Productivity Growth in Philippine Agriculture Project 1

Inception Report

INCEPTION REPORT

The Nature, Sources, and Causes of Productivity Growth in Philippine

Agriculture
Productivity Growth in Philippine Agriculture Project 2
Inception Report

LIST OF FIGURES
Figure 1: Schematic on determinants of productivity growth..............................................6
Figure 2: Project Organizational Chart..............................................................................11

LIST OF TABLES
Table 1: Estimates of TFP growth for selected Asian countries, last two decades (%).......1
Table 2: Program of Work..................................................................................................12
Table 3: Sources of funds, in millions of pesos.................................................................13
Table 4: Project budget, in millions of pesos.....................................................................13

LIST OF ACRONYMS

DA-BAR Department of Agriculture – Bureau of Agricultural Research

PhilRice Philippine Rice Research Institute
SEARCA Southeast Asian Regional Centre for Graduate Study and Research in
Agriculture
TFP Total Factor Productivity
Productivity Growth in Philippine Agriculture Project 1
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1. INTRODUCTION
Philippine agriculture performed relatively well in the 1960’s and 70’s, but faltered in the
following decades. Several trends portended its stagnation: production increases in
almost all crops decelerated, expansion in cultivated area began to decline, real
commodity prices dropped, and gains from the Green Revolution approached exhaustion.
Policy-related factors may have also played a role, such as the sharp decline in public
investments for agriculture. Cross-country studies suggest that total factor productivity
(TFP) growth in the Philippine agriculture has been negligible to negative from the
1980s, in contrast with the good to impressive performance of other countries in the
region (Table 1).

Table 1: Estimates of TFP growth for selected Asian countries, last two decades (%)

(1) (2) (3) (4)

Philippines -0.3 0.4 -1.3 0.1
Afghanistan -0.1
Iran 3.2
Iraq -1.2
Saudi Arabia 2.2
Syria 1.9
Turkey 0.1
Yemen 2.4
Bangladesh 1.3 1.1
India 2.4 -1.1
Nepal 2.1 1.2
Pakistan 2.5 2.7
Sri Lanka -0.9 -0.2
Cambodia 2.0
Indonesia -0.4 -1.1 1.5
Laos 2.5
Malaysia 1.4 1.5
Thailand 1.1 1.4 0.9
Vietnam 3.3 1.0
China 4.8 3.6
Mongolia -0.5

Notes and Sources:

(1) Avila and Evenson (2004): 1981 - 2001
(2) FAO (2004): 1980-2000
(3) Cororaton and Caparas (1999): 1981 - 1996
(4) Mundlak, Larson, and Butzer (2002): Philippines 1980-1998; Indonesia 1981-
1988; Thailand 1981-1995
Productivity Growth in Philippine Agriculture Project 2
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Nevertheless the critical role of agriculture in economic progress remains widely

recognized. About 37% of the labor force is still engaged directly in the sector; over two-
thirds of the poor depend, directly or indirectly, on agriculture for livelihood and
sustenance. Hence, the country’s success or failure in winning the war against poverty
would be decided by how household income from agriculture can increase. Given rapid
population growth and the closure of the land frontier, such increases in income can
originate only from productivity growth. This remains a critical challenge given the
productivity slowdown in Philippine agriculture in recent decades.

Recently, a major research project on analyzing productivity growth in Philippine

agriculture has been launched by SEARCA, DA-BAR, and PhilRice. The project
addresses the following questions, which are key issues in defining a strategy for
accelerating agricultural growth:

• What explains the past performance and how do these influence the future sources of
agricultural growth?

• What are the key policy and investment levers needed to spur and sustain growth
across commodities and geographic areas?

• How do institutions and governance structures influence the patterns of agricultural

growth?

• How do emerging structures of global and regional trade, as well as communication

and information technologies, influence the sources and patterns of agricultural
growth?

• How can agricultural growth be made more broadly based so that its impact on
poverty reduction is enhanced?

