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The early agenda for the MCC's second Philippine compact

ByNaki B. Mendoza - 19 July 2016


A worker on a tenant farm harvests rice crop in the Philippines. Rural agriculture will be the priority of the Philippine Compact Development Team as a way to achieve broader inclusive development in the country. Photo by:Jeff Pearcy / UUSC /CC BY-NC-ND
 
Fresh off of presidential election in May that promised to deliver bold reforms and sweeping changes over the next six years, one of Southeast Asia’s fastest-growing and most highly populated countries is now also in the early stages of writing a new chapter of its development agenda.
In December 2015, theMillennium Challenge Corp. — an independent foreign aid agency of the United States government — agreed to fund a second large-scale five-year development grant for the Philippines.
The specific terms of the second “compact” — as officially designated by MCC — are still being constructed, but funding is expected to be roughly on par with the $434 million of aid that was disbursed in the previous compact between May 2011 to 2016. Final terms for the new compact are anticipated to be approved by late 2017.
Over the next several months, the large task on hand for U.S. and Philippine development officials is to determine precisely how that chunk of aid will be invested and ensure it is done in a way that more inclusively builds on the country’s economic growth in recent years.
Among the many possible areas to allocate funding, an early stage priority is to gear the second compact towards the rural agriculture sector, according to the team convened by the Philippine finance department to design the new grant’s projects and interventions.
The Philippines Compact Development Team — comprised of local economists and development experts — met with Devex and explained that they are prioritizing rural agriculture as a way to achieve broader inclusive development.
The early analysis and investment recommendations from the compact development team also identifies weak infrastructure, high electricity costs and a lack of coordination among government agencies as potential areas for funding. But by focusing primarily on agriculture, the team aims to alleviate the high levels of poverty that still afflict rural parts of the country and invest in a sector that has not kept pace with the expansion of other sectors in the economy.
While growth in the past six years has averaged 6 percent, according to theWorld Bank, most of those economic spoils have been confined to urban areas. Aid organizations such as the World Bank have taken note of the disparity.
In an April report on the Philippine economy, the bank noted that despite the country’s broad economic expansion, “high rates of structural poverty remain, especially among households depending on agriculture.”
Newly elected President Rodrigo Duterte, who took office on June 30, vowed to fix the country’s problems of crime, corruption and illegal drugs but also income equality and inclusive growth.
The challenges with agriculture
The problems afflicting rural agriculture in the Philippines stem from a set of issues that are both unique to the Philippines and universal to the sector at-large.
Agriculture accounts for roughly 11 percent of the national income in the Philippines, but the sector continues to suffer from low productivity, high production costs and low investment in its infrastructure and value chains. Addressing those inefficiencies goes hand-in-hand with plugging income inequality gaps, said a member of the compact development team.
More than two decades ago the Philippines passed sweeping agricultural reform laws that limited the maximum size of farms in an effort to break up to the monopoly of large plantation owners and more equitably distribute farmland to the rural poor. An indirect consequence has been the loss of efficiency and productivity that come with larger tracts of land, where mechanized farming, for example, is incentivized.
“Without turning back the clock to pre-agrarian reform, the challenge is how to work within the law so that you can get the economies that large-scale cultivation offers,” a member of the compact team, who declined to be identified by name, told Devex.
Rural agriculture is also hampered by limited access to finance, which affects smallholder farmers around the world. In the Philippines, commercial banks are required to allocate 25 percent of their loans to the agricultural sector, 10 percent of which must specifically go to the smallholder beneficiaries of the land distribution reforms. But most banks don’t meet that threshold for smallholder lending, choosing instead to pay a regulatory fine rather than take on what they see as risky investments.
On the demand side, few Philippine farmers have direct access to the modern food and retail industry, selling either to local markets or at low prices to traders who sell to large companies.
“It is an informal collector’s model where farmers are desperate and will sell to any middle man,” said Jenny Costelloe, director of country partnerships for Grow Asia, a multistakeholder platform for sustainable agriculture in Southeast Asia. “It’s the complete opposite end of empowerment.”
The compact development team is considering a number of projects including various interventions to improve many of these market inefficiencies, including farmer training and extension services, improved access to credit and better market access.
Also needed, the team said, are better and more transparent information services that improve the business of agricultural — digital and data platforms, for example, that provide farmers with real-time information on commodity production, crop pricing and land availability.
The compact team is also considering dedicating a large portion of funds to large-scale infrastructure projects that would improve physical transport and market connectivity. One potential project is port upgrades in the Visayas region — a heavy clustering of island provinces in the central Philippines whose local economies rely mainly on agriculture.
Ultimately, the compact development team is aiming for aid and interventions in agriculture that feed into other strategic industries.
“Agriculture doesn’t necessarily have to lead strictly to processing,” one of the team members said. “It can contribute to retail services while new agricultural goods can feed into the high-value tourism sector.”
Next steps
Though early planning for the second compact has focused on rural agriculture, it still remains far from final. The compact development team, in consultation with the Philippine government, private industry and civil society, will be designing the exact contours of development projects for the second grant. They expect to submit final project proposals to the MCC by October and final approval is slated for November 2017.
Philippine agriculture specialists have welcomed the preliminary focus on their sector but caution that interventions and aid projects must actually reach the smallholder level.
“At the end of the day, when the rubber hits the road, how will funding get to the people?” said Eduardo Mendoza, chief executive of TPSI, a microfinance organization that funds the agricultural sector. “The goal should be to increase productivity, introduce newer commodities that have better market access and invest in processing facilities that will draw more demand from farmers.”
Under new leadership for the next six years the Philippines is pursuing an ambitious development agenda that aims to maintain surging growth while expanding prosperity across regions and social sectors. It is still very early days, but MCC’s long-term success will ultimately hinge on how strongly development interventions impact rural areas and promote inclusive livelihoods.
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About the author
Naki is a reporter for Devex Impact based in Washington, D.C., where he covers the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America and Australia.
 

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