Professional Documents
Culture Documents
Roehlano M. Briones1
Assistant Professor
Economics Department, School of Social Sciences
Ateneo de Manila University
Katipunan Avenue, Loyola Heights, Q.C.
The slow implementation of land reform under the Comprehensive Agrarian Reform
Program (CARP) is allegedly a significant factor behind declining investment in
agriculture. There are two reasons behind this allegation: first, under CARP, traditional
landowner face greater uncertainty in realizing returns to agricultural investment; second,
CARP regulations erode the collateral value of land, thus cutting off bank finance of farm
investment. The evidence for the allegation however has been mostly anecdotal. This
study confirms the hypothesis of adverse investment impact using quantitative analysis of
primary data collected from traditional landowners. It therefore improves on previous
anecdotal evidence for the hypothesis. Moreover, the study identifies the main reason for
the negative impact to be the introduction of uncertainty, rather than the erosion of
collateral value of farm land. The findings buttress the call for faster implementation of
land reform under CARP.
1
I thank Cielito Habito, Joseph Lim, Ponciano Intal, and Arsenio Balisacan for their helpful comments.
Financial support for the study from the Department of Agrarian Reform is gratefully acknowledged. I am
solely responsible for the views presented here, as well as any remaining errors and omissions.
1
1. INTRODUCTION
directed not against the land redistribution per se, but rather in its sluggish
implementation. During the lengthy interim until the end of the Program, agricultural
investment is alleged to suffered dramatic decline. Low land valuation and uncertain
farm investment faces a more severe financing constraint as the collateral value of farm
land is eroded. Aside from anecdotal evidence, there is however little statistical support
for or against the hypothesized adverse impact on investment. Briones (2000) discusses
some of the relevant studies but concludes that their findings are of limited generality.
drawn from a sample of traditional landowners. The analytical method controls for other
factors determining investment. The findings of the paper are therefore supported by
The study confirms that finds that agricultural investment has indeed been
adversely affected by CARP. The main avenue for this effect is the prospective capital
loss inflicted by compulsory acquisition. On the other hand, erosion of farm land’s
Nevertheless the confirmation of the adverse impact buttresses the call for faster
grounds.
2
describes the survey frame and the sample respondents. Section 4 presents evidence on
The CARP, which was implemented from 1988 onward, is the culmination of
retention of five ha. of farm land. The Land Bank is authorized to forcibly acquire
agricultural land exceeding the retention limit for transfer to agrarian reform beneficiaries
(unless landowners themselves negotiate a land sale to their tenants.) Compensation is set
explain why, out of the total scope of 8 million ha., only 61% has actually been
distributed, 2 years after the legal deadline for completing the program (Table 1). Private
lands (for which the investment hypothesis is most relevant) has an even lower
land reform under CARP has been in the form of non-private agricultural land (i.e.
Table 1.
Scope and accomplishments of the land acquisition and distribution
component of the Comprehensive Agrarian Reform Progam, as of June 2000
1
A & D: Alienable and disposable
2
ISF: Integrated Social Forestry; CBFM: Community-based Forest Management
flow of net income. The income flow can be capitalized into a reservation price of the
land, below which a landowner will not voluntarily offer her land for sale. Current
investments, by raising land income over time, can therefore increase the reservation
price for the land. Transfer of ownership effectively truncates the flow of income at the
period of transfer. If landowner compensation is below the net present value of post-
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transfer income (i.e. the reservation price), then the landowner suffers a capital loss.
Hence, landowners are expected to oppose land transfer and scale down their investments
The foregoing argument can be easily formalized, e.g. Besley (1995). The
assets: that is, other factors constant, landowners who remain threatened by LAD should
have a smaller asset stock per ha. Hence, with adequate controls for other investment-
Aside from the prospective capital loss channel, land reform can affect
this channel rests on two premises: First, agricultural investment is heavily dependent on
formal finance. Second, such formal finance is in turn dependent on collateral in the
Collateral provides lending institutions a means of mitigating credit risks because of the
exchange value of the collateral itself. In the case of agriculture, the only significant asset
will be the land itself. However once the lending institution forecloses in the event of
default, the lending institution becomes the de facto landowner and automatically falls
under the Comprehensive Agrarian Reform Law (CARL or RA 6657). This creates
enormous complications because the CARL mandates that the foreclosed land must be
disposed only to the government, at a value determined solely by the government and
acted only upon the disposition of the government. Under these conditions, land as
collateral clearly loses its exchange value. As a result, the values of lands that may be
covered by the CARL are drastically eroded in the market. At such low prices, they could
not carry enough market value to be used as loan collateral. [Underscoring in the
original.]
