KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR A Study on the Effects of Farmland Regulations and Financial Support on Agricultural Productivity: Focusing on Agricultural Promotion Areas and the Direct Payment System

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.

Summary

Working Paper Policy Alternatives for Farm Income Enhancement and Farm Productivity

From the late half of the 19690s, as a means of narrowing
the rural-urban income gap and promoting rural development,
this policy on rural development shifted towards the
enhancement of farm household income. Accordingly since the
late of the 1960s, applying the high farm price support program
and the fertilizer price subsidy program, the government began
to place emphasis on increasing farm household income.

Because small-scale farming is prevalent in Korea and its
farming system is expected to continue for long time in the
future, the price policy for agricultural products is not effective.
One reason is that the public funds transferred from non-farm
sector to agricultural sector through the subsidy program in
terms of per capita base of non-farm sector will be large
compared with advanced countries because a large proportion of
the total population in Korea still lives in rural areas.

Another reason is that the price elasticity for foodgrain
production in a small scale farming system is inelastic. Thus
from the early 1980s the main core of the farm income policy
was placed on the increment of non-farm income in rural areas
through rural industrialization. Even though the high farm price
support policy contributes apparently to increase farm income, it
accelerates the inflation. Thus because not only the economic
stability but also balanced regional development can be achieved
by the rural industrialization, as one of the non-inflationary
measures, the government has given policy priority on rural
industrialization.

The imbalance between rural and urban areas and among
regions has prevailed as the result of the past Korea's economic
development strategy which was mainly based on the large-
scale, urban - concentrated and capital - intensive manufacturing
industries. But we expect that the rural industrialization which
based on the development of small and medium industries can
create the rural non-farm employment activities for promoting
rural development and increasing farm income.

Several important policy measures for the effectiveness of
rural industrialization need to be pointed out.
1) In contrast to the relatively decentralized pattern of
industrialization in Taiwan and Japan, industrialization in
Korea has been concentrated in the Seoul and Pusan areas
(Seoul, Pusan, Gyeonggi, and Gyeong Nam areas)
2) Small commercial and service establishments, industrial
workshops, and homecraft activities have not been
developed in rural areas,
3) A depletion of human capital in rural areas has occurred
as a result of migration from rural to urban areas,
4) A modernized credit system has not been developed in
rural areas, and it has been extremely difficult to get
credit for rural non-farm activities, and
5) In contrast to the relatively well developed technical
infrastructure in primary cities, rural infrastructure has not
been developed.

Government efforts to solve above five problems should be
continued for the successful rural industrialization.

The government has offered every effort to increase
agricultural production for easing the shock from the poor crop
harvests in 1979 and 1980. Accordingly the production of the
crops included rice, barely vegetables and fruits except wheat,
soybeans, and feedgrains have been surplus. This production
policy has contributed considerable to expand and stabilize the
national economy in the early 1980s. But in recent years as the
self-sufficiency in stable food has been achieved, the structural
transformation of agricultural production sector is badly required
for efficient reallocation of production resources.

Summary

Working Paper The Role of the Government in Agricultural and Rural Development in Korea, 1970-85

Presented at UCLA and SNU/GSPA Joint Conference on the
role of the State in Economic Development, James E. West
Center, UCLA, Los Angeles, August 14-16, 1987.

Summary

Working Paper Agricultural Policies Structural Adjustment in NICS : Lessons from Korea

In the initial stage of economic development in the early
1960s, government policy on rural development focused on
agricultural production increase through the improvement of land
productivity and the expansion of farm land to achieve
self-sufficiency in staple foodgrains.

From the late half of the 1960s, as a means of narrowing
the rural-urban income gap and promoting rural development,
this policy on rural development shifted towards the
enhancement of farm household income. Accordingly since the
late of the 1960s, applying the high farm price support program
and the fertilizer price subsidy program, the government began
to place emphasis on increasing farm household income.

Because small-scale farming is prevalent in Korea and its
farming system is expected to continue for some time in the
future, the price policy for agricultural products is not effective.
One reason is that the public funds transferred from non-farm
sector to agricultural sector through the subsidy program in
terms of per capita base of non-farm sector will be large
compared with advanced countries because a large proportion of
the total population in Korea still lives in rural areas. Another
reason is that the price elasticity of foodgrain production in a
small scale farming system is inelastic.

