Productivity Growth in Philippine

Agriculture: A Literature Review

Submitted by

Romeo G. Teruel

1
 1. Introduction

With the sizable contribution of agriculture to the Philippine economy, the

country’s economic future will continue to be highly affected by agriculture’s

performance. In recent years, the agricultural sector has accounted for

approximately 20 per cent of the Gross Domestic Product (GDP) and about 14

per cent of the country’s export earnings. In addition, it employs almost half of the

country’s labor force. Thus, the dependence of the majority of the rural poor on

the agriculture as the major source of livelihood remains high.

Recent discussions have expressed cause of concern regarding the future

role of Philippine agriculture in the process of economic development.

Agricultural production stagnated in the 1980s, growing at an average of 1 per

cent annually. From 1990 to 1995, the average annual growth rate increased to

1.4 per cent; by 1996-2000, however, this declined to 0.60 per cent (David,

1996a; Development Indicators for the Philippine Agriculture, 2002).

Furthermore, the past and present agricultural scenarios seem to suggest that

Philippine agriculture is lagging behind other agricultural economies in terms of

comparative competitiveness. The Philippines has been transformed into a net

agricultural importing country over the last decade. This trade scenario is the

complete opposite compared to the scenarios observed in other neighboring

countries, such as Indonesia, Malaysia and Thailand, which have consistently

posted an increasing agricultural surplus since the 1970s. It has also been

shown that the dismal growth of the agriculture correlates with the overall growth

of the economy. Several studies have shown that the decline in agricultural

2
growth can be attributed to the continued deceleration of productivity (Mundlak,

2004 and Teruel and Kuroda, 2004, 2005).

The objectives of this paper are as follows:

1. To contribute a literature review on agricultural productivity analysis,

providing a critical assessment of the state-of-the-art at both

international and national levels;

2. To describe the standard and emerging empirical techniques used in

agricultural productivity studies, internationally and in the Philippines,

including econometric analysis and growth accounting;

3. To identify the similarities, relationships, and differences between the

techniques within a coherent framework;

4. To assess what is known about agricultural productivity growth in the

Philippines, critical gaps in our knowledge and data on the nature,

sources, and causes of productivity growth; and

5. To propose a theoretical framework and empirical technique for use in

the aggregate agriculture sector analysis of the PGPA

The review is composed of two stages: 1) theoretical and empirical. The

first stage aims to examine the five theoretical approaches to measuring

productivity growth such as: 1) the growth accounting, 2) index number, 3)

econometrics, 4) the distance function based-Malmqvist approach and 5) the

stochastic frontier approach. The second stage intends to review the empirical

studies on productivity in Philippine agriculture that employ these approaches.

The availability of data on output and input is essential for the accurate

3
measurement of productivity; hence, this paper also seeks to review the

availability of agricultural data by looking at the different data sets assembled in

previous studies, the data gaps in actual empirical productivity measurement,

and other important data issues. This paper ends with a synthesis,

recommendation and conclusion.

2. The Concept of Productivity

This section discusses the concepts of and the issues surrounding

productivity. It also proposes to differentiate partial productivity from total factor

productivity (TFP).

The basic definition of productivity is expressed as a quantitative

relationship between output and input (Antle and Capalbo, 1988). It is also

defined as the ratio of some measure of output to some measure of input use or

simply an arithmetic ratio between the amount produced and the amount of any

resources used in the process of production. This definition of productivity can be

further simplified as the output per unit input or the efficiency with which

resources are utilized (Samuelson and Nordhaus, 1995).

As a concept, productivity can be a partial or total measure. The partial

measure of productivity or partial factor productivity (PFP) relates output to any

input implying that there will be as many definitions of productivity as inputs used

in production. In this case, productivity is the amount of output per unit of a

particular input or equally known as the average product. Commonly used partial

measures are: yield (output per unit of land), labor productivity (output per

economically active person or per agricultural per-hour) and capital productivity.

4
Yield is usually used to assess the success of a particular production technology.

Labor productivity is used as an indicator to assess rural welfare or standard of

living since this captures the ability to acquire income through agricultural

production (Block, 1995).

PFP can sometimes be misleading. Changes in PFP can hardly be

explained since there is no clear indicator on why this measure of productivity

changes. An improvement for example in labor productivity can either be

attributed to the increased use of fertilizer or tractors. To account for at least

some of these problems, one can use the total measure of productivity or the

concept of total factor productivity (TFP). TFP relates the output produced with

an index of composite inputs; meaning the sum of all the inputs used in the

production process which may include land, labor, physical capital, livestock,

fertilizers and pesticides. TFP is computed as the ratio of an index of agricultural

output to an index of agricultural inputs. The index of agricultural output

(agricultural input) is a value-weighted sum of all agricultural production

components (conventional agricultural inputs).

Growth in TFP is termed in the literature as the Solow residual and it is a

measure of technological progress brought about by the changes in agricultural

research and development, extension services, human capital development,

infrastructure, government policies and environmental degradation. The change

in TFP may also be attributed to unmeasured inputs or imperfectly measured

inputs.

5
 3. Review of Methods

There are several approaches or techniques that can be used to measure

the change in output, to calculate the relative contribution of the different inputs

used in production to output growth and to identify the Solow residual or output

growth not due to increases in inputs. These major approaches are: 1) the

growth accounting, 2) index number, 3) econometrics and 4) the distance

function-based Malmquist approach and 5) the stochastic frontier approach.

Each of this approach has different data requirements, is suited to address

different questions, and has its relative strengths and weaknesses.

3.1 Growth Accounting Approach

The growth accounting approach involves compiling detailed accounts of

inputs and outputs, and aggregating these into input and output indices in order

to calculate the TFP index (Diewer, 1976, 1980). It decomposes the output

growth into two components: 1) the growth in different inputs like labor and

capital and 2) growth in TFP. This approach requires the specification of a

production function, which describes the technical relationship between the levels

of output that can be produced using certain amount of inputs.

This production function can be expressed as:

1
Yt = At f ( K t , Lt )

where Yt is the output at time t, At represents the technology or TFP at time t, Kt

is the capital stock at time t, and L is the amount of labor input at time t. Given

this production function, the use of growth accounting approach requires the

6
following assumptions, namely: 1) the technology, as represented by At, is

separable as shown in Eq. 1, 2) the production function exhibits constant returns

to scale (CRS), 3) the producers are efficient and they attempt to maximize profit,

and 4) the markets are perfectly competitive.

Differentiating (1) with respect to t gives

• • ∂f • ∂f • 2
Y = Af ( K , L ) + KA+ LA
∂K ∂L

where the dots indicate a first partial derivative with respect to time. Dividing Eq.

2 by Q gives:
• • • •
Y A ∂f K ∂f L 3
= +A +A .
Y A ∂K Y ∂K Y

Given the assumptions, the elasticity of output with respect to capital w k and the

elasticity of output with respect to labor wL can be written as:

∂Y K ∂f K
wK = =A
∂K Y ∂K Y
4
∂Y L ∂f L
wL = =A
∂L Y ∂L Y

and therefore, Eq. 3 can be written as:

• • • •
Y A K L 5
= + wK + wL
Y A K L

•
 A
Solving for   , the growth rate of TFP is
 A
 

• • • •
A Y K L 6
= − wK − wL .
A Y K L

7
 The TFP growth can be interpreted as the residual share of output growth

after accounting for the changes in the production inputs. One of the

disadvantages of using the growth accounting approach is that it imposes several

strong assumptions like the Hicks-neutrality of technological change, constant

returns to scale and long-run competitive equilibrium.

3.2 Index Number Approach

An alternative way to compute for TFP is through the use of the Index

Number Theory. This theory describes how to derive a single index for the

quantity of different outputs or goods produced and of inputs used over time

including their corresponding prices. The index number approach involves

dividing an output quantity index by an input quantity index resulting to a

productivity index. Therefore,

Yt 7
At =
Xt

where At is TFP, Yt is an index of output quantities, Xt is an index of input

quantities and subscript t denotes the time period. After obtaining At, the

calculation of TFP growth rate is straightforward.

The difficulty associated with using the index number approach is in the

determination of the type of index to use and in gathering the price and quantity

data necessary to construct them. There are several index procedures that can

be used to measure productivity and these include the Laspeyres, Paasche,

Fisher and the Törnqvist index procedures. What follows is the formulation of

different output quantity indexes using the different index approaches. Input

8
quantity indexes can be similarly constructed using the data on input quantities

and prices.

Given the vectors of prices

t
(
p = p1t , p 2t ....... p kt ) and quantities

t
( )
y = y1t , y 2t ....... y kt for the k different outputs produced in an economy at time t =

0,1,…….T, a Laspeyres index is computed as

k

p ⋅y
0 1 ∑P Y 0 1

( )
i i
0 1 0 1 8
YL p , p , y , y = 0 0
= i =1
k
p ⋅y
∑P Y
i =1
i
0
i
0

(  y1
) 
k
YL p , p , y , y = ∑ si0  i0  9
0 1 0 1

i =1  yi 

pit y it
s =
t
i m
where is quantity i’s nominal output share. Eq. 9 shows that the
∑p
i =1
t
i y it

Laspeyres index is a nominal share-weighted sum of quantities ratios.

The Paasche index is calculated by using period 0 prices instead of period

1 prices. This index formulation is obtained by using the following equation:

k

 k  y1
1
p ⋅y
1 ∑p 1
y i1 −1

−1

( ) 
i
= ∑ si1  i0   10
0 1 0 1
YP p , p , y , y = 1 0 = ik=1
p ⋅y
∑ pi1 yi0  i =1  i 
y 
i =1

The Fisher index, on the other hand, is computed by getting the geometric

average of the Laspeyres and Paasche indexes. Finally, the Törnqvist index is

defined as

(
0.5 si0 s1i )
(  y1
) 
k
YT p , p , y , y = ∏  i0  11
0 1 0 1

i =1  y i 

9
 One can either use the economic or the axiomatic approach to decide on

what index formulation to use in constructing quantity indices for output and

input. The economic approach selects an index number formulation on the basis

of an assumed underlying production function given the price taking, profit

maximizing behavior of producers (Diewert and Lawrence, 1999). The

Laspeyres index procedure is believed to be exact for, or at least imply, a linear

production function in which all inputs are perfect substitutes in the process.

Similarly, the Törnqvist index, which is a discrete approximation to the more

general Divisia index, implies a homogenous translog production function. On

the other hand, a geometric index like the Fisher index exacts the Cobb-Douglas

production function.

The axiomatic approach requires a comparison of the properties of the

different index number formulations with a number of desirable mathematical

properties. The index that satisfies the most tests is the “preferred” index

formulation. The axioms or desirable properties used for the test are as follows:

1. Constant quantities test: If quantities are the same in two periods, then

the output index should be the same in both periods irrespective of the

price of the goods in both periods;

2. Constant basket test: If prices are constant over two periods, then the

level of output in period 1 compared to period 0 is equal to the value of

output in period 1 divided by the value of output in period 0;

10
 3. Proportional increase in quantity test: If all quantities in period t are

multiplied by a common factor, λ, then the quantity index in period t

compared to period 0 should be increased by λ also; and

4. Time reversal test: If the price and quantities in period 0 and t are

interchanged, then the resulting output index should be the reciprocal of

the original index.

Diewert and Lawrence (1999) noted that among the index number

formulations, only the Fisher index passes all the axioms or desirable properties.

Both the Laspeyres and Paasche indexes are found to be inconsistent with the

time reversal test, while the Törnqvist index does not satisfy the constant basket

test. They also noted that using a more extensive list of axiomatic tests, the

Fisher index formulation continues to satisfy more tests than the other index

formulations.

Like the growth accounting approach, the construction of the output and

input quantity indexes using the different index procedures requires restrictive

assumptions such as the neutrality of technical change, constant returns to scale,

competitive markets and the separability of the underlying transformation function

in outputs and inputs. Another disadvantage is that the statistical methods

cannot be used to evaluate their reliability because index numbers are not

statistically generated. In addition, index numbers are not particularly informative

in identifying sources of growth. This approach however can be easily

implemented regardless of the number of observations.

11
3.3 The Econometric Approach

The econometric approach is based on an econometric estimation of the

production technology. Thus, this approach requires the use of econometric

methodology; necessitates the specification of a function representing the

technology and the estimation of such function, its derivatives or both to

determine the value of the different parameters necessary for productivity

estimation.

The function can either be a primal function like the transformation

function or the production function or a dual function like the cost or profit

function. The estimation using the primal function involves the derivation of a

factor demand and supply function based on the necessary conditions of

optimization given a production function and the assumption of profit

maximization or cost minimization. The estimation using dual functions on the

other hand involves the derivation of a system of input demand and output supply

by appealing to the theory of duality. The fundamental principle of duality in

production is that the cost or profit function summarizes the economically

relevant characteristics of a technology. Thus, a firm’s technology as

represented by its production possibilities set or production function may also be

characterized by its cost or profit functions, provided that these obey certain

regularity conditions. To better understand the idea of this theory, the duality

between a cost function and production possibilities set or production function will

be discussed in turn1.

1
Between the two dual functions, cost function is frequently used in productivity estimation. Antle
and Capalbo (1988) pointed out that TFP estimation using profit function is not straightforward.
The link between TFP and cost function will be discussed in the latter part of this subsection.

12
3.3.1 Duality Theory

A production function is often assumed and used as a starting point in

many researches on production relationship. The analytical framework of

production functions can be extended with the inclusion of the duality theory

under the assumption that firm chooses input quantities in order to minimize the

cost of their production process, given the prices of these inputs. The duality

between production and cost functions can be explained by following Diewert

(1978): consider a production function with a single output given by Y = f(X)

where Y is the maximum output which can be produced by a firm given a k-

dimensional vector of inputs X at a certain point in time. The function f can be

said to describe the firm’s technology. On the other hand, if this firm has

minimum total cost of producing the level of output Y given the vector of input

prices P defined by C(Y,P), then its minimum C clearly depends on the underlying

production function f. The duality theory establishes the duality of cost as well as

production functions indicating that either of these functions, C or f, can

adequately describe the economically relevant characteristics of the same

underlying technology given certain restrictions on them.

