The Effects of Industrialization To The PDF

A Study on the Effects of Industrialization to the Agricultural Sector of a Developing Country
Philippines
A Research Paper
Presented to the
Economics Department
De La Salle University Manila
In Partial Fulfilment
Of the Course Requirements in
Basic Econometrics (ECONMET)
Submitted to:
Dr. Cesar Rufino
Submitted by:
Benette Louie E. Rivera
11147148
September 2013
Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines
Abstract
The Philippines have been well known as an agricultural country. However, the
Philippines was recently stated by IRRI as the worlds largest importer of rice. How can such
agricultural country lack the supply to sustain its own agricultural needs? In this paper, the
researcher would like to find out if industrialization has an effect on the agricultural
production of a developing country using Guadagnos (2012) constant determinants of
industrialization. Results show that industrialization actually improves the agricultural
production of a developing country.
BENETTE LOUIE E. RIVERA
2013
Table of Contents
Abstract ..................................................................................................................................................................... 2
Introduction ............................................................................................................................................................ 5
Statement of the Problem .............................................................................................................................. 6
Objective and Significance of the Study ................................................................................................... 6
Review of Related Literature ............................................................................................................................ 7
The Determinants of Industrialization in Developing Countries ....... Error! Bookmark not
defined.
Theoretical Framework ...................................................................................................................................... 8
Classical Linear Regression Model - Ordinary Least Squares (OLS)............................................. 8
Violations in Classical Linear Regression Model (CLRM) ................................................................. 9
Distributed-Lag Model - Autoregressive Models............................................................................... 11
Research Approach ........................................................................................................................................... 11
Data Presentation .............................................................................................................................................. 12
Description of Dataset and A-priori Expectations ............................................................................ 12
Table 1. Dataset, 1961-2011 ................................................................................................................. 12
Table 2. A-Priori Expectations.............................................................................................................. 15
Descriptive/Summary Statistics .............................................................................................................. 15
Table 3. Summary Statistics, using the observations 1961-2011 .......................................... 15
Graph 1. Crop Production Index Frequency Distribution.......................................................... 16
Graph 2. Size of Domestic Market Frequency Distribution ....................................................... 17
Graph 3. Trade Openness Frequency Distribution ....................................................................... 18
Graph 4. Underdeveloped Manufacturing Base Frequency Distribution ............................ 18
Methodology ........................................................................................................................................................ 19
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Initial Regression ........................................................................................................................................... 19

Model 1: OLS, using observations 1962-2011 (T=50) ................................................................ 19
Test for Omitted Variable Bias ................................................................................................................. 20
Table 4. Ramseys RESET ....................................................................................................................... 21
Test for Multicollinearity ............................................................................................................................ 21
Table 5. Variance Inflation Factor (VIF) ........................................................................................... 21
Test for Autocorrelation ............................................................................................................................. 22
Table 6. Durbin-Watson Test ................................................................................................................ 22
Feasible Generalized Least Squares (FGLS) ........................................................................................ 22
Model 2: Cochrane-Orcutt, using observations 1963-2011 (T = 49) .................................... 23
Model 3: Prais-Winsten, using observations 1962-2011 (T = 50) ......................................... 24
Model 4: Hildreth-Lu, using observations 1963-2011 (T = 49) .............................................. 25
Graph 5. Hildreth-Lu Plot (ESS against rho) ................................................................................... 25
Analysis of Results ............................................................................................................................................. 26
Conclusion and Policy Recommendations ............................................................................................... 28
Bibliography......................................................................................................................................................... 29
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Introduction
The Philippines have been well known in Asia as an agricultural exporting country.
The top agricultural exports being exported by the domestic market are coconut oil, fresh
bananas, tuna, and pineapple. 75% of the coconut oil being exported go to USA and
Netherlands, 62% of fresh bananas being exported go to Japan and China, 47% of tuna being
exported go to USA and Germany, and 52% of pineapple products are exported to USA and
Japan (Country Statistics Philippines, 2013). However, in 2008, the Philippines became the
largest importer of rice in the world, importing 1.8 million tons (World Rice Statistics, 2013).
What is the reason of an agricultural country that exports millions of metric tons of
agricultural products import a huge amount of rice?
According to the International Rice Research Institute (2013), there are three reasons
why the Philippines is importing rice land area, population growth, and infrastructure. The
Philippine population is estimated to be around 97 million and growth rate of around 2%
(World Development Indicators, 2013). Since consumers from the Philippines have high
demands for rice, the increase in population has led to the shortage of rice supply. In 1991,
the Philippines had a total 5.487 million hectares of arable land and in 2012, the area of
arable land decreased to 5.4 million hectares. This is due to rapid urbanization of most areas
in the Philippines. IRRI also stated that the irrigation infrastructure in the Philippines is not
being used very efficiently.
Population growth, urbanization, and infrastructure these are some of the
indicators that a country is experiencing industrialization. Industrialization refers to the
structural change that backward countries experience in their development process from an
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agricultural to an industrial economy (Kuznets, 1973). From the definition given by Simon
Kuznets, it clearly states that industrialization will make countries revert from being
agricultural to being industrial. Industrial in terms of shifting to agrarian to manufacturing.
Statement of the Problem
The researcher of this paper aims to answer the following questions:
What is the effect of industrialization to the agricultural sector of a developing