The project meets two major challenges: the first is to quantify the determinants of
productivity growth in such a way as to be instrumental for policy and investment choice.
For example, while a standard productivity growth analysis may underscore the
importance of total factor productivity, what is really useful for policymakers is the
impact of an investment lever – say, funding for public agricultural research – on
productivity growth. The second challenge, which is common to empirical work on
Philippine agriculture, is unavailability and inadequacy of data. Addressing this requires a
two-pronged approach: one is to devise data collection systems to address the remediable
gaps; the other is to innovate analytical methods to maximize the information that could
be generated from official surveys and administrative data.

Meeting these challenges divides the project into three stages. The first stage involves
extensive preparatory work, which entails the following: evaluation of the statistical
system and identification of critical data gaps; a review of the literature to synthesize the
state-of-the-art in productivity analysis; and analytical work to formulate new empirical
methods. The second stage involves application, which entails: piloting new data systems
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to test its value and feasibility for integration in regular systems; implementation of
empirical techniques for in-depth study of the agricultural sector, major agricultural
commodities, and cross-cutting themes. By the end of the second stage, substantive
results and recommendations are already available for formulating policies and strategies.
Lastly, the third stage covers the scientific and policy review process, in which the
research is finalized for national and international publication and dissemination. The
entire project is programmed for three years, with each stage running for one year.

The rest of this Inception Report discusses in detail the objectives (Section 2), the
framework (Section 3), the components and activities (Section 4), and finally the
institutional arrangements and funding (Section 5).

2. OBJECTIVES
As the title indicates, the project aims to determine the nature, sources and causes of
productivity growth in Philippine agriculture. More specifically, the objectives of the
project are:

i) To measure productivity growth in Philippine agriculture and disaggregate the

sources of growth;
ii) To develop data collection systems and analytical approaches appropriate to
Philippine conditions;
iii) To examine the determinants of productivity change over time;
iv) To identify policy and investment levers relevant for formulating development
strategies for the agricultural sector.

The first objective is the straightforward starting point of the analysis. However,
productivity estimation is constrained by availability of data, especially of the type and
form that is uniform over long period of time. This problem has long hindered the
application of existing models or tools. This leads to the second objective; the systems
and techniques developed would lay the groundwork for a sustained and institutionalized
system of gathering information and performing analysis that would establish and track
the performance of Philippine agriculture over time.

Apart from measuring productivity change, the project also aims to examine the
determinants of productivity change over time, both for the aggregate and sub-
sector/commodity levels, accounting for Objective iii). Note that the measurement and
estimation techniques should also account for the endogeneity of some parameters that
explain technical change.

Analysis of these determinants leads to the fourth objective, which are specific policy and
investment levers required to lift and sustain the productivity growth path of Philippine
agriculture and its major sub-sectors. It focuses not only on proximate factors of
productivity growth (such as R&D investment), but also to deeper determinants,
including: policies, e.g. in trade and marketing; institutional change, e.g. agrarian and
property rights reform; infrastructure development; changes in the environment, e.g.
resource degradation in farmlands, uplands, and coastal areas; and finally, economic and
Productivity Growth in Philippine Agriculture Project 4
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technological trends, e.g. globalization, and the rise of information and communications
technologies.

3. FRAMEWORK

3.1. Measuring productivity growth

The idea of “productivity growth” hinges on a simple distinction between various ways
of increasing output. Output can be raised by increasing inputs; for instance in
agriculture, more harvest can be obtained by expanding farm area and adding farm
workers. A more interesting source of output increase though is improvements in
productivity, that is getting more output from the same inputs. This is closely associated
with better production techniques. As far back as Malthus, economists have understood
that food supplies would run out in the face of a growing population, if farm output could
only grow by adding more inputs. In fact the reason why the Malthusian scenario has
failed to materialize is that output did manage to grow despite land constraints, owing to
improvements in productivity.

Despite its conceptual appeal, productivity growth has posed major challenges to
empirical measurement. The literature has addressed these challenges in various ways
(see Annex 1 for details). One comprehensive approach is the estimation of production
functions. However it requires strong assumptions on modeling and availability of data.
Another, more parsimonious approach is “growth accounting”, which makes even
stronger assumptions about market structure and technology. The choice of utilizing one
particular approach is guided by the availability of data, area of analysis, dimension of
the study, or simply analytical convenience.

