PART I
Perspectives on agricultural development in the Republic of Korea: lessons and challenges

JooHo Song
Korea Rural Economic Institute

Abbreviations and acronyms

Executive summary

A. Introduction

The Republic of Korea has undergone radical changes from an agricultural to an industrial society within one generation. During this process, the share of agriculture in the GDP, the agricultural population and the number of rural communities declined sharply because of urbanization. Recognizing the diverse roles that agriculture plays, the government has maintained price control and trade protection measures to maintain self-sufficiency for staple crops. However, the completion of the Uruguay Round (UR) forced Korean agriculture to open up its markets and cut trade-distorting subsidies. The traditional price-support policy will be replaced by an income-support policy, which needs a large government budget. Korean farmers are very concerned about the ongoing Doha Development Agenda (DDA) and Free Trade Agreements (FTA), which are the greatest challenges that Korean agriculture is facing.

B. Agricultural situation and policy changes in Korea

In 1970, per capita annual income was only US$1 062 (US$ 2004 constant), but in 2004 it exceeded US$14 000. In the same period, the share of agriculture in the GDP and the agricultural population decreased sharply from 17.6 to 3.2 percent and from 44.7 to 7.1 percent respectively. The average age of the agricultural population is increasing rapidly in Korea. In 1971, 7.6 percent of the agricultural population was over 60 years of age, but in 2003, this increased to 39.0 percent. In 1971, the total farmland area was 2.3 million ha, but this decreased to 1.8 million ha in 2003 because approximately 20 000 to 30 000 ha of farmland had been converted into industrial or residential land annually. In the meantime, the agricultural population declined faster than the reduction in farmland area. As a result, the farmland area per farm household increased during the same period from 0.92 to 1.46 ha.

In the 1950s and 1960s, Korea taxed the agriculture sector by maintaining low grain prices (using PL480 imports). But in the 1970s, Korea switched from taxing to subsidizing agriculture in order to accomplish food security through domestic self-sufficiency. Over the last 40 to 50 years, the policy instruments used to influence agriculture have also changed. In the early years the thrust was on reducing costs of production through research and development. This was augmented by increasing price support and the availability of inputs, such as fertilizer, to encourage expanded production in the early 1970s. But production efficiency was limited by small farm size, lack of rural infrastructure and inadequate rural institutions. Thus, rural policy in more recent years has focused on addressing rural income parity by encouraging rural industrialization and investing in infrastructure.

Korean agriculture is dominated by rice farming. The importance of rice diminished in the 1970s but has risen since the mid-1990s. Rice cultivation still covers a large area of farmland and is a major factor with respect to generating agricultural income and farm employment.

Imports of agricultural products grew from US$1.9 billion in 1970 (US$ 2004 constant) to US$8.5 billion in 2003. Of the agricultural products imported by Korea, grain predominates. Korea's overall exports increased from US$3.5 billion in 1970 (US$ 2004 constant) to US$198.8 billion in 2003. During the same period, the export of agricultural products jumped from US$0.4 billion (US$ 2004 constant) to US$1.7 billion. Even though the export of agricultural products rose sizeably in terms of absolute value, its share in total exports has dropped sharply.

C. Policy directions, achievements and emerging issues

Policy directions

Since the conclusion of the UR negotiations, the government has allocated more resources to the agriculture sector. Amidst manifold internal and external challenges, the Korean Government is striving to maintain an adequate level of agricultural production and enhance the importance of agriculture's multifaceted role.

The Korean Government has invested heavily in improving the infrastructure for agricultural production. In addition, the government has made substantial investments and offered loans with low interest rates to increase the size of landholding and for the modernization of distribution and processing facilities.

The Korean Government has started to ease regulations related to farmland ownership and land transactions. The principle that only farmers should be allowed to own farmland, which had been strictly implemented, is now being eased. Reform is also taking place in the distribution system for agricultural products; more systematic and specialized distribution centres are being established.

With growing public awareness on environmental issues, consumer interest in organic agricultural products has increased. The government has promoted environmentally friendly farming as a major policy goal since the mid-1990s and has been implementing the five-year plan for its promotion since 2001.

The government wishes to stimulate declining rural vitality as young people and capital are being drawn in greater numbers to urban rather than rural areas. In this context, rural investment centres have been established to provide more information to urban residents about investing in rural areas.