More formally, the dual relationship between cost and production (or

transformation) functions implies that the minimum total cost of producing Y given

the production possibility set T = (X,Y) and a vector of positive input prices P that

13
correspond to X, that is, C(Y,P), can be constructed from T with C having the

following properties2:

(a) C(Y,P) is a negative real valued function defined for all finite Y ≥ 0, P ≥

0k.

(b) C(Y,P) is nondecreasing in input prices P.

(c) C(Y,P) is nondecreasing in Y and tends to approach ∞ for every P ≥ 0k.

(d) C(Y,P) is positively linearly homogenous and quasi-concave in the

components P for every Y > 0.

Similarly, given C with properties (a) to (d) above, the production possibilities set

T with properties (i) to (iv) (please refer to footnote 2) can also be constructed

from C.3

By Shephard’s lemma, the total cost function C with properties (a) to (d)

above is related to the cost minimizing demand function for input X through its

first partial derivative with respect to the input price P. Suppose the first partial

derivative of C with respect to P is given by CP(Y, P). If C is continuously

differentiable in P, then Cp equals the total cost minimizing demand for input X, at

(Y,P). Moreover, if there is a unique cost-minimizing demand for input X at (Y, P),

then CP exists. The application of Shephard’s lemma produces a system of

2
The production possibilities set T has the following properties: (i) the set of producible outputs
Y* is nonempty; (ii) for each Y in Y *, the input requirement set X(Y) is closed and for a nonzero
output not contained the zero input vector; (iii) there is free disposal of inputs, that is, if an input
vector X0 can produce output Y then a second input vector X 1 that is at least as large as X0 in
each component can also produce Y; (iv) the input requirement sets are strictly convex from
below, that is, two input vectors X0 and X1 are in X(Y), then for a weighted combination of X0 and
X1, for instance, X2 = λX1+ (1-λ)X0 where the scalar λ is 0<λ<1, there is an input vector X 3 in X(Y)
such that X2 is at least as large as X3 in every component.
3
Please see Diewert (1971, 1978) and McFadden (1978) for the proofs of these duality relations
between cost functions and production possibility sets.

14
equation representing the output supply and input demand functions which is

used to estimate parameters necessary for productivity measurement.

3.3.2 Primal and Dual Rate of Technological Change

In the econometric approach to productivity measurement, technological

change, which corresponds to the shifts of the production function, is

synonymous with productivity change under the assumption that production is

efficient. Technological change refers to changes in production process brought

about by the application of scientific knowledge. Technological change occurs

when there is an increase in output per unit of input due to the use of improved

production methods resulting in an increase of efficiency in the use of resources,

changes in input quality and the introduction of new processes and new inputs

(Antle and Capalbo, 1988). This production function shifts or the technological

change can actually be investigated using the duality relation by estimating the

dual cost (or profit functions). What follows are discussions on an econometric-

based productivity measurement drawn mainly from Antle and Capalbo (1988).

For the productivity estimation, assume that the aggregate production

function is given by
12
Y = F( X ,t)

where Y and X are the aggregate output and the aggregate input vector,

respectively, and t denotes the state of technology. The prime rate of

technological change under the assumption of efficient production is given by

 n

∂ ln F /∂t = d ln Y /dt − 1 /F ∑ Fi dX i /dt  13
 i =1 

15
where Fi is the marginal product of Xi. Under a competitive market where price

equals marginal cost and inputs are paid in terms of their value of their marginal

products, Eq.12 can be written as

n
14
∂ ln F /∂t = dlnY / dt − ( ∂ lnC /∂ ln Y ) ∑ S d ln X /dt
−1
i i
i =1

where Si = Wi X i ∑W X
i
i i is the factor cost share and the term ∂ ln C ∂ ln Y is the

elasticity of cost with respect to output indicating returns to scale. The primal

rate of technological change given by Eq. 14 can be defined, therefore, as the

rate of change in output minus the scale-adjusted index of the rate of change in

input.

In the case of the dual cost function4, the dual rate of technological change

can be derived by differentiating totally the cost function C = C(Y, W, t) with

respect to time and by invoking the Shepard’s lemma. The dual rate of

technological change is algebraically expressed as

∂ ln C n
d ln Wi ∂ ln C dInY d ln C
− = ∑ Si + − 15
∂t i =1 dt ∂ ln Y dt dt

Eq. 15 shows that the dual rate is the sum of the index of the rate of change in

factor prices and the scale effects less the rate of change of total cost. The

relationship of the primal and dual rate of technological change can be shown by

4
The advantage of this so-called dual approach over the primal approach (use of production
function) is that the derivation of the output supply and input demand functions is much simpler
and easier. With this approach, it is not necessary to go through the sometimes bothersome
algebra that is involved when solving the first order conditions as required in primal approach;
one simply has to differentiate the cost function with respect to prices. Also, the cost function in
general has factor prices as arguments or as independent variables rather than factor inputs as in
the case of production function. The cost function, therefore, allows the use of input prices, which
are actually exogenous to the firm instead of endogenous variables such as input quantities
(Binswanger, 1974).

16
the total differentiation of total cost C = ∑ Wi X i with respect to time and by using

Eq.15. The relationship is indicated by the following equation:

− ∂ lnC/∂t = ( ∂ lnC/ ∂ ln Y ) ∂ lnF / ∂t 16

Thus, the primal and dual rates of technological change are equal if the

elasticity of cost with respect to output, ∂ ln C ∂ ln Y , is equal to 1. This means

that the primal and dual rates are equal if and only if the technology can be

described by constant returns to scale.

The derivation of the primal and dual rates of technological change can be

generalized to multiproduct technology represented by the following

transformation function

(
Y1 = F Y 2 , X , t ) 17

where Y 2 = ( Y2 ,.........Yk ) and X = ( X 1,..................... X n ) . Hulten (1978) defines the

primal rate of technological change in the case of multiproduct technology as

∂ ln F 18
R1
∂t

where R1 is defined as the revenue share of Y1 in total revenue. Here, the rate

of technological change is measured in terms of Y1. Using the multiproduct cost

function, C ( Y , W , t ) , where Y and W are vectors of outputs and factor prices,

respectively, the dual rate of multiproduct technological change can be derived

by getting the time derivative of the transformation function and by using the first

order conditions for multiproduct profit maximization and the equilibrium

17
condition, pi = ∂C ∂Yi . The dual rate of multiproduct technological change can

be expressed as

 k  19
− ∂ ln C / ∂t =  ∑ ∂ ln C / ∂ ln Yi  R1∂ ln F / ∂t
 i =1 

Eq. 19 shows that if the multiproduct technology exhibits constant returns

k
to scale, ∑ ∂ ln C / ∂ ln Yi = 1 , the primal and dual measures of the rate of
i =1

technological change are equal.

Following Capalbo (1988), the relationship between the definition of

productivity as indicated by ∂ lnF ∂t , which is the measure of technical change,

• • 
and the conventional definition of TFP =  Y − X  , which is the growth in outputs
 

not being accounted for by the growth in inputs, is shown by the following

equation:

[ ] ∑ S d ln X /dt
• n
TFP = ∂ ln F /∂t + ( ∂ lnC /∂ ln Y ) 20
−1
−1 i i
i =1

Under constant returns to scale, the measured growth rate of TFP is equal

to the rate of technical change. As previously mentioned, for the single output

case, the latter measures the marginal shift in the production function. On the

other hand, if the production structure is characterized by increasing or

decreasing returns to scale, then the TFP growth rate captures both the technical

change as well as the scale effect.

18
 Similarly, it is also possible to show the link between the dual definition of

productivity ∂ lnC ∂t and TFP. Suppose the aggregate cost function is

C = g ( w1 ,........., wn ,Y , t ) 21

then by totally differentiating it with respect to time, invoking the Shephard’s

lemma, dividing everything by C and by simplifying, the expression for the

proportionate shift in the cost function is given by

• • wi xi •
B = C− ∑ w − ε CY Y 22
C

where B = ∂ lnC ∂t . Eq. 22 indicates that B is equal to the change in costs minus

the change in aggregate inputs and the scale effect. Following Ohta (1974), this

equation can be further simplified by the total differentiation of the cost equation

C = ∑ Wi X i with respect to time, yielding

wx wx
C = ∑ i i x + ∑ i i w , or
i C i C 23
wx wx
C − ∑ i i w = ∑ i i x ⋅
C C

By substitution, Eq. 22 becomes

• • wi xi
− B = ε CY Y − ∑ x i
i C
• • 24
− B = ε CY Y − X .

Combining Eq. 24 with the conventional definition of TFP, the dual cost function-

based definition of productivity is given as

• •
TFP = − B + (1 − ε CY ) Y 25

19
 Using Eq. 14 and Eq. 24, one can show that − B = ∂ lnC ∂t = ε CY ( ∂ lnF ∂t ) .

In the case of multiple outputs, the relationship between the shift in the cost

function and the growth in TFP is indicated by the following equation:5

( )
• •
TFP = − B + 1 − ∑ ε CYJ Y . 26

3.3.3 The Translog Functional Form

The use of the econometric approach in measuring productivity requires

the use of functional form for econometric estimation. The functional form,

however, should possess certain desirable properties, such as flexibility,

consistency and linearity. A functional form is said to be flexible if it can provide a

second order approximation to any arbitrary, twice continuously differentiable

function (cost, profit or production) having the appropriate theoretical properties.

The functional form should also be consistent, i.e. it must be consistent with the

appropriate theoretical properties that the function must have. In the case of the

cost function, these theoretical properties, as previously discussed, require

compliance for linear homogeneity in factor prices, concavity in factor prices and

monotonicity. Moreover, a functional form is desirable if the unknown parameters

appear in a linear fashion in the function as well as in the output supply and input

demand functions. A functional form that is linear in unknown parameters allows

the application of linear regression techniques on the estimating equations of a

particular function.
5
See Capalbo (1988) for the detailed derivation of the link between the primal and dual definition
of productivity and the conventional TFP.

20
 There are several functional forms that can be used for estimation: 1) the

transcendental logarithmic (translog), 2) normalized quadratic and, 3) the

generalized Leontief functional forms. Among these forms, the translog is

commonly used in productivity estimation using the econometric approach and it

also satisfies the flexibility, consistency and linearity properties. (Christensen,

Jorgenson and Lau, 1973).

In a manner similar to Cobb-Douglas, changes in TFP can be estimated

using the translog production function specified as

1 1
ln Y = α 0 + ∑ α i ln X i + ∑∑ α ij ln X i ln X j + β 0 t + β 1t 2 + t ∑ γ i ln X i . 27
i 2 i j 2 i

In this function, a time trend denoted by t is included, indicating that the

technological change is not Hicks-neutral. Hicks neutrality can only be assumed

if parametric restriction is imposed, that is γ i = 0 for all i .

Applying Eq. 20 to Eq. 27, under the assumption of non-neutrality of

•
technological change, the TFP ∗ is computed as

• •  ∂ ln C  −1  •
•
∗
TFP = Y − X =   − 1 X + β 0 + β1t + ∑ γ i ln X i . 28
∂ ln Q 
 

Assuming constant returns to scale, ∂ ln C / ∂ ln Q = 1 , Eq. 28 can be written as

•
TFP ∗ = β 0 + β1t + ∑ γ i ln X i 29

On the other hand, if Hicks neutrality is assumed then

•
TFP ∗ = β 0 + β1t. 30

21
As shown above, the cost function-based TFP can also be derived by appealing

to the theory of duality. Specifically, a translog cost function can be used and

specified as

1
ln C = α 0 + ∑ α i ln Wi + ∑∑ γ ij ln Wi ln W j + ∑k β k ln Yk +
i 2 i i
1
∑ ∑ β kl ln Yk ln Yl + ∑∑
2 k l i k
ρ ik ln Wi ln Yk + α t t 31

1
+ α ii t 2 + ∑ α it ln Wi t + ∑ β kt ln Yk t.
2 i

Applying Eq. 25 to the translog cost function given by Eq. 31 and assuming

constant returns to scale, non-neutrality of technological change and

homotheticity, the cost function-based definition of productivity is given by

•
TFP = α t + α ii t. 32

The econometric approach has the advantage of being statistical, thus,

allowing inferential statistics or permitting hypothesis testing and calculation of

confidence intervals in order to test the reliability of the model estimated. This

approach specifically allows determining the contribution of each input to

aggregate output. Furthermore, if the flexible functional form is used, then the

use of the econometric approach would also mean the imposition of fewer

restrictive assumptions about technology as opposed to the growth accounting

and the index number approaches. The major disadvantage of the econometric

approach, however, is that it is more demanding in terms of data requirement

than the other approaches to productivity measurement. Oftentimes, the

constraint on data availability may make it difficult to implement the econometric

approach.

22
3.4 A Distance Function-based Malmquist Approach

The Malmquist approach is a non-parametric approach used to measure

productivity change. Unlike the Tornqvist-Theil index, the Malmquist productivity

index does not presume that production is always efficient. Hence, the

Malmquist index of productivity can be broken down into two components: 1) the

changes in efficiency (firms getting closer to the frontier) and 2) the changes in

technology (shifts in the frontier itself).

In this approach, the productivity index is defined using two distance

functions: 1) the input distance function or 2) the output distance function.

These functions allow one to describe a multi-input and multi-output production

technology without assuming or specifying the cost-minimizing or profit-

maximizing behavior of the producers. The Malmquist productivity index can be

derived as follows:

Assume a production technology that can be described using the output

set, P(x). This output set P(x) represents the set of all output and input vectors

that are feasible, meaning that output vectors y can be produced using input

vectors x. For the sake of convenience, assuming that there is only one output

and one input, then the output set can be written as

P(x) = {y: x can produce y}

33
Given this output set, the output distance can be defined as

  y 
d O ( x, y ) = min δ :   ∈ P ( x )  . 34
 δ  

23
 If y is an element of the feasible production set, P(x), then the distance

function d O ( x, y ) will take a value less than one or equal to one. In particular, if

the value of d O ( x, y ) is unity, then y is located on the outer boundary of the

feasible production set, otherwise, it is greater than one and located outside the

set.