country like the Philippines?
If such effect exist, is it positive or negative?
What are the determinants of Industrialization that will directly affect the agricultural
production of the Philippines?
Is agriculture better off or worse off when there is industrialization?
What are the policy and recommendations that can be made in order to address such
problem?
Objective and Significance of the Study

This paper aims to find out whether there is a relationship between an
industrialization of a country and its agricultural sector. It also intends to find out whether
industrialization has a positive or negative externality on agriculture.
This study will be significant because it address a very crucial part of a developing
country, specifically, industrialization. It tries to find consequences of industrializing a
developing country that started being agricultural in nature. Results from this study might
affect the economic decision making of policy makers in the country. Lastly, it will also
provide added literature to the agricultural literature of the Philippines.
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Review of Related Literature

Role of Manufacturing on Economic Growth
Manufacturing has been a huge factor in the upsurge of economic growth. In
Cornwalls (1977) model, he explained that the role of manufacturing output for the gross
domestic product growth of a country. He formulated the following model that explains the
role of growth of manufacturing output in economic growth:
= + 1 + 2 + 3 + 4 ( )
= + 1
The model presented above basically shows the effect of the growth of manufacturing
output and the power of this growth in the economic growth rate. This model will the
researcher determine that industrialization that is, growth of industry (manufacturing)
is indeed important in economic growth.
The Determinants of Industrialization in Developing Countries

In the preceding literature, it talks about the effect and importance of manufacturing
in economic growth. In this literature, Guadagno (2013) found out in her research paper,
Determinants of Industrialization in Developing Countries, that the constant determinants of
industrialization are underdeveloped manufacturing bases, trade openness, and the size of
the domestic market. She found out that these determinants constantly measures the
industrialization of a developing country. She used a panel data regression and analysis
which consist of numerous empirical procedures and corrections in order to arrive at the
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discussed results. She also discovered that undervaluation and technological backwardness
only mattered from year 1970 to 1995 which makes these determinants not consistent as a
measure of industrialization. Moreover, absorptive capacity and technological capabilities,
and technological level only became critical after 1995.
This literature will help establish the researchers theoretical framework which
assumes that the constant determinants of industrialization are clear measures of the
industrialization process of a developing country. These determinants, namely, trade
openness, size of the domestic market, and underdeveloped manufacturing bases, will be
used to assess its effect to the agricultural production of a developing country.
Theoretical Framework
Classical Linear Regression Model - Ordinary Least Squares (OLS)
The Classical Linear Regression Model, specifically, Ordinary Least Squares is a
regression model that yields the best, linear, unbiased, and efficient estimator which is
proved by the prominent Gauss-Markov Theorem. It is also the cornerstone of most
economic theories for it gives empirical proof on the validity of economic models (Gujarati,
2003).
As presented by Gujarati (2003), the k-variable linear regression model specifically
follows the following form:
= 1 + 2 2 + 3 3 + + +
For = 1
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The variables are the independent variables of the regression model that
regresses their overall individual effect on the dependent variable, . is the coefficient of
the independent variables of the regression model it provides the numerical value of a unit
or percentage change in the independent variables to the dependent variable.
This regression model will be very important in determining the effects of
industrialization to the agricultural sector of a developing country Philippines. Using the
determinants of industrialization in the regression model underdeveloped manufacturing
bases, trade openness, and the size of the domestic market which was discussed in the
preceding section of the paper, the effects and significance of the determinants will be
assessed.
Violations in Classical Linear Regression Model (CLRM)

