7:44 AM May 28, 1996

PHILIPPINES: MYTHS AND PERILS OF LIBERALIZATION

by Kevin Watkins*

London May (Focus/TWN) -- We are all free traders now, or so the world's agriculture ministers would have us believe. Since the Uruguay Round trade agreement, no meeting has been complete without a liturgy on the virtues of market principles for agricultural production and trade. Images of a level playing field, on which all farmers compete without help of government subsidies, are recited with all the evangelical fervour reminiscent of a born-again community gripped by a vision of the promised land -- in this case, a world free of trade barriers.

The Philippines has been recently visited by the spirit of the new order.

Earlier this month, the Speaker of the House of Representatives, Jose de Venecia, was moved to push through a tariff bill which, by removing quantitative restrictions on imports, will accelerate the rate at which producers are exposed to world market competition.

There was precious little debate, perhaps because the stakes were seen as too high. The Speaker offered apocalyptic warnings about the threat of trade sanctions should the Philippines fail to open its markets, contrasting this bleak prospect to the future of rising prosperity and efficiency offered by trade liberalization.

The upshot is that farmers in the Philippines have been locked into the global agricultural trading system.

Contrary to the view of Speaker de Venecia, however, that system is not governed by market principles, but by the farm policies of the European Union (EU) and the US. These farm superpowers continue to plough vast subsidies into their agricultural systems, generating the surpluses which dominate international trade.

Liberalization in the Philippines will expose local farmers not to a mythical level playing field, but to unfair competition from these surpluses. It is competition which, left unregulated, will destroy livelihoods on a vast scale and leave the country increasingly dependent upon food imports.

Of course, Northern governments too profess their faith in so-called free-trade principles. There is, however, a gulf between principle and practice. The facts tell their own story. Last year, the equivalent to half the value of farm output was spent on subsidies. This year, the European Union's spending on cereals exports is expected to increase despite a rise in world prices and despite the Uruguay Round agreement. The reason: direct export subsidies have been replaced by income transfers to farmers of the type used in the US.

The apparently arcane distinction between those two types of subsidy is important. Under the Uruguay Round agreement, "direct payments" to producers of the type used in the US and, since 1992, in Europe do not count as subsidies, even though they enable farmers to produce at far higher levels than would otherwise be the case. This helps to explain why the US and the EU, unlike countries such as the Philippines, will not be required to substantially reduce their overall level of subsidization under the new World Trade Organization (WTO) regime.

And since, in the looking glass world of farm policy, direct payments do not count as export subsidies, the ability of other countries to protect their producers through anti-dumping duties will be severely curtailed.

The inequity built into the new WTO regime defies credibility. Currently, each farmer in the US, the main source of cereals imports for the Philippines, receives over $16,000 in subsidies. To put this figure in context, it is around thirty times the average Filipino income.

Even this situation, stark as it is, tells only part of the story. Recently, I had an opportunity to visit smallholder corn farmers in Mindanao. They are among the two million households who depend on that crop for their livelihoods. Most were farming around one hectare or less, working with the most basic inputs and no capital. The infrastructure upon which they depend for access to markets was grossly inadequate.

During our meetings, I asked why they believed the US could export corn to Manila at prices up to 30% lower than they could compete with. Most shook their heads in disbelief, or put it down to American ingenuity. None of them were aware that the US government provides around $5 billion annually in subsidies to its maize producers, enabling them to export at prices which - while "unsubsidized" on the WTO definition - are far lower than most staple food producers in developing countries can compete with.

What these producers did understand, unlike most of the legislators sitting in Manila, was that increased competition from cheap imports would compound their poverty, forcing many to leave the land in search of work elsewhere.

Presumably, the Philippine government regards this prospect with relish. After all, the medium-term agricultural plan envisages a reduction by half in the 2.5 million hectares now planted to corn, and much of which the government wants to see transferred to livestock production. The underlying assumption, left unstated for political reasons, is that imports will fill the gap left by declining production.

