's majoragricultural products occurred in the 1970s IFigure 1I. The attempt toinsulate domestic consumers and agro-processing industries from higherfood and raw material prices and to siphon off windfall profits for thestate led to reduced protection, or increased taxation, for severalcommodities. Except in the Philippines, this policy response aimed onlyat price stabilisation and hence the increase in taxation pertained only tothe specific subperiod, for example, sugar [1970-741 and rubber [1980-821in Thailand and rubber 11980-821 in Malaysia. In the Philippines,however, the increase in govemment regulation Cand hence taxationl ofexports, especially in sugar and copra, occasioned by the world com-modity boom was much more severe and prolonged, extending beyondthe end of the boom period.

STRUCTURE OF AND CHANGES IN AGRICULTURAL PROTECTION 21

Increases in productivity will tend to lower NPRs for import-competing commodities. Rightward shifts in the supply curve reduce thegap between domestic and border prices making the government andnatural protection (the latter being due to international marketing costs}partly or wholly redundant. Efficiency gains resulting kom the shift tocommercial type of production, vertical integration of feed milling andlivestock production and international technology transfers facilitated bythis new organisation of production, lowered the protection rates for porkand chicken in Malaysia, the Philippines, and Thailand. Thailand beingan exporter of corn has the competitive advantage in the exports ofpoultry products among ASEAN countries.

Figure 2 illustrates the trends in productivity, as represented byyields, of selected major crops in the four ASEAN countries. In the 1970syields of sugar grew by two-thirds in Thailand but they stagnated in thePhilippines and even declined in Indonesia which has become moreimport-dependent in this commodity. As Thailand shifted from being anet importer to being one of the top sugar exporting countries, the NPRfor sugar was gradually eliminated.

Corn yields have risen in both the Philippines and Indonesia. TheNPR for corn in Indonesia, however, increased owing to greater compe-tition for land in Java with rice, whose yields were growing even faster. Inthe Philippines, productivity growth and a more liberal import policyintended to defend ceiling prices on livestock products lowered protec-tion for corn producers. Technical changes in rubber and rice have had adifferential impact on comparative advantage in the production of thesecommodities in the different countries. Rapid gains in yields of rubberoccurred only in Malaysia, where 80 per cent of the rubber area wasalready planted to high yielding varieties. This compares to 15 per cent orless in Indonesia and Thailand. The growth in comparative advantage ofMalaysia in rubber relative to the other two countries is consistent withthe trends in their respective nominal protection rates. Indonesia andThailand have had to reduce export taxes for rubber in order to maintaintheir world market shares.

Themost dramatic regional yield improvements occurred in ricewith the introduction of modern varieties in the mid-1960s. Modernvarieties have been generally more suited to irrigated conditions. Owingto physical conditions, the cost of irrigation per hectare is lower amongtraditional importers. The regional impact of technical change in ricetherefore has been to lower the cost of producing rice in traditionalimporting countries, the Philippines and Indonesia, more than intraditional exporting countries, such as Thailand (Siamwalla and Haykin,1988). An exception was Malaysia where by the late 1970s it became clearthat importing rice had become more economic, owing to the rise in realfarm wages. The spread of modern varieties was earliest and most rapid inthe Philippines and as the country shifted from being a net importer toexporting small surpluses, nominal protection and the real price of ricedeclined. The adoption of modem varieties came later in Indonesia, but

9.9. STRUCTURE OF AND CHANGES IN AGRICULTURAL PROTECTION

increases in yields were even greater. Selfisufficiency in rice was achievedby 1984, and the real rice price declined as per capita rice availabilityincreased. The growing comparative advantage of Indonesian rice pro-duction, however, is not reflected in trends of the NPR as governmenttrade and marketing policy has kept domestic price close to import paritysince the early 1970s.

Because the proportion of irrigated areas in Thailand is small,adoption rates of modern varieties and fertiliser use were lower. Yieldsremained about the same between 1965 and 1982. As world prices of ricefell in real terms, Thailand reduced penalties for exporting rice tomaintain farmers' incomes and incentives. As a result, rice productionand exports continued to expand at historical rates.