For Philippine agriculture, productivity growth studies date as far back as Hooley, which
covered the prewar period. Lawas (1965), Paris (1971), David and Barker (1979), David,
Barker and Palacpac (1985) and Evenson and Sardido (1986) analyzed postwar
agricultural data to identify subsequent changes in agricultural productivity growth. More
recent evaluation of productivity performance include that of Patalinhug (2001) that
reviewed the program components of the Medium term National Action Agenda for
Productivity (MNAAP) which was formulated to promote globally competitive
agriculture, industrial and services sectors. Teruel and Kuroda (2004) meanwhile used
agricultural data set up to 2000 to empirically investigate the nature of Philippine
agricultural productivity growth.

3.2. Determinants of productivity growth

Figure 1 represents a conceptual framework for understanding productivity growth (See
Annex 1 for technical details). Consider the basic production function, where inputs are
narrowly defined in the conventional manner, corresponding to land, labor, equipment,
(primary inputs), as well as seed and chemicals (intermediate inputs). These inputs are
used at the primary production stage to yield output, which is then converted into
agricultural value added via a series of product market transactions along a supply chain.
Other than conventional inputs, some determinants of the input-output production process
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are factor of production outside the immediate control of the producer (i.e. quasi-fixed
factors). The former may include factors such as infrastructure, environmental or natural
resource services, human capital, and so on. Transformation of inputs into outputs, and
then into economic values through markets, allows one to measure productivity growth.

There are various sources of productivity growth. First and most straightforward is an
increase in quasi-fixed factors, leading to an increase in physical output given fixed
conventional inputs. Second, with respect to aggregative analysis of agriculture as a
whole, a structural change that alters sectoral composition can change the level of
productivity. For instance, a shift in resources from low-productivity to high-productivity
sectors, can raise aggregate productivity, even in absence of productivity growth in the
sub-sectors. Third, lagged prices affect the choice of production technology, which could
therefore affect productivity growth. Fourth, the translation of products to economic
values is strongly affected by transaction costs. The latter can denote a tangible
“friction”, such as transportation cost and spoilage. These costs drive a wedge between
farm and market prices, both in the output and factor markets, hence affecting the
translation of factors into value added. Fifth, the coordination of output and input
decisions within the production process is strongly affected by uncertainty, risk,
asymmetric information, and strategic behavior. Hence underlying the market process are
institutional factors, including asset endowments (which affect investments in new
technologies), as risk instruments (such as insurance), legal systems (for contract
enforcement), and trust networks. The latter mitigate risk and reduce intangible forms of
transaction cost.

Ultimately we wish to relate policy and investment levers on productivity growth. First,
policies can more directly affect productivity growth through market channels. For
instance, trade liberalization exposes domestic agriculture to competitive pressures to
increase productivity; it also allows reduces the cost of inputs embodying the latest
technologies (i.e. chemicals, seeds, machinery). Other, indirect channels is through the
quasi-fixed factors and transaction costs discussed above.
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POLICY AND
PRODUCTIVIT INVESTMENT
Y GROWTH LEVERS

DIRECT
CHANNEL

MARKETS OTHER
CHANNELS
- supply chain
- composition TRANSACTION
COST

QUASI-FIXED
PRODUCTION FACTORS

Figure 1: Schematic on determinants of productivity growth

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The research would measure indicators along the transmission chain, as well as estimate
the quantitative links between these indicators. Hence it would transcend traditional
analysis that would identify the TFP as a component of growth, without attributing TFP
to policy handles such as R & D investments. The estimation process should cover both
productivity growth in agriculture as a whole, and productivity growth disaggregated by
major commodity, with consistency imposed throughout. Some more technical issues that
need to be resolved in the course of implementation are: the use of simultaneous equation
systems or commodity-specific single equations; choice of functional form; reduced form
versus structural estimation; possible imposition of a parsimonious parameter and
functional structure; and other issues related to the estimation procedure.