In the Classical Linear Regression Model (CLRM), there are certain violations that
most models are infested with, namely, Heteroscedasticity, Autocorrelation, and
Multicollinearity (Gujarati, 2003).
Multicollinearity, is the exact and perfect relationship between two variables of a time
series and a cross-sectional regression model. It indicates that the estimates are very
sensitive to small changes in data. Having perfect Multicollinearity means that an
independent variable is highly related to another independent variable which is highly
dangerous in making economic inferences about the model. Multicollinearity is mostly
present in all regressive models because most economic data and variables are related to
each other. However Multicollinearity does not take away the characteristic of OLS being
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BLUE. It depends on the severity of Multicollinearity whether to remove a variable or use

other regression tools such as Ridge Regression and Principal Component Analysis.
Heteroscedasticity violates the assumption of the CLRM where the model should be
Homoscedastic, that is, equal variance. This violation will make OLS not the best linear
unbiased estimator. There will also be a general breakdown of interest if such violation is
existent. The presence of Heteroscedasticity in OLS estimation will make some of the
independent variables statistically insignificant where in fact it is actually significant if it
were established on the basis of WLS (Weighted Least Square) estimator (Gujarati, 2003).
Note that Heteroscedasticity is infests only cross-sectional data and panel data, thus, this
violation is eliminated in the model that will be used in this paper.
Autocorrelation on the other hand is the presence of correlation between members
of series of observations ordered in time (Gujarati, 2003). Autocorrelation signifies that
there is a violation of the CLRM assumption, serial independence of errors. Such violation
will make the statistical inference OLS not BLUE (Best Linear Unbiased Estimator) for the
error terms will affect a different variable where it should not. Presence of autocorrelation
may also indicate that there is Mis-specification of Models, Inertia, Outliers, and
Manipulation of Data. Autocorrelation will also make statistical inference inefficient and
narrow confidence intervals which will make a wrong and/or misleading inference. Most
time series models are highly infested with autocorrelation, thus, it will be assumed that this
violation is highly present in the model that will be presented in this paper.
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Distributed-Lag Model - Autoregressive Models