Compared to other nations, Korea has a very vulnerable rural income structure, reflected by the lower off-farm income of 32.9 percent in 2004. Therefore the government is focusing on increased off-farm income by promoting rural village tours and establishing industrial complexes in rural areas. Currently, the government is providing support for retired senior farmers and has initiated pilot programmes to introduce direct payment for landscape preservation, environmentally friendly animal husbandry and grants for farming in disadvantaged areas.

Policy achievements

The agriculture sector reversed negative growth in the late 1980s to 3 percent or above in the mid-1990s due to the governmental expansion of investment subsidies and financing for the agriculture sector during this period. More government support for the agriculture sector boosted the mechanization rate of rice farming from 84 percent in 1992 to 95 percent in 2002. The area of upgraded greenhouses also increased from 45 to 8 983 ha. The accelerated enlargement of farm size boosted the number of rice-farming households with 3 ha of farmland or more from 42 000 to 78 000 during the same period. Meanwhile, in the livestock sector, such expansion is also rapid, and the number of full-time farms is increasing quickly.

One of the most important objectives of agricultural policies is to maintain an adequate domestic production of rice for food security. In this regard, Korea has achieved nearly 100 percent self-sufficiency for rice while total grain self-sufficiency has declined since the 1980s. Self-sufficiency for wheat and maize is less than 1 percent, and for soybeans less than 10 percent. For all grains, self-sufficiency has been less than 30 percent since 1995.

Emerging issues

1. Korea faces a contradiction between farm growth and farm income. Government policy has focused on boosting price competitiveness for agricultural products by enlarging farm size. This has resulted in an increase in agricultural product supply and a fall in prices. Ultimately this has led to deteriorating farm income and increasing the income gap between urban and rural households. There was almost no income difference between urban and rural households in 1990. But in 2002 the average income of rural households was only 73 percent of the average income of city dwellers.

2. Korea is experiencing accelerated restructuring of the agriculture sector. Since the establishment of the World Trade Organization (WTO), it has made a tremendous effort to re-orient its agriculture sector to a market economy while implementing its own commitments to the WTO. However, an ageing agricultural population and overenthusiastic farm restructuring have made it difficult to achieve tangible results. In Korea the agricultural share of the GDP fell from 40 to 7 percent in 26 years, while similar restructuring took more than 100 years in most developed countries.

3. Instability in farming incomes is rising due to policy changes. The government has implemented a two-price scheme for a long time but this price support has to be scaled down each year based on the WTO Agreement. Finally, the government's rice procurement system was repealed in 2005. Instead, the public stockholding system was introduced, where the government can purchase a predetermined volume of rice at the current market price solely for food security. Thus, the price of rice in the domestic market fluctuates. The government also introduced a direct payment system to compensate rice farmers for annual differences between target prices and market prices.

4. The rural population is dwindling and rural living conditions are deteriorating. The rapidly declining rural population is draining vitality from the rural economy. The share of the rural population among the total national population had a dramatic slip from 42.7 percent in 1980 to 20.3 percent in 2000. The number of Myeons (small towns) with less than 2 000 people noticeably surged from nine in 1985 to 170 in 2000. Young people are leaving rural areas because of better educational, medical, cultural and other living conditions in urban areas.

5. Environmental issues are emerging. For a number of years, the government has provided subsidies for chemical fertilizers. As a result, agricultural productivity has improved, but the excessive use of chemical fertilizer has caused environmental problems. Moreover, former part-time and small-scale livestock farms have transformed into much larger livestock enterprises that generate huge amounts of manure. This puts considerable stress on the rural environment. Accordingly, the government stopped subsidizing chemical fertilizer in 2005, and is actively encouraging farmers to use livestock manure as a substitute for chemical fertilizer.

D. Challenges for Korean agriculture

1. The sector needs a soft landing on the WTO/FTA plateau. Subsequent to the UR, the DDA will generate new challenges for farmers in Korea. As many proposals tabled in the negotiations thus far suggest deeper cuts in trade protection and domestic support as well as a call for stricter discipline than the UR agreement, the DDA impact on farmers will be much harder and more substantial. A study of the potential impact of the DDA estimated that Korean farmers will lose 7.5 to 35.6 percent of farm income in 2010 compared to their average annual farm income between 2000 and 2002 depending upon tariff-cut scenarios. It is therefore important to take advantage of flexibility and transition room in the reduction of tariffs and domestic support in the DDA for Korean agriculture, at least during the soft landing period. Along with multilateral trade negotiations, the country is also pursuing bilateral FTAs with some countries and economic blocs which will affect the highly protected agriculture sector in Korea.

