Government intervention in South Korean agriculture

J. Albert Evans

Government Intervention in South Korean Agriculture

Abstract: South Korea's aggregate assistance to agriculture, weighted heavily by rice, was highest after Japan among developed countries, with 89 percent of support stemming from price intervention measures. South Korean Government assistance in 1987-89 was generally higher for crops than for livestock products. Among the latter, beef and milk were more heavily assisted than chickens, eggs, and pork.

Keywords: South Korea, producer subsidy equivalent, consumer subsidy equivalent, price intervention assistance, budgetary program assistance.

The South Korean Government provides very high levels of assistance to agricultural producers while heavily taxing consumers. Assistance to producers in 1987-89 was about double the level in the United States, 1.6 times that in the European Community, and nearly 80 percent that in Japan, the most heavily assisted developed country. These ratios are derived from producer and consumer subsidy equivalents (PSE's and CSE's) for nine commodities.

South Korea has been transformed since the early 1960's from a poor agrarian economy to a highly industrialized upper-middle-income economy. The adoption of a "high price policy" for rice and barley producers in 1968 started South Korea toward the objective of agricultural self-sufficiency or food security for major crop and livestock products, and a related goal of greater parity between rural and urban incomes. Food security is important to South Koreans because they remember the deleterious effects of major shortages of basic staples under Japanese colonial rule and later during the Korean War.

South Korea's food security and rural development policies are widely perceived as underpinning public welfare, and economic and political stability. South Korea's Economic Planning Board (EPB), a powerful agency, recognizes the need for restructuring agriculture to seek international competitiveness, but the process is being slowed by the political reality that a high percentage of South Koreans still have relatives on farms or in rural areas and do not want to see them hurt by farm sector adjustments meant to further trade liberalization objectives.

South Korea's import barriers on many products cause conflicts with agricultural exporting countries, such as the United States, that seek to expand trade and reduce overall trade deficits with South Korea. Paradoxically, South Korea's export-led economy depends on access to foreign markets for commodities such as automobiles, textiles, leather goods, and footwear. These divergent domestic interests concerning trade liberalization have created a dilemma for South Korean policymakers.

Although food grains continue to dominate farm income, the shares from fruits, vegetables, and livestock products have risen rapidly as these products increasingly supplement cereals in the Korean diet. Economic and population growth are raising demands for agricultural products and imports. Because of South Korea's interventionist policies, its highly assisted grain, soybean, beef, and milk producers remain quite inefficient by international standards.

Kinds of Assistance

Price Intervention - Major intervention policies that distort prices include state trading, import quotas and tariffs, producer price supports, and retail price ceilings for various commodities (1, 30). These policies permit agricultural producers to obtain commodity prices that exceed prevailing world market levels, with the difference paid by consumers through higher prices (20).

The combined effects of all price intervention policies for any given commodity are estimated by a single price gap because of the problem of sorting out their separate effects. Such policies accounted for 89 percent of total South Korean Government assistance to producers of the selected commodities in 1987-89.

Parastatal Organizations - South Korea's Ministry of Agriculture, Forestry and Fisheries (MAFF) has overall authority for food grain and other price support programs, land and water resource development, fertilizer distribution, credit and marketing programs, and import and export policies. Organizations of a semi-public character, known as parastatals, also are active in assisting South Korean agriculture through price controls or product marketing. These include the National Agricultural Cooperatives Federation (NACF), the Agricultural and Fisheries Marketing Corporation (AFMC), the National Livestock Cooperatives Federation (NLCF), and the Livestock Products Marketing Organization (LPMO).

The NACF administers grain and soybean price support and distribution programs, and is responsible for distributing production inputs, including fertilizer, pesticides, and farm machinery. It supplies farm credit, processes and markets farm products, conducts research, sells various subsidized agricultural inputs, and provides management guidance to farmers.

The AFMC (formerly the Agricultural and Fisheries Development Corporation) has sole authority to import food-use soybeans. Each of the three soybean crushing companies is authorized to import for crushing, up to allocated levels established by the MAFF based on its determination of an annual import quota.