This is the Malmquist productivity index defined by Caves, et al. (1982a

and b) with reference to the base period that is:

DOS ( xt , y t )
M OS ( x s , y s , xt , y t ) = 35
DOS ( x s , y s )

In particular, they defined their productivity index as the ratio of the two

output distance functions both using the technology at time s (the base period).

The numerator is the output distance function at time t based on technology of

period s. On the other hand, the denominator is the output distance function at

time s based on technology of period s. Thus, the Malmquist productivity index

measures the distance between two data points of a particular unit (e.g. region or

country in two adjacent time period) by calculating the distances of each data

point relative to a common technology.

Alternatively, instead of using period s technology as the reference group,

it is also possible to develop the two output distance functions based on period

t‘s technology. The Malmquist productivity index in this case is given by

DOT ( xt , y t ) 36
M ( x s , y s , xt , y t ) = T
T

DO ( x s , y s )
O

24
To avoid arbitrariness in the choice of benchmark technology, Fare et al. (1994)

suggested that the Malmquist productivity index computed, based on output

orientation, should be the geometric mean of the two indexes given by Eq. 35

and Eq. 36. That is

1
 DOS ( xt , y t )  DOT ( xt , y t )  2
M O ( x s , y s , xt , y t ) =  S  T  37
D ( x , y )
 O s s  O s s  D ( x , y )

The value of M0 will indicate whether there are positive or negative changes in

productivity. If M0 is greater than one, this indicates positive productivity growth

from period s to period t, whereas if the value is less than one, then this shows a

decline in productivity.

An equivalent way to writing this productivity index is

D T ( x , y )  D S ( x , y )  D S ( x , y )  2 38
M O ( x s , y s , xt , y t ) = OS t t ×  OT t t  OT s s 
DO ( x s , y s )  DO ( xt , y t )  DO ( x s , y s ) 

Fare et al (1994) gave the following interpretation to the two terms on the right-

hand side of Eq. 38:

DOT ( xt , y t )
Efficiency change = 39
DOS ( x s , y s )

Technical change =  DO ( xt , y t )  DO ( x s , y s )  .
 S  S  2 40
 T  T 
 DO ( xt , y t )  DO ( x s , y s ) 

From Eq. 38, the Malmquist productivity index is just the product of the change in

relative efficiency that occurred from period s to period t and the change in

technology from period s to t.

25
 One can estimate the distance functions necessary in the computation of

the productivity index based on the Malmquist approach using the Data

Envelopment Analysis (DEA).

In their seminal paper, Charnes, et al.(1978) described DEA as a

mathematical programming model applied to observational data that provides a

new way of obtaining empirical estimates of relations such as production

functions and/or efficient production possibility surfaces — the cornerstones of

modern economics. DEA is, therefore, a non-parametric analysis. It is data-

oriented and does not require the specification of any particular functional form to

describe the efficient frontier or envelopment surface.

DEA is used to evaluate the performance of a homogenous set of peer

entities called “Decision Making Units” (DMUs). Under the DEA context, these

DMUs are compared against each other because they can individually identify

and vary their inputs and outputs. In this case, comparison is relative, meaning

all DMUs are compared with best performing DMUs. DEA is a methodology that

does not use central tendencies. Instead of fitting a regression plane through the

center of the data as in statistical regression, one floats a piecewise linear

surface to rest on top of the observations. The distance between the observed

data point and the frontier measures the relative technical efficiency of each

DMU. DEA is deterministic in nature and this approach does not differentiate

technical inefficiency from statistical noise effects.

DEA can either be input-oriented or output-oriented. In the input-oriented

DEA, the frontier is defined by searching for the maximum possible reduction in

26
input usage, with output held constant. While, in the output-oriented DEA, it

seeks the maximum proportional increase in output production, with input levels

held fixed. The two measures will give the same technical efficiency scores

under the assumption of constant returns to scale (CRS) technology, but will

register different scores when variable returns to scale are assumed.

The required distance measures necessary in the computation of output

oriented Malmquist productivity index can be calculated by using DEA-like linear

programs (Färe et al, 1994). A brief methodological explanation mainly taken

from Coelli and Rao (2003) follows.

In the single output and input case, the basis for the inefficiency

measurement is usually the productivity δ that can be expressed as

Output 41
δ= .
Input

If some DMUs are compared using the δ, then the one with a bigger δ is

considered a better performer or more efficient because less input is used for a

constant amount of output. The productivity δ is a relative measure because its

interpretation is facilitated by making a comparison among the different DMUs in

terms of efficiency.

Typically, DMUs have multiple inputs x j ( j = 1,..., m ) and outputs

y k ( k = 1,..., z ) that have to be weighted (u j , v k ) and can be summed up. Thus δ

is expressed as

27
 z

∑v k yk
δ= k =1
. 42
m

∑u
j =1
j xj

The numerator and denominator describe the sum of the weighted output and the

sum of the weighted inputs, respectively. In the case of the output-oriented

approach, the objective is to minimize the 1 δ , the reciprocal of the efficiency

score, by increasing proportionally the amount of outputs given the level of

inputs. The reciprocal of the efficiency score is just the ratio between the

weighted sum of inputs and the weighted sum of outputs.

Suppose there are n DMUs producing z outputs using m inputs. Then,

under the constant returns to scale assumption, the reciprocal of the relative

efficiency score of a hypothetical DMU p can be derived by solving the following

CCR model proposed by Charnes, Coopers and Rhodes (1978):

∑u
j =1
j x ji
min z

∑v
k =1
j y ki
m
43
∑u
j =1
j x ji
s.t z
≥ 1 i = 1,..., n
∑v
k =1
k y ki

vk , u j ≥ 0 ∀k , j

The fractional model above can be converted to a linear program by

setting the denominator equal to a constant usually unity. The resulting model is

given by

28
 m
min ∑ u j x jp
j =1
z
s.t ∑v
k =1
k y kp = 1 44
m z

∑ u j x ji − ∑ vk y ki ≥ 0 i = 1,..., n
j =1 k =1

vk , u j ≥ 0 ∀k , j

Every DMU has to choose input and output weights that minimize the 1 δ , the

reciprocal of its efficiency score. Thus, the above model has to be run n times in

order to calculate the reciprocal of the efficiency score of all the DMUs.

Generally, a DMU is efficient when the reciprocal of its efficiency score is less 1,

and it is inefficient when the score is greater than 1.

However, the following dual form is the one usually calculated:

max θ
n
s.t ∑λ x i ji − x jp ≤ 0 j = 1,..., m
i =1 45
n

∑λ y
i =1
i ki − θy kp ≥ 0 k = 1,..., z

λi ≥ 0 i = 1,..., n

where λ is the dual variable or dual multiplier and the variable θ is the factor by

which DMU p’s output should be increased in order to achieve efficiency. A value

of one indicates that DMU p is efficient relative to other DMUs considered, while

a value higher than one indicates relative inefficiency. The ratio 1 θ coincides

with the efficiency score δ which varies between zero to one.

For pth DMU, four distance functions have to be calculated between

periods s and t indicating solving four linear programming (LP) problems.

29
Following Färe et al (1994), under the assumption of constant returns to scale

(CRS) technology, the pth DMU requires the following LPs:

[d ( x
t
o t
p
, y tp )] −1
= max θ p
n
s.t. ∑λ
i =1
i, p
t y tk ,i − θ p y tk , p ≥ 0 k = 1,..., z
46
xtj , p − ∑ λit , p xtj ,i ≥ 0 j = 1,..., m
i =1

λit , p ≥ 0 i = 1,..., n

[d ( x
s
0 s
p
, y sp )] −1
= max θ p

n
s.t. ∑λ
i =1
i, p
s y sk ,i − θ p y sk , p ≥ 0 k = 1,..., z
47
n
x s
j, p
− ∑ λ is, p x sj ,i ≥ 0 j = 1,..., m
i =1

λ is, p ≥ 0 i = 1,..., n

[d ( x
t
o s
p
, y sp ) ] −1
= max θ p

n
s.t. ∑λ
i =1
i, p
t x tk ,i − θ p y sk , p ≥ 0 k = 1,..., z
n
48
x s
j, p
− ∑ λ xt ≥ 0 i, p
t
j ,i
j = 1,..., m
i =1

λ it , p ≥ 0 i = 1,..., n

30
 [d ( x
s
o t
p
, y tp )] −1
= max θ p

n
s.t. ∑λi =1
i, p
s y sk ,i − θ p y tk , p ≥ 0 k = 1,..., z
49
n
x tj , p − ∑ λis, p x sj ,i ≥ 0 j = 1,..., m
i =1

λis, p ≥ 0 i = 1,..., n

The change in the technical efficiency can be further decomposed into two

components: 1) the change in pure efficiency and 2) the change in scale

efficiency. This decomposition can be done by using the variable returns to scale

(VRS) version of the above model. This version was introduced by Banker,

Charnes and Cooper (1984) and is denoted as the BCC model. This BCC model

has additional convexity constraint:

∑λ
i =1
i = 1. 50

This constraint allows capturing the returns to scale characteristics. The BCC

model estimates the reciprocal of the pure technical efficiency, the overall

technical efficiency estimated by the CCR model, net of the scale efficiency. The

scale efficiency measures the capability of the DMU to fully exploit production

possibilities and it is affected by external factors such as credit constraints,

market demand and the likes. It can be obtained by calculating the ratio between

the overall technical efficiency and the pure technical efficiency. If the values of

the pure technical efficiency and the scale efficiency are less than one, then the

DMUs are inefficient, but if the values are equal to one, then the units are

efficient.

31
 d ot ( x t , y t ) pure
The change in the pure efficiency is, therefore, whereas the
d os ( x s , y s ) pure

d ot ( xt , y t ) d o ( xt , yt ) pure
s

change in the scale of efficiency can be derived as s ⋅ .

d o ( x s , y s ) d ot ( x s , y s ) pure

The use of BCC model requires calculating two additional distance functions by

solving the following two additional linear programming problems:

[d ( x
t
o t
p
, y tp ) ]pure
−1
= max θ p
n
s.t. ∑λ i =1
i, p
t y tj ,i − θ p y tk , p ≥ 0 k = 1,..., z
n
x tj , p − ∑ λit , p x tj ,i ≥ 0 j = 1,..., m 51
i =1
n

∑λ
i =1
i, p
t =1

λit, p ≥ 0 i = 1,..., n

[d ( x
s
o s
p
, y sp ) pure
] −1
= max θ p
n
s.t. ∑λ
i =1
i, p
t y sk ,i −θ p y sk , p ≥ 0 k =1,..., z
n 52
x s
j, p
− ∑λis, p x sj ,i ≥ 0 j =1,..., m
i =1
n

∑λ
i =1
i, p
s =1

λis, p ≥ 0 i =1,..., n

32
 DEA offers some benefits but also has certain limitations that have to be

kept in mind when using it. DEA is able to handle multiple inputs and outputs

cases and as mentioned earlier, it does not require a functional form that relates

inputs and outputs nor any specific behavioral assumptions of the firms/unit

under consideration often expressed as cost minimization, or profit or revenue

maximization. It can also handle inputs and outputs without knowing their prices

or weights.

With regards to its limitation, DEA can only calculate the relative efficiency

measures and as a non-parametric technique, statistical hypothesis tests are

quite difficult (Charnes, A., et al., 1994, Schmid, F. A., 1994, Anderson, T. 1996,

Hamburg, C., 2000). In DEA, it is also possible that some of the inefficient DMUs

are in fact better overall performers than certain efficient ones. This is because

of the unrestricted weight flexibility problem in DEA. Thus, a DMU can achieve a

high relative efficiency score by being involved in an unreasonable scheme.

Such DMUs heavily weigh few favorable measures and completely ignore other

inputs and outputs. These DMUs can be considered as niche members and are

not good overall performers.

3.5 Stochastic Frontier Approach

In recent years, the measurement of technical efficiency with the use of

the Stochastic Frontier Approach (SFA) has become a common approach. Like in

the DEA-Malmquist productivity index approach, the level of technical efficiency

of the firm in the SFA also refers to its ability to transform inputs into outputs

33
relative to a sample of similar firm. A firm is deemed efficient if it can potentially

increase its output level without reducing its input level. This potential is

dependent on the productive capabilities of comparable firms in the sector and is

represented by a production frontier which displays the boundary or highest

possible output levels for all input levels (Kumbhakar and Lovell, 2000 and Coelli

et al., 2005). As a result, SFA differs with the other productivity measurement

techniques but is similar with the Malmquist productivity index approach because

it uses a frontier approach capable of capturing the two components of

productivity: the efficiency change and the technical change. Unlike the DEA-

based approach, however, the SFA is parametric in nature because it also

depends on the choice of the estimation method, particularly on the specification

of the functional form for technology and the choice of distribution for the

inefficiency error term.

The choice of functional form appears to be arbitrary, but the Cobb-

Douglas (C-D) framework is generally adopted. The C-D functional form has

been used by many researchers because of its parsimony and simplicity. But this

simplicity comes with a cost due to strong restrictions imposed such as the

unitary elasticities of substitution. As a result, a number of alternative flexible

functional forms to C-D framework have been proposed in the literature, but the

transcendental logarithmic form (commonly known as translog form) is by far the

most popular despite the observation that the dominance of one functional form

over the other depends on the data set (Kumbhabar and Lovell, 2000).

34
 The many studies on efficiency measurement started from the seminal

papers of Aigner, Lovell and Schmidt (1977) and Meeusen and Van den Broeck.

The general stochastic frontier production function is expressed as

Yi = X i b + vi − u i i = 1,............., N 53

where i = l,……N indicates the units being studied, Yi is the output, Xi are factors

of production and b is a vector of unknown parameters. The term, vi - ui, is the

composed error term, where vi and ui capture the statistical noise and technical

inefficiency in production, respectively.

There are two models under the parametric SFA: the deterministic and

stochastic frontier models. The deterministic model involves a process of

enveloping all observations and identifying the distance between the observed

production and the maximum production defined by the frontier and the available

technology. This distance measures the technical inefficiency, hence, in the

deterministic approach, v i will be equal to zero.