3

Intersectoral pattern of protection

Crop-specific policies have generally imposed a tax on prices received byfarmers, particularly of exportable crops. In Malaysia and Indonesia, someimport-competing crops have been granted modest levels of protection.Consideration of input price policies will not essentially change thepattern indicated by the NPRs as such policies have been significant onlyin rice in Indonesia and Malaysia.

The Philippine policies which reduced agricultural protection after1970 have limited the country's ability to benefit from the extraordinarygrowth in world trade brought about by the commodity boom inASEAN's major exports in the 1970s. As a result, annual growth ofagricuhural exports in the Philippines was only 9 per cent compared to 20per cent per year in the other ASEAN countries during the 1970s. Bycontrast, policy responses to changes in world market conditions andproductivity in the other countries were based purely on stabilisationobjectives and tended to put more stress on farm incentives.

Agricultural incentives and the direction and rate of resource flowsbetween agriculture and non-agriculture are influenced not only by thelevels of agricuhural protection but also by the nature of incentives in theindustrial sector and by distortions in the macro price of foreignexchange. The penalty on Philippine agriculture imposed by the indus-trial protection system and the undervaluation of foreign exchange iseven more severe than commodity-specific policies. Among ASEANcountries, the Philippines had, in the late 1970s, the highest average tariffrate {44 per cent}, followed by Indonesia (33 per centl, Thailand (29 percent}, and Malaysia {15 per cent} {cited in Ariff and Hill, 1985, p. 80}.Malaysia's average tariff rate would have been lower if the high tariffs onbeverage and tobacco had been excluded. The same ranking is indicatedby estimates of nominal and effective protection rates [EPRI for manufac-turing. In the Philippines, the system of industrial protection has beenestimated to cause a 20 to 30 per cent overvaluation of the peso {Medalla,1979}. Compared to the other ASEAN countries, foreign debt as a ratio oftotal exports has grown most rapidly and is now highest in thePhilippines. Declining agricultural protection and increasing distortionin the exchange rate not only continued but increased the bias againstagriculture in the Philippines during the 1970s.

Unlike the Philippine manufacturing protection which encouragedcapital-intensive industries, Indonesia's industrial protection which isnext highest appears to favour unskilled labour-intensive activities {citedin A.rift and Hill, 1985, pp. 82-31. The increase in real farm wages inIndonesia, compared to the declining trend in the Philippines, reduced

24 INTERSECTORAL PATTERN OF PROTECTION

the competitiveness of Indonesian agriculture in the world market butimproved incomes and income distribution in the rural sector. The'Dutch disease' syndrome expected in the wake of the oil boom in themid-1970s did not have a significant adverse effect on agriculture owingto the timely devaluation in 1978 and the acceleration of governmentspending for irrigation, farm input subsidies, research and extension(Warr, 1984_ Glassbumer, 1985).

Except for rubber, Malaysia had the least discrimination againstagriculture. In fact, effective protection for food commodities tended tobe higher than that for manufacturing. The macroeconomic policiespursued continued the generally open trading system characteristic of thepre-war period and have had a stimulating effect on the whole economy.Thailand's economic policies affecting agriculture are in relative termsnot as discriminatory. The heavy taxation of rice is the exception butperhaps the early crop diversification induced by this policy ultimatelylessened the severity of the adjustment process required as the pattern ofregional comparative advantage in rice changed in the 1970s.

4

Conclusions

Since they have a relatively abundant area of cultivated land per capita,the four largest ASEAN countries continue to have a comparativeadvantage in agriculture. This is indicated by their agricultural tradesurpluses and their low average nominal protection rates on agriculture.While the average nominal protection rate on agriculture is near zero ornegative and does not differ substantially among ASEAN countries, thereare significant variations in its structure across commodities and in thechanges in the NPRs over time. These patterns of agricultural protectionacross countries, commodities and time reflect not only the pattern ofcomparative advantage but also the nature of policies pursued by eachcountry which either hinder or promote the realisation of each country'srespective comparative advantage in agriculture. Whilst the relativeimportance of the agricultural sector has been declimng in these ASEANcountries, it is not clear when the switch from taxing to subsidisingagriculture observed in the process of economic development will occur.