In regression analysis involving time series data, if the regression model includes not
only current data but also lagged values of the explanatory variables, it is called a distributedlag model and if the models include one or more lagged values among the explanatory
variables, it is called an autoregressive model (Gujarati, 2003).
Since a lagged value is present in the model in this paper, namely, underdeveloped
manufacturing base, the model may be considered as an autoregressive model. However, in
Guadagnos (2012) Determinants of Industrialization in Developing Countries, 1960-2005, the
underdeveloped manufacturing base has a different objective it will capture the catching
up or cumulativeness of the industrialization process. Therefore, autoregressive
assumptions will not be used in this paper. However, if autoregressive assumptions and
violations persist in the model presented, the researcher is highly incapable of addressing
these problems since the scope of this paper only deals up to the Classical Linear Regression
Model (CLRM), specifically, Ordinary Least Squares (OLS).
Research Approach
The size of the domestic market, trade openness, and underdeveloped manufacturing
bases are consistent determinants of industrialization (Guadagno, 2012). These
determinants will be used as the independent variables of the regression model and the Crop
Production Index will be used as the dependent variable. The regression model will take the
following form:
= 1 + 2 + 3 + 4 +
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The research will mainly focus in finding out the effect of the industrialization
determinants on the agricultural production of the Philippines. The main tool for regression,
testing for the overall significance, testing for CLRM violations, and remedies for CLRM
violations of the model will be the state of the art statistical programs, Gretl and Stata.
Data Presentation
Description of Dataset and A-priori Expectations
The data that will be used in the Classical Linear Regression Model will be a time
series data retrieved from World Banks Development Indicator of the Philippines with a
time period of 1961 to 2011. The succeeding table shows the data that will be used for the
model.
Table 1. Dataset, 1961-2011
Year
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Size of Domestic
Market
(Logarithmic Form
of Total Population)
Underdeveloped
Manufacturing Base (Lag
Value of Manufacturing)
[logPop]
17.11738
17.15057
17.18335
17.21544
17.24669
17.27708
17.30674
17.33588
17.36477
17.3936
17.42241
17.45115
17.47976
17.50816
17.53628
17.56413
[lagManu]
3,652,063,744.00
4,100,992,256.00
4,781,964,800.00
5,040,827,392.00
5,344,000,000.00
5,900,000,000.00
6,467,000,000.00
7,065,000,000.00
7,561,000,000.00
9,833,000,000.00
12,322,000,000.00
14,165,000,000.00
18,115,000,000.00
24,034,000,000.00
27,713,000,000.00
Trade Openness
(Exports and Imports as
percentage of GDP)
[Openness]
26.6173219123025
36.1823405555882
35.5710587081842
36.6760489159446
38.3428394570456
38.7490955864619
40.5696747389303
36.3934975699682
32.5025709273486
42.6213739685111
40.8684519811954
39.1497710922171
44.6559899006209
52.3737238762093
48.1278369615563
44.5755477120689
Crop Production
Index (20042006=100)
[CropIndex]
29.83
31.73
32.89
33.13
33.24
34.11
34.63
34.49
36.37
38.7
40.19
39.42
40.68
43.65
50.18
54.88
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1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
17.59175
17.61923
17.64666
17.6741
17.70153
17.72889
17.75618
17.7834
17.81049
17.83749
17.86432
17.89079
17.91667
17.94182
17.96618
17.98984
18.01297
18.03576
18.05837
18.08079
18.10296
18.12487
18.14648
18.16775
18.18872
18.20939
18.22958
18.24908
18.26778
18.28562
18.30275
18.31944
18.33606
18.35288
18.36995
32,330,000,000.00
36,993,000,000.00
43,538,000,000.00
51,019,000,000.00
62,654,000,000.00
71,829,000,000.00
79,608,000,000.00
89,472,000,000.00
129,171,000,000.00
143,851,000,000.00
149,958,000,000.00
169,627,000,000.00
204,784,000,000.00
230,163,000,000.00
267,485,000,000.00
315,938,000,000.00
326,839,000,000.00
349,595,000,000.00
393,810,000,000.00
438,247,000,000.00
495,389,000,000.00
540,305,000,000.00
692,597,069,284.90
761,325,534,915.01
876,107,422,402.04
959,245,205,900.53
1,036,674,114,587.95
1,120,770,718,064.99
1,226,258,979,966.97
1,365,694,816,617.17
1,481,321,703,328.77
1,567,696,647,888.36
1,760,890,277,741.11
1,706,390,509,461.50
1,930,779,011,601.61
45.1842888670411
45.6044580236653
48.1976343026121
52.0437006921054
51.0053409849572
46.4702673901323
49.4208525592221
49.0972980908746
45.9090408352757
48.7026328366347
52.8635077420602
55.3318267928957
58.3805178919524
60.8002695785607
62.1849486903561
63.1579531489191
71.1664700971273
73.9595565563177
80.5385343064958
89.7999559836863
108.2503174007300
98.6622441794711
94.9094562564434
104.7298597796020
98.9089410764351
102.4350803036770
101.8493334400240
102.6425208344840
97.8785492281432
94.9408258696763
86.6194088996960
76.2822665667580
65.5903846395359
71.4194912697743
67.0399520935093
56.12
57.84
59.4
61.43
63.08
65.96
60.08
61.54
63.87
68.28
66.39
65.8
67.93
75.69
74.69
76.64
77.21
79.18
79.12
84.26
83.81
75.5
81.63
84.63
87.87
90.61
93.95
97.95
100.45
101.61
108.76
113.03
112.34
112.32
114.3
Source: World Bank, World Development Indicators (2013)
Crop Production Index (CropIndex) shows agricultural production for each year
relative to the base period 2004-2006. It includes all crops except fodder crops crops that
are used to feed livestock (World Development Indicators, 2013). It will be used as the
dependent variable in order to acquire the effect of the industrial determinants on the total
agricultural production. Since agricultural production is measured as an index number,
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expressed in quantity, the analysis will be a change in quantity produced by the agricultural
sector when industrialization persist over a given period of time.
The size of the domestic market (logPop) is mainly the total population of the
Philippines taken in logarithmic form. The population catches most of the demand for
agricultural crops in the Philippine market. In economic theory, the higher the demand for a
certain good, the higher will be the supply produced by a firm. Therefore, the higher the
population, more people will demand for agricultural products. Hence, it is expected that the
size of the domestic market is positively related with Crop Production Index.
Trade Openness (Openness) is the sum of total exports and imports of goods and
services measured as a share of gross domestic product (World Development Indicators,
2013). Trade Openness measures the availability of a country to exchange with other
countries. The higher the share of exports and imports on gross domestic product, the higher
the demand for agricultural crops will be. Therefore, it is expected that Trade Openness will
have a positive relationship with Crop Production Index.
On the other hand, undervalued manufacturing bases (lagManu) has a different
construction. Undervalued manufacturing bases is the lagged of the manufacturing. In
Guadagnos (2012) research, he discussed that the lagged value of manufacturing captures
catching up or cumulativeness in the industrialization process. Since the term
industrialization refers to the structural change of countries experience in their
development from agrarian to industrial economy (Kuznets, 1973), the relationship between
Crop Production Index and undervalued manufacturing bases is expected to be negative.
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Table 2. A-Priori Expectations