There are several econometric techniques that can be employed to

estimate the deterministic frontier model. One can use the corrected ordinary

least square method where the parameters of the model, excluding the intercept

term, can be estimated consistently by using the ordinary least squares. This

method is considered robust even in the case of non-normality (Richmond,

1974). The consistent estimator for the intercept term can be obtained if the

estimated intercept term is corrected by shifting it upward until no residual is

positive and at least one is zero.

Assume the following model:

54

35
 y i = α + ∑ β j X ij + ε i where ε i ~ N (0, σ 2 )
j

The corrected parameter estimates are given by

Λ Λ
B jcols = B jols
Λ Λ Λ
α cols = α ols + max ε i 55
Λ Λ Λ
µ icols = ε i − max ε i

then the individual efficiency can be computed as

^
− µ iCOLS 56
TEi = e .

The stochastic frontier model differs from the deterministic model because

the former can capture the effects of exogenous shocks not under the control of

the units being investigated. In the stochastic model, other errors related to the

data measurement are also being taken into account. The error capturing the

statistical noise v i in Eq. (53) is assumed to be identical, independent and

identically distributed. With respect to the one-sided (inefficiency) error u i the

distributional assumption is a requirement. The commonly assumed distributions

in the literature are: the half-normal, truncated from below at zero and the

exponential distribution. If the two error terms are assumed to be independent of

each other and of the input variables, and assuming a particular distribution, then

the likelihood function can be defined and the maximum likelihood estimates can

be determined.

36
 From the estimation, one can obtain the fitted value for the composed

error term v i − u i . These two error terms, therefore, have to be separated in

order to facilitate the measurement of technical efficiency. Jondrow, Lovell,

Materov and Shmidt (1982) separated the ramdomness or statistical noise from

the technical efficiency by developing an explicit formula for the expected value

of u i conditional on the composed error term ( E ( u i v i − u i ) ) in the half-normal

and exponential cases.

Half-normal case:

σλ  φ ( ei λ / σ ) ei λ 
E [ u i ei ] = − 57
(1 + λ2 )  Φ( − ei λ / σ ) ς 


where Ø(۰) is the density of the standard normal distribution and Ф(۰) the

cumulative density function.

Exponential case:

E [ u i ei ] = ( ei − θσ ) +
2 [
σ v φ ( ei − θσ v2 ) / σ v ] 58
v
[
Φ ( ei − θσ v2 ) / σ v ]
1
where θ = .
σu

Truncated case:

Following Greene (1993), the conditional technical efficiencies for the

truncated model are obtained by replacing ei λ / σ in the expression for the half-

normal case, with

37
 ei λ ui
u i∗ = + 59
σ σλ

Finally, individual (conditioned) technical efficiency scores can be

expressed as

− E [ ui ei ]
TEi = e . 60

The measurement of technical efficiency has been extended to the panel

data and this approach captures the behavior of the producer as it evolves

across time. There are several benefits that can be derived from the use of

panel data: there will be more data variability, collinearity is less of a problem and

there will be more degrees of freedom necessary for econometric estimation

(Baltagi, 1995).

For the general panel data specification, the generic form of stochastic

frontier production function given by Eq. (53) can be extended by adding the

subscript t to the output, inputs and the error term. The stochastic frontier

production function can then be expressed as:

γ it = f ( xit , t ) exp( vit − u it ) 61

where yit is the output of the ith unit (i = 1,2,. . . . . ,N) in period t (t =1,2,. . . .,T);

f(.) is the production technology; xit is a vector of j inputs; t is the time trend

variable; uit is a non-negative random variable and output-oriented technical

inefficiency term; and vit is assumed to be an iid N(0, σ v ) random variable,

2

independently distributed of the uit.

The technical efficiency (uit) in Eq. (61) is assumed to be invariant through

time. This time-invariant efficiency assumption is only plausible with very short

38
panels, but highly unlikely if the time-dimension of the panel data spans over a

longer period of time. It can be argued that a firm’s efficiency or technology is

less likely to remain constant over an extended period of time. This issue on

technical efficiency (uit) has been addressed in the literature and several

specifications have been proposed to make the technical inefficiency term uit time

varying. Kumbhakar (1990) and Battese and Coelli (1992), respectively,

proposed the following time-varying efficiency specifications

[ (
u it = u i / 1 + exp at + βt 2 )] 62.a

u it = u i × exp[ − η ( t − T ) ] 62.b

where t is time and α, β, and η are the parameters to be estimated. The

shortcoming of these two specifications is the imposition of the same temporal

pattern of efficiency across time making the efficiency rankings of the firms

invariant through time. Cuesta (2000) has addressed this problem by proposing

an efficiency specification following the firm-specific pattern as indicated by

u it = u i × exp[ − ξ i ( t − T ) ] 63

where ξi are firm-specific parameters responsive to different patterns of temporal

variation among firms.

Battese and Coelli (1995) have further extended the approach of

Kumbhakar, Ghosh and McGuckin (1991) to panel data by specifying the

technical efficiency (uit) as a function of a set of explanatory variables zit, and an

unknown vector of coefficients δ:

u it = z it δ + wit . 64

39
They pointed out that the random wit is defined by the truncation of the normal

distribution with zero mean and variance σ2, such that the point of truncation is

-zitδ, that is, wit ≥ -zitδ. As a result, uit is obtained by truncation at zero of the

normal distribution with mean zitδ and variance σ2. The normal assumption that

the uits and vits independently distributed for all i =1,2,……N and t = 1,2, . . .,T is

obviously a simplifying but restrictive condition.

The measure for technical efficiency uit is the proportion by which the

actual output yit falls short of the maximum possible output which is considered

the frontier output f(x,t). Therefore technical efficiency (TE) can be defined by:

y it
TE it = = exp( − u it ). 65
f ( xit , t )

In addition to the measure of technical efficicency uit, the productivity

change interpreted as the exogenous technical change can also be measured

using the time trend variable appended in Eq. (61). It is specifically calculated by

taking the log derivative of the stochastic frontier production function with respect

to time (Kumbhakar, 2000). That is, technical change (TC) is defined as:

∂ ln f ( xit , t ) 66
TC it =
∂t

Since the technical efficiency is time-varying, the overall productivity

change is not only dependent on the technical change but also on the change in

technical efficiency (TEit). That is, given the input level, the productivity change is

given by

∂ ln y it 68
= TC it + TEC it
∂t

40
where

∂u it ∂ ln TE it 69
TEC it = = .
∂t ∂t

TCit is positive if the exogenous technical change shifts the production frontier

upward given inputs. TECit is negative if technical efficiency (TEit) declines over

time or positive if a producer is moving closer to the production frontier (technical

efficiency increasing over time, ceteris paribus).

When input quantities change, the productivity change can be measured

by TFP change and is defined as:

• • •
TFP it = y it − ∑ J S jit x jit 70

where Sjit is the share of the jth input for ith firm at time t. Following Kumbhakar

(2000), the overall technical efficiency change is decomposed into a pure

technical efficiency change effect and scale efficiency change effect. This overall

technical efficiency can be measured by differentiating Eq. (61) totally and using

the definition of TFP change in Eq. (70). The TFP change can be expressed as

TFP = ( RTS − 1) ∑ J λ j x j + TC + TEC + ∑ J ( λ j − S j ) x j

• • •
71

∂ ln y
where RST = ∑ j ≡ ∑ j ε j is the measurement of the returns to scale and
∂ ln x j

εj inputs elasticities defined at the production frontier f ( xit , t ) ,and

λ j = f j x j / RTS when fj is the marginal product of input x j (assuming that

inefficiency effects u it are not functions of inputs). As shown by Eq. 71, TFP

change is composed of different components: the first term is the scale effect, the

41
second term is the pure technical change, the third term is the technical

efficiency change, and the last term is the input allocative effect.

In this parametric SFA, the measures of technical efficiency and technical

change can be used to calculate the Malmquist index via Eqs. 38-40. Eq. (65)

can be employed to compute for efficiency change component. Suppose

d Ot ( xit , y it ) = TE it and d O ( xis , y is ) = TE is , then the efficiency change can be

S

expressed as

TE it
Efficiency change = . 72
TE is

This measure is the same with Eq. 39. On the other hand, the technical change

index between periods s and t for the ith firm can also be calculated using the

parameter estimates derived by taking the time derivative of the production

function. This index may vary for different input vectors due to the assumption of

non-neutrality of the technical change. Hence, there is a need to use the

geometric mean to measure the technical change index between two periods.

This can be expressed as

1
 ∂f ( xis , s, B )   ∂f ( xit , t , B )   2
Techncial change = 1 +  x 1 +  73
 ∂s   ∂t 

This measure is related to Eq. 40. To compute for the Malmquist productivity

index, the efficiency change and technical change indices can be derived using

Eqs. (72) and (73), respectively, have to be multiplied together. This Malmqvist

productivity index can also be compared with Eq. 38.

42
 4. Review of Applications in the Philippines

This section presents the results obtained in selected studies that have

attempted to measure the productivity levels or growth rates of Philippine

agriculture. This does not attempt to explain the robustness of the estimation

results from these studies, rather, it demonstrates that a number of studies have

already been done to measure the growth of productivity in Philippine agriculture

using different data sets, timeframes and measurement techniques. This section

also presents the different data sets used to estimate productivity estimates for

Philippine agriculture.

Researches on agricultural productivity in the Philippines can be classified

according to the types of study conducted or the analysis used in the study. A

research can be a cross-country study or a country-specific study. The first type

is conducted purposely to examine productivity gaps among different countries or

to analyze convergence. Thus, in this case, productivity estimates are usually

43
calculated at the national or aggregate level. Examples of these studies are

those of Fulginiti and Perrin (1993, 1998), Craig, et al., (1997), Mundlak, et al.

(2004), Arnade (1998), Suharriyanto and Thirtle (2001), Trueblood and Coggins

(1997), and Coelli and Rao (2003). The second type intends to estimate country-

specific productivity levels or growth rates usually for purposes of a trend

analysis and these can be either national or regional estimates (see Evenson

and Sardido, 1986, Cororaton and Cuenca, 2001 and Teruel and Kuroda, 2004,

2005).

In the Philippines, only a handful of empirical studies have dealt with

productivity estimation in agriculture. This paper is limited to a review of the

studies conducted since the 1980s onwards. Table 1 summarizes the different

productivity studies in Philippine agriculture showing the different timeframes,

productivity estimates and the productivity approaches used.

4. 1 Application in the Philippines

4.1.1 Cross-country Studies

Pioneering cross-country studies started with the work done by Clark

(1940) and Bhattachrjee (1953) followed by prominent studies by Hayami and

Ruttan (1969, 1970). Thereafter, most of the studies conducted were

refinements of the earlier ones through inclusion of variables missing in the

previous models such as R&D, infrastructure, use of different functional forms,

pooling techniques, as well as improved measurements of input and output with

quality adjustment (Evenson and Kislev, 1975; Antle, 1983; Nguyen, 1979;

44
Mundlaak and Hellinghausen, 1982; Kawagoe, Hayami and Ruttan, 1985; Lau

and Yotopolous, 1989; Craig, Pardey, and Roseboom, 1997). What follows are

accounts of cross-country studies on productivity offering some estimates for

Philippine agriculture.

Using a Cobb Douglas production function, Fulginiti and Perrin (1993)

specifically studied the effects of price discrimination and other related policies

on agricultural productivity from 1961-1985 for eighteen (18) developing

countries. Empirical evidence shows that price-depressing policies reduce

productivity with an elasticity estimate of 1.3 per cent. They pointed out that

those countries with higher taxation show more regression than those with little

or no taxation at all. Based on their analysis, Philippine agricultural productivity

could have been increased by 1.3 per cent through the elimination of direct

government intervention (commodity price intervention) and 4.1 per cent through

the removal of indirect intervention (real exchange rate distortion and protection

afforded to the nonagricultural sector).

Fulginiti and Perrin (1998) conducted another cross-country study to

confirm previous findings that agricultural productivity is declining in developing

countries. In this study, they covered the same time period and used four

different productivity estimation procedures. The empirical results show that at

least 50 per cent of the countries investigated have experienced a decline in

productivity. For Philippine agriculture, wide discrepancy in results is observed as

indicated by the estimated growth rates of productivity. Using the Malmquist

index approach, the average annual productivity growth rate was -0.30 per cent

45
from 1961-85. On the other hand, using the traditional growth accounting

approach, the average rate of growth was –2.50 per cent for the same period.

Conversely, the production function- (variable and fixed coefficient) based

estimations resulted in positive estimates of 0.1 and 1.80 per cent, respectively.

Another, but more comprehensive, multi-country study using the

Malmquist index approach was conducted by Trueblood and Coggins (1997).

This study computed the productivity growth rates of 115 developed and

developing countries. For the years covered 1961-1991, this study shows that

most countries had modest agricultural productivity growth rates. The developed

countries had an overall weighted average growth rate of 1.6 per cent for the

entire period. There was, however, a marked decline in productivity in

developing countries pointing to the widening gap of productivity among these

countries. The widening productivity gap was particularly evident during the

decades of the 1960s and the 1970s, though there was a reversion in this trend

in the 1980s. When viewing the period as a whole, Trueblood and Coggins

(1997) approximated a 1.19 per cent annual average productivity growth rate for

Philippine agriculture.

Arnade (1998) also investigated the productivity changes among the

different countries. Like Thirtle, et al. (1995) and Fulginiti and Perrin (1997,

1998), he used the conventional Malmquist approach by constructing an index

with respect to a contemporaneous frontier technology, in which the frontier in

year t+1 is compared with that of the previous year, t, while ignoring past history.

Based on this study, Philippine agriculture recorded a negative productivity

46
growth rate of 0.40 per cent indicating a deceleration of productivity growth for

the years 1961-93. This also indicates that productivity has not been the source

of growth in Philippine agriculture for the entire period.

Though the approach adopted by Arnade (1998) is used extensively in

examining cross-country productivity differences, it is noted to suffer a

dimensionality problem especially when the number of observations in the cross-

section is small relative to the total number of inputs and outputs. This problem

wa emphasized by Suhariyanto and Thirtle (2001) in their study and they

addressed this by measuring the agricultural total factor productivity using the

Malmquist index calculated with respect to the sequential frontier. Based on the

empirical evidence, more than 50 per cent of the 18 Asian countries were found

to have lost their productivity from 1965 to 1996. This is a corroboration of the

empirical results on productivity loss obtained by Fulginiti and Perrin (1998) and

Arnade (1998). On the contrary, Philippines agriculture posted an annual

positive growth rate of 1.33 per cent.