prospective capital loss, and through land decollateralization. The rest of the paper is
devoted to ascertaining the significance of the investment impact through these channels.
5
The data of the study is obtained from a purposive sample of landowners in areas
planted to rice, corn, coconut, sugar, banana, pineapple, and mango (the country’s major
crops in terms of land area and production value.) Respondents are drawn from provinces
Table 2.
Provinces in the survey by crop and island group
coverage, as well as diversity in the size holdings of landowners. The provinces are
distributed throughout the major island groups. Information from the respondents was
elicited using a structured questionnaire. There are 100 respondents, classified by type of
crop accounting for the major source of farm income. The sample includes twenty each
for rice, coconut, and sugarcane, as well as ten each for corn, banana, pineapple, and
mango. They are distributed across the various size categories of the Department of
Agrarian Reform (DAR): small (5 ha. and below), medium (between 5 and 24 ha.), and
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large (24 ha. and above). The sample contains 29 small, 41 medium, and 30 large
landowners are referred to as proprietors. Note that these farm sizes denote total farm
landholding; for proprietors this would differ slightly from actual owned land (due to
Compliance with land acquisition and distribution (LAD) of the CARP is far from
complete among the affected proprietors (all of whom fall in the medium-large category.)
The total number of affected landowners is 53 (63% of the sample proprietors). Affected
landowners who have complied with land acquisition and distribution are referred to as
LAD-compliant, while those who have not complied are LAD-pending. The majority
(57%) of the affected proprietors are LAD-pending, For some, negotiations with the DAR
are already underway; other cases are not being acted upon by the DAR due to
Of the affected proprietors, close to a third claim to have escaped coverage due to
subdivision of the land, whether through the CARP itself (i.e. children are the identified
classified these as under a single landowner if one person (the identified proprietor)
As for the commercial farms, the survey covers four corporations each for banana
and sugarcane, three for pineapple, two for mango, and one for corn. Except for the
sugarcane farms and the corn farm, all have complied with CARP by entering leaseback
or contract growing arrangements. During field interviews it was the sugar planters who
7
were most vocal in their objections to CARP. They were nevertheless open to the
leaseback arrangement as the best compromise under the realities of an agrarian reform
regime.
hypothesis. After describing how data on productivity and investment are computed, the
section then presents some data summaries, undertaken separately for corporate farms
and proprietors (due to the large differences between these two categories). This is
The adopted measure of productivity is net income per ha. per year, equal to
revenue less out of pocket costs (and is therefore gross of the opportunity costs such as
the foregone capital and labor income). Data on incomes and costs all pertain to the crop
or assets per ha. Assets include farm equipment (at current market value), land
improvement (at current cost of investment), and trees (at current price of equivalent
timber wood, or valuation of such trees by the municipal assessor). Only assets attributed
to the current landowner is summed up to total assets (hence, for example, trees planted
Corporate farms
To present the productivity and asset stock of corporate farms (except for corn),
the classifications banana, other fruit (pineapple and mango) and sugarcane are adopted.
Net income of banana farms is highest in banana farms, at 119,024 pesos/ha. This is
8
followed by other fruit at 50,364 pesos/ha., while sugarcane had the lowest net income
per ha. at 29,974 pesos/ha. These figures are much higher than the net incomes per ha. of
proprietary farms. Meanwhile, capital stock is also largest in the banana farms, at
593,000 pesos/ha.; other fruits needed only 117,000 pesos/ha., while sugarcane needed
only 65,000 pesos/ha. These figures also dwarf the farm assets for proprietors.
requirements typically does not involve borrowing from banks. For five of the farms,
admittedly this may also be bank financed); in one corporate farm, the collateral used was
urban commercial property of the conglomerate. One sugarcane farm owner reported the
use of chattel mortgage, while three corporate farms who exported their produce used
their marketing agreements (i.e. the flow of prospective revenue) as collateral. Hence
“decollateralization” would seem to be only a minor setback for these corporate farms.