Indicator
Crop Production Index
Trade Openness
Undervalued Manufacturing
Bases
Size of Domestic Market
Variable Name
CropIndex
Openness
lagManu
Sign
Dependent Variable
(+)
(-)
logPop
(+)
Descriptive/Summary Statistics
Table 3. Summary Statistics, using the observations 1961-2011
Variable
Openness
CropIndex
lagManu
logPop
Mean
61.8815
67.2822
4.25289e+011
17.8062
Median
52.3737
65.9600
1.46905e+011
17.8375
Minimum
26.6173
29.8300
3.65206e+009
17.1174
Maximum
108.250
114.300
1.93078e+012
18.3699
Variable
Std. Dev.
Skewness
Ex. kurtosis
Openness
CropIndex
lagManu
logPop
23.6501
25.1206
5.58729e+011
0.377376
Coefficient of
Variation
0.382184
0.373362
1.31376
0.0211936
0.615508
0.208174
1.32351
-0.197338
-0.976037
-0.943875
0.480683
-1.20170
Generated by Gretl.
The table above shows that the domestic market is very open to trade since the
average share of exports and imports in gross domestic product is around 61.9%. This
indicates that most of the goods and services that contributes to gross domestic product are
open to trade. This value may also indicate a higher demand for agricultural product in the
Philippines. Thus, increasing the assumption that the expected relationship between trade
openness and agricultural production is positive.
From the summary statistics, it can be observed that Crop Production Index and the
size of the domestic market is almost symmetric because their median and mean are closely
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equal. The closeness of the symmetry of the two variables can also be supported by their
skewness, which is very close to 0.
Graph 1. Crop Production Index Frequency Distribution

0.016
CropIndex
N(67.282,25.121)
Test statistic for normality:

Chi-square(2) = 3.104 [0.2118]
0.014
0.012
Density
0.01
0.008
0.006
0.004
0.002
0
0
20
40
60
80
100
120
140
CropIndex
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Graph 2. Size of Domestic Market Frequency Distribution

1.2
logPop
N(17.806,0.37738)

Chi-square(2) = 6.353 [0.0417]
Density
0.8
0.6
0.4
0.2
0
17
17.5
18
18.5
19
logPop
From the preceding tables, it can be observed that Crop Production Index and size of
domestic markets standard deviation are relatively low. This indicates that most of the
observations are closer to the mean.
In the succeeding Frequency Distribution tables, it can be observed that Trade
Openness have a relatively high standard deviation due to the comparison of its frequency
distribution against its standard normal distribution. This indicates that the data points are
scattered all over a quite large range of values. Whereas in the frequency distribution of
underdeveloped manufacturing bases, it clearly shows that the distribution is positively
skewed (can also refer to table 3). It can also be observed that there is a huge disparity
between the highest value and the value next to it which may indicate a structural change
in the due to economic, political, or financial occurrences in the Philippines.
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Graph 3. Trade Openness Frequency Distribution

0.025
Openness
N(61.881,23.65)

Chi-square(2) = 17.106 [0.0002]
0.02
Density
0.015
0.01
0.005
0
0
20
40
60
80
100
120
140
Openness
Graph 4. Underdeveloped Manufacturing Base Frequency Distribution

2e-012
lagManu
N(4.2529e+011,5.5873e+011)

Chi-square(2) = 48.915 [0.0000]
1.8e-012
1.6e-012
1.4e-012
Density
1.2e-012
1e-012
8e-013
6e-013
4e-013
2e-013
0
-1e+012
-5e+011
5e+011
1e+012
1.5e+012
2e+012
lagManu
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Methodology
Initial Regression
Through the use of the statistical program Gretl, the following results were obtained:
Model 1: OLS, using observations 1962-2011 (T=50)
Coefficient
Std. Error
t-ratio
17.3738
p-value
7.75e022
constant
-954.869
54.9604
***
Openness
-0.123753
0.0383904
-3.2235
0.00233
***
lagManu
1.18896e011
1.51473e-012
7.8493
4.94-e10
***
logPop
57.5529
3.20081
17.9808
1.95e022
***
Legend: *** - significant at = 0.01.
Mean dependent var

Sum squared resid
R-squared
F(3, 46)
Log-likelihood
Schwarz criterion
rho
68.03120
499.6676
0.983412
909.0062
-128.4949
272.6379
0.590348
S.D. dependent variable

S.E. of regression
Adjusted R-squared
P-value(F)
Akaike criterion
Hannan-Quinn
Durbin-Watson
24.79363
3.295806
0.982330
6.20e-41
264.9899
267.9023
0.790498
Thus, giving the intital regression model:

