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Technical Efficiency of Rice
Technical Efficiency of Rice
Technical Efficiency of Rice
by
ABSTRACT
This study measures the technical efficiency of rice production in fifteen (15)
regions of the Philippines for the period 1991-2002. It measures the adequacy of different
estimation methods to find out a more accurate model to represent irrigated and rainfed
rice production in the Philippines and to provide a thematic map of the spatial distribution
of technical efficiency among rice-producing regions using Geographic Information
System (GIS). The frontier function involves inputs such as area of production, fertilizer
applied in kilogram of nutrients (N:P2O 5:K 2O), cost of labor, seeds/planting materials in
pesos, crop protection products, other miscellaneous inputs, year of observation, dummy
for seve re drought due to El Niño phenomenon and tropical cyclone passage.
I. Introduction
Rice is the most important food crop with more than 90% of the global production
occurring in tropical and semi-tropical Asia. The production of rice has increased faster than
population over the last three decades, despite being produced on small and marginal farms in
countries with extreme population pressure on limited land resources. Most of the growth in
production originated from technological progress in the irrigated and favorable rainfed
ecosystem (Hossain, 2004).
Recent trend analyses indicate that the growth of the rice sector has become
completely dependent on yield improvements (David and Balisacan, 1995 and Gonzales,
1998). Yield improvement can come in either of two ways: a) shifting the yield frontier, i.e.,
breeding varieties that have significantly higher yield potential than our current varieties, and b)
developing and promoting yield-enhancing technologies such as the use of high quality seeds
and efficient fertilizers. This raises the aggregate questions of how technically efficient the rice
production in the Philippines and how much production improvement can be made through
increased technical efficiency.
1
Institutional Research Analyst and Assessment Consultant, Administration Division, Palau Community College, Republic of Palau
Majority of the studies in the Philippines used the classical linear regression analysis to
estimate the production function. Most of the conducted studies were concerned only in
maximizing output but overlooking other variables that may influence the productivity of a
particular firm. Efficiency is a very important factor of productivity growth especially in
developing agricultural economies where resources are meager, and opportunities for
developing and adopting better technologies have lately started dwindling (Ali and Chaudhry,
1990).
Some of earlier studies in rice farming applying frontier methods done in the Philippines
include those of Kalirajan and Flinn (1983), Lingard, Castillo and Jayasuriya (1983), Kalirajan
(1984), Fare, Grabowski and Grosskopf (1985), and Dawson and Lingard (1989). Table 1 is a
summary of related studies, some of which were referred to by this paper.
2
Faculty Member, School of Applied Economics, University of Southeastern Philippines, Davao City
Importante and Tan-Cruz* 2000 Selected Regions Stochastic
It has been observed that most of the studies on technical efficiency and produc tivity in
Philippine rice production are on a farm-level basis. Because of this limited literature, the
researcher conducted a study to estimate the technical efficiency of irrigated and rainfed
lowland rice production using stochastic frontier approach us ing regional-level panel data.
II. Objectives
The general objective of the study is to measure the technical efficiency of rice
producing-regions in the Philippines for the period 1991-2002.
Specifically it aims:
1. To come up with an adequate model to represent each of the irrigated and rainfed
lowland rice production of the entire Philippines;
2. To estimate the technical efficiency of irrigated and rainfed lowland rice production
of different regions;
3. To provide a thematic map of the spatial distribution of technical efficiency among
rice-producing regions using Geographic Information System (GIS).
III. Methodology
A production function is defined in terms of the maximum output that can be attained
from a given combination of inputs. For quite a time , the usual methodology used in the
optimization process had been the ordinary least squares (OLS) estimation.
In 1977, an alternative approach, called Stochastic Frontier Production estimation was
proposed, and this paper made use of said methodology.