Proprietors
As for the sample proprietors, the following crop categories are adopted for the
tabulations: cereal (rice and corn), fruit (nontraditional export crops, composed of
banana, pineapple, and mango); and traditional (coconut and sugarcane). Table 3
presents productivity and assets of the sample proprietors by size category and LAD
compliance. The greatest capital intensity and farm incomes per hectare are found among
the small landowners (with the exception of income for the traditional category). LAD-
pending landowners are usually characterized by the lowest capital intensity and net
incomes.
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Table 3.
Net income and assets in pesos per ha. of sample proprietors, by LAD status
All Small LAD- LAD-
compliant pending
Assets
(Note that the first column summarizes data for all proprietors while the next two
affected proprietors have never borrowed from formal sources, even well before CARP
(the average farming experience of all proprietors is 32.6 years). Meanwhile, of those that
did borrow, the last credit episode occurred on the 5 years ago on the average. Neither do
Table 4.
Credit availment and potential collateral of sample proprietors, by LAD status
LAD-pending landowners who most often do so.2 Rather, collateral put up by borrowers
usually takes the form of residential property. To buttress this point, the bottom part of
Table 4 presents the ratio of total farm assets to total residential and commercial
properties of the affected landowners. On the average farm assets amount to less than a
2
On a case-to-case basis farmland within the retention limit of the borrowing landowner can be accepted
by some banks as collateral for an agricultural loan.
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tenth of total nonfarm properties; this diminutive ratio holds consistently across crop
capital; based on the survey data, only one fifth of the assets of the average proprietor
were financed by borrowing. Note that this figure applies to the entire history of asset
formation of the landowner, most of which began in the 1970s and 1960s, far earlier
than the implementation of land reform in areas outside rice and corn. The bulk of actual
farm investments were actually financed by savings, for any type of proprietor (and even
for some corporate farms). The proportion is slightly higher for LAD-compliant
capital per ha. than other landowners and have lower net farm incomes per ha. This is
probably not due to the fact that formal finance has become more difficult due to land
reform. It may be attributed to land reform’s threat of inflicting a capital loss; such
attribution cannot yet be rigorously supported. For one, low asset and productivity figures
for LAD-pending landowners, who are also the bigger landowners, may simply be a
and area are negatively correlated (Heltberg, 1998), hence it is not surprising to observe a
negative relationship between income and area or even capital intensity and area.
As simple data comparison based on LAD status obscures multiple factors determining
investment (such as farm size and type of crop), the paper now turns to multiple
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regression analysis in our attempt to control isolate the significance of LAD status in
The study adopts the ordinary least squares method to isolate the significance of
LAD status on farm investment. On the left hand side of the OLS equation is assets per
ha. On the right hand side are explanatory variables, the most important being a dummy
and NECIJA (Nueva Ecija); South Cotabato is omitted from the regression.3
The variables AGE, SCHOOL, NFINC, and NFPROP are applicable only for
proprietors and are set at zero for corporate farms; these variables may therefore be
regarded as interacted with the PROPRIETOR dummy. The rationale for the proprietor-
specific variables is to incorporate alternative asset types (including human capital) and
sources of income, that could assist in financing farm investment, given borrowing
constraints. On the other hand, YRFARM incorporates the time factor in the build-up of
capital stock. Finally, HHSIZE increases consumption ceteris paribus and constrains
The SHARE variable accounts for depressed incentives to invest in those land
portions where the owner is not a residual claimant. The crop dummies are intended to
adjust for differences in capital requirements across the major crop categories, owing to
introduce conditions common to a location but differing across locations; among these
conditions are the relative prices prevailing in a locality. Finally, AREA incorporates the
size and scale factor in determining the capital-land ratio, to account for non-
are: PROPRIETOR, HHSIZE, and SHARE. The others are either positive or are
3
Among the dummy variables pertaining to location, it is a standard technical requirement to drop one of
the locations so as to avoid linear dependence. The choice of South Cotabato for omission is arbitrary.