= 954.869 + 57.5529 0.123753
+ 0.000000000012
The regression results indicate that all the independent variables namely, trade
openness, size of the domestic market, and underdeveloped manufacturing base are
statistically significant at 1% level of significance. This indicates that committing a Type I
error that is, accepting the null hypothesis where = 0 when is actually not equal to 0
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is very small. The results also show that the explanatory power of the model is 98.34%
because its R2 is 0.983412.
However, there cannot be further inference that can be conducted at this point due to
the assumption that the initial model (Model 1) is infested with CLRM violations. In addition,
there are symptoms in the regression results that indicate the presence of CLRM violations,
specifically, autocorrelation. According to Gujarati (2013), the Durbin-Watson statistic
should be closer to 2 in order for it to have non-autocorrelation. Since the Durbin-Watson
statistic is 0.790498 which is very far from 2, the initial regression model must be infested
with autocorrelation.
Conducting inferences using this model without corrected measures will give rise to
the inadequacy, inefficiency, and biasedness of the statistical and empirical results.
Therefore, further test for multicollinearity, omitted variable bias and autocorrelation will
be conducted in the subsequent parts of this paper.
Test for Omitted Variable Bias

In this part, the model will be tested if its explanatory variables are sufficient enough
to explain the model. The test for Omitted Variable Bias will indicate if there is an
independent variable that is not presented in the model but it is statistically significant. In
order to test whether there is Omitted Variable Bias in the initial model (Model 1), Ramseys
RESET (Regression Specification Error Test) will be used via Gretl.
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Table 4. Ramseys RESET

Ramseys Test For Specification
Null Hypothesis: specification is adequate
Test Statistic
F(2, 44) = 0.120845
P-value
P (F(2, 44) > 0.120845) = 0.886465

Generated by Gretl.
The results show that there is no Omitted Variable Bias present in the model. Having
a p-value lower higher than 0.05 means that we must accept the null hypothesis
specification is adequate. Thus, the model is adequate since the null hypothesis is not to be
rejected.
Test for Multicollinearity

To test whether Multicollinearity exist in the initial model, the Variance Inflation
Factor (VIF) will be used. VIF indicates that if the value is greater than 10, there exist a very
dangerous Multicollinearity between explanatory variables.
Using Gretl, the obtained results are,
Table 5. Variance Inflation Factor (VIF)
Variable
VIF
Openness
3.622
lagManu
3.321
logPop
6.260
The table above shows the existence of Multicollinearity in the model. Since all the
VIFs of all the explanatory variables are greater than 10 there exists no dangerous
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Multicollinearity it can be concluded that there is no direct linear relationship between the
independent variables of the initial model (Model 1).
Test for Autocorrelation

It is inevitable that Autocorrelation is highly present in the initial model. Symptoms
of autocorrelation already persist in the initial regression model. In this part of the paper, we
will further test whether autocorrelation is highly present using the Durbin-Watson Test.
Table 6. Durbin-Watson Test
Durbin-Watson
Statistic
Durbin-Watson p-value
0.790498
5.22603e-008
From the Durbin-Watson Test, it can be clearly verified that autocorrelation does
exist in the initial regression model. The Durbin-Watson p-value is less than = 0.05,
therefore gives the conclusion, the null hypothesis that is, homoscedasticity exists must
be rejected. The result also indicates that OLS is not BLUE and GLS (Generalized Least
Squares) is blue.
Feasible Generalized Least Squares (FGLS)

Feasible Generalized Least Squares is a remedy for autocorrelation it is where is
unknown. Unlike in GLS, where is known, this model (FGLS) is a much stronger remedy for
the sickness of time-series model autocorrelation.
There are three iterative models of estimating using FGLS, namely, Cochrane-Orcutt,
Prais-Winsten, and Hildreth-Lu. In the Cochrane-Orcutt iterative procedure, it will estimate
2013
22
until convergence is reached based on a criteria. While the Prais-Winsten will recover the
loss of the 1st observation in the Cochrane-Orcutt which makes it a better procedure. On the
other hand, Hildreth-Lu will use a grid search procedure where it will find the estimated
until found and will then simulate the GLS.
To cure the autocorrelation in the initial regression model (Model 1), FGLS will be
used and the three iterative models of estimating will be used. The results of the three
procedures will be compared with each other and will find the best procedure that will
address the problem of autocorrelation. The comparison will allow for the individual
prowess of each iterative models to successfully cure autocorrelation.
Using the Cochrane-Orcutt model we get,
Model 2: Cochrane-Orcutt, using observations 1963-2011 (T = 49)
Coefficient
Std. Error
t-ratio
const
-950.216
120.843
-7.8632
Openness
-0.0669603
0.0596853
-1.1219
lagManu
1.07221e-011 3.05644e-012
3.5080
logPop
57.1037
6.96625
8.1972
Iteration
RHO
ESS
s
1
0.5903 303.49
5
5
2
0.6235 302.78
8
3
3
0.6304 302.75
0
2
4
0.6319 302.75
1
1
5
0.6322 302.75
5
1
p-value
5.46e-010 ***
0.26786
0.00104 ***
1.78e-010 ***
Statistics based on the rho-differenced data:

