Effectiveness of Public Spending: The Case of Rice Subsidies in The Philippines

Effectiveness of Public Spending: The Case of Rice Subsidies in the Philippines
Shikha Jha and Aashish Mehta

No. 138 | December 2008
In the study of ADB Economics Working Paper Series No. 138, the following conclusions were drawn in
the evaluation of the effectiveness of the rice subsidy program.
The rice subsidy program run by the NFA is an important safety net in the Philippines, receiving the
largest share of government subsidy among all government corporations. The NFA endeavors to satisfy
multiple, often conflicting, objectives to achieve food security in the country, including price support to
consumers and producers and stabilization of market prices. Its key feature is an untargeted transfer of
subsidized rice to households across the country. Sales from NFA and consumer price subsidy were
significantly enhanced in 2008 in view of escalating rice prices, raising NFA costs to about 2.5% of GDP.
The research analyzed crucial economic aspects of the program, including its economic efficiency, reach
to and support for the poor, and targeting effectiveness. By making use of the latest household
consumption expenditure survey data, the paper also examined factors influencing its performance in
terms of participation and utilization by the poor.
The program fared well on some design elements for successfully and efficiently reaching the poor. Its
cost is low as share of GDP (except for the steep hike in 2008), implying sustainability. The subsidy to
consumers is progressive across economic classes, with poorer households more likely to participate and
(mostly) having higher latent demand for NFA rice. Furthermore, the percentage of the population
having access to NFA rice is higher in regions with greater poverty. About 52% of the users are poor with
an annual income of merely $0.53 per day per capita.
However, a puzzling fact is that while the NFA rice program is a universal program with unlimited
purchase, it is used by only about 16% of the population. One reason could be high participation costs,
especially for the poor. The targeting effectiveness of the program is low as reflected in high exclusion
and inclusion errors. Our results show that only 25% of the poor benefit from the program while 75%
are excluded. At the same time, 48% of the beneficiaries are nonpoor. The incidence is particularly high
in urban areas where leakage amounts to 68% of the participants being nonpoor against 39% in rural
areas, implying misallocation of resources. We also find a gap of 64% between NFA supply and reported
consumption in household survey. While part of this discrepancy might arise from measurement errors,
the rest may owe to pilferage, damage in storage, and loss in transit. Moreover, even assuming no
pilferage at all, transferring $1 of subsidy to consumers costs the NFA more than $2.
The mixed picture of performance of the NFA rice program raises important questions as to what
determines its success. The econometric analysis suggests that rice consumers follow a two-stage
decision procedure, determining first, whether to buy NFA rice and second, how much to buy. We find
that nonparticipation is probably involuntary, being the result of limitations (e.g., in the availability of
nearby NFA outlets or because outlets run out of rice) or fixed costs in accessing the program. This is
inferred from that fact that Effectiveness of Public Spending: The Case of Rice Subsidies in the
Philippines | 21
households, who, for unobservable reasons, are unable to access the program, appear likely to use the
program more intensively if they participate in it at all.
As would normally be expected, higher incomes are associated with lower odds of participating in the
NFA rice program. Farmers participate less in the program, presumably because they are more self-
reliant where rice is concerned. High inflation induces more households to consume NFA rice—an
unsurprising, but salient fact given the recent volatility in food prices in the Philippines. Participation
varies with the demographic composition of households as would be expected: the presence in the
household of many infants, older workers, or members of working age reduces participation, while the
presence of teenagers boosts participation. Our result that households whose heads are employed are
more likely to participate suggests that the NFA is not acting as a safety net in case of unemployment, as
much as a general source
of consumption support.
Results for regional GDP per capita, as a measure of regional economic development and as a proxy for
the quality of governance, show that households in better-governed regions have a higher propensity to
participate in the program—which makes sense if poor governance leads to reduced access to the NFA
program. Although the urban participation rate is lower given fewer substitutes for NFA rice for the
urban poor, it is not surprising that those who do participate in cities buy more NFA rice than their rural
counterparts.
The NFA rice program can better reach the poor if its inclusion and exclusion errors are reduced, its
access and availability to the poor improved, and the quality of governance bolstered. In times of
volatile and unprecedented food price increases, strengthening food-based safety nets for a more
effective and efficient role in shielding the poor is more important than ever.
Questions:
1. The article identified program indicators to measure the effectiveness of the rice subsidy program in
the Philippines. What are the indicators or measurement scales that were utilized to measure the reach
and/or effectiveness of the program? Explain why this measurement scales were used. (30 pts)
2. Enumerate the reasons for the ineffectiveness of the program which were identified in the latter part
of the article. (30pts)
3. Given the identified reasons for the program ineffectiveness, in your opinion, how would you
address the gaps/issues that were presented in the study? (20 pts)

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Effectiveness of Public Spending: The Case of Rice Subsidies in the Philippines

Shikha Jha and Aashish Mehta

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