2. Korean agriculture needs to develop policy measures to maintain adequate levels of farm income. Substituting for the price support policy, an income policy was introduced recently. The direct payment policy means that the government pays a predetermined amount of money, regardless of the market price, to farmers directly. Other measures, considering farm size, also need to be drawn up. It is more likely that large-scale farms will expand their area of farmland, while the number of small farms will increase. Small farm owners are expected to continue farming as long as agricultural product prices are higher than farm operating costs. They need to have a social safety net to secure their living costs. The mid-scale or bigger farms should be encouraged to enlarge their farm area to increase farm income per household.

3. The importance of sustainable agriculture cannot be overemphasized. In the past, when food quantity was critically short, the goal was production expansion with little consideration for the environment. At present there is a surplus of rice. This has encouraged a shift in policy towards environmentally friendly agricultural production using lower volumes of chemical fertilizers and pesticides. The government has introduced a plan to reduce their usage by 5 percent every year until 2013 and establish stronger regulations on livestock numbers.

1. Introduction

The Republic of Korea has undergone radical changes from an agricultural to an industrial society within one generation.¹ During this process, the share of agriculture in the GDP, agricultural population and the number of rural communities declined sharply because of urbanization. In the 1950s, Korea suffered from chronic food shortages. However, thanks to the Green Revolution in the 1970s (improvement in plant varieties, more chemical fertilizer use and farm mechanization) Korea's productivity increased considerably to provide a stable supply of staple crops. Amidst all these changes in agriculture, the income gap between urban and rural areas continued to widen. Therefore the government pursued price-support policies such as tariff and quota protection and a government procurement programme, in most cases to maintain farm household income. Such policies caused widening disparities between prices of imported and domestically produced major agricultural products.

Under these circumstances, the Uruguay Round (UR) negotiations in agriculture began in 1986. The ensuing deep reduction of tariffs and subsidies threatened the viability of Korean agriculture, and created a sense of crisis among Korean farmers. The government is required to reform its agricultural policies to be consistent with the World Trade Organization (WTO) rules, which require reduction in domestic price support. The government has tried hard to fit its agricultural policies into the market system and to enhance the competitiveness of Korean agriculture. This transition took place in a relatively short period and inevitably resulted in unstable farm income in the country. In fact it took 50 to 100 years for developed countries to carry out similar reforms. But Korea had to face the liberalization of agricultural markets at a critical moment of industrialization and restructuring in the agriculture sector.

Korean farmers, who are still in a very difficult situation, are paying apprehensive attention to the Doha Development Agenda (DDA) negotiations on agriculture. The extension of Free Trade Agreements (FTAs) is considered to be inevitable for the continuous growth of the Korean economy, which is heavily dependent on foreign trade. Market liberalization is the greatest challenge for Korean agriculture.

2. Agricultural situation and policy changes in Korea

2.1 Economic growth and structural transformation

In 1960, Korea was one of the poorest countries in the region with per capita annual income of less than most countries in Asia. In 1970, per capita annual income was only US$1 062 (US$ 2004 constant), but in 2004 it exceeded US$14 000. The economic transformation in Korea has occurred in less than a lifetime (less than 40 years). It has been extremely rapid if we remember that the same transformation took more than 100 years in most developed countries. At its peak, agriculture was supplying 380 000 educated workers per year for rapidly expanding export-led industrialization. Thus it is not surprising that the evolution of food security, agricultural development and policies for the rural sector, likewise, also changed rapidly.

2.2 The role of agriculture in industrial growth

In the 1950s and 1960s, Korea was typical of most developing countries in that it taxed a large agriculture sector heavily by maintaining low grain prices (using PL480 imports) and high levels of industrial protection.

A strategy of import substitution/industrialization required “three lows”: low grain prices, low interest rates and a low exchange rate (i.e. an overvalued domestic currency). In a poor country with a dominant single food grain like rice, rice prices were an adjunct to monetary policy. After 1954, US PL480 grain shipments, which were basically free, kept grain prices low, permitting low wages for competitive industrial production. The impact of low prices on agriculture was acceptable because the import substitution model of development assigned agriculture the limited role as the source of labour, tax revenue and food for workers in industrial development.