4. ACTIVITIES AND OUTPUTS

4.1. Components
Achieving the study objectives requires the following activities, which structure the study
into four components: 1) Development of empirical methods; 2) Case studies; 3)
Commodity studies; 4) Cross-cutting issues.

Component 1: Development of empirical methods

This component focuses on the development of empirical method and approaches to
understand productivity growth in a regime of imperfect data. The main sources of
information on Philippine agriculture would be the Bureau of Agricultural Statistics data,
as well as the Census of Agriculture. The former are generally area-based data, while the
latter incorporates farm-level information. The latter may be a more reliable source, but is
decadal (the last was conducted in 2000). There are also a number of farm-level surveys
or area-based data sets scattered in the literature, which could be used for productivity
analysis. Conducting agricultural productivity analysis under such data-sparse conditions
is a problem to be tackled in general terms under this component. Some topics to be dealt
with under this component include the following:

• A survey of the theoretical and econometric literature on estimating productivity

growth;

• A review of the empirical literature on agricultural productivity growth in the

Philippines;

• A review of statistical system in the Philippines, its strengths and weaknesses, and
recommendations for improving data collection, processing, and presentation.

• Special topics for bridging gaps in the data, such as but not limited to:
- Interpolation for missing years in time-series data;
- Small area estimation for increasing the resolution of geo-referenced data
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Component 2: Case studies

The case studies would involve empirical work, i.e. collection and analysis of primary
data, to test some of the innovative methods suggested under component 1. Data
collection can take the form of small-scale or even provincial or regional surveys. The
intention is to pilot new data systems to be institutionalized in the regular administrative
and statistical systems towards a sustained generation of the indicators for tracking
agricultural performance, productivity growth, and its sources.

Component 3: Commodity studies

This component covers commodity and sub-sectoral studies on productivity growth. The
following are the major categories to be covered; italics denote the priority commodity
types under each category.

1. Grains – rice, corn

2. Traditional export crops – coconut, sugarcane; abaca, tobacco
3. High value crops – banana, pineapple, mango; vegetables
4. Livestock and poultry – chicken, hogs
5. Aquaculture – seaweed, shrimp, tilapia, milkfish

Each study would consist of: i) a commodity profile covering both production and the
supply chain; ii) a complete set of commodity-specific data and indicators for conducting
productivity growth analysis; iii) qualitative analysis of growth determinants; and
possibly, iv) estimation of links between policies and productivity growth.

Component 4: Cross-cutting themes

Cross-cutting themes to be tackled under this component are as follows:

1.1. The research and extension system

1.2. Institutions and Social Capital
1.3. Infrastructure
1.4. Landscape/Environment
1.5. Human Capital
1.6. Transaction costs
1.7. Estimation of productivity growth for agriculture
1.8. Science frontiers and implications for agricultural productivity growth
1.9. Overview, synthesis, and prospects

Themes 1 to 6 are factors derived from the framework (Section 3.2). Each of these are to
elaborate the following: i) components, profile, and trends; ii) transmission channels to
productivity growth; iii) measurement issues; iv) indices for productivity analysis; v)
evaluation and recommendations. Themes 7 to 9 examine agriculture as a whole: Theme
7 is the technical estimation, Theme 8 looks forward to future sources of growth, and
Theme 9 summarizes the findings and recommendations of the project.
Productivity Growth in Philippine Agriculture Project 9
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4.2. Approaches and expected outputs

Based on the project components, the project will be conducted through literature
reviews, compilation and analysis of secondary data, theory-building, collection of
primary data, as well as statistical and econometric analysis. The study will actively
involve young researchers, particularly faculty and graduate students, whose work would
simultaneously build their capacity in productivity analysis and the economics of
agricultural development. Peer review would be integrated into the work through
workshops with both national and international experts, editorial work and refereeing
within the project, as well as submission of the work to peer-reviewed journals.