The NLCF controls the Livestock Development Fund (LDF) and is authorized to make development and production loans to cooperative members. The LPMO marks up resale prices of imported beef to hotels and for general consumption, depositing the net proceeds beyond handling costs into the LDF.

Expenditures from the LDF, approved by the MAFF, support activities such as livestock research, and infrastructure improvement loans to farmers. Other functions of the NLCF include extension work and agribusiness development. The NLCF imports and exports livestock products (except beef), as determined by the MAFF.

The South Korean Government set the LPMO up in late 1988 as the sole state trading organization for importing beef. According to its bylaws, the purpose of the LPMO is to increase livestock farmer incomes and stabilize livestock product prices through smooth adjustments in supply and distribution (12, 17).

Individual Product Laws - Individual product laws, an issue in recent U.S.-South Korean trade talks, underpin domestic subsidies and import protection. These laws are often vaguely worded but are the basis for regulations or guidelines which frequently are not publicized and allow wide administrative discretion. Commodity-specific individual laws include, among others, the Food Grain and Feed Management Acts of 1950, the Livestock Law, and the Animal Quarantine Act.

The grain management laws of 1950 are still the basic legal authority that is central to government farm policy. Under these laws, the Government is the ultimate authority to approve or deny import licensing.

Budgetary Programs - Aggregate outlays for 10 budgeted programs of assistance to agriculture increased 37 percent between 1987 and 1989, continuing the strong uptrend of recent decades. Budget allocations for development programs designated as "Agricultural Development," "Irrigation Development," and "Agricultural Infrastructure Development" amounted to 76 percent of the 1989 total budget of 1.12 trillion won ($1.67 billion) and reflected the greatest areas of growth in 1987-89 (table 1). (In tables 2 and 3 showing calculations of PSE's and CSE's, government budget assistance under these 10 programs is aggregated into four generalized categories (inputs assistance, marketing assistance, infrastructure support, and regional support) under the heading "Policy Transfers.")

Merchanization, through credit supplied by the NACF, is still strongly encouraged, primarily because it enhances the productivity of labor for rice and allows time to establish a supplementary crop of winter barley or greenhouse vegetables. The Government has maintained a dominant role in large and medium-scale projects that include forest land reclamation, tidal land development, irrigation and drainage facilities, and farmland rearrangement of small fragmented fields after the land is leveled.

Under the Saemael (New Community) initiative, investment projects continue to be undertaken to improve rural living conditions by providing sanitary water supply systems, better sewage systems, housing, and village reconstruction. Other projects include paving roads and rural electrification. To enable the marketing network to handle the increased volume and variety of agricultural products, the Government is modernizing markets while seeking increased private ownership of wholesale outlets.

In 1987-89, producers of chickens, eggs, and hogs received a higher proportion of total government assistance from budgetary programs than did producers of other commodities. Budgetary assistance was relatively more important to livestock producers than to crop producers, although rice growers received the greatest absolute benefit from such programs.

Budgetary programs in 1987-89 accounted for only 11 percent of total government aid to South Korean agriculture. In contrast to price intervention, budget outlays are taxpayer transfers to agricultural producers and usually do not otherwise entail costs to consumers.

Assistance to Crop Producers

Food Grains - Rice's 39-percent share of farm output and status as the major food grain make it the keystone of South Korean agricultural policy and give it great weight in the average level of assistance to agriculture. Under the dual price system for rice and barley, support prices are paid to producers. Consumers pay prices below the NACF's cost of acquisition and handling but still above world price levels. This arrangement is reflected by increasing deficits in the Grain Management Fund, which finances NACF purchases of significant shares of the total outputs of rice, barley, and more recently, soybeans. Government support for rice includes a ban on imports.

Rice producers received 90 percent of their assistance in 1987-89 from price intervention policies (table 4). Government budget outlays constituted the remainder, with infrastructure support and marketing assistance most important.

