Trade Arrangements and Interlinked Credit in the Philippines

Abstract

Land reforms and the Green Revolution with its capital-intensive agricultural technology have increased the importance of informal lenders in many low-income countries, including traders of food products, input dealers, rich farmer-lenders, rice millers and store owners. As a result, informal financial intermediaries have received growing attention from researchers and policymakers, particularly in the Philippines (Agabin et al. 1989; Lamberte and Lim 1987; TBAC 1989). However, in spite of the growing number of (predominantly economic) studies, evaluations of the role of the new financiers still lack detailed, empirical data on their methods of working, their relationships with borrowers, and the different socio-economic and cultural contexts in which they operate. This chapter wants to contribute to a better understanding of these methods, relationships and contexts. For this purpose, I describe credit relations in the production and marketing of vegetables in the central Philippines, taking into account their diversity and contexts. My analysis provides insights into the interdependency of lenders and borrowers, the interweaving of trade and credit transactions, and the cultural and economic backgrounds of the combined strategy of spreading of risks and profit-seeking. It highlights personalized relations of exchange in vegetable marketing, called suki, and the flexible ways in which vegetable traders make use of these relations. Socio-economic factors, the normative environment, specific features of commodities and power conflicts affect opportunities and constraints in the vegetable market, and consequently, suki as a normative construct of individual traders and farmers, has different meanings. High risks are common to credit extension in the production and marketing of agricultural products in the Philippines. While neither the commercial banks nor the Philippines’ cooperative sector have proved wellequipped for lending to small farmers, the need for production capital has increased considerably due to the introduction of new HYV technology. With the failure of government programs and the withdrawal of landlords from the credit sphere, the informal finance circuit has extended and diversified since the mid 1970s. Traders and processors of farm produce, dealers in farm inputs, and rich farmers, offer production loans, together with a host of local middlemen in the credit chain from village to city and back, replacing patron-client relations with landlords (Sacay et al. 1985; TBAC 1981). Peasant agriculture faces further risks and uncertainty because of climatic factors, seasonality of production, changes in consumer preferences, and dependency in land use relations. Trade in agricultural products is similarly risky, and costs of transportation, storage, processing and information are high. Earlier studies show that informal lenders reduce risks and costs by operating in more than one market through interlinked deals (Floro 1987; Geron 1989). For instance, a person engages in the sale of farm inputs, the milling of rice, the purchase of farm products, the finance of production, all with the same farmer. The literature on India is particularly extensive (Bharadway 1985; Bhaduri 1983; Braverman and Stiglitz 1982). Vertical integration appears as a profit strategy and a way of extracting surplus from poor farmers, since the conditions and asymmetry in one transaction are transferred to the other transactions with the same person. One of the few who have analyzed the interlinkage of credit and marketing in the Philippines is Floro (1987), focussing on the strategies and motives of trader-lenders and rich farmer lenders. She argues that the interlinkage is meant not only to reduce the risk of defaults by replacing the collateral, but also to control the market channels of food commodities and to make profits at the expense of small farmers. In return for the production credit, a trader makes a claim on the produce, and at a lower price than the prevailing market price. Mark-ups on farm inputs and low prices for farm produce (also labor services are sometimes included), contain hidden forms of interest, as opposed to high nominal interest rates common to other forms of informal moneylending in low-income countries (Floro 1987; Geron 1989). Although these studies on market interlinkage give valuable insights into the lending strategies of traders, they leave many questions unanswered, such as those regarding the influence of the socio-economic context on the interlinkage mechanisms and the long-term and short-term credit relationships, not only between traders and farmers, but also between the various traders in the market chain. In the Philippines these relations are institutionalized in the form of sukis, personalized socio-economic relations through which transactions are interlinked, providing the elements of trust and patronage on which the linkages are based and enforced.