Changing comparative advantage in Philippine rice production

This paper examines Philippine comparative advantage in rice production and whether government policies encourage the rice sector to exploit its advantage° Rice production has grown at 6°0 percent annually in 1970s. This growth has been due to yield increases from newer modern varieties and more fertilizer and to increases in irrigated area° Government policies have contributed to growth principally through irrigation investments. Irrigation is heavily subsidized but other price policies tax producers° Domestic rice prices are slightly below world prices and most input prices are above world levels. The distortion in net incentives however is not large° The net effect of government policy is to provide slightly positive protection for irrigated farms (3.6%) and slightly negative protection for rainfed farms (-4.7%). Rice production on both rainfed and irrigated environments is socially profitable in 1979. Although yields are higher on irrigated fields costs per unit of rice output are similar in rainfed systems° Government policies reduce private profitability in rainfed farms, but in social terms these farms are quite competitive. A comparison of the DRC for irrigated rice with the 1974 estimate of Herdt and Lacsina (1976) shows that rising yields have increased Philippine comparative advantage in rice. Future comparative advantage will depend on the relative growth of yields and irrigation costs. If capital cost per new hectare irrigated continues to grow at past rates, yields will have to increase at least 2°8 percent annually to maintain current comparative advantage° Although the Philippines has a comparative advantage in rice production, exports were unprofitable for the government marketing agency in 1977 to 1979. Government control of exports puts a barrier between world and domestic markets so that world quality premiums are not reflected in domestic prices. The domestic milling industry therefore has no incentive to become competitive in higher quality international markets. Inelastic demand for low-quality Philippine rice on world markets then limits profitable exports. If private traders were allowed to export, they should be able to respond to world market incentives to produce and export good quality rice at a profit.