Reducing poverty incidence to zero

Icould not believe my eyes when I read poverty statistics published by the World Bank on Asian economies. Malaysia has zero poverty incidence, using the poverty line of $US1. 25 per capita per day. Using the same metrics, the Philippines still suffers from a 25 percent poverty incidence, the highest in East Asia. Delving more deeply into the economic strategy followed by Malaysia over the last thirty years or so, we can learn a very important lesson in reshaping our plan for Philippine agriculture in the coming ten or more years, especially as regards new approaches to agrarian reform. The key to this new strategy, that a good number of agribusiness entrepreneurs in Mindanao, Palawan and Negros, among others, are already considering is the replication of the Malaysian institution called the Federal Land Development Authority or FELDA. I was happy to learn in a recent trip to Bukidnon that some agribusiness investors in the Northern Mindanao region are already partnering with FELDA to put up palm oil plantations using the very successful model called “nucleus estate”.

What is FELDA? A quick look at Wikipedia gives a short answer: FELDA is a Malaysian government agency initially founded to handle the resettlement of rural poor into newly developed areas and to organize small holder farms growing cash crops. It was formed on July 1, 1956 when the Land Development Act came into fore. The first FELDA settlement was in Air Lanas in Kelantan. It was launched in 1957 by then Prime Minister Tunku Abdul Rahman. Some 400 settlers were relocated to the area. With an initial capital off M$10 million, the next FELDA settlement was opened at Lurah Bilut the following year, comprising about 3,000 hectares of land, with a focus on rubber. In the 1960s and 1970s, government policy began to emphasize crop diversification, in an effort to avoid being affected if the world price of rubber were to drop precipitously. In 1961, FELDA’s first oil palm settlement opened, with 3.75 square kilometers of land. As of 2000, close to 7,000 square kilometers of the land under FELDA’s programs (76%) were devoted to oil palms. It is no wonder that the poverty incidence in Malaysia was drastically reduced during those intervening 40 years.

Is the management scheme adopted by FELDA something that can be applied to coconut in the Philippines as well as to higher-value crops like cacao, coffee, rubber, and especially palm oil? When the poverty incidence in Malaysia at that time was over 60 percent, settlers were drawn from the rural poor. They were to be aged between 21 to 50 years, married, and physically fit. Priority was given to those who did not own any land to farm. New settlers were assigned to a particular settlement, and were given 4 to 6 hectares of land to cultivate, usually either rubber or oil palm. All the settlers were required to reside at the settlement itself and were allotted 1,000 square meters in a planned village, where their home — already built by FELDA — was located. Although basic infrastructures, such as piped water and electricity, used to be lacking, nowadays such facilities are readily provided. Schools, medical centers, and places of worship are also made available. These are all an integral part of the “township” scheme which is included in the “nucleus estate” approach involving a large “nucleus” farm put up by the State or a private firm like Sime Darby or Guthrie working with the small farmers surrounding the nucleus as contract growers (the plasma).

Originally, FELDA schemes were designed as co-operatives, where instead of each settler owning a defined piece of land, each one held an equal share in the ownership of the particular scheme. What could have been predicted from normal human behavior, the settlers did not prefer this scheme, as workers who did not tend to the land assiduously still benefited from the revenues earned by all (the so-called free rider syndrome). The Government then set up a three-phase program where in the first phase, the co-operative remained as a mechanism for the settlers to learn how to farm. In the second phase, each settler was given a specific plot of land to work. Finally, in the third phase, he was given the land title to that plot. There was a proviso, however, that the settler could not sell the land without the permission from FELDA or the federal government. The costs of acquiring, developing and allocating the land are funded by loans made to FELDA settlers, payable in monthly installments by deductions from the settlers’ income over a 15year period. Because of the growth of commercial activities in the various townships, the families of the settlers are able to engage in other economic pursuits, such as shop keeping, smallscale manufacturing, services to households, etc. Other members of the farm household are able to obtain employment outside the settlement. FELDA and its private sector equivalents have been instrumental in reducing poverty in the countryside of Malaysia.

FELDA was so successful that it was able to diversify from its original business of land development to other economic ventures. First, it launched a number of private corporate entities, the largest of which is FELDA Global Ventures Holdings, considered to be the world’s largest plantation operator, with 811,140 hectares of oil palms, not only in Peninsular Malaysia but also in other countries like Indonesia. FELDA has subsidiaries involved in businesses such as marketing, transportation, milling, and financial services (it has a significant investment in Maybank, which is very active in the Philippines). A few years back, when it did an IPO, it attracted the largest pool of investments in the history of capital markets, a record broken only a few years later by Alibaba. What has happened to FELDA in Malaysia reminds me of Mondragon, the largest cooperative in Spain and Raifaissen, the farmers cooperative in Bavaria, the Federal Republic of Germany. Both have grown into conglomerates operating banks, industrial enterprises and other large businesses. There is reason to hope that if we can replicate FELDA successfully in the Philippines, one day our farmers can become rich by also having investments in other sectors of the economy.

I am glad that even the Philippine Coconut Authority is open minded enough to transform some of our coconut farms into palm oil plantations. There are other coconut growing regions, such as those in Palawan, that are diversifying into cacao plantations (coconut, being a very good cover crop for cacao). Another 15,000 hectares of coconut farms with close to 6,000 small farmers in the town of Nakar in Quezon Province are being programmed by a group of investors and professional managers for diversification into other higher-value crops, in addition to the replanting of higher-yielding coconut varieties. This group plans to adopt the FELDA scheme. All these very doable investments will be facilitated by a more flexible approach to agrarian reform that will avoid the mistakes of the first phase of the Comprehensive Agrarian Reform Program (CARP), which in the words of a leading Filipino economist only increased the number of poor farmers in the Philippines, in great contrast with what happened in Malaysia. For comments, my email address is bernardo.villegas@uap.asia.