For the period 1962-1992, Martin and Mitra (1999) estimated the total

factor productivity for the agricultural as well as the manufacturing sectors in a

relatively wide range of countries for convergence analysis. Under the

assumption of constant returns to scale, they used primal functions such as the

translog and the Cobb Douglas production functions. They also computed for

productivity growth rates using the growth accounting approach that is based on

the actual factor shares. For the Philippines, agricultural productivity grew at an

average annual rate of 1.64 per cent using the translog production function and

47
at 1.57 per cent based on the Cobb Douglas production function. A relatively

higher annual growth rate of productivity of 2.07 per cent was calculated using

the growth accounting procedure.

Using the Malmquist index approach, Coelli and Rao (2003) examined the

level and trends of productivity of 93 developed and developing countries that

account for 97 per cent of the world’s agricultural output and 98 per cent of the

world’s population. Using the Malmquist index approach on recent data from the

Food and Agriculture Organization of the United Nations, they calculated an

annual average rate of growth in productivity of 2.1 per cent from year 1980 to

2000. They found little evidence of technological regression and this is in

contrast with the empirical findings of a number of studies. For Philippine

agriculture, they computed 0.80 per cent annual rate of productivity growth for

the same period. They, however, got a higher productivity growth rate of 1.3 per

cent using the Törnqvist index number procedure.

Mundlak (2002, 2004) estimated productivity growth rates that departed

from the use of a traditional production function that assumes that technology is

homogenous. They argued that the level of output was dependent on the

implemented technology and the inputs used. Thus, the aggregate output is the

sum of outputs produced using more than one technique, making the technology

heterogeneous. In the case of heterogeneous technology, Mundlak (2002,

2004) adopted an optimization problem at the firm level expressed as the choice

of the techniques to be implemented and their level of intensity, given the

available technology, product demand, factor supply, and constraints, referred to

48
as state variables. The state variables in this study were referred to as the

carriers of the implemented technology and these included roads, representing

the physical infrastructure, measures of education, health representing human

capital and incentives. For the empirical estimation, the aggregate production

function was specified and applied to three ASEAN Countries: Philippines,

Thailand and Indonesia. This production function is like a Cobb-Douglas

function, but the coefficients are functions of the state variables and possibly of

the inputs. Basing on the empirical evidence, the state variables accounted for

an important part of the changes in the total factor productivity. Decreasing

productivity was noted among the three countries, with the steepest decline

observed in Philippine agriculture, from 0.98 per cent in 1961-80 to 0.13 per cent

in 1980-98. On the average, the productivity growth rate was 0.25 for the entire

period.

4.1.2 Country-specific Studies

Using a growth accounting procedure, Evenson and Sardido (1986)

conducted a country-specific study and obtained an estimated average annual

productivity growth rate of 1.90 per cent for Philippine agriculture over the years

1955-1984.

Cororaton and Cuenca (2001) also attempted to estimate the productivity

growth rate for the entire Philippines and for the different sectors including

agriculture. They also applied the growth accounting approach using national

and sectoral databases covering years 1980-1998. The sectoral database was

49
constructed from the national level data using some distributional shares. In their

productivity estimation, they only included two conventional inputs such as

capital and labor. For the entire period, agricultural productivity growth rate was

negative 0.56 per cent. This indicates that the growth in output for the period

1980-1989 was driven by production inputs.

On the other hand, using a recent time-series cross-sectional agricultural

data set covering 12 regions and covering the years 1974-2000, Teruel and

Kuroda (2004, 2005) computed the productivity growth rates in Philippine

agriculture by using a translog variable cost function (with land assumed to be a

quasi-fixed input), a translog cost function (with price of land calculated as the

residual of total revenue, net of measured costs for agricultural labor, fertilizer,

seeds, and machinery and animal services), the growth accounting approach

(the factor shares were based on a Cobb Douglas production function estimation)

and an index number approach using the Törnqvist–Theil approximation method

of the Divisia index. It is worth emphasizing, that Teruel and Kuroda (2005)

applied these different approaches to the same dataset with the same timeframe.

For the entire 27-year period, Teruel and Kuroda (2004, 2005) obtained a

conservative estimate of the average annual productivity growth rate of 0.51 per

cent based on the econometric approach using a translog variable cost function.

The estimate based on a Cobb–Douglas production function approach is also

modest, giving an annual average productivity growth rate of 0.99 per cent for

Philippine agriculture. For the translog cost function and index number

50
techniques, they, however, obtained higher estimates of 1.42 and 1.62 per cent,

respectively.

4.1.3 Productivity Estimates by Subperiod

Evenson and Sardido (1986) and Teruel and Kuroda (2004, 2005)

summarized and presented estimates of productivity by subperiods. These

studies were conducted to assess productivity growth and trends across time.

These estimates are presented in Table 2. Evenson and Sardido (1986) reported

productivity estimates using a 5-year and 10-year subperiods, while Cororaton

and Cuenca (2001) maintained 9-year subperiods. Teruel and Kuroda (2004,

2005), on the other hand, computed productivity growth rates by considering the

following time periods: 1974-1980, 1981-1990 and 1991-2000. Mundlak, et al.

(2004) for their study maintained longer episodes such as 1961-1980 and 1980-

1998.

Using a growth accounting procedure and agricultural data from 1950-

1984, Evenson and Sardido (1986) obtained positive estimates for the different

5-year subperiods except for 1980-1984. The agricultural sector performed better

during the 1950s as indicated by productivity growing at an annual rate higher

than 2 per cent, followed by a decline in the 1960s and a recovery in the 1970s.

The productivity growth rate particularly was at its peak during the period of

1975-1979 with a growth rate of 5.3 per cent. This subperiod, however,

considered as the post Green Revolution period by Evenson and Sardido (1986),

was followed by a deceleration of productivity as evidenced by a negative annual

51
growth rate of 1.10 per cent during the subperiod 1980-1984. This poor

performance of the agricultural sector in the early 1980s seems to find support

from the study carried out by Cororaton and Cuenca (2001). They computed an

annual productivity growth rate of -5.36 per cent for years 1980-1989 followed by

a positive growth during the 1990s at 4.25 per cent.

Teruel and Kuroda (2004, 2005), based on a translog variable cost

function, found that the highest productivity level of 0.77 per cent in Philippine

agriculture also occurred during the post-Green Revolution period (1974–1980).

From this subperiod, the productivity growth declined in the 1980s and even

further in the 1990s as evidenced by the computed annual average rate of 0.50

and 0.35 per cent, respectively. This further indicates that productivity level

during the Green Revolution era has not been sustained or paralleled, despite

substantial policy changes put in place since 1986 to invigorate agriculture in the

Philippines. These productivity trends are also reinforced qualitatively by

estimates derived from the translog cost function as shown by growth rates 2.01,

1.16 and 0.84 per cent for the subperiods 1974-1980, 1981-1990 and 1990-2000,

respectively.

On the other hand, these temporal patterns of productivity are not

supported by estimates obtained from productivity measurement using the

growth accounting and the Törnqvist index approaches. For the growth

accounting approach, Philippine agricultural productivity grew annually at a rate

of 2.19 per cent in the late 1970s and then followed by a deceleration and

recovery in the 1980s and 1990s as explicitly shown by annual growth rates of

52
-0.53 and 1.44 per cent, respectively. Similarly, for the Törnqvist index

approach, the calculated productivity growth rates are 2.50, 0.50 and 2.60 per

cent across time periods. However, Mundlak, et al (2004), using Cobb-Douglas

production function with state variables, seem to validate the evidence on

declining productivity as shown by their estimates indicating a relatively rapid

growth during years the 1961-1980 (0.98%) and slower growth during the years

1980-1998 (0.13%).

4.1.4 Regional Productivity Estimates.

Table 3 presents productivity estimates for different regions. Evenson and

Sardido (1986) reported estimates for productivity growth rates for 9 regions

using the growth accounting approach. For the entire 1950-1984, the rapid

productivity growth was observed in Northern-Eastern Mindanao (2.54%),

followed by two regions in Luzon, namely: Southern Tagalog (2.39%) and the

Ilocos region (1.60%). Western-Southern Mindanao and Eastern Visayas had

productivity growth rates within the range of 1.09 to 1.46 per cent. Other regions

showed modest growth with a rate of less than 1 per cent except for Central

Luzon that did not reflect any productivity growth.

Teruel and Kuroda (2005) also computed for the productivity estimates of

the different regions using the translog variable cost function and the index

number approach. Compared with Evenson and Sardido, the empirical

estimates based on the translog variable cost function show a marked difference

53
in terms of the productivity performance of the different regions over the period

1974-2000. The highest annual average productivity growth of 1.56 per cent was

posted by the Ilocos region, followed by Central Luzon with productivity growing

at a rate of 1.45 per cent. On the other hand, negative productivity estimates

were noted in three of the twelve regions, namely: Bicol, Western Visayas and

Western Mindanao.

Using the index number approach, among the regional production areas,

Central Luzon had the highest annual productivity rate of growth of 3.28 per cent.

This region was followed by Ilocos, Southern Tagalog and Northern Mindanao

having an annual productivity growth rate of 2.16 per cent. Other regions with

productivity growth rates above 2 per cent per annum were Cagayan Valley and

Southern Mindanao. The remaining regions with positive productivity growth

rates included Western Visayas (0.55%), Central Visayas (1.07%), Eastern

Visayas (0.91%), Western Mindanao (0.17%) and Central Mindanao (0.85%).

On the contrary, between the years 1975 to 2000, only Bicol region posted an

annual negative productivity growth rate of 0.29 per cent.

It can be noted from Table 3 that out of the 12 regional agricultural

production areas, eight has productivity levels explaining more than 50 per cent

of output growth and these included all the regions in Luzon and two regions

each from the Visayas and Mindanao. This illustrates that agricultural production

in the Philippines during this period was driven by productivity and the regions in

Luzon were relatively more productive than those in the Visayas and Mindanao.

54
On the average, productivity contributed 59 per cent to output growth with the

remaining 41 per cent attributed to the increased use of inputs.

4.1.5 Productivity Estimates by Approach

This subsection classifies productivity studies by type of approaches used

in the estimation. As indicated by Table 4, four studies used growth accounting

approach to estimate productivity growth. Regardless of timeframes and data

sets, the average productivity growth rate based on this approach fell within the

range of -2.50 to 2.07 per cent

For the index number approach, two studies attempted to compute for the

rate of growth of productivity using the Tornqvist-Theil index number procedure.

The mean growth rate was relatively higher at 1.46 per cent annually.

There are five studies identified to have used the econometric approach

using both the primal and the dual functions. These studies adopted one or a

combination of these functions for empirical exposition purposes. Three studies

estimated productivity based on a production function either using the Cobb-

Douglas or the Translog functional forms. On the other hand, two studies

employed a dual cost function using a translog functional form. Ignoring the

differences in the methodologies, the time periods, the functional forms and the

data used in the estimation, the productivity growth rate based on the

econometric approach averaged 1.14 per cent; lower than the average estimate

based on the index number approach.

55
 Moreover, a number of productivity studies conducted more recently

offered productivity estimates for Philippine agriculture using the DEA-based

Malmquist approach. With this approach, the productivity estimates fell within

the range of -0.30 to 1.19 per cent and averaged 0.32 per cent. This indicates

that average annual productivity growth rate calculated using DEA-based

Malmquist approach generated more conservative than results than those

obtained using other productivity measurement techniques.

4.2 Contribution of Non-conventional Inputs to Productivity

This section discusses the non-conventional inputs in relation to productivity.

The concept of TFP, as residual share of output growth after accounting for the

changes in production inputs, originated from the seminal papers of Tinbergen

(1942) and Solow (1957). Abromovitz (1956) called this residual part of the

output growth as “measure of our ignorance”, since it does not only contain

technological change but also other unnecessary components, namely

measurement errors, omitted variables, model misspecification, etc.

Accurate measurement is at the heart of productivity estimation and

comparison. There are two types of measurement errors: in factor utilization and

in the quality changes of the production factors. Thus, given the importance of

TFP in understanding the growth process, one of the recent directions taken by

researchers, as indicated in the literature, has been on measuring better the

56
factors of production, including corrections for quality of factors (Jorgenson and

Griliches, 1967; Greenwood and Jovanovic, 2000). Some researchers have

addressed the issues pertaining to omitted variables and model specification by

incorporating non-conventional inputs to TFP estimation. These non-

conventional inputs include education, research and development, extension,

government programmes and policies and infrastructure. Several empirical

studies have been conducted to determine their contribution to productivity.

Some of these non-conventional inputs have been used to account for input

quality changes. This will be discussed in turn.

Education is always assumed to be related to the quality of the agricultural

labor force. Education is an investment in “human capital”. It provides

individuals with general skills to solve problems. However, data on the

educational level of the agricultural labor are not available especially in most

developing countries. Consequently, for productivity analysis, national proxies

are usually used in empirical studies: literacy and life expectancy (Craig, Pardey

and Roseboom, 1997), historic calorie availability (Frisvold and Ingram, 1995)

and the number of agricultural college graduates as a proxy for the level of

advanced technical education in agriculture (Hayami and Ruttan, 1985).

Many researchers also have attempted to account for land quality in

productivity estimation in order not to attribute the differences in production that

are actually due to changes in land quality to other inputs. Some tried to control

for differences in land quality by including a land quality index in productivity

estimation. Developed by Peterson (1987), in this land quality index, land quality

57
is characterized as a function of historic precipitation and the share of a

country's land area devoted to pasture and crops. Other researchers have made

adjustments for the impact of land quality on productivity by using proxy variables

such as the mean rainfall and the percentage of land area that is arable and

irrigated.