Food grain consumers in 1987-89 were taxed heavily but at lower levels than producers were assisted. Subsidized rice was provided to institutions, including public hospitals, police forces, and the military.

The high level of government assistance to barley producers (89 percent) reflects the continuing incorrect perception of barley as a major food grain rather than an important secondary and complementary crop to rice. Domestic barley is now used primarily in livestock feeds and in producing malted beverages, including beer. Food use of barley was less than 2 percent of total food grain use in 1987-89. Subsidies to producers included price supports and collection losses on credit extended for purchases of fertilizer, seeds, and other chemicals.

Corn - Corn is the major South Korean feed grain. Imports accounted for 98 percent of corn use in 1987-89. In 1987-89, South Korean corn producers received total government assistance equivalent to 76 percent of the value of corn output (table 4). Budgetary assistance was mainly due to subsidized fertilizer prices.

The NACF, as the government buying agent, purchases all corn offered by farmers, selling the great bulk of it to feed mills and the rest to companies of the Korea Corn Processors Association. Feed manufacturers are forced to buy domestic corn from the NACF at its cost of acquisition and handling, which continues to be several times greater than the import price. Since 1984, individual feed mills and the NLCF - as well as the Korea Feed Association, formerly the sole importer - have been authorized to import feed corn.

Soybeans - Almost all of the domestic soybean output is for human use. About 80 percent of soybeans consumed are imported under quotas, subject to a 3-percent tariff that began in 1988. Assistance to South Korean soybean producers in 1987-89, indicated by a PSE of 86 percent (table 4), was essentially the same as levels for rice and barley. Budgetary subsidies provided about 10 percent of total assistance, primarily for inputs such as seed and fertilizer, for marketing assistance, and regional and infrastructure support. The MAFF emphasizes soybean production through high price supports, budgetary assistance, and border policies (27).

Consumer taxes on soybeans were relatively high in 1987-89 at 79 percent of total consumer cost, about the same as on rice and barley. The cost of domestic soybean price support programs and the effects of import quotas and restrictions are passed on to consumers, which keeps prices for soybeans very high.

Refined Sugar - South Korea does not produce raw sugar, and relies entirely on imports for its processing industry. Domestically refined sugar satisfies internal needs and enters export channels around the world. Domestic consumers of refined sugar were taxed in 1987-89 to the extent of 54 percent of their total product cost, benefiting domestic processors and companies that trade sugar products in South Korea and in export markets.

Assistance to Livestock Producers

As measured by PSE's, government assistance to producers of meats, milk, and eggs in 1987-89 was well below levels for rice, barley, corn, and soybeans (table 4). The lower rates to livestock producers is partly explained by the dominant food security focus on food grains. In addition, there are far fewer livestock producers than grain producers, and consequently they have less political clout.

Producer assistance for beef (67 percent) and milk (64 percent) was about three-fourths the rates for rice and barley, and about double those for chicken and eggs. Assistance to producers of pork, an export commodity, was lowest. Overall, government assistance to livestock producers averaged 45 percent in 1987-89, somewhat more than consumers were taxed (38 percent).

Despite high prices, South Koreans have increased their dietary intake of meats (20). Per capita meat consumption, 17 kilograms per year in 1987-89, was 72 percent more than in 1977-79. Pork's 59-percent share of total meat use in 1987-89 was about triple that of beef (the preferred meat) and chicken. Per capita pork consumption doubled during the decade, far exceeding growth for chicken (52 percent), and beef (25 percent). Milk use per capita more than tripled and eggs gained 58 percent.

Beef - Of 1987-89 government assistance to beef, 91 percent reflects various price intervention policies (table 4). These include a 20-percent tariff, beef import quotas that have been increased since mid-1989 following a 4-year virtual ban, State trading through the NLCF and later the LPMO, and parastatal control of beef marketing and distribution. A cattle price stabilization program was implemented in July 1988, also administered by the LPMO (29).

