The economic effects and food security impact of Philippine rice market interventions: an analysis using a CGE model
Creators: name: Mariano, Marc Jim
Publisher: name: Monash University
Year: 2017
Subjects: Uncategorized

description: The Philippines has been a net rice importer since the 1990s. Against a background of rapid population growth and a high dependence by the country’s rural poor on paddy production, recent price volatility in global rice markets has made food security a significant policy issue in the country. The main focus of the government’s food security agenda is the rice market, with self-sufficiency and price stabilisation being key goals. The centrality of rice in the government’s food security policy is understandable given the commodity’s dietary and economic importance. This thesis concerns the analysis of food security interventions in the Philippines. More specifically, I carried out policy simulations that investigate the impact – both for the broader economy, household welfare, and for indices of food security – of the following scenarios: (1) the removal of rice market price subsidies, (2) the removal of rice tariff import restriction, and (3) an external rice price shock to the domestic economy. To undertake the policy simulations, I developed a large-scale dynamic computable general equilibrium (CGE) model of the Philippine economy. This Philippine economic model is distinct from other CGE models for the Philippines because of the following modelling extensions: (1) a detailed treatment of agricultural land supply-use process, tracking the transition through time of agricultural land between competing land uses; (2) a three-stage demand structure of household food consumption, to better model inter-food substitution possibilities, particularly as they relate to food staples, so as to properly elucidate food security consequences of policy reform; (3) modelling of surplus agricultural labour, and the mechanism governing rural-urban migration, to better model the full economic benefits of agricultural policy reform; (4) multi-household top-down income-expenditure extension of the CGE model, in order to understand the distributional consequences of policies that affect relative food prices; and (5) modelling of a number of food security indices, in order to track the year-on-year policy-induced changes in national and household food security. For the price subsidy simulations, I investigated the effects of three policies: (1) the paddy ‘price floor’ which provides a subsidy on the sales of paddy, (2) the rice ‘price ceiling’ which provides a subsidy on the consumption of rice, and (3) a price subsidy on intermediate seed inputs used by paddy farmers. These government interventions are aimed at enhancing the incomes of small farmers through price support (in the form of the paddy price ceiling and input subsidy policies) while simultaneously lowering the price of rice to consumers (via the rice price floor policy). However, these programs have been criticised within the Philippines on the grounds of allocative inefficiency, poor targeting, and high public budgetary cost. Simulation results indicate that, as an exercise in demonstrating policy concern for the incomes of farmers and the food security needs of households, the three policies would appear to have a modest budgetary cost, while improving several measures of food security. The allocative efficiency gains available from ending the programs are small, and may be outweighed by the potential for adverse short-run macroeconomic consequences. Like the price subsidy interventions in the rice market, another favourite subject of public debate in the Philippines is whether or not the government should liberalise the domestic rice market. At present, rice remains as the most protected traded commodities in the Philippines, with a tariff rate ranging from 40 to 50 per cent. For my second simulation, I examine the national economic consequences and food security implications of permanently removing the tariff trade barrier in the domestic rice market. Macro results show that the removal of rice tariff enhances the country’s real GDP, and household’s real consumption particularly urban non-farming households. Removing the rice tariff import restriction also generates allocative efficiency gains. The economy becomes more efficient because: (i) workers are shifted from the agriculture sector, where returns to labour are relatively low, into the manufacturing sector, where returns to labour are relatively high, and (ii) land moves out from low-rent paddy agriculture into higher value uses in non-paddy agriculture. In terms of food security impacts, the removal of the tariff on rice imports generates a deterioration in two of the four food security indexes in the model. The results of the first two simulations support the argument that removing the existing rice tariff import restriction and price subsidy programs of the government generates allocative efficiency gains to the domestic economy. Despite the economic benefits of program removal, the government justifies these programs on the grounds that they insulate the domestic economy from unexpected price spikes in the international rice market. An interesting matter for policy evaluation therefore is to quantify the insulation benefit that the government rice interventions provide in such circumstances. To examine this question, I carried out a third simulation in which the Philippines is subject to an external rice price shock. I run this scenario against two alternative baselines: one in which the existing rice import tariff and price subsidy interventions are in place (the “with support” case), and one in which they have been removed (the “without support” case). Results indicate that, relative to the “without support” case, the economy is more insulated from the rice price spike under the “with support” case, reducing the real consumption loss from a 2008-like event by approximately 0.10 per cent. However the cost of insuring against these price spikes is significant. The estimated annual allocative efficiency cost of implementing the rice market interventions is approximately 0.40 per cent of real consumption. This thesis makes two broad contributions in the current literature. One relates to the methodological contribution, and the other relates to the policy simulations. The methodological contribution is the modelling extensions incorporated in the PhAGE model, which made it possible to evaluate the full effects of food security interventions. The policy contribution is an in-depth analysis of simulation results that identifies policy implications for the removal of existing price subsidies and import tariff in the Philippine rice market, and provides policy insights on the extent to which the government rice market support mechanisms insulate the domestic economy from external rice price shocks.