Thus from the early 1980s the main core of the farm
income policy was placed on the increment of non-farm income
in rural areas through rural industrialization. Even though the
high farm price support policy contributes apparently to increase
farm income, it accelerates the inflation. Thus because not only
the economic stability but also balanced regional development
can be achieved by the rural industrialization, as one of the
non-inflationary measures, the government has given policy
priority on rural industrialization.

The imbalance between rural and urban areas and among
regions has prevailed as the result of the past Korea's economic
development strategy which was mainly based on the
large-scale, urban-concentrated and capital-intensive
manufacturing industries. But we expect that the rural
industrialization which based on the development of small and
medium industries can create the rural non-farm employment
activities for promoting rural development and increasing farm
income.

New comprehensive program which was enacted recently to
eliminate the shortcoming of the previous government programs
through rural industrialization seems to be more appropriate
measure to accelerate rural development and to improve farm
income. But considering the following restrictions, that is,

1) In contrast to the relatively decentralized pattern of
industrialization in Taiwan and Japan, industrialization in
Korea has been concentrated in the Seoul and Pusan
areas(Seoul, Pusan, Gyeonggi, and Gyeong Nam area),
2) Small commercial and service establishments, industrial
workshops, and homecraft activities have not developed in
rural areas,
3) A depletion of human capital in rural areas has occurred
as a result of migration form rural to urban areas,
4) A modernized credit system has not developed in rural
areas, and it has been extremely difficult to get credit for
rural non-farm activities, and
5) In contrast to the relatively well developed technical
infrastructure in primary cities, rural infrastructure has not
been developed, even of factories built in the newly
designated rural industrial parks under construction in the
optimum industrial sites are entitled to preferential
financial and tax treatment over a certain period, as well
as to technological and managerial guidance from the
government agencies, it is questionable that the rural
industrialization program for increasing rural income will
be successful.

Farm management diversification policy executed since 1983
was one of the government efforts to eliminate the risk of
decreased farm income which we experienced in 1980. This
policy option in the early 1980s was very reasonable and the
most appropriate measure because rice is the most important
single crop to give crucial influence on the determination of farm
income and on the national economy in Korea. In short run
under the small scale farming system it will be one of the
feasible options for maintaining farm household income. But it is
not desirable for the specialized commercial large scale farming
system in long run.

The government has offered every effort to increase
agricultural production for easing the shock from the poor crop
harvests in 1979 and 1980. Accordingly the production of the
crops included rice, barley vegetables and fruits except wheat,
soybeans, and foodgrains have been surplus. This production
policy has contributed considerable to expand and stabilize the
national economy in the early 1980s.

But in recent years as the self-sufficiency in stable food has
been achieved, the structural transformation of agricultural
production sector was required for efficient allocation of
production resources. Even if the international economic
cooperations, specialization and division of labor based on the
comparative advantage theory has become an important policy
option, the present agricultural production policy will be
maintained in near future period in Korea.

The government has established and enforced the institutes
to control domestic demand for and supply of foodgrains and to
stabilize grain prices for increasing farm income and protection
of the welfare loss of the urban consumers. This policy has
been reasonable in the period in which the size of national
economy was small and the disparity between demand for and
supply of main foodgrains had been prevailed.

During the period that the food supply was not sufficient to
meet food requirement, the government attempted to increase
farm products and to reduce consumption to keep the aggregate
demand and supply in balance. Thus the purchase prices should
be maintained at a relatively high level and the selling prices
must be kept at a relatively low level. The hish price of farm
products certainly contributes to increase farm revenue as well
as saving foreign exchanges through reduction in consumption.
But high farm prices have caused an upward pressure on
general price level and negative effects upon urban consumer's
welfare.

The dual price policy, higher price for farmers and lower
prices for urban consumer, might have contributed to increase
farm income and at the same time to alleviate an upward
pressure on consumer prices. Also it caused government costs
for grain operation to increase at an accelerating pace.