Currently, all imported beef carcasses (sold at a sharp discount compared to domestic carcasses) are deboned at Korea Cold Storage Company (KCS) facilities and then marketed at the rapidly expanding number of stores established by the KCS or the NLCF exclusively to sell imported beef. Boned high-quality beef (HQB) is distributed through the Korea Tourist Hotel Supply Center (KTHSC) to hotels; is auctioned to wholesalers, purveyors, or restaurants; or is sold directly to private retailers (26).

The South Korean Government will allow retailers of beef (and pork) in late 1991 to set prices on products by grade and cut. South Korea presently has no grading system for beef, either carcass or cut. The United States competes strongly in the HQB sector of South Korea's market, which previously was limited almost exclusively to hotels and upscale restaurants.

Beef imports by South Korea are scheduled to increase under an April 1990 Beef Memorandum of Understanding with the United States, which set a minimum import quota of 58,000 tons (customs clearance basis) in 1990 and 66,000 in 1992. In addition, a Simultaneous Buy/Sell system somewhat similar to one in Japan has been established, whereby South Korean beef buyers, such as hotels, can negotiate product specifications and prices directly with sellers. The LPMO will remain the monopoly importer of beef (26).

South Korea actually imported more than 100,000 tons of beef in 1990, 30 percent from the United States. But the import market is obviously much larger than this. A recent study projects South Korean imports of beef in the year 2000, assuming no constraints, to be between 340,000 and 700,000 tons (7).

Minimum beef import increases for 1993 through 1997 are subject to future negotiations. In October 1987, South Korea agreed to disinvoke use of GATT article XVIII(B) to justify import restrictions on balance of payments grounds. South Korea has until July 1, 1997, to fulfill a commitment to remove all import restrictions or to bring its policies into conformity with the GATT.

Pork - Pork production and consumption grew more than beef mainly because of lower prices. Government assistance to pork producers (20 percent in 1987-89) is still primarily provided by border measures that limit imports, subject to a 25-percent tariff. Imports of canned pork were liberalized on July 1, 1987.

Government assistance to pork producers was significantly less in 1987-89 than earlier in the 1980's, although this decline may reflect problems with the reference prices used to calculate the PSE's rather than a fundamental policy change. A sharp 70-percent growth in the South Korean swine inventory during 1986-89 resulted in substantially lower prices for hogs, and for pork carcasses on which the PSE calculations are based. Thus, lower average prices for domestic pork carcasses in 1987-89, combined with only small increases in the reference price (Taiwanese pork carcasses), greatly narrowed the price gap used in determining PSE's.

Occasionally, the NLCF purchases hogs or pork to aid in stabilizing prices and supplies. More often it attempts to reduce the instability in hog production by pressuring large producers to expand or decrease their herds. Exports of pork averaged only 8,000 tons in 1987-89, nearly all to Japan. The Government limits the size of individual hog operations to no more than 1,000 sows or 10,000 total hogs.

The NLCF allows subsidized imports of swine (cattle and poultry also) for breeding purposes, subject to a tariff. Other benefits provided livestock producers include loans for livestock purchases and subsidies for pasture and other forage production. The NLCF also operates rural livestock markets. It collects pigs produced by large growers through purchase or consignment, and arranges transportation to NLCF slaughterhouses in urban areas.

Chicken - Chicken accounts for 98 percent of total poultry meat production and consumption in South Korea. The broiler industry will continue to grow with increasing consumer income, an expanding fast-food industry, and population growth.

Assistance for chicken producers (34 percent in 1987-89) is mainly accomplished through border restrictions, but sometimes the MAFF stabilizes producer prices through market purchases of chicken. Imports of fresh, chilled, and frozen chicken are highly restricted and subject to a 20-percent tariff. Canned poultry meat and turkey imports were liberalized July 1, 1987 (28).

The South Korean Government is subsidizing eight broiler companies to aid in integrating their operations. The industry, mainly controlled by large operators, realizes the need for increased efficiency to become internationally competitive within the next decade.

