This study focuses on agricultural promotion areas and the direct payment system―the two most representative policies directly linked to Korea’s agricultural production―to examine their effects on agricultural productivity through theoretical and empirical analyses. The designation of agricultural promotion areas is deemed both a tool and a regulation as it helps secure sufficient farmland to stabilize the food supply but may also incur an infringement of private property rights. As such, the goal of enhancing agricultural productivity is viewed as a means to minimize the degree of infringement. Here, based on the fact that farmers are provided with differentiated payment depending on whether their land is a promotion area, agricultural promotion areas and the direct payment system are linked to examine how this affects productivity, while at the same time, each policy is assessed separately for their impact.

This study is composed of four sections. Starting with the background of this research, Part 1 outlines Korea’s key agricultural policies and the current conditions. Firstly, compared to major countries, Korea’s agricultural development has relied more on labor than on land to increase productivity. This is a small-sized, labor-intensive production structure and thus, not only is it cost inefficient but also highly dependent on government regulations and financial support. Furthermore, due to an increasing fiscal burden, falling rural population and population aging, Korea’s current agricultural production structure is not sustainable. Accordingly, a shift is needed in the production structure to a capital-intensive model using methods such as improving farmland scale and agricultural mechanization. Ultimately, efforts should be made to bolster Korea’s agricultural competitiveness, internally and externally, through the enhancement of productivity and to respond to the changes in the agricultural population structure.

Part 2 provides a theoretical perspective on the nature of the two policies. From the aspect of law and economics, the designation of agricultural promotion areas can be a substantial infringement of private property rights for farmland owners, and requires compensation. Accordingly, the section discusses the provision of additional fixed direct payments to such land owners, which is stipulated under current law.

Then, using a theoretical model, the authors show that the current system may have an adverse effect on agricultural productivity. Specifically, although the designation of agricultural promotion areas was intended to increase the efficiency of agricultural production, it could have a negative impact when the compensation is linked to the current direct payment system when it includes variable direct payments. The system was adopted to optimize agricultural production taking into account the significant restrictions to the property rights of farmland owners. However, the system’s unique structure and additional fixed direct payment give rise to the possibility that the incentives in relation to agricultural production may become distorted.

Part 3 draws on the agricultural TFP growth rates and indices for the nine provinces and overall nation using the Tornqvist productivity index, and examines their trends. Two empirical analyses are then conducted to look into the effects of the designation of agricultural promotion areas (farmland regulation) and financial support (direct payment system) on agricultural productivity.

In the first analysis, based on data compiled for the respective provinces in 2013-2017, the productivity index is fixed as a dependent variable and the determinants of productivity are analyzed in a reduced-form model. The key explanatory variables are the share of agricultural development areas within the respective provinces’ farmlands and the amount of compensation for agricultural damages―a category that includes the variable direct payment. Meanwhile, the macroeconomic aspects such as the national R&D stock and climate and economic conditions are controlled. The results show that an increase (decrease) in the share of development areas due to additional designations or maintenance has a negative (positive) effect on agricultural productivity. This contradicts the intended goal, and becomes even more so from 2005 onwards when the direct payment to compensate for rice income was introduced. This can be considered an indirect evidence of a possible deterioration in the productivity of promotion areas which are under the variable direct payment system as presented in the theoretical analysis in Part 2.

In the second analysis, three analysis periods are established―2003-2007, 2008-2012 and 2013-2017―and the components of productivity in the structural model are examined using farm level panel data. In particular, unlike the Tornqvist index which assumes that technological efficiency is always achieved, this empirical analysis examines the TFP in terms of the scale effect according to the degree of returns to scale (RTS); technological change (TC) and; technological efficiency (TE). All three periods fail to show any changes in the returns to scale, and the 2013-2017 period reveals a regression in the technological level with some significance. Lastly, an analysis is conducted on the effects of financial support for farms and their various characteristics on technological inefficiency (distance from production frontier). According to the analysis, an increase in compensation for agricultural damages and subsidies relative to farmers’ income leads to a statistically significant decrease in technological efficiency. In particular, the negative effects from compensation seems to even amplify for rice producing farmers.

Part 4 presents the direction to improve the system based on the discussions at home and abroad in regards to the reform of agricultural subsidies. Compulsory regulations for farmland inevitably entail compensation, but the current method of linking farmland regulations with direct payment does not contribute to the purpose of compensation or to the enhancement of productivity. Accordingly, compensation should be provided explicitly and independently, and should not be linked to direct payments. In addition, the designation of promotion areas should be more flexibly managed rather than being unconditionally maintained, taking into account the improvements to productivity. On the other hand, considering that the direct payment itself can cause inefficiency in production and that this is would worsen if the payment is linked to the production of a particular crop, policymakers need to take caution when determining the amount of direct payment. Also, they must reform the current system so that it is not linked to production activities, as recommended by agriculturally developed countries and the WTO. This will help to ensure an increase in productivity while providing effective compensation for regulatory losses.

Preface
Executive Summary

Part 1 Background and Overview of the System

Chapter 1 Background of the Study

Chapter 2 Overview of Farmland Regulations and Financial Support Programs
　Section 1 Overview of Agricultural Promotion Areas
　Section 2 Overview of the Direct Payment System

Part 2 Theoretical Analysis of Farmland Regulations and Financial Support

Chapter 3 Law and Economics Approach to Farmland Regulations and Property Rights
　Section 1 Law and Economics Approach to Regulations and Property Rights
　Section 2 Property Rights Infringement in Agricultural Promotion Areas
　Section 3 Direct Payment System as a Compensation Mechanism

Chapter 4 Theoretical Model on Farmland Regulations and Financial Support
　Section 1 Basic Assumptions and Model
　Section 2 Key Findings
　Section 3 Implications and Conclusion

Part 3 Empirical Analysis of Farmland Regulations and Financial Support

Chapter 5 Analytical Approach and Empirical Model
　Section 1 Literature Review and Analytical Methods
　Section 2 Index-Based Analysis of Productivity Determinants
　Section 3 Stochastic Frontier Analysis of Productivity Components

Chapter 6 Data for Analysis
　Section 1 Regional-Level Data
　Section 2 Farm-Level Data

Chapter 7 Empirical Analysis Results
　Section 1 Estimation of Regional-Level Productivity Indices
　Section 2 Determinants of Regional-Level Productivity
　Section 3 Farm-Level Productivity Component Analysis
　Section 4 Implications and Conclusion

Part 4 Policy Implications

Chapter 8 Policy Implications
　Section 1 Agricultural Market Liberalization and Challenges for Korea’s Agricultural Support System
　Section 2 Case Studies from Japan and the EU
　Section 3 Policy Recommendations and Conclusion

References
Appendix
ABSTRACT