Research and development is also undertaken to improve the production

capacity of the agricultural sector given resource constraints and to minimize the

environmental degradation caused by agricultural production. Research and

development has been shown to have significant contribution to productivity. On

the average, the productivity contribution of agricultural research ranged from 20

to 60 per cent (Ruttan, 1980, 1982; Echeverria, 1990; Huffman and Evenson,

1993; and Fuglie et al., 1996). For productivity analysis, public agricultural

research expenditures are generally used as proxy for research and

development. To measure the impact of research and development to

productivity, expenditures in research are lagged for a number of years to

account for the time required for research to reach fruition. This is done

specifically because a particular research may require several years for

completion and the farmer’s learning curve for the new innovation may also take

time. This approach of lagging agricultural research expenditures, however,

does not account for the spillover effects of research to other countries or

regions. Agricultural research is performed both by public and private sectors.

Private agricultural research is equally important but related information is

incomplete or not yet available especially in the case of developing countries. It

58
has been shown in the productivity literature that public investment in research

stimulates private research efforts (Pray, Neumeyer and Upadhyaya, 1988).

Related to research are extension services. This non-conventional input

has been shown to have positive contribution to agricultural productivity.

Agricultural extension involves the dissemination of agricultural information, the

demonstration of new production technologies as well as direct consultation with

farmers regarding specific problems related to production and farm management.

Agricultural extension is undertaken to reduce the time lag between the

development of new technologies and adoption. It is assumed that the impact of

extension on productivity is more immediate than research. Based on empirical

findings, the contribution of extension to agricultural productivity is more mixed

than research and this problem is data-related since reports on public extension

expenditures are incomplete and even more non-existent than research

especially in most developing countries.

On the other hand, the effects of government programs and policies to

productivity have also been revealed by a number of studies (Fulginiti and Perrin,

1993; Hu and Antle, 1993; Block, 1995; Fulginiti and Perrin, 1997; Frisvold and

Ingram, 1995). It has been indicated that the prices of agricultural outputs and

inputs affect the technology chosen by the farmers and thus the productivity

trends. These prices may be affected by government policies that tax or

subsidize agriculture. In some productivity estimation studies, the depreciation of

the real exchange rate, past export growth rate and export instability are used as

proxies for government policy and policy reforms. Relatively, little research has

59
attempted to investigate the impact of government programs on productivity in

agriculture, but some have shown evidence of positive relationship (Huffman and

Evenson, 1993 and Makki and Tweeten, 1993).

Like other non-conventional inputs, public investments in infrastructure

can also increase agricultural productivity by lowering the cost of inputs at the

farm level and increasing farmers' access to marketing opportunities. To account

for the impact of the provision of public infrastructure to productivity, proxy

variables are also used such as the paved road density adopted by Craig,

Pardey and Roseboom (1997) and the gross domestic product of each country's

transportation and communication sectors employed by Hu and Antle (1993).

Other proxy variables include water and sewer systems, schools, hospitals,

conservation structures and mass transit. Using a Cobb-Douglas (C-D)

aggregate production function, Aschauer (1989) was the first to empirically show

the strong positive impact of the ratio of the public to the private capital stock to

productivity in the United States. Specifically, he found out that a 1 per cent

increase in the public capital stock would result in an increase in total factor

productivity (TFP) by almost 0.40 per cent. Thus, he attributed the decline in US

TFP growth in the 70s to lower public investment spending.

In the Philippines, some studies attempted to incorporate these non-

conventional inputs to account for the changes in the quality of production inputs

and to determine their contribution to productivity.

One empirical study was conducted by Evenson and Quizon (1991) and

they employed a normalized quadratic profit function with infrastructure,

60
technology and policy or program variables and used pooled dataset covering

the years 1948-1984 and 9 regions.6 Infrastructure variables include roads, rural

electrification and general rural development expenditures. To capture the

impact of policies or programs to productivity, they used variables such as land

transfers under the agrarian reform program. On the other hand, they also

included technology variables such as high-yielding rice varieties, the regional

and national research stock variables and extension. Evenson and Quizon

(1991) have evaluated the productivity effects of infrastructure, technology and

policy via the output supply and input demand equations using elasticities, but

not in the sense of productivity decomposition analysis. The major findings can

be summarized as follows:

i. HYVs stimulated input demands and had positive impact on output;

ii. Regional research program had substantial impact to output

relative to national research program, although though combined

research investment had a higher marginal rate of return of 70 per

cent;

iii. The net impact of extension was positive but small, indicating a

lower rate of return;

iv. Roads were shown to have a significant impact on inputs and

outputs with a substantial net profit effects;

v. Rural electrification appeared to have minimal impact on output;

and

6
Evenson and Quizon (1991) used the data set constructed by Evenson and Sardido.

61
 vi. Land reform had a small but significant output and net productivity

effect.

Teruel and Kuroda (2000) also examined the impact of public

infrastructure on the productivity performance of Philippine agriculture. Instead

of the profit function, they used a translog cost function framework augmented

with public infrastructure such as irrigation, roads and rural electrification7. They

used more a recent data set covering 12 regions and period 1974-2000.

From their study, a higher TFP estimate was noted during the late 1970s,

but this was followed by a discernible decline in the 1980s and 1990s. The higher

productivity growth in the period 1974-1980 was driven by public infrastructure.

Its productivity contribution, however, decreased markedly in the 1980s. During

this decade, it was technological change that spurred the growth of productivity,

although its contribution was not sufficient to sustain the higher productivity level

of the late 1970s. On the other hand, in the last decade, there was a recovery of

contribution of public infrastructure to productivity, though this did not reverse the

overall trend in TFP growth. For the entire period, TFP grew with an annual

average growth rate of 1.42 per cent. The contributions of technological change

and public infrastructure to TFP were comparable (1.81 and 1.99 per cent

respectively), with provision of farm-to-market roads seen to play an important

role. This is in line with the findings of Evenson and Quizon (1991) emphasizing

the importance of roads relative to rural electrification in effecting significant

changes in input demand, output supply as well as in profit. Overall, in this study,

7
Teruel and Kuroda (2005) also estimated a profit function. However, we did not further pursue
this line of inquiry since there were negative profits in some regions for some years.

62
Teruel and Kuroda (2005) provided empirical evidence showing that the decline

of productivity in Philippine agriculture could be partly explained by the reduced

provision of rural infrastructure.

4.3. Data Sets

In order to estimate productivity levels or growth rates, data are needed on

agricultural output and input. In the case of the cross-country or even the

country-specific study using time and cross sectional data, comparable and

consistent data are necessary to make comparisons over time and space. This

subsection deals with the measurement of inputs and outputs that may influence

measured productivity. First, it begins with a discussion of the measurement of

the quantity of output and proceeds with a discussion of the measurement of the

different inputs. Discussion will be done by type of productivity studies starting

with cross-country and moving on to country-specific studies. Specifically, the

different data sets will be presented: those used by cross-country studies to

include that of Mundlak, et al. (2002) in their study involving three ASEAN

countries, and those employed for country-specific analysis such as the works of

Evenson and Sardido (1986) and Teruel and Kuroda (2004, 2005).

6.1 Cross-country Studies

For the past decade, the number of cross-country studies examining the

differences in agricultural productivity levels and their growth rates has increased

significantly. This can be attributed to three factors: 1) the availability of some

63
panel data sets, 2) the development of new empirical techniques to analyze this

type of data, and 3) the desire to assess the impact of Green Revolution and

other programs to agricultural productivity in developing countries (Coelli and

Rao, 2003).

Most of the cross-country studies reviewed in this paper used the Food

and Agriculture Organization of the United Nations (FAO) panel data, spanning

for several decades from the 1960s to 1990s8. Most of these data are typically

measured in relatively simple physical terms especially the conventional inputs.

The shortcomings of the FAO data have been cited in the literature (Thirtle, et al.,

1995; Fulginiti and Perrin, 1997, 1998; Arnade, 1998). This data set does not

account for the differences in input quality especially land, the chemical inputs

considered only fertilizers and excluded other chemicals for crop protection like

pesticides, and the machinery did not include animal draft power, equipment and

other machinery.

6.1.1 FAO Data Set

The FAO developed a measure of output that aggregates each country’s

output in a manner that minimizes exchange rate distortions and facilitates inter-

country comparisons. This measure is called the “international dollar.” This

measure involves the calculation of weighted world prices for each commodity,

and multiplies each country’s commodity quantities by their weighted world

prices. Aside from the international dollar measure, there are other ways to

aggregate agricultural output and these include the wheat unit approach and the
8
Other researchers used the data set from Hayami and Ruttan series of studies.

64
use of official exchange rates. The former was developed by Hayami and Ruttan

(1985) and this involved the calculation of the ratio of each individual commodity

price to the price of wheat in India, the United States and Japan, while the latter

converted output in local currency units to dollars.

Land typically is measured as hectares of agricultural land that is arable

and permanent cropland. Some studies exercised control over the differences in

land quality by using the international land quality index of Peterson (1987).

Fertilizer input is measured as the sum, in nutrient-equivalent terms, of

nitrogen (N), potassium (P2O2), and phosphate (K2O) contained in the

commercial fertilizers consumed in each country.

Labor includes economically active agricultural population. Economically

active population is defined as all persons engaged or seeking employment in an

economic activity, whether as employers, own-account workers, salaried

employees or unpaid workers assisting in the operation of a family farm or

business. Specifically, the FAO definition of economically active population in

agriculture includes workers in agriculture, forestry and fisheries. A few

researchers have attempted to correct for the quality of the agricultural labor

force by considering non-conventional inputs such as national-level measures of

education or literacy. In addition, other researches adjusted the quality of

agricultural labor force directly by sex and age.

Livestock in the FAO dataset are measured by aggregating different

animals (Cattle, sheep, goats, pigs, mules, horses, asses, buffaloes, camels,

65
ducks, chicken, and turkeys) using different weights usually taken from Hayami

and Ruttan (1985).

Machinery is measured as the total number of wheel and crawler tractors

used in agriculture. This, however, excludes garden tractors.

6.1.2 The Mundlak, et al. Data Set

For Mundlak, et al. (2002), the data set included time series data on the

quantity of output and inputs such as agricultural land, fertilizers, capital stock in

agricultural machines and in non-agricultural origin (livestock and orchards), and

labor. The data were taken from the different sources: National Statistical

Coordination Board (NSCB), FAO, Fertilizer and Pesticide Authority (FPA) and

from different surveys conducted by National Statistics Office. From the

Mundlak, et al. study (2002), the data series construction will be discussed in

turn.

The agricultural Gross Domestic Product series includes Forestry and

Fishery. National accounts were obtained in constant and current market prices

(pesos) from the Economic and Social Statistics Office of the National Statistical

Coordination Board (NSCB).

Data on the area in hectares of agricultural land were taken from the

statistical databases found in FAO's website. This data series included the arable

and permanent cropland, along with permanent pastures. Data on the area in

hectares of irrigated land were also downloaded from the statistical databases of

66
the FAO website. Data on the consumption of fertilizers in metric tons were

reported by the FPA.

The data series on the agricultural capital stock in agricultural machines

as well as in livestock and orchard were estimated using the method of Larson,

Butzer, Mundlak, and Crego (2000). Data on gross domestic capital formation in

agricultural machinery and tractors in current pesos were taken from the

Philippine Statistical Yearbook. These were used to calculate capital stock. The

investment data were then converted to constant values using the agricultural,

fishery, and forestry GDP deflator before aggregating these to the capital stock

series. On the other hand, the data on gross domestic capital formation in

breeding stock and orchard development were in constant and current market

prices (pesos) taken from NSCB. These were also used in calculating capital

stock.

Labor force data were obtained from the Philippine Statistical Yearbook

and the Bureau of the Census and Statistics' (BCS) Survey of Households, now

known as the National Statistics Office (NSO). When available, data on total

agricultural employment were taken from the October survey of NSO.

6.2 Country-specific Studies

For country-specific studies, several data sets were assembled for

Philippine agriculture for the analysis of production structure and for productivity

estimation. Evenson and Sardido (1986) constructed a data set for years 1948-

1974 for 9 regions. They also assembled agricultural data series for the years

67
1974-1984 using a 12-region classification. The most recent data set can be

attributed to Teruel and Kuroda (2004, 2005). This cross-sectional and time-

series dataset on Philippine agriculture included 12 regions and spanned 27-year

period. This period spans the post-Green Revolution era and the period

characterized by substantial changes in policies affecting Philippine agriculture.

Teruel and Kuroda’s (2004, 2005) data set was constructed using assumptions

mostly taken from Evenson and Sardido (1986).

6.2.1. The Evenson and Sardido’s Data set

Evenson and Sardido (1986) define agricultural output as the gross value

of production of agricultural crops and livestock. Most of the data for this series

were taken from the Raw Materials Resources Survey for Agriculture (RMRSA)

of the Department of Agriculture and Natural Resources (DANR) and from the

Crop and Livestock Survey (CLS) of the Bureau of Agricultural Economics

(BAEcon), DANR. The data on agricultural output were reported on a calendar

year basis.

Regional agricultural crop production included palay, corn, coconut,

sugarcane, fruits, and other crop production such as root crops, onions, potatoes,

beans and peas, vegetables, coffee, cacao, peanuts, abaca, tobacco, cotton,

kapok, ramie, rubber, maguey, and other commercial and food crops. Annual

crop prices were computed by dividing the crop value by the quantity of

production.

68
 For the regional livestock and poultry production, Evenson and Sardido

(1986) included meat, milk and egg production of farm households as well as

changes in the livestock and the poultry inventories. Annual changes in the

inventories from 1948 to 1984 were computed using the annual regional

population estimates of carabaos, cattle, hogs, horses, goats, sheep, chicken,

ducks, geese, and turkeys from the RMRSA and the CLS. Dressed weights of

the slaughtered livestock and poultry in each region were also obtained from the

RMRSA and the CLS. Missing years were filled in by using the ratios of dressed

weights of slaughtered animals to their corresponding January populations.

Prices of livestock and poultry were computed in the same manner as

crop prices. Meat prices were computed as the price of a particular animal

divided by the average dressed weight of similar slaughtered animals. These

dressed weight equivalents were obtained from the DANR.