Eggs - Government assistance for egg producers (26 percent in 1987-89) is accomplished mainly through border restrictions that limit imports. Imports of eggs and egg products had been banned under the Government's Import Surveillance System until it was abolished January 1, 1989. Subsequently, shell eggs and dried egg yolks may be imported, subject to a 30-percent tariff, which is likely to continue for at least another 3 years. However, domestic production of fresh eggs currently is sufficient to satisfy demand. The South Korean chicken industry may soon become competitive enough to export chicks for breeding.

Milk - Nearly 90 percent of South Korea's milk output is consumed fresh. The comparatively high level of assistance to milk producers in 1987-89 (64 percent) stems from government established prices for raw milk and from highly restrictive border policies that ban most dairy product imports by the NLCF, the only legal importer (18, 24). Dairy processing companies purchase raw milk directly from producers at prices set by the Government after negotiations that include producers, processors, and the MAFF.

South Korea's dairy industry is a recent development, beginning with the purchase of 2,000 Holsteins from the United States and Canada in 1962. The dairy herd size now exceeds 500,000 animals, all Holsteins. The Government, through the MAFF and parastatal organizations, has directed the development of the industry from its inception. Growth of the industry is likely to slow in the 1990's compared with the 1980's because the shortfall in domestic milk output has been greatly reduced, even as consumer awareness of milk has reached a high level.

Growth in milk consumption has averaged about 19 percent annually for more than a decade. Before the mid-1970's, use of milk and dairy products was very low because of limited production, lower per capital incomes,

Calculating South Korea's PSE's and CSE's

Producer subsidy equivalents (PSE's) and consumer subsidy equivalents (CSE's) are a commodity-specific, short-hand way of describing the effect of government intervention on producers and consumers.

A PSE is defined as that subsidy level required to remunerate producers of a commodity for withdrawing government support. The percentage PSE is the ratio of the total value of policy transfers to the total value of agricultural production. A positive PSE denotes producer assistance, and a negative PSE producer taxation. Likewise, a CSE is defined as the subsidy level that would be required to compensate consumers for the removal of beneficial agricultural programs. The CSE, in percentage terms, reflects the ratio of the total value of policy transfers received by consumers for a product to total consumer cost. CSE's also may be positive (net assistance) or negative (net taxation).

PSE's were calculated for rice, barley, corn, soybeans, beef, pork, chicken, milk, and eggs. CSE's were calculated for the same commodities (except corn) plus wheat flour.

In calculating PSE's and CSE's for South Korea, a number of methodological conventions were made.

Some of these are described in the footnotes to the tables reporting the results.

One important convention in this research is that state trading is defined as exclusive trading in an agricultural commodity by a government agency or government-sponsored agency and includes importing/ exporting authority, and often involves product distribution activities.

[Tabular Data Omitted]

Aggregate assistance to producers or consumers from price intervention policies is derived as the gap between the domestic producer price or consumer cost for each product and the corresponding import unit values (or proxy import values if imports are banned, as is the case for rice and barley), multiplied by the production or consumption quantity of each product. Recipients of government agricultural budget programs include nonfarm rural residents and part-time farmers whose earnings are primarily from non-farm sources. Hence, it is difficult to determine budgetary outlays for those involved only in agriculture, and to allocate program expenses among the various commodities without having more program details than ERS has been able to obtain from the MAFF. and lack of consumer awareness. The Government continues to support a subsidized nationwide program of supplying milk to schools. Still, consumers of milk in general were taxed (82 percent) relatively more than were consumers of other livestock products.

Conclusions

South Korean producers are greatly assisted by Government policies that support domestic commodity prices, supply subsidized inputs and credit, and ban or restrain imports. Pervasive government intervention in agriculture is consistent with the objectives of agricultural self-sufficiency, higher rural living standards, and agricultural development. South Korean policies that contribute most to agricultural price distortions include import bans, quotas and tariffs, state trading, producer price supports, and retail price stabilization programs. Consumers are taxed through higher prices to cover a high percentage of such assistance to producers. Budgetary program assistance, the costs of which are borne by taxpayers, was a small portion of total assistance for all commodities.

[Tabular Data Omitted]

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