Form 1980 the government began to adjust the dual price
system to eliminate the GMF deficit. Narrowing the price
differentials between purchase and selling prices, the government
has increased selling price enough to cover the handling cost
with low rate of increment in purchase price. What with national
economic stability, and what with extinction of the GMF deficit,
the government tried to adjust the dual price system. But this
policy gave negative effect for farmers to increase their income.

Summary

Other Research Improving Performance in Markets for Agricultural Products

To insure that marketing services are provided as efficiently
as possible is of obvious importance to the consuming public.
Efficiency in this sense is to be judged by the extent to which
firms in the marketing sector 1) make full and effective use of
the facilities and resources they command, 2) are organized
(institutionally and spatially) to take the maximum feasible
advantage of scale economies, and 3) are technologically
progressive. Excess profits and excess promotional expenditures
should be eliminated, prices should be reflective of appropriate
grades and standards, and price changes should be transmitted
with a minimum of delay.

It is apparently less obvious that the marketing sector can
have significant impacts on the farming sector, or that the
marketing sector can contribute to (or detract from) the
development objectives of society. In this paper I have used two
rather general, albeit simplified, models to study the nature of
some of these impacts and contributions. it seems quite clear
that marketing and marketing policy are much too important to
developing countries to be ignored!

The models presented here were intended to be illustrative
rather than final. They obviously require further modification
before being applied to any specific situation. They are static in
nature so they cannot treat dynamic or temporal issues. They
are "partial" equilibrium models so the results must be
interpreted, in some cases at least, conditional upon further
investigation. They rest on perfectly competitive ideals.

Despite their limitation, models such as these provide the
researcher a useful framework within which to analyze policy
options in an objective way, and thus to be of real assistance to
policy-makers. Too often marketing economists are content to
count firms and categorize them along the pure competition
-monopoly continuum, and to pictorially describe marketing
channels. While this type of work can be useful in providing
background information, it is rarely helpful in analyzing policy
options or assessing market performance. For the latter a
normative framework encompassing the basic relationships of the
real world is necessary so that the existing system can be
judged by standards of socially desirable results.

(※ 본 보고서의 Concluding Remarks 부분을 요약으로 대체)

Summary

Other Research The Current World Food Situation

My assignment is to review the major trends is world food
production, trade and prices for the past two decades, During
those two decades there were two times when fears were
expressed that world food supplies were insufficient to prevent
wide scale suffering and loss of life, On such period was in the
early and mid-1960s; the second came in less than a decade.
This paper explores the major reasons why the production, trade
price developments after 1972 did not result in a deterioration in
the world food situation but actually provided for some modest
improvement for the world's poor people. I shall conclude by
considering some of the factors that may influence price and the
availability of food during the 1980s.

(※ 서문에서 발췌한 내용임)

Summary

Other Research U.S. Agricultural Trends and Policies, and World Food Prospects

This paper is a summary of Dr. Sanderson's presentation at
a seminar held at KDI on November 18, 1982.

Summary

Research Monograph Korean Regional Farm Product and Income : 1910-1975

The importance of agriculture for a nation's overall
economic development has been appreciated for some time, but
the interrelations between industry and agriculture are still
imperfectly understood. The usual emphasis in studies of these
interrelations is on transfers of resources from agriculture to
industry, or on the provision by industry of modern inputs to
raise rural productivity. The present study compiles and analyzed
voluminous regional data from South korea's rural development
to show that raising rural productivity involves more than the
mere application of modern inputs.

The summary of Korean experience reported here argues
that there is an intangible symbiotic relationship between
industrial activity and farm productivity that transcends
traditional input variations. The results are important for
development policy, for they imply that the degree of industrial
decentralization may significantly influence the degree of rural
development success. In economies with regional inequalities or
isolated rural poverty, or indeed in economies where the major
concern is only th raise farm output with minimum sacrifice,
these data may provide insights for broad strategy alternatives.

For this reason, the Korea Development Institute is pleased
to be able to present this original study of South Korea's
regional farm development. At the same time, we feel the study
should be of general interest and value to students of South
Korean agricultural history, for it present for the first time an
account of provincial development patterns, providing a rich
extension of work already done at the national aggregate level.

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