Philippine coconut oil industry reationalization plan : a study of benefits and cost

Abstract

This study pertains to the financial and social evaluation of the industry rationalization plan approved by the Philippine Board of Investments (BOX). In 1973, the BOI, through the concurrence of the National Economic Economic and Development Authority (NEDA), saw fit to adopt a plan which called for gradual phasing out of copra exports, by encouraging further processing of copra into coconut oil and meal before bringing them to the international markets. Fiscal instruments were redesigned to attract private enterprises to engage in this business venture. This study evaluates the plan approved by BOI and compares it to alternative plans through the application of cost-benefit. The study also endeavours to derive an implicit weight assigned by the decisionmakers to the income redistribution and balanced growth objectives of the country. As a consequence, two fundamental development issues are highlighted in this study. These are the Hirschman's "growth pole" and Myrdal's "industry polarization" theories in the choice of industrial development strategies. The BOI, following the mandate of legislative and policy declarations, adopted an industry dispersion strategy in the rationalization plan of the coconut oil industry. This plan is compared to an alternative plan which called for industry concentration in the Iligan/Cagayan de Oro area where hydro-electric power is adequately available. The ratio of the net present values of the two plans is thought to be the implicit weight assigned by the BOI as the trade-off coefficient between "allocative efficiency" and distribution/balance growth effects in a similar fashion as the Weisbrod model. Chapter 2 portrays the importance of the coconut industry in the whole economy. A review of the socio-economic contributions in the foreign trade and traditional sector are presented in this chapter. Also, the direction of trade or coconut export products and export instability are analyzed in relation to the economic evaluation and the rationalization plan. Chapter 3 is a miniature survey of the literature of cost-benefit analysis. Discussion of investment criteria, both in the commercial and social viewpoints, are featured in this chapter. Techniques of project appraisal are partially highlighted. Philosophical dictums in the welfare implications of projects are compared to establish the framework of analysis for this study. In addition, shadow pricing of labour, foreign exchange rate and social opportunity cost of capital are presented in Chapter 3. Most of the techniques adopted in shadow pricing in this study deviate from the theoretical approach. Pragmatic approaches generally used in central planning bodies of less developed countries are utilized instead, primarily due to the absence of reliable data and the difficulty of applying highly sophisticated mathematical models. Chapter A deals with the economic appraisal of the different oil mill models, sixteen models in the case of financial evaluation and twenty-eight models in the social evaluation. The analytic models used in this study omitted a number of interesting theoretical and empirical questions, such as the cost of transportation of copra and finished products, postponability of the entire plan or any component mill, risk and uncertainty analysis. Rather than considering the above, the study concentrated on testing the viability of the different plans through sensitivity analysis and varying the price of copra and final products.The result of the cost-benefit analysis, using the net present value (NPV) and the internal rate of return (IRR) as investment criteria, shows that industry concentration (Plan D) is more efficient than Plan A (BOIadopted plan) which called for industry dispersion. It is also found that in both financial and social evaluation, the contribution of labour to aggregate wealth, when a labour intensive technique is adopted, is insignificant compared to the cost advantage of hydro-electric energy over diesel electric energy. It is also concluded that a solvent extraction process of a 300 metric tonne plant is the most economical size mill amongst the sizes subjected to the evaluation process. The study reveals that the Philippine decision-makers appeared to consider that an 85-peso income generated by the relatively lagging regions like Mindoro, Samar, Quezon, Iloilo, Dumaguete, Surigao, Zamboanga and Davao is equivalent to a 100-peso income if generated by relatively leading regions like Ilogan and Cagayan de Oro. The estimated trade-off between economic efficiency and distributive income/regional industry dispersion effects would mean a sacrifice of kk to 56 million pesos a year. This amount is about equal to the current government expenditure for the upliftment of labour welfare in the fiscal year 1969/70. The problems which are isolated in this study are conceptually difficult and empirically elusive; however, the study appears to be a promising attempt to define one point on the "equity-efficiency" social welfare frontier of the Philippine society. Show more