But in the 1970s, Korea switched from taxing to subsidizing agriculture. Korea's PSE (producer support estimate)² reached 55 percent in 1979 and peaked at 82 percent in 1995. Korea's rapid changes in policy direction were driven by both internal and external factors. A United States policy decision to charge hard currency for PL480 shipments in the late 1960s greatly increased the foreign exchange costs of food imports. This outcome, coupled with rising domestic concerns about low rural incomes, caused a radical shift from food security based on concessional imports to food security based on domestic self-sufficiency. To accomplish this goal, farm prices were raised substantially in the Third Five-year Economic Development Plan (1972–1976). However, to prevent these higher prices from being fully passed to urban industrial workers, a two-price scheme (with lower prices for consumers) was introduced, with rapidly increasing government fiscal costs. After 1980, as the cost of subsidies increased, the policy was modified to allow relatively free import of some commodities such as wheat, maize and soybeans. However, there was a continuing ban on imports of rice and barley. The conclusion of the UR in 1994 resulted in rapid structural changes in Korean agriculture and imposed binding constraints on available policy options to meet the WTO commitments. Market price support will be replaced by income support as an alternative policy option under the UR agreement.

Over the last 40 to 50 years, policy for agriculture also changed. In the early years, the thrust was on reducing the costs of production through research and development. Higher farm price support and increased availability of inputs such as fertilizer further increased farm production and incomes in the early 1970s. The Green Revolution occurred in the mid-1970s. But production efficiency was limited by small farm size, lack of rural infrastructure and inadequate rural institutions. Thus, rural policy in more recent years has addressed rural income parity by encouraging rural industrialization and investing in infrastructure. Korea's agricultural policy regime changes are given in Table 1.

Table 1. Korean agricultural policy regime changes

2.3 The agricultural situation in Korea

2.3.1 Share of agriculture in the GDP

The share of agriculture in the GDP showed a sharp decline from 17.6 percent in 1971 to 3.2 percent in 2004 (Table 2). This radical decrease is a result of the unprecedented rate of industrialization.

Table 2. Share of agriculture in the GDP

Unit: trillion won (2000 constant)

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

2.3.2 Changes in production share by commodity

Table 3 shows the agricultural production amount by commodity. The share of rice in total agricultural production increased from 1995 onwards, after the UR negotiations were concluded. This was because rice was regarded as a commodity that can generate relatively higher incomes. Recently, however, the relatively low domestic rice price, stemming from a reduction in consumption, has led to a decrease in production. Along with rising national income, however, the consumption of livestock products increased at a rapid pace. Accordingly, domestic livestock production continues to increase, while its share in total agricultural production grows.

Table 3. Commodity share in total agricultural production, 1991–2004

Unit: %

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

2.3.3 Changes in agricultural population

The agricultural population in Korea fell sharply from 14.4 million or 44.7 percent of the total population in 1971 to 10.8 million or 28.3 percent in 1981 and 3.5 million or 7.4 percent in 2003 (Table 4). As the agricultural population in developed countries is about 2 to 3 percent of the total population, the share of the agricultural population in Korea is still relatively high.

Another important point to note is the increasing average age of the agricultural population in Korea. As indicated in Table 5, in 1971, 7.6 percent of the agricultural population was over 60 years of age, but the corresponding figure for 2003 was 39.0 percent. Indeed, the issue of the ageing agricultural population is very serious.

Table 4. Share of the agricultural population in total population

Unit: million

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

This phenomenon is attributable to the older generation finding vocational transition difficult and opting to remain in current occupations while the younger generation leaves the rural villages in search of higher income and better social standards in the city. This trend continued throughout the industrialization phase, and the average age of the agricultural population increased rapidly.

Table 5. Share of the agricultural population over the age of 60 in the total agricultural population

Unit: million

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

2.3.4 Changes in farmland size

In traditional Korean society prior to 1950, it was a common practice for landowners to hire tenants to farm their land. After comprehensive land reform in 1950, farmland was distributed evenly among all tenants. Based on the principle that only farmers should be allowed to own farmland, the government limited the maximum size of farmland that can be owned to 3 ha per farming household until the early 1990s. Thus, Korean agriculture has been characterized as small-sized family farming, and farming was usually conducted by family members.

In 1971, the total farmland area was 2.3 million ha, but this decreased to 1.8 million ha in 2003, because between 20 000 and 30 000 ha of farmland had been converted into industrial or residential land annually. Meantime, the agricultural population declined more quickly than the reduction of farmland area. As a result, the average size per farm increased during the same period from 0.92 ha to 1.46 ha (Table 6).

Table 6. Change in agricultural farm size

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

The government has started easing the law on farmland possession recently, recognizing that the ceiling does not help to enhance international competitiveness. As a result, the number of farmhouses owning more than 3 ha has gradually increased from 18 000 in 1990 to 41 000 in 2000.