The project aims to inform policy and investment decisions; hence, its findings would be
would be disseminated to policymakers and other stakeholders through non-technical
communication materials, such as policy briefs; these briefs will be disseminated at the
conclusion of each Phase of the project (see Section 4.3). In sum the expected output of
the projects are as follows:

1) Monographs on commodity studies and cross-cutting issues – to be published by

SEARCA.
2) Articles in peer-reviewed journals.
3) Book on agricultural productivity – this volume synthesizes the project studies
and is intended for global and national distribution, in partnership with a local and
foreign publisher. It will serve as a reference for both policymakers and
researchers, as it would contain both policy evaluation and technical analysis of
productivity growth.
4) Expanded pool of young researchers doing empirical work on agriculture.
5) Policy briefs and other communications –dissemination would be both through
printed matter and the internet.

4.3. Time frame

The project is expected to last 3 years, beginning March 2007 (with possible extension to
5 years.) Each year corresponds to a phase of the project, with activities described as
follows:

Phase 1 (first year) - Benchmarking

This first phase involves literature review and two workshops, an inception and a
planning workshop, to answer the questions “Where are we?”, “Where do we want to
go”, and “How do we proceed?” The first wave of studies will cover data and data
sources, including gaps and ways of enhancing information; review of literature;
research/knowledge gaps in terms of productivity growth studies; and detailed work plans
covering the remaining phases of the study. The monthly program is shown in Table 1.
The planning workshop in the last row covers identification and programming of
activities for Components 2 to 4, as well as Phases 2 and 3 of the project, hence a more
detailed timetable would be developed then.
Productivity Growth in Philippine Agriculture Project 10
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Phase 2 (second year) – Research

The main body of the research will be conducted in the second phase. This entails model
formulation, data collection, field work, statistical analysis, etc. The expected output of
the second wave of studies will present the initial results of the empirical work.

Phase 3 (third year) - Finalization

The third phase involves finalization of the research, as well as synthesis of the research
findings, that would identify the nature, sources, and causes of productivity growth of
Philippine agriculture, along with policy and investment levers for accelerating
productivity growth. Results will be reviewed and integrated in the final project
conference workshop. Writing, editing, and publication of the expected project outputs
will be completed in this stage.

5. IMPLEMENTATION

5.1. Institutional arrangements

Oversight of the project will be exercised by the Project Coordinator, the SEARCA
Director, as well as a Steering Committee composed of the Directors of SEARCA, BAR,
PhilRice. An internationally recognized expert in the field of agricultural productivity
would serve as a Project Adviser, who will participate in the Planning and Final
Workshop, as well in the review of selected aspects of the project. Project management
will be exercised by the Project Manager based in SEARCA, who will be supported by a
full-time research assistant. Additional administrative coordination will be exercised by
the Research Services and Consulting Services Departments of SEARCA, represented by
their respective managers. The organizational chart for the project is shown in Figure 2.
Research will be carried out with partner institutions, with study leaders (either senior or
junior researchers) based in these institutions. Preferred partners would be statistical
agencies (BAS) and academic institutions with graduate students who can conduct parts
of the research as part of their thesis.

5.2. Funding
Project cost is estimated at PhP 18.0 M for the three-year study period, from core
contributions of BAR, PHILRICE and SEARCA (Table 2). Based on Table 1 and 2, the
milestones are:

Inception Report draft – April 2007: First release

“First Wave” studies – December 2008: Second release
Draft of “Second wave” Studies – December 2008: Third release

The budget for the project, by activity and phase, is shown in Table 3. The travel and
honorarium of the Project Adviser would be mobilized from external sources.
Productivity Growth in Philippine Agriculture Project 11
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Steering Committee

Project Coordinator
SEARCA Director

Project Adviser

Research Project management Consulting

Services Project Manager Services
Division Research assistant Division

Study leaders Study leaders Study leaders

Figure 2: Project Organizational Chart

Productivity Growth in Philippine Agriculture Project 12
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Table 2: Program of Work

Activity 2007 2008 2009 2010

q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1
Inception Report *
Inception workshop *
Component 1 reviews *
Submission of 1st wave studies X
Planning workshop *
Component 2, 3, 4 research * * * *
Submission of 1st drafts – 2nd wave studies X
Final workshop *
Revisions *
Submission of final drafts 2nd wave studies X
Publication * * *
Productivity Growth in Philippine Agriculture Project 13
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Table 3: Sources of funds, in millions of pesos