All of which is good news for the US Department of Agriculture (USDA), which has been systematically cultivating the Philippines as a lucrative agricultural export market. Two years ago, a USDA report predicted that "In the absence of sustained investment in infrastructure ..... the Philippines could become a regular corn importer by the end of the decade," and that the US would capture a growing share of the market. More recently, the US embassy in Manila and the Cargill Grain Corporation has been actively lobbying for the passage of Speaker de Venecia's tariff bill. Thinly-veiled threats of trade sanctions have been cleverly deployed to overcome resistance.

As a result, corporate America can expect to make huge commercial gains in the Philippine market. The losers will be corn producers in Mindanao and the Cagayan Valley. Western and Central Mindanao are the poorest and second poorest regions respectively in the Philippines. The Cagayan Valley is not far behind, with over 40% living around the poverty line. As the trickle of cheap corn imports turns into a flood in the years ahead, the dampening effect on local markets will undermine household incomes, with potentially terrifying social consequences.

The problems are not restricted to corn.

Since the mid-1980s, the US has been systematically developing the Pacific Rim as a dumping outlet for its agricultural surpluses. The Philippines has figured prominently.

In the early 1990s, the US was using its Export Enhancement Program to provide $1.4 in export subsidy for every $1 worth of wheat imported, (by the Philippines from the US) helping to create markets for everything from wheat-based bread to pizza dough and noodles. Over the past decade, imports of wheat into the Philippines have doubled to over 2 millions tons, and the country has emerged from modest beginnings to become the US's fifteenth largest customer, spending over $700m annually on agricultural imports.

Over the coming years, countries in the Pacific Rim can expect an increasingly aggressive US export drive. Market projections suggest that two-thirds of the global increase in demand for farm exports up to 2000 will occur in the region - and the US intends to take the lion's share. By the end of the decade, the USDA anticipates that export receipts will have risen by $14 billion, and that the Pacific Rim will be absorbing two-thirds of all US farm exports.

It is not difficult to see why the US sets such great store by expanding its commercial outlets for farm exports. After all, the $2.3 billion surplus on the agricultural trade account plays a vital role in containing the country's chronic trade deficit. Moreover, agricultural trade remains a surplus item even in US trade with southeast Asia. There is an obvious strategic interest in expanding that trade.

Precisely what strategic interest of countries such as the Philippines have in following the African route to dependence on food imports is less obvious. The warning signs are there for all to see. Per capita production of maize and rice have stagnated, and structural deficits in rice - amounting to 800,000 tons over the past five years - now appear to be an accepted part of the landscape. Embarking on a mindlessly extravagant exercise in market liberalization will further erode the incentive to invest in staple food production, and expand the market for imports.

So, what is the alternative? Part of the answer is to be found in public investment. Current levels of expenditure on agricultural infrastructure are grossly inadequate, amounting to 6% of total government spending. That is less than half of the ASEAN average. Rural feeder roads are in a dilapidated condition in most rural areas, post-storage facilities are non-existent. Inevitably, such conditions have the effect of excluding producers from market opportunities.

Ultimately, however, no amount of public investment in the Philippines is going to compensate for the effects of US and European export dumping. That is why the Philippine government should reconsider its obligations under the WTO, and re-think its obsession with rapid import liberalization. Perhaps a negotiating strategy in which market access for US agricultural imports was made contingent upon America reducing its farm subsidies to the level of the Philippines would be a step in the right direction.

More fundamentally, in a world market dominated by subsidized exports, there is no economic rationale for liberalizing markets and exposing vulnerable producers to unfair competition. The fact that the WTO effectively permits agricultural export dumping while prohibiting the same activity in other sectors, reflects the extent to which the pursuit of US and EU self-interest have perverted the multilateral system. It does not constitute grounds for governments to impose on their citizens trade reforms which threaten national food security.

Finally, the people of the Philippines have a right to expect that their legislators will protect their interests, rather than pursue those of US agricultural exporters. Free market platitudes and legislation born of back- room deals between the US embassy, the Cargill grains corporation and its friends in Congress, are not the answer. What is needed is a genuine public debate about the future direction of Philippine agriculture, and about the realities of the world market into which it is being integrated.

(*Mr. Kevin Watkins is a senior policy adviser at OXFAM UK-Ireland and is author of several books about structural adjustment, debt and trade liberalization. His most recent works include the books "Fixing the Rules: North-South Issues in International Trade" (1992) and "The OXFAM Poverty Report" (1995).)