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Results of the regressions are reported in Table 5. The first column pair contains
the coefficients and t-values from the least squares regression. The estimated model has a
high goodness-of-fit. The variable of main concern, PENDING, has a negative and
significant coefficient, consistent with the investment hypothesis. The t-value is high
enough to pass a significance level of 5%. According to the regression, all other factors
constant, a landowner with facing LAD has a capital intensity lower by 54,475 pesos/ha.
on average.
As for the other explanatory variables: a proprietary status implies lower capital
intensity compared to a corporate status. None of the demographic variables, save for
influence on capital intensity. Likewise counterintuitive is the sign of the coefficient for
NFPROP (though the coefficient is insignificant). CEREAL and FRUIT coefficients are
positive and significant, suggest that investment tends to be lowest in traditional farms.
Neither share tenancy nor farm size matter exert a statistically discernible effect on
capital intensity.
For cross-section data though, the assumptions of least squares regression for
statistical inference are suspect, particularly the one imposing homoscedasticity. A Cook-
Weiberg test yields a χ2-value of 184.09, forcefully rejecting the constant variance
the standard errors and t-values. The t-values of the coefficients rise (except for a few
province dummies), including the t-value of PENDING, which becomes significant at the
1%-level.
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Table 5.
Regression results
The finding is rather strong, hence further checks for robustness are warranted. A
Ramsey Reset test on the least squares regression finds that the null hypothesis of “no
patterns in the residual” is rejected with 0.000 probability, i.e. near certainty. Hence the
findings in columns 1 and 2 are suspect; inspection of the residual plot reveals a great
deal of dispersion in the computed error term at high levels of capital, i.e. for corporate
farms.
Hence, the least squares regression is re-run only for proprietors. That is, to
eliminate correlation between corporate status and the error term, all corporate farms are
dropped from the regression. For this specification, the Ramsey reset fails to reject the
null. The third column pair reports the results of the regression with White-corrected
standard errors. The variable PENDING remains negative and significant, though with a
Summary
Data tabulation suggests that traditional landowners whose compliance with land
reform under CARP is pending do tend to have lower capital intensity in their farms.
Lower capital intensity suggests lower accumulated farm investments among such
by erosion of land collateral value. The two premises of conventional wisdom that posit
the importance of the decollateralization are inconsistent with the data from the
landowner survey. First, agricultural investment are typically not financed mainly by
4
For the regression in the third column pair of Table 5, dropping insignificant demographic variables AGE,
SCHOOL, and HHSIZE increases the t-value of the the negative PENDING coefficient, making it
significant at the 5 percent level.
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formal loans, but rather by alternative means such as internal capital. Formal loans are in
fact more often relied upon to finance working capital rather than asset formation.
Second, when formal loans are obtained, the collateral used is typically not farmland, but
other real properties of the landowner, which are unaffected by land reform. Hence, if
land reform is indeed the cause of the differences in accumulated investment, then the
expropriation.
We must however first confirm that the difference is indeed caused by land
reform by isolating other factors that could affect capital intensity using multivariate
a dummy variable. We find that the noncompliance dummy is significant and negative,
and that this finding is robust to alternative regression specifications. This confirms the
characteristics are mostly not significant, except for (in the White-corrected run) some
5. CONCLUDING REMARKS
The study has confirmed the hypothesis of a negative impact of delayed land
returns, rather than to the erosion of farm land collateral value. As this is the first time
strongly recommended that further data gathering and analysis be undertaken to replicate
agricultural land. Within the existing land reform strategy, delays are due to low
the progressive agricultural land tax, universally recommended by experts, but with
weak advocacy in Congress. Whatever the difficulties facing accelerated land reform, this
study underscores the urgency of attending to these difficulties right away, or face
REFERENCES
Ravallo, J. (1999). “The value and role of agricultural credit in the design of a sustainable
development program.” Rural Finance Symposium Proceedings: Small Farmer
Credit Delivery After the 1980s Reforms. Agricultural Credit Policy Council.