Mean dependent var
Sum squared resid
68.77204
302.7506
S.D. dependent var

S.E. of regression
24.48503
2.593798
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23
R-squared
F(3, 45)
rho
0.989480
199.4094
0.082443
Adjusted R-squared
P-value(F)
Durbin-Watson
0.988778
5.37e-26
1.826497
From the model presented above, it took 5 iterations in order to arrive at

convergence. Through Cochrane-Corcutt procedure, the violation of autocorrelation has
been cured. The Durbin-Watson statistic is now closer to 2 which indicates that there is no
autocorrelation and there is serial independence of errors. The explanatory power of this
model is also very high because the R2 is 0.989480 which is very close to 1.
Using the Prais-Winsten model, we also get,
Model 3: Prais-Winsten, using observations 1962-2011 (T = 50)
const
Openness
lagManu
logPop
Coefficient
-864.22
-0.044998
1.22369e-011
52.1849
Iterations
1
2
3
4
5
Std. Error
100.595
0.0592496
2.88113e-012
5.83156
RHO
0.59035
0.64099
0.65230
0.65503
0.65569
t-ratio
-8.5911
-0.7595
4.2473
8.9487
p-value
4.04e-011
0.45145
0.00010
1.23e-011
***
***
***
ESS
312.539
310.407
310.224
310.196
310.196

Mean dependent var
Sum squared resid
R-squared
F(3, 46)
rho
68.03120
310.1898
0.989721
175.0329
0.087515
S.D. dependent var

S.E. of regression
Adjusted R-squared
P-value(F)
Durbin-Watson
24.79363
2.596778
0.989051
3.65e-25
1.807481
Based from the Prais-Winsten procedure, it also took 5 iterations in order to arrive at
convergence. The first variable was also recovered during the estimation. It is also very clear
2013
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that the violation of autocorrelation is now cured since the Durbin-Watson statistic is
1.807481 which is closer to 2. In addition, the explanatory power of this model is also very
high for its R2 is very close to 1.
Using the Hildreth-Lu model, we also get,
Model 4: Hildreth-Lu, using observations 1963-2011 (T = 49)
const
Openness
lagManu
logPop
Coefficient
-950.218
-0.066965
1.07221e-011
57.1039
Std. Error
120.837
0.0596839
3.0563e-012
6.9659
t-ratio
-7.8636
-1.1220
3.5082
8.1976
p-value
5.45e-010
0.26782
0.00104
1.78e-10
***
***
***
Iterations
RHO
ESS
1
0.63000 302.753
2
0.63182 302.751
3
0.63223 302.751
Graph 5. Hildreth-Lu Plot (ESS against rho)
1600
1400
1200
ESS
1000
800
600
400
200
-1
-0.5
0.5
rho
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25

Mean dependent var
Sum squared resid
R-squared
F(3, 45)
rho
68.77204
302.7506
0.989480
199.4304
0.082457
S.D. dependent var

S.E. of regression
Adjusted R-squared
P-value(F)
Durbin-Watson
24.48503
2.593798
0.988778
5.35e-26
1.826469
In the Hildreth-Lu model, it only took 3 iterations in order to arrive at convergence.

However, among the three iterative model, this model has the second highest value for the
Durbin-Watson statistic which is 1.826469. This strongly indicates that autocorrelation is
cured and the explanatory power of the model is also very high due to its R2 being very close
to 1.
From the three iterative models, Cochrane-Orcutt yielded the best results. It gave the
highest Durbin-Watson Statistic and the highest explanatory power. Since there are no
violations in this model, at this point, statistical inference, anaylsis, conclusion, and
recommendations may be conducted and will certainly be efficient, consistent, sufficient,
unbiased, and adequate.
Analysis of Results
Through the corrective measures conducted in the prior part of this paper, the final
regression model, using the Cochrane-Orcutt model, will be:
const
Openness
lagManu
logPop
Coefficient
-950.216
-0.0669603
1.07221e-011
57.1037
Std. Error
120.843
0.0596853
3.05644e-012
6.96625
t-ratio
-7.8632
-1.1219
3.5080
8.1972
p-value
5.46e-010 ***
0.26786
0.00104 ***
1.78e-010 ***
Legend: *** - significant at = 0.01.
2013
26
= 950.216 0.0669603 + 0.00000000001