3.1 Stochastic Frontier Production Function and
Technical Efficiency Measures
Aigner, Lovell and Schmidt (1977) and Meeusen and van den Broeck (1977)
independently proposed the stochastic frontier production function. Battese and Coelli (1992)
proposed a stochastic frontier production function for (un)balanced panel data, which has firm
effects assumed to be distributed as truncated normal random variables, and are also
permitted to vary systematically with time. For the i-th firm in the t-th time period, the model may
be expressed as:
Yit = X it ? + (V it - Uit) i = 1, 2, …, N, t = 1, 2, …, T
where
Yit is (the logarithm of) the production of the i-th firm in the t-th time period
Xit is a k×1 vector of input quantities (or their transformations)
? is a vector of unknown parameters
? v 2), independent of
Vit are random variables, which are assumed to be iid N(0,?
Uit which are non-negative random variables assumed to account for technical
inefficiency in production, and are assumed to be iid 1/2N(0,?? u2) .
Battese and Tessema (1993) specified the more general form of stochastic frontier
production function for (un)balanced panel data as:
Y it = Xit ? + (Vit - Uit) i = 1, 2, …, N, t = 1, 2, …, T
Uit = ? i + Ui = {exp[-? (t-T)] Ui
where ? ?
shows the time varying behavior of the non-negative firm effects. If ? ?
is zero, then the
inefficiency effects does not vary over time. The hypothesis that ? ?
is zero can be tested using
likelihood ratio test. The technical efficiency of a given firm is defined as the ratio of its mean
production given its realized firm effect, to the corresponding mean production if the firm effect
was zero. Thus, the technical efficiency of the i-th firm, denoted by TEit, is defined as
In particular, this study assumed half-normal and truncated normal distributions for Uit.
Further, the assumption of constant return to scale was relaxed.
3.2 Model Specification
The input costs are deflated using the regional Consumer Price Index with 1994 as
the base year. Data on quantities, prices, input cost of rice production and area planted are
from the publications of the Bureau of Agricultural Statistics (BAS).
Table 2 shows the six basic model specifications formulated in the estimation
process. Model 1 is the stochastic frontier production function in which the farm effects, Uit,
have the time-varying structure ( ? i?s an unknown parameter and the Ui’s are non-negative
truncations of the N(? ? u2) distribution). If ? ?is statistically significant the SFA presentation is
appropriate for the model but if it is closer to 0 h
t en the usual response function is the
appropriate presentation for the model. Model 2 is the special case of model 1 in which the Ui
? v2). Model 3 is the time-invariant model with
have half-normal distribution N(0,?
truncated-normal distribution considered by Battese, Coelli and Colby (1989). The model
implicitly assumes that variation in all regional effects (technical efficiency) is monotone
throughout time periods and that one rate of change applies to all regions. Furthermore, if the
estimated ? is significantly different from zero and positive, then the non-negative firms’
technical inefficiency in production is not only time-variant, but also decreasing, i.e., technical
efficiency is improving. Model 4 is the time-invariant model in which the farm effects, Ui have
half-normal distribution. Model 5 is the traditional average response function in which farms
are assumed to be fully technically efficient (i.e., the regional effects, Uit are absent from the
model). Finally, Model 6 is the corrected ordinary least squares (COLS) estimation method
suggested by Greene (1980).
Model 2 ??
=0 TV CD HN
Model 3 ??
=0 TI CD TN
Model 4 ? =??
=0 TI CD HN
Model 5 ? =? =??
=0 Ordinary Least Square (OLS)
The estimates of the parameters and results of the likelihood ratio tests are presented
in Tables 3-6.
It is evident that the average production function is not an adequate representation of the
data. Further, the hypotheses that the models are time-invariant are also rejected (i.e., Ho: ? =
??
= 0 and Ho: ? ?
= 0, rejected). However, the half-normal distribution with time-varying technical
efficiency is an adequate representation for the data given the specification of the stochastic
frontier model (i.e., Ho: ? = 0, is not rejected).