Year 1 Year 2 Year 3

Total
BAR 2 3 3 8
PhilRice 1 2 2 5
SEARCA 1 2 2 5
Total 4 7 6 18

Table 4: Project budget, in millions of pesos

Total Year 1 Year 2 Year 3

General costs 3.8 1.1 1.4 1.3
Grants:
Component 1 1.0 1.0 0.0 0.0
Component 2 5.0 1.5 2.3 1.2
Component 3 5.0 1.5 2.3 1.2
Component 4 2.2 1.0 1.0 0.2
Total 18.0 6.1 7.0 3.9
Productivity Growth in Philippine Agriculture Project 14
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Annex: Measuring Productivity Growth

The first attempts to measure productivity growth relied on simple approaches, such as
the productivity ratio (Kendrick, 1961). A more rigorous approach represents productivity
in terms of production function (Solow, 1957), which leads to parametric estimation of
given functional forms (Christensen, Jorgenson, and Lau, 1973; Lau and Yotopoulos,
1989; Boskin and Lau, 1992). Such estimation would require data on production, inputs,
and (in dual approaches), input and output prices.

The production function became the basis of more general, nonparametric approaches
represented by growth accounting, the third approach to measuring productivity growth.
Consider a production function of the following form:

Yi  Ti Fi ( Xi ; Zi ) . (1)

Here i is a commodity index, Yi the level of output, Xi a vector of conventional input

quantities, Zi a vector of quasi-fixed factors, Ti a technology index (represented by shift-
neutral parameter), and  a production function. Technology is represented by a Hicks
shift-neutral parameter. Suppose the output price is normalized (to unity). Let the real
factor prices be w j , where j is an factor index; let the share of factor j in output i be
denoted sxij , and suppose factor prices equal the marginal products at equilibrium. Finally,
denote growth rates of outputs, factors, and technology by corresponding lower-case
notation. Totally differentiating (1), keeping quasi-fixed factors constant yields:

yi   j sxij xij  ti (2)

Hence, TFP growth can be measured as a residual after subtracting the weighted average
of factor growth. However this residual is admittedly a “measure of ignorance” rather
than a true productivity measure. It could include measurement error, omitted variables,
and a stochastic disturbance term. Jorgenson and Grilliches (1967) and Denison (1972)
implemented various techniques to adjust inputs for quality changes, to better isolate the
productivity component of the residual.

When growth accounting is applied to aggregate output or sectors, one can analyze
structural change (Jorgenson, 1988). Growth in measured productivity may be due in part
to a change in composition from products with low TFP to those with high TFP. One way
to formalize this is to define total agricultural output as Y   i Yi (Warr, 2006):

Let s yi be the share of commodity i in total agricultural output. Total differentiation

yields:

y   i s yi ti   i s yi f i (5)
Productivity Growth in Philippine Agriculture Project 15
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That is, aggregate sectoral growth can be decomposed into a weighted average of TFP
growth by commodity, plus a weighted average of production growth (sans the TFP
component).

A more general formalization follows Mundlak, Larsen, and Butzer (1997). This time let
i denote production technique, such that we write i (xi ; z i ) ; let pi the output price for the
ith technique; let the technique, output and factor price vectors be F , p and w, where T is
a set of feasible techniques. The Lagrangian equation for the optimization problem is:

L  p F (x; z )  w x    z  z 0 ) (6)

subject to F  T , x  0 z  0 , where T is a set of feasible technologies. Let S be a vector

of state variables for the problem, such that S  (z, p, w, T) . The Kuhn-Tucker conditions
allow us to write the implicit functions xi  xi (S) . Hence we can write F(x* ; z ) or F (S) .
* *
Productivity Growth in Philippine Agriculture Project 16
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stochastic frontier production function models, ” Journal of Econometrics 6:21—37.

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Boskin, M. And L. J. Lau..1992. “Capital, Technology, and Economic Growth,” in N.

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Christensen, Laurits R., Dale W. Jorgenson and Lawrence J. Lau, 1973, "Transcendental
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