+ 57.1037
From the results of the regression model, the trade openness of the Philippines is not
statistically significant in identifying the probable effects of industrialization of a developing
country (Philippines). In addition, the coefficient of trade openness is negative which is
counter-intuitive with our a-priori expectations. This may be due to the fact that when there
is higher trade openness, Filipinos tend to import more goods and services which reduces
the demand for domestic agricultural products. Although it is highly insignificant, trade
openness may indicate negative externality to the agricultural sector of the Philippines.
The size of the domestic market is statistically significant at 95% level of significance
= 0.01 and is in line with the a-priori expectations. It also gives empirical proof to the
economic theory where a rise in demand will result to a rise in quantity supplied by firms.
This result indicates that industrialization has a positive externality on agriculture.
Underdeveloped manufacturing base is also statistically significant at 95% level of
significance = 0.01 but it is counter-intuitive with the a-priori expectation. This result
may indicate agricultural industrialization in the Philippines. Agricultural industrialization
the system of chemically intensive food production developed in the decades after World
War II, featuring enormous single-crop farms and animal production facilities (Union of
Concerned Scientists, 2012). This indicates that the Philippines might be starting to
industrialize its agricultural sector due to a positive coefficient although it is very
infinitesimally small.
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27
Conclusion and Policy Recommendations

The constant determinants of industrialization, namely, size of domestic market and
underdeveloped manufacturing bases, have confirmed that industrialization is boosting up
the agricultural production of the Philippines, thus, the agricultural sector is slowly
improving in time. However, trade openness has a negative effect on the crop production but
is statistically insignificant in nature. Therefore, the constant determinants of
industrialization has an overall positive effect on the agricultural sector of a developing
country, specifically, the Philippines. This indicates that as industrialization persist in the
Philippines, agricultural production will also increase. Thus, the agricultural sector of the
Philippines will even prosper due to agricultural industrialization.
As for policy recommendations, the researcher would like to recommend that the
government give incentives to students to enrol in agricultural undergraduate degrees. This
will give more empirical and scientific research that will help the agricultural sector of the
Philippines improve its technology and techniques. Incentives like cash donations and future
grants will help induce secondary level graduates to enter an agricultural undergraduate
degree in college. The local government should prioritize in investments in agricultural
industrialization so that production of agricultural products will prosper. Lastly, opening
employment opportunities in agricultural-based firms will make the share of agriculture in
gross domestic product increase.
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Bibliography
Country Statistics Philippines. (2013). Retrieved from Bureau of Agricultural Statistics:
http://countrystat.bas.gov.ph/?cont=3
Guadagno, F. (2012). The Determinants of Industrialization in Developing Countries, 19602005.
Gujarati, D. N. (2003). Basic Econometrics. New York: McGraw-Hill.
Kuznets, S. (1973). Modern Economic Growth: Findings and Reflections. The American
Economic Review, 63(3): 247-258.
Union of Concerned Scientists. (2012, August). Retrieved from Food and Agriculture Industrial Agriculture: http://www.ucsusa.org/food_and_agriculture/our-failingfood-system/industrial-agriculture/
World Development Indicators. (2013). Retrieved from World Bank:
http://data.worldbank.org/country/philippines
World Rice Statistics. (2013). Retrieved from International Rice Research Institute:
http://irri.org/index.php?option=com_k2&view=itemlist&task=category&id=744&l
ang=en
2013
29

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A Study on the Effects of Industrialization to the Agricultural Sector of a Developing Country

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Initial Regression ........................................................................................................................................... 19

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

What is the effect of industrialization to the agricultural sector of a developing

If such effect exist, is it positive or negative?

Is agriculture better off or worse off when there is industrialization?

Objective and Significance of the Study

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Review of Related Literature

The Determinants of Industrialization in Developing Countries

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Violations in Classical Linear Regression Model (CLRM)

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BLUE. It depends on the severity of Multicollinearity whether to remove a variable or use

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Distributed-Lag Model - Autoregressive Models

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Source: World Bank, World Development Indicators (2013)

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Table 2. A-Priori Expectations

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Graph 1. Crop Production Index Frequency Distribution

Test statistic for normality:

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Graph 2. Size of Domestic Market Frequency Distribution

Test statistic for normality:

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Graph 3. Trade Openness Frequency Distribution

Test statistic for normality:

Graph 4. Underdeveloped Manufacturing Base Frequency Distribution

Test statistic for normality:

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Legend: *** - significant at = 0.01.

Mean dependent var

S.D. dependent variable

Thus, giving the intital regression model:

BENETTE LOUIE E. RIVERA

Effects of Industrialization to the Agricultural Sector of a Developing Country Philippines

Test for Omitted Variable Bias