The topic has not received that much attention in the past couple of years, but when the Philippines’ quarter-century experiment with land reform finally ends this coming June, it will have achieved an outwardly remarkable feat, as University of the Philippines Professor of Economics Raul V. Fabella explained in a paper published last month. By the expiration date of Republic Act 9700—the CARP Extension with Reform, or CARPER, which extended the original Comprehensive Agrarian Reform Law (RA 6657) of 1988—5.05 million hectares of the 5.37 million hectares targeted by the program will have been distributed, ostensibly accounting for 2.6 million new agricultural landowners with an average of 1.2 hectares each. The figures represent an astonishing 16 percent of the Philippines’ total land area of 30 million hectares, a program that dwarfs in size and duration the much-heralded land reform programs in Japan, Taiwan and South Korea.
It is worthwhile to point out these achievements now, because they will undoubtedly be part of the litany of self-congratulations of President B.S. Aquino 3rd in his State of the Nation Address shortly after the book is closed on CARPER. Lest anyone be taken in, though, Dr. Fabella’s paper points out that any gain is cosmetic at best—land reform as it has been pursued in the Philippines has been an utter failure. Even worse, it has left the country with a huge new set of social and economic problems that would not have existed without CARP.
Dr. Fabella’s article titled “Comprehensive Agrarian Reform Program (CARP): Time to Let Go” is available through the website of the UP School of Economics, and it is one of the clearest and most reader-friendly treatments of the subject to reach an audience in years. In it, Dr. Fabella stresses two (among many) key flaws of CARP and CARPER that doom the entire land reform program to failure. First, the proscription against a legal market for land assets in Section 27 of the CARP law, and second, the arbitrary five-hectare ceiling on land ownership, which virtually guarantees individual farms will be too small to be profitable.
The paper explains how making transfers (through sale, lease, or other means) of CARP-distributed land illegal until the land is fully-paid runs counter to an economic principle called the Coase Theorem. Contrived by Nobel Prize Winner Ronald Coase, the theorem essentially says that an initial transfer of an asset (such as a parcel of land) does not sacrifice economic efficiency for social and economic equity so long as the asset can voluntarily be transferred again by the recipient.
To paraphrase the example provided by Dr. Fabella, if rich farmer Pedro is compelled to transfer his land to poor farmer Juan, equity is served but economic efficiency is not (that is, society loses overall) if Juan is incapable of being as productive as Pedro. The inefficiency is corrected, however, if Juan is able to transfer his land—leasing or selling it back to the more productive Pedro, or to someone else. Juan is then able to earn a higher return for his asset, thus satisfying economic efficiency for his own sake (which, at the individual level, is the equivalent of asset equity), and also maintaining or even improving economic efficiency for society overall.
The restrictions on the scale of land holdings also works against farmers; total land retention is limited to five hectares, but the stipulation of the land reform laws placed a limit of three hectares on land awards, with actual awards being much smaller in practice. There are two problems here: First, the physical size of land parcels is below the minimum needed for credit-worthy productivity; knowing that a small plot of rice land is physically incapable of producing a profitable crop, banks and other formal credit sources regard it as unacceptable collateral. Second, the restrictions on land retention, both in terms of the allowable size and in beneficiaries’ legal inability to transfer the assets, further discourage lenders from offering credit support to land reform beneficiaries.
What has happened as a result is that the informal economy has stepped in to fill the legally-imposed gaps. Land reform beneficiaries are able to access informal credit, but at exploitative rates, even as high as the approximate cost of tenancy, which is around 70 percent. Likewise, an entire illegal land market has developed in spite of CARP’s restrictions, with all the problems of lack of transaction security and creeping lawlessness accompanying it.
Between the illogical and doomed-to-fail design of the Philippines’ land reform model and the exploitation of the informal economy, land reform beneficiaries must subject themselves to a survival strategy. An entire new class of underprivileged citizens has been created, according to Dr. Fabella: the “landed poor.” And basic economic indicators confirm this: Poverty rates as high as 54 percent in land-reform areas, dismal, sub-20 percent repayment rates to the government from land recipients, and a proportion of land given up by its recipients—whether through the illegal market or simply through abandonment—that ranges from 20 percent to over 50 percent in different parts of the country.
The concern now, with the imminent end of CARPER, is that the shallow success of the program in terms of simply “distributing nearly all the land that was supposed to be distributed” will be used as justification for some new version of the land reform program—CARPERER, maybe, as Dr. Fabella wryly suggests, or perhaps CARPEST. That, quite obviously, should not be allowed to happen. Whether it does or not, the recommendations of Dr. Fabella should be carefully considered and implemented as soon as possible: abolishing the restrictions on land transfers; raising the ceiling on land holdings to at least the productive area for different crops; and encouraging agro-industrial development by allowing legitimate enterprises (such as those listed on the Philippine Stock Exchange) to own and develop unlimited land areas for agricultural production. Socially-oriented asset equity is admirable, and in most cases, is probably morally right. But unless it also raises the standards of the recipients—and by extension, the country’s economy as a whole—it is probably worse than doing nothing at all.