The input series were subjected to the following qualifications:

1. Agricultural land was classified as either (a) land planted to temporary

and permanent crops or cultivated land, and (b) all other agricultural land (land

under temporary and permanent pastures, land temporarily idle/fallow, etc.). Area

measures of other agricultural land were not available from the RMRSA and the

CLS. This series was constructed by initially using the regional estimates of all

other agricultural land from the 1948, 1960, 1971 and 1980 Censuses of

Agriculture. Interpolation and extrapolation were used to complete the missing

years.

69
 2. Cultivated land is reported as crop area capturing the effects of multiple

cropping. Evenson and Sardido (1986) converted this crop area into physical

land area by first computing the multiple cropping indices as the ratio of crop

area to physical area in each region. Then, these multiple cropping indices were

completed for the missing years by interpolation and extrapolation using the

1948, 1960, 1971 and 1981 BCS Censuses of Agriculture. Finally, to purge the

land data series of the effects of multiple cropping, crop areas were subsequently

divided by their respective multiple cropping indices. For each type of land, they

constructed a rental series for the 1948-74 data and assumed constant shares

for each type of land for recent period fixed at 0.3.

3. Labor was measured in equivalent man-days spent in agricultural

production. The labor data series was based on annual data from the Philippine

Statistical Survey of Households (PSSH) of the BCS. However, the PSSH

surveys (labor force survey) reported employment in agriculture, forestry, hunting

and fishing, as a group. Evenson and Sardido (1986) assumed that labor

employment in agriculture was a constant-proportion (92%) of the reported total

employment for this group of economic activities. This assumption was adopted

from Paris (1971).

4. Prior to the construction of the series of equivalent man-days spent in

agriculture, several adjustments or estimations were employed to come up with

regional data on employment in agriculture purposely to complete the missing

years. This was done especially for the years prior to 1967.

70
 In computing for the equivalent man-days (LMDt), the regional

employment in agriculture had to be broken down by age and sex. For age

distribution, Evenson and Sardido (1986) used the national percentage

distribution of agricultural employment by age for each year and applied this

uniformly to the different regions. On the other hand, the within-region

distributions of employment by sex were used to estimate the distribution of

employment by sex for each age group in each region.

Equivalent man-days spent in agriculture per year were computed using

the equation:

mt f C
LMDt = 23 Mat + 15 t ( 0.75) Fat + t ( 0.50 )( Mct + Fct ) 74
8 8 8

where M = number of male workers,

F = number of female workers,

a = adult, i.e., 15 years and above,

c = children, i.e., 14 years and below,

m = average number of hours worked per week by male adults,

f = average number of hours worked per week by female adults,

c = average number of hours worked per week by children,

t = time

This equation implies that females and children have working capacities

equal to 75 and 50 per cent, respectively, of the working adult males. The

equation further assumes that the adult male workers work 23 weeks a year

while female adults and children work only 15 weeks a year. This assumption

71
was adopted from Oppenfeld, et al. (1957). Regional agricultural wages were

taken from BAEcon surveys and referred to wages without meals.

The farm machinery data series was based heavily on the annual national

stock data for four-wheel tractors, hand tractors, plows, harrows, and other

implements. To estimate the annual national stock of farm equipment, the

following formula was used:

Kt = (1-d) Kt = 1 + I t 75

where K refers to the stock of farm equipment, I to gross domestic capital

formation, d to the annual rate of depreciation and t to the time subscript. To

construct this input series, Evenson and Sardido (1986) gathered the data on the

stock of farm equipment from the 1948 Census of Agriculture and the data on

gross domestic capital formation from the 1956 Capital Formation Study of

BaEcon and from the annual estimates of gross domestic capital formation in

durable agricultural machinery as well as implements from the National

Economic and Development Authority’s National Income Account. Evenson and

Sardido (1986) computed the annual depreciation rate using the 1948 and the

1956 benchmarks and the annual gross domestic capital formation data. In a

similar manner with the labor input, adjustments or estimations were done to fill

in data gaps in the farm machinery data series.

The amount of capital services of agricultural machinery in each region

was assumed to be 16.2 percent of the total value of each region's agricultural

capital stock. This was based on the interest rate assumed to be 10 per cent and

the depreciation rate of 6.2 per cent. Implicit price indices for farm equipment

72
were computed from the National Income Accounts. They were assumed to be

equal across regions in any given year.

The fertilizer input series was constructed using data from the different

sources. For the years 1956-1975, the total supply of fertilizer in nutrient

equivalents (the sum of domestic production and imports unadjusted for year-end

stocks) was taken from Anden (1976). This series was extended backwards to

1948 by converting total supply of fertilizer (unadjusted for yearend stocks)

available for the years 1948 to 1955 into their nutrient equivalents using the

constant conversion factor computed as the average ratio of total nutrient supply

to total fertilizer supply for the years 1956 to 1960.

For the years 1974-1984, fertilizer consumption was based on the fertilizer

sales of the distributors obtained from the Fertilizer and Pesticide Authority.

Regional series construction was done by distributing the total sales to the

different regions using the regional proportion of fertilizer distributors. The

regional fertilizer sales by nutrient were then computed based on the proportion

of N, P, and K to the total nutrient demand and then multiplied by the total sales.

The series on work animal was based on the 1948, 1960, 1971 and 1980

Censuses of Agriculture. Working carabaos and cattle stocks were estimated for

each region by interpolation between censuses. The service flow included an

adjustment for feed.

6.2.2 Teruel and Kuroda’s Data Set

73
 A regional data set on agricultural products and inputs was assembled for

the years 1974-2000. Like Evenson and Sardido (1986), the data were reported

on a calendar year basis using the 12-region classification for the Philippines9.

The data set accounted for 88 per cent of the total volume of crop production and

almost 100 per cent of the total poultry and livestock production.

The data on the quantities and prices of the different agricultural products,

inputs, and areas planted were sourced from the several occasional publications

of the Bureau of Agricultural Statistics (BAS). These publications include the

Crop Statistics, Selected Crop Statistics, Prices Received by Farmers, Rice

Statistics Handbook and Selected Statistics on Agriculture. In the data set,

quantities were reported in thousands of metric tons, prices in pesos per

kilogram, and areas in hectares.

The crop categories include rice, corn, sugarcane, coconut, tobacco,

rootcrops (camote, cassava, gabi, pao galiang, tugui, and ubi or yam), fruits

(banana, mango and pineapple), and vegetables (cabbage, eggplant, garlic,

radish and tomato). Livestock and poultry products, on the other hand, included

meat of cattle, carabao, hogs, goat, chicken, and ducks, as well as chicken and

duck eggs. The prices reported in the data set were farmgate prices. Gaps in the

price data were filled in through estimation.

The data on land variable is the sum of the areas for all the crops (i.e. rice,

corn, sugarcane, coconut, tobacco, rootcrops, fruits, and vegetables).

9
The twelve regions are as follows: Ilocos, Cagayan Valley, Central Luzon, Southern Tagalog,
Bicol, Western Visayas, Central Visayas, Eastern Visayas, Western Mindanao, Northern
Mindanao, Southern Mindanao and Central Mindanao.

74
 Labor was reported in terms of equivalent man-days (MD) spent in

agricultural production. Equivalent man-days were computed based on the

number of male and female workers aged 15 years old and over who were

employed in agriculture. Equivalent man-days spent in agricultural production

were computed using

MD = 160∗ M + 105∗0.75∗ F 76

where M refers to the number of male workers and F refers to the number of

female workers, following Quizon (1980) and Evenson and Sardido (1986).10 The

equivalent mandays equation reflected the assumption that a female worker had

75% of the working capacity of a male worker, and that an adult male agricultural

worker worked 160 days in a year while an adult female worked 105 days in a

year.11 Regional agricultural wages referred to the average daily wage (without

meal allowance) received by farm workers in all agriculture, 12 as reported by the

Bureau of Agricultural Statistics.

Equivalent animal work days were computed based on the number of

work carabaos and work cattle by assuming that these animals worked an

average of 220 and 150 days a year, respectively. 13 The cost of services of work

animals per work day was assumed to be one-half of the daily wage rate of

agricultural labor.14

10
These authors included the number of male and female children who were employed in
agriculture in their computation of equivalent mandays. This was not done in this study however
due to the unavailability of such data for most of the years covered by the data series.
11
The latter assumption on the number of workdays of males and females was based on a study
by Oppenfeld, et. al.(1957).
12
This is a weighted average of the wages received by farm workers in rice, corn, coconut and
sugarcane farms.
13
The assumptions on the number of workdays were adopted from Quizon (1980).
14
This was the assumption used in the Evenson data set.

75
 Fertilizer quantities were reported in metric tons of nutrients, i.e. nitrogen,

phosphorus and potassium. Raw quantity data were taken from the Fertilizer

Statistics, a publication of Fertilizer and Pesticide Authority (FPA) and were

reported by fertilizer grade (e.g. 46-0-0, 14-14-14, etc.). The data on the volume

of consumption/sales15 by fertilizer grade were converted to their nutrient

equivalents. The fertilizer grade indicates the nutrient content of the fertilizer.

For example, let x-y-z be a fertilizer grade. Then the nitrogen content of this

fertilizer is X% of its weight, phosphorous is y%, and potassium is Z% of its

weight. Regional consumption of nitrogen, phosphorus, and potassium fertilizers

was computed by getting the nutrient content of all the fertilizer grades consumed

in the region, and summing these by type of nutrient (i.e. nitrogen, phosphorus

and potassium) for all the grades.

Fertilizer prices were reported in the data set in pesos per kilogram of

nutrient. For a given region, the price per kilogram of nutrient in a particular

fertilizer grade was computed as follows:

Let x-y-z be a fertilizer grade, and let Px-y-z be its retail price per kilogram in
region i. Then the price per kilogram of nitrogen in x-y-z is P x-y-z/x%; of
phosphorus is Px-y-z/y%; and of potassium is Px-y-z/z%.

These prices were computed for all the fertilizer grades consumed in the

region. Thus, for a given region, there were as many prices per kilogram of

particular nutrient as there were fertilizer grades containing this nutrient.16 To

15
FPA defines consumption/sales as withdrawals from importers’ and manufactures’ warehouses.
No data on actual consumption were available.
16
For example, for the year 1974, there were five fertilizer grades containing nitrogen (46-0-0, 21-
0-0, 16-20-0 and 14-14-0, 14-14-14), two fertilizer grades containing phosphorus (16-20-0 and
14-14-14), and two fertilizer grades containing potassium (0-0-60 and 14-14-14). Thus there
were four computed prices of nitrogen, one for each grade, and two prices each of phosphorus
and potassium.

76
derive the final price estimates for a given region, the prices per kilogram of a

particular nutrient, say nitrogen, computed for the various fertilizer grades were

weighted by the ratio of the nitrogen content of a particular grade to the total

nitrogen content of all the grades consumed in the region. For example, the

computation of the price per kilogram of nitrogen for region i in 1974, denoted by

PN,i is as follows:

Ng
PN , i = ∑ PN , g ∗ 77
g total N

where PN,g is the region’s price per kilogram of nitrogen in fertilizer grade g, g=

46-0-0, 21-0-0, 16-20-0, 14-14-14; Ng is the nitrogen content of fertilizer grade g;

and total N = N46-0-0 + N21-0-0 +N16-20-0 +N14-14-14.

The data on seeds, which included rice and corn seeds, were taken from

the Supply-Use data of BAS. The price of seeds was based on the farmgate

prices of corn and rice.

The sources of the data they used to construct the data series on

agricultural machinery were: (i) the 1978 BAEcon Capital formation Study and (ii)

the annual national estimates of gross domestic capital formation17 from the

Economic and Social Statistics Office (ESSO) of the National Statistical

Coordination Board.

17
Based on the Manual on the Philippine System of National Account, gross domestic capital
formation consists of two major components; the gross fixed capital formation and the change in
stocks. The gross fixed capital formation refers to the outlays on construction, durable equipment
and breeding stocks, orchard development and afforestation. Change in stocks, on the other
hand, refers to the difference between ending and beginning inventories such as finished goods,
work-in-progress, and raw materials, which have been produced or purchased but not yet sold or
consumed as intermediate inputs during the accounting period.

77
 To estimate the national stock values of agricultural machinery for 1974-

2000,18 the following equation was used:

K t = (1 − d ) K t −1 + I t 78

where K refers to the stock value of agricultural machinery, I to investment in

agricultural machinery, d to the depreciation rate, and t to the time subscript. The

benchmark figure used for k was the 1973 value of agricultural machinery

(=185.6 million pesos, in current prices) reported in the 1978 BAEcon Capital

Formation Study, and the depreciation rate was assumed to be 10%. The

investment data used were the data on gross domestic capital formation in

agricultural machinery and tractors (in current prices) taken from Economic and

Social Statistics Office (ESSO) of the National Statistical Coordinating Board.

The estimated annual national stock values of agricultural machinery in current

prices were deflated using implicit price indices computed from the ESSO data.

The amount of capital service of agricultural machinery in each region

depended on the (deflated) value of the capital stock, the interest rate and the

depreciation rate. The relationship can be expressed as

K st = ( d + r ) K t 79

where Kst is the value of capital service in year t, Kt is the deflated value of capital

stock in year t, d is the annual depreciation rate which they have assumed to be

10% and r is the annual interest rate, also assumed to be 10%. Implicit price

indices were computed from the ESSO data as the ratio of the current price to

18
The ESSO reported data on gross domestic capital formation separately for agricultural
machinery and for tractors other than steam. We define agricultural machinery to be inclusive of
tractors, so the sum of the gross domestic capital formation data for these two categories of
durable equipment were used in the estimation.

78
the constant price estimates of gross domestic capital formation in agricultural

machinery and tractors. The computed indices had 1985 as base year; these

indices were rebased to 1974.

6. Literature Gaps

6.1 Key General Findings

Most of the cross-country and country-specific studies reviewed offer

evidence of positive productivity growth rates for Philippine agriculture.

Numerically, however, there were marked discrepancies among these estimates.

These can be attributed to the differences in the theoretical constructs or

methodologies used or probably due to the use of different data sets assembled

using different assumptions and time periods. Although this paper highlights the

alternative approaches to productivity measurement and data sources, a

consistent general picture emerges with regard to the recent agricultural

productivity performance of the Philippines.