Table 3. Estimates of Stochastic Frontier Production Function ( Irrigated )
Maximum Likelihood Estimation
OLS COLS
Variable Parametr Model Model Model Model
Model 5 Model 6
1 2 3 4
?? 6.48* 6.47* 6.39* 6.39* 6.36* 6.32*
Constant
(0.22) (0.24) (0.26) (0.27) (0.21) (0.20)
ln (LRP) ?? 0.80* 0.78* 0.76* 0.68* 0.77* 0.73*
- ha (0.05) (0.06) (0.07) (0.08) (0.05) (0.05)
ln (QFA) ?? 0.19* 0.20* 0.23* 0.26* 0.21* 0.22*
- NPK,kg (0.04) (0.04) (0.05) (0.05) (0.33) (0.03)
ln (COL) ?? 0.05 0.05 0.03 0.03 0.03 0.02
- Pesos (0.04) (0.04) (0.04) (0.05) (0.04) (0.04)
ln (SPM) ?? 0.06* 0.06* 0.05* 0.05* 0.06* 0.05*
- Pesos (0.01) (0.01) (0.02) (0.02) (0.01) (0.01)
ln (CCP) ?? 0.01 0.01 0.02 0.02 0.01 0.01
- Pesos (0.01) (0.01) (0.01) (0.02) (0.01) (0.01)
ln (OMI) ?? 0.06* 0.06* 0.05* 0.05* 0.04* 0.04*
- Pesos (0.01) (0.02) (0.02) (0.02) (0.01) (0.01)
Year ?? 0.05* 0.06* 0.03 0.04 0.06* 0.07*
Drought ?? -0.06* -0.08* -0.07* -0.07* -0.07* -0.07*
Dummy (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Tropical ?? -0.13* -0.13* -0.12* -0.12* -0.11* -0.11*
Cyclone (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Dummy
? s2 0.11* 0.13* 0.01 0.12* 0.01 0
(0.01) (0.01) (0.01) (0.00)
? 0.27* 0.86* 0.56* 0.29* 0 0
(0.01) (0.02) (0.27) (0.21)
? -0.01 0 -0.16 0 0 0
(0.02) (0.26)
? 0.36* 0.42* 0 0 0 0
(0.04) (0.05)
217.6 210.1 210.0
Log likelihood Function 217.92 207.79 208.71
2 7 5
Note: 1. Model 1 is with ? a
?nd ? unrestricted, Model 2 is with ? = 0,
Model 3 is with ? ? ?Model 4 is with ??
?? ??
Model 5 is OLS estimation with ? ? ? ? ? ? ?and
Model 6 is COLS estimation ? ?adjusted).
2. Figures in parentheses are standard errors of
estimates
The preferred model for irrigated rice production is Model 2. Rainfed rice production in
the Philippines exhibits technical inefficiency and do not improve the level of
efficiency over the period. The hypothesis that half-normal distribution with time varying
technical efficiency (i.e., Ho: ? = 0) was not rejected.
The preferred model for the rainfed rice production is the model with time-invariant
technical efficiency having half-normal distribution (i.e., H o: ? = ? ?
= 0), or Model 4.
Elasticities of output for land area and cost of seeds and planting materials are the two
most important inputs determining the yield of rainfed rice production. The signs are positive
which conforms to a priori assumption that the estimated production function is an increasing
function.
4.1 Technical Efficiency Estimates
V. Conclusions
Aigner, D.J., Lovell, C.A.K. and Schmidt, P., 1997. “Formulation and Estimation of Stochastic Frontier
Production Function models,” Journal of Econometrics, 6: 21-37.
Battese, G.E. and Coelli, T.J., 1992. “Frontier Production Function, Technical Efficiency and Panel Data:
with Application to Paddy Farmers in India,” Journal of Productivity Analysis,
Coelli, T.J., 1994. A Guide to FRONTIER Version 4.1: “A Computer Program for Stochastic Frontier
Production and Cost Function Estimation,” Department of Econometrics, University of New
England, Armidale, Australia.
Hossain, M., 2004. “Long-term Prospects for the Global Rice Economy,” Paper presented to FAO Rice
Conference 04/CRS.1.
Pitt, M.M. and Lee, L.F., 1981. “Measurement and Sources of Technical Inefficiency in the Indonesian
Weaving Industry,” Journal of Developmental Economics, 9:43-64.
Villano, R.A. and Fleming, E., 2004. “Analysis of Technical Efficiency in a Rainfed Lowland Rice
Environment in Central Luzon Philippines using a Stochastic Frontier Production Function with
Heteroskedastic Error,” Working Paper Series in Agricultural and Resource Economics.
University of New England, Armidale, NSW, Australia.
Appendix A