A compelling business case of rural development

There is a strategic link between poverty reduction and markets. Market size and growth are important to business as they affect profits and investment scale.

The business community needs to get involved in shaping public policies.  More especially, poverty reduction. After all, businessmen and entrepreneurs are the main investors, job creators and—directly and indirectly—major tax generators.

Poverty and markets

There is a direct correlation between poverty and markets. In 2007, I joined a business mission to Vietnam organized by the UA&P’s (University of Asia and the Pacific) Top Executive Program in Business Economics. An expert from a top research firm in Vietnam claimed that the middle class in Vietnam was bigger than that in the Philippines. Demand for packaged products (such as toiletries, for example) was bigger.

This was surprising as the population and land areas of the two countries are similar. Besides, the average per capita income in Vietnam was half of that of the Philippines. World Bank data confirmed this. And yet, the poverty rate in Vietnam was significantly lower at less than 15 percent.

Deeper research shows that poverty in the Philippines continues to persist. About 40 percent of the rural folk are poor, about three times the incidence of urban residents. This means nearly 20 million farmers, fishers and rural workers have little purchasing power.

What does 26.5 million mean to consumer markets? That is more than the size of the middle class (Class C) as defined by market research firms. The official poverty threshold of about P230 per family per day pays only for basic needs—food and little more. There is little left for non-basics: toiletries, clothes and accessories, packaged foods, eating out, and savings. The lower the income, the higher the gap.

There are no precise estimates on foregone business sales but the numbers run into hundreds of billions. Just increasing the family income by a modest P50 per family per day means a staggering P127 billion in sales.  Imagine the new investments and jobs to satisfy these consumer needs!

The bets

Development experts claim that raising farm productivity, diversification, and increasing nonfarm jobs are levers in reducing poverty. Let us go into specifics.

Productivity

Low farm productivity is widespread in the country. Coconut yield is barely 40 nuts per tree as compared to three to four times  for the new hybrids developed by the Philippine Coconut Authority. By contrast, the new breeds of competitor oil palm yield an equivalent of seven times of oil per hectare than traditional coconut trees. There is a strong basis for more hybrid seed farms and less reliance on the traditional varieties.

Coffee productivity is abysmally low (less than 0.3 tons of beans per ha.) as compared to 2.4 tons per hectare in Vietnam. Corn yield is less than 3 tons compared to 4-5 tons in Thailand and Vietnam. Rubber productivity is only a third of that of Thai farmers. Rice is not doing badly at about 3.8 tons per hectare compared to 5.3 tons per hectare in Vietnam.

Competitive farms co-exist with subsistence farms. These are Cavendish pineapple, oil palm, and some areas of rice, corn, sugar, rubber and fruit farms. The low yield shows that there is a compelling basis for more research and development, and technology transfer to the farms.

Diversification

Anemic crop diversification is reflected in the low export intensity of the Philippines. Agri-food exports are three to eight times larger in Vietnam, Indonesia, Malaysia and Thailand. Low exports mean low rural buying power and foregone job opportunities. Coconut export is way below its potential. Natural rubber export is embarrassingly miniscule despite large areas for development.

The country is also a food importer. It imports about three-fourths of palm oil, coffee and cacao—crops that can be grown here. The country has comparative advantage in tree crops. The sector needs investments.

Land use

Travels from Cagayan to Zamboanga show large tracks of idle and underused private and public lands. Most glaring are the lands under senile coconut trees as well as ancestral domains and brush land in public lands. The private sector can invest in these lands provided these lands are consolidated, and farmers are coordinated. Public lands can be used for tree crops. Convergence among the Departments of Agriculture, of Agrarian Reform and of Environment and Natural Resources is best exemplified in investment promotion.

Nonfarm jobs

Agriculture alone cannot provide full employment to the rural work force.  Excess labor must move from agriculture to industry, especially in manufacturing. What is often overlooked is that processing of farm products is part of manufacturing. The fast-food business is one whole chain from farming to processing to restaurant services. Processing has high job-creation potential. Sadly, low productivity and weak diversification result in the scarcity of raw materials and, in turn, low capacity utilization of plants from coconut mills to fruits and rubber processing

Additionally, infrastructure, irrigation, extension and farmers’ training, and financing are key supports to these strategic directions.

P-Noy’s great legacy

A most enduring legacy of P-Noy would be how much of rural poverty will be reduced from 40 percent today. Lowering rural poverty to say 25 percent by 2016 will be very dramatic with millions of people lifted out of poverty and joining the ranks of a dynamic consumer sector. It is a tough target but it should be a main gauge in P-Noy’s dashboard toward the straight path. This is real inclusive growth.

Development agencies must rally behind this target and soul-search their respective contributions. In the meantime, the business community must help in proposing solutions to help the President. Then, the President’s success will become a business success.

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is the executive director of the Center for Food and AgriBusiness of the University of Asia & the Pacific. Feedback at [email protected]. For previous articles, visit <map.org.ph>.)