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Anderson, K., Hayami, Y. et al. (1986), The Political Economy of Agricultural Protection:East Asia in International Perspective, Allen & Unwin, Sydney.

Arfff, M. and Hill, H. (1985), Export-oriented Industrialisation: The ASEAN Experience,Allen & Unwin, Sydney.

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Glassbumer, B. (1985}, 'Macroeconomics and the Agricultural Sector', Bulletin ofIndonesian Economic Studies, 21 (2), 51-73.

Honma, M. and Hayami, Y. (1986), 'Structure of Agricultural Protection in IndustrialCountries', Journal of International Economics, forthcoming.

Medalla, E.M. (1979}, 'Estimating the Shadow Exchange ]Kate Under Alternative PolicyAssumptions', in R.M. Bautista, J.H. Power and Associates, Industrial PromotionPolicies in the Philippines, Philippine Institute for Development Studies, Makati,Philippines, 79-125.

Meyanathan, S. and Sivalingam, G. (1986), 'Malaysia', in A. Booth, C. David et al., FoodTrade and Food Security in ASEAN and Australia, ASEAN-Australia Joint ResearchProject, Kuala Lumpur and Canberra, 37_84.

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Previous titles in the ASEAN-Australia Economic Papers series:No. 1 Christopher C. Findlay, Australian international civil aviation policy

and the ASEAN-Australia dispute, 1983No. 2 Ken Tucker, Greg Seow and Mark Sundberg, Services in ASEAN-

Australian trade, 1983

No. 3 Ow Chin Hock and Lim Chong Yah, The development of ASEAN: aperspective on relations with Australia, 1984

No. 4 Hal Hill, Australian direct investment in Philippine manufacturing, 1984No. 5 Stuart Macdonald and Thomas Mandeville, Telecommunications in

ASEAN and Australia, 1984

No. 6 Clem Tisdell, Tourism, the environment, international trade and publiceconomics, 1984

No. 7 Peter J. Rimmer, Consultancy services: supply to Southeast Asia fromAustralia, 1984

No. 8 Mingsam Santikarn, Trade in technology: ASEAN and Australia, 1984No. 9 Simon Bell, Trade between northwest Australia and Southeast Asia,

1984

No. 10 Bruce Glassburner, ASEAN' s 'other four': economic policy and economicperformance since 1970, 1984

No. 11 Ken Tucker, Greg Seow and Mark 8undberg, ASEAN-Australian trade intourist services, 1984

No. 12 F.D. Gallagher and 84. Meyrick, ASEAN-Australia liner shipping: a cost-based simulation analysis, 1984

No. 13 Rodney Tyers and Prue Phillips, Australia, ASEAN and Pacific Basinmerchandise trade: factor composition and performance in the 1970s,1984

No. 14 Craig Emerson, Mining taxation in ASEAN, Australia and Papua NewGuinea, 1984

No. 15 Hal Hill, Australia-Phih'ppine economic relations, 1984No. 16 John V. Langdale, Information services in Australia and Singapore, 1984No. 17 David Pope and Peter Shergold, ASEAN-Australian immigration and the

demise of 'White Australia', 1985No. 18 Garry Rodan, Singapore's "second industrial revolution': state inter-

vention and foreign investment, 1985No. 19 Christopher Findlay, Prue Phillips and Rodney Tyers, China's merchan-

dise trade: composition and export growth in the 1980s, 1985No. 20 Peter G. Wart, Export processing zones in the Philippines, 1985No. 21 Rodney Tyers and Kym Anderson, Economic growth and agricultural

protection in East and Southeast Asia: implications for internationalgrain and meat trade, 1985

No. 22 Pang Eng Fong, Labour market changes and industrialisation in Singa-pore, 1985

No. 24 Chic Slow Yue, Singapore-Australia economic relations, 1986No. 25 M. Ariff, R. Gamaut, H. Hill and Pang Eng Fong, ASEAN-Australia

economic relations: recent developments and future prospects, 1986

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