79
 The performance during the 1950s was generally good. This was followed

by a decline in the decade of the 1960s and a recovery between 1970s and

1980s as shown by a relatively strong growth in productivity. A subsequent

decline, however, followed through until 2000. These empirical results seem to

corroborate relatively few studies arguing that the poor performance of

agriculture can be attributed to the prolonged and relatively rapid decline in

agricultural productivity, which characterizes many developing countries (Fulginiti

and Perrin, 1997, 1998, 1999; Kawagoe et al., 1985; Lau and Yotopoulos, 1989

and Kawagoe and Hayami, 1985). At the regional level, the regions in Luzon are

generally more productive than in the Visayas and Mindanao especially in recent

years. The regions of Ilocos and Central Luzon are identified as the relatively

more productive regions. Bicol region, on the other hand, is consistently the

least productive of the regions and in some years experienced negative growth

rates.

6.2 Estimation

In addition to cross-country studies, there are a handful of country-specific

studies on productivity estimation conducted in the Philippines. From 1980

onwards, the common approaches to productivity measurement used by these

studies are the growth accounting approach and the econometric approach. The

latter approach specifically employed the Cobb-Douglas production function, the

translog production function and the dual translog cost function. All dual

estimations dealt with a single output case, indicating that multiple output dual

80
models have not been fully exploited in studying agricultural productivity in

Philippine agriculture. The index number procedure is also seldom used, while

the DEA-based Malmquist index procedure has not been applied so far to

Philippine agriculture using regions as the DMUs in spite of its advantage of

handling inputs and outputs without requiring information on prices and weights,

which are often problematic under the Philippine context. A number of these

studies based on non-parametric approach were considered cross-country

studies. Just like the DEA-based Malmquist index approach, the stochastic

frontier approach has not also been used to empirically estimate productivity

levels or growth rates in Philippine agriculture.

6.3 Data

Regardless of the source of data, there are several data issues that are

widely recognized in estimating productivity in Philippine agriculture, to wit:

1.1 The constraint imposed by data availability or small data dimension

indicating limited number of observations which consequently

diminishes the number of options for sophisticated approaches to

productivity measurement or the use of more advanced techniques

such as the econometric and the parametric SFA.

1.2 The insufficient disaggregation of the inputs implies the inability to

assign inputs to particular outputs. Given the diverse and highly

81
 specialized nature of modern agriculture, it will be interesting to have

forecasts of the productivity growth of the different commodities.

1.3 Missing data on some intermediate inputs such as pesticides,

herbicides, organic fertilizers and on non-conventional inputs affecting

productivity, among them, research and development, extension,

government programs and education is also a concern. Missing

variables will have an upward bias on productivity estimates.

Likewise, the problem on measurement errors also needs to be

addressed in the estimation process. One technique is by accounting

for the changes in the quality of inputs over time or by through

minimizing under/over measurement of inputs.

1.4 The most recent data set maintained a 12-region classification. There

is also a need to look at the possibility of reconstituting the data to

come up with a panel data for the current classification composed of

14 regions or, if possible, even for a more detailed dimension like at

the provincial level.

1.5 The use of the following assumptions in constructing the data set need

to be validated:

i. The assumption used in the computation of the equivalent

man-days regarding the working capacity of a female worker

relative to the working capacity of a male worker.

ii. The assumption that an adult male agricultural worker works

160 days a year while an adult female works 105 days.

82
 iii. The assumption used in the calculation of the equivalent

animal work day that the carabao and the cattle work an

average of 220 and 150 days a year, respectively.

iv. The cost of services of the work animals per workday was

assumed to be one half of the daily wage of agricultural

labor.

v. The assumption that labor employment in agriculture is a

constant-proportion (92%) of the reported total employment

in the agricultural sector.

vi. The use of fertilizer consumption/sales data (withdrawals

from importers’ and manufactures’ warehouses) in lieu of

data on the actual fertilizer consumption.

vii. The assumption regarding the depreciation as well as the

interest rates used for the computation of the amount of

capital service of the agricultural machinery.

viii. The imputation of land price as the residual of total revenue

net of measured costs for agricultural labor, fertilizer, seeds,

and machinery and animal services.

1.6 The implication of the use of interpolation, extrapolation and other

techniques such as the application of regional shares to distribute

national data to the different regions to fill in the missing years. An

example of this is the distribution of deflated capital stock figures to the

regions using the regional distribution of interpolated number of

83
 tractors. These techniques are commonly used and these might have

caused some biases in the estimates for productivity growth or levels.

7. Recommendations and Conclusion

In spite of the fact that all studies reviewed in this paper used different

data sets, time frames and theoretical constructs, most of these studies revealed

positive growth rates for Philippine agriculture. A review of the existing literature,

however, poses a challenge with regard to the veracity of productivity estimates

offered by the studies due to the reported problems such as the data gaps or

difficulties in constructing relevant data series especially at the regional level and

also in terms of the use of restrictive assumptions to fill in the missing years, the

measurement errors attributed to missing variables and over/under measurement

of the output and input data, to name a few.

In order to provide better estimates of productivity, particularly in Philippine

agriculture, more work needs to be done on the following areas:

84
 On the issue of methodology, there is a need to highlight the use of

models with functional forms that are flexible enough to take into account the

complexity of relations between output and input and between various inputs to

include intermediate inputs such as pesticides, herbicides, organic fertilizers, etc.

due their increasing importance in agricultural production. These relationships

can be easily investigated by using parametric approaches like the econometric

and the SFA. Aside from productivity estimates, these approaches can provide

information on the production structure and the nature of technology in Philippine

agriculture not readily available when using for example the index number

procedure. For Philippine agriculture, one can also use the DEA-based

Malmqvist productivity index approach to address the issue on the availability of

quality input data series. This approach provides additional information on

efficiency which is assumed to be constant in the case of econometric approach.

There is also a need to identify the data requirements for chosen methods

and conduct a detailed quality assessment of all readily available data series and

consider alternatives for correcting the common data problems. The econometric

approach is more demanding in terms of data requirement than the Malmquist

index approach. The former requires both data on quantity and prices of output

and input, while the latter provides options to use either the data on output or

input quantity. However, both are sensitive to measurement errors due to

missing variables and over/under measurement. These measurement errors

have been shown to cause biases in the parameter estimates that are used in

productivity estimation.

85
 In preparing for the data series, there is also a need to develop options for

obtaining the missing data of interest and to assess the feasibility of obtaining the

required data. The missing data problem is more common in all inputs than in

output data and more conspicuous in pooled time-series and cross-sectional data

set.

The measurement of agricultural productivity growth has been in the policy

agenda for the longest time due to its welfare implication. Because of its

importance, a huge literature on agricultural productivity measurement has been

developed. In spite of the extensiveness of the literature, one important

characteristic stands out, that is, most publications measure sectoral productivity

and neglect commodity-specific productivity growth. This observation also holds

true in Philippine agriculture and this can be attributed to the difficulty of

allocating inputs to individual outputs. There is a need, therefore, to review

research studies addressing this empirical issue such as those of Lence and

Miller 1998; Paris and Howitt, 1998 and Just, Zilberman and Hochman, 1983).

The studies reviewed in this paper, particularly the country-specific

studies, that have focused on Philippine agriculture constitute a small part

relative to the extensiveness of a broad body of international work that has been

published with regard to productivity since the 1980s. The attempt to investigate

key issues related to data and estimation will not only bring research on

Philippine agricultural productivity at par with international studies, it will also

provide broader evidence significantly to rejuvenate Philippine agriculture.

86
 Table 1: Productivity Studies on Philippine Agriculture: 1986-2005

Authors Year Years Productivity Methodology

Covered Estimates
Cross-country
Studies
Trueblood and 1997 1961-1991 0.0119 Malmqvist Index
Coggins
Arnade 1997 1961-1993 -0.0040 Malmqvist Index
Martin and Mitra 1999 1967-1992 0.0164 Translog Production
Function

0.0157 Cobb-Douglas Production

Function
Martin and Mitra 1999 1967-1992 0.0207 Growth Accounting
(Actual Factor Share)
Fulginiti and 1998 1961-1985 -0.0250 Growth Accounting Method
Perrin
Fulginiti and 1998 1961-1985 0.0010 Production Function
Perrin (Variable Coefficient)

0.0180 Production Function

(Fixed Coefficient)

87
 Fulginiti and 1998 1961-1985 -0.0030 Malmqvist Index
Perrin
Coelli and Rao 2003 1980-2000 0.0080 Malmqvist Index
Coelli and Rao 2003 1980-2000 0.0130 Index Number Approach
(Törnqvist Index Procedure)
Mundlak, Larson 2004 1961-1998 0.0025 Production function
and Butzer
Country-specific
Studies
Evenson and 1986 1950-1984 0.0190 Growth Accounting Method
Sardido
Cororaton and 2001 1980-1998 -0.0056 Growth Accounting Method
Cuenca
Teruel and 2004 1974-2000 0.0051 Translog Variable Cost
Kuroda Function
Teruel and 2005 1974-2000 0.0162 Index Number Approach
Kuroda (Törnqvist Index Procedure)
Teruel and 2005 1974-2000 0.0091 Cobb-Douglas Production
Kuroda Function
Teruel and 2005 1974-2000 0.0142 Translog Cost Function
Kuroda
Table 2: Productivity Estimates Across Subperiods in Philippine Agriculture
Authors Year Years Productivit
Covered y Estimates Methodology
Evenson and 1986 1950-1954 0.021
Sardido 1955-1959 0.024
(5-year subperiod) 1960-1964 0.018 Growth Accounting Method
1965-1969 0.008 (Land Rents Based)
1970-1974 0.014
1975-1979 0.053
1980-1984 -0.011
Evenson and 1986 1950-1954 0.027
Sardido 1955-1959 0.025
(5-year subperiod) 1960-1964 0.019 Growth Accounting Method
1965-1969 0.010 (Fixed Share = 0.3)
1970-1974 0.021
1975-1979 0.053
1980-1984 -0.011
Evenson and 1986 1955-1964 0.021
Sardido 1965-1974 0.013 Growth Accounting Method
(10-year subperiod) 1975-1984 0.021 (Land Rents-based)
Evenson and 1986 1955-1964 0.022
Sardido 1965-1974 0.016 Growth Accounting Method
(10-year subperiod) 1975-1984 0.021 (Fixed Share = 0.3)
Corroraton and 2001 1981-1989 -0.054 Growth Accounting Method

88
 Cuenca 1990-1998 0.042
Mundlak, Larson 2004 1961-1980 0.0098 Production Function
and Butzer 1980-1998 0.0013 (With State Variables)
Teruel and Kuroda 2004 1974-1980 0.0077
1981-1990 0.0050 Translog Variable Cost
1991-2000 0.0035 Function
Teruel and Kuroda 2005 1974-1980 0.0219
1981-1990 -0.0053 Cobb-Douglas Production
1991-2000 0.0144 Function
Teruel and Kuroda 2005 1974-1980 0.0250 Index Number Approach
1981-1990 0.0050 (Törnqvist Index Procedure)
1991-2000 0.0260
Teruel and Kuroda 2005 1974-1980 0.0201
1981-1990 0.0116 Translog Cost Function
1991-2000 0.0084

Table 3: Productivity Estimates by Regions in Philippine Agriculture

Regions Growth Accounting Translog Variable Index Number
Approach Cost Function Approach

(Evenson and (Teruel and (Teruel and

Sardido, 1986) Kuroda, 2004) Kuroda, 2004)

9-Region 12-Region 12-Region

Classification Classification Classification

1950-1984 1974-2000 1974-2000

Ilocos 0.0160 0.0156 0.0216

Cagayan Valley 0.0073 0.0084 0.0204

Central Luzon 0.0000 0.0145 0.0328

Southern Tagalog 0.0239 0.0066 0.0216

Bicol 0.0047 -0.0025 -0.0029

Western Visayas 0.0083 -0.0059 0.0055

89
Central Visayas - 0.0059 0.0107

Eastern Visayas 0.0146 0.0021 0.0091

Northern-Eastern 0.0254 - -
Mindanao
Western-Southern 0.0109 - -
Mindanao
Western Mindanao - -0.0028 0.0017

Northern Mindanao - 0.0085 0.0216

Southern Mindanao - 0.0082 0.0201

Central Mindanao - 0.0032 0.0085

Table 4: Productivity Studies on Philippine Agriculture by Approaches:

1986-2005
Authors Year Years Productivity
Covered Estimates Methodology

Growth Accounting
Approach
Evenson and Sardido 1986 1950-1984 0.0190 Growth Accounting Method

Fulginiti and Perrin 1998 1961-1985 -0.0250 Growth Accounting Method

Martin and Mitra 1999 1967-1992 0.0207 Growth Accounting
(Actual Factor Share)
Cororaton and Cuenca 2001 1980-1998 -0.0056 Growth Accounting Method
Index Number
Approach
Teruel and Kuroda 2005 1974-2000 0.0162 Index Number Approach
(Törnqvist Index Procedure)
Coelli and Rao 2003 1980-2000 0.0130 Index Number Approach
(Törnqvist Index Procedure)
Econometric Approach

Fulginiti and Perrin 1998 1961-1985 0.0010 Production Function

90
 (Variable Coefficient)

0.0180 Production Function

(Fixed Coefficient)
Martin and Mitra 1999 1967-1992 0.0164 Translog Production
Function

0.0157 Cobb-Douglas Production

Function
Mundlak, Larson and 2004 1961-1998 0.0025 Production Function
Butzer (With State Variables)
Teruel and Kuroda 2004 1974-2000 0.0051 Translog Variable Cost
Function
Teruel and Kuroda 2005 1974-2000 0.0091 Cobb-Douglas Production
Function
Teruel and Kuroda 2005 1974-2000 0.0142 Translog Cost Function
Malmquist
Approach
Trueblood and Coggins 1997 1961-1991 0.0119 Malmqvist Index
Arnade 1997 1961-1993 -0.0040 Malmqvist Index
Fulginiti and Perrin 1998 1961-1985 -0.0030 Malmqvist Index
Coelli and Rao 2003 1980-2000 0.0080 Malmqvist Index
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