2.3.5 Rice-dominant farming system

Rice farming predominates in Korea. The importance of rice declined in the 1970s but rose in the mid-1990s; it is still important for generating agricultural income and farm employment. There were three reasons for the rebound: (1) rice was exempted from tariffication in the UR; (2) the government has maintained a price-support system for rice so that it remains a profitable exercise for farmers compared with other liberalized commodities; and (3) mechanization enables older farmers to continue with this activity (only 280 labour hours are needed to cultivate 1 ha of rice). Table 7 shows the labour hours required for the cultivation of other major crops.

Table 7. Labour hours required for the cultivation of major crops

Unit: hours/ha

Source: Lee and Kim (2004).

In 2003, income from rice farming accounted for 50.8 percent of the total income from farming and 20 percent of farm household income (Table 8).

Table 8. Rice farming as a major income source

(Unit: thousand won)

Sources: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

2.3.6 Agricultural imports and exports

Import of agricultural products grew from US$1.9 billion in 1970 to US$8.5 billion in 2003.³ Among the agricultural products imported by Korea, grains have the largest share.

Only 2.1 million tonnes of grain were imported in 1970 but this rapidly grew to 5 million tonnes in 1980, 10 million tonnes in 1990 and 15 million tonnes in 2003. As to the value of grain imports in 2002, maize recorded US$0.9 billion. Rice was one of the most important imported agricultural products from the late 1960s to the early 1980s. However, as self-sufficiency in rice was achieved by the mid-1980s, rice was not imported until 1995 when Korea started to import rice in minimum market access (MMA) quantity under the UR Agreement.

Maize has had the largest import volume among grains. Demand for maize as animal feed has grown sharply since the mid-1970s when the consumption of meat began to increase. The volume of imported maize was only 0.3 million tonnes in 1970 but this jumped to 2.2 million tonnes in 1980 and to 8.6 million tonnes in 2002. Import of livestock products amounted to only US$38.3 million in 1970 (US$ 2004 constant) but this rose to US$2 115 million in 2003. Import of fruit recorded only US$2.3 million in 1970 (US$ 2004 constant) but this grew sharply from the late 1980s onwards as a result of market expansion. The value of fruit imports rose from US$71.3 million in 1990 (US$ 2004 constant) to US$564 million in 2004. The largest supplier is the United States, accounting for one-third of the total agricultural products imported by the country.

Table 9. Value of total and agricultural imports and exports

Unit: US$ billion (US$ 2004 constant)

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

Korea's overall export volume increased from US$3.5 billion in 1970 (US$ 2004 constant) to US$198.8 billion in 2003 (Table 9). During the same period, export of agricultural products rose from US$0.4 billion (US$ 2004 constant) to US$1.7 billion. Though export of agricultural products rose sizeably in absolute value, their share in total exports has dropped sharply. After peaking in 1962 at 43.1 percent, the share of agricultural products in total exports fell to 16.2 percent in 1970. The share fell to only 1.0 percent in 2003. Agricultural products valued at US$100 million in 2003 included cookies, noodles and sugar. Pork had the highest share in the total export of livestock products. Major importers of Korean agricultural products are Japan, China, the United States and the Russian Federation. Exports to Japan in 2003 amounted to US$657 million, accounting for 35.3 percent of total agricultural exports.

2.4 The impacts of the UR on Korean agriculture

The conclusion of the UR negotiations brought about the general reform of the agriculture sector and accelerated opening of markets, both home and abroad. The UR agreement required Korea to open up its market for all agricultural products. As a result, Korea's import liberalization rate for agricultural products rose to 95.6 percent in 1995 and 99.1 percent in 2003. The UR Agreement on Agriculture (AoA) has had a significant impact on the agriculture sector in Korea. Above all, market openness has been symbolized by import of rice under minimum market access (MMA), which still accounts for more than 30 percent of total calorie intake. MMA expanded from 1 percent of total domestic consumption in 1995 to 4 percent in 2004. In 2004 about 205 000 tonnes of rice (milled rice equivalent) were imported. The leading sources of rice imports include China, Thailand and the United States. Other farm products whose imports had been restricted until 1994 were also liberalized. More specifically, the import restriction for beef was removed in 2001 with imports subject to 40 percent of tariff only. Import of pork and chicken meat was liberalized from July 1997 with tariff rates of 25 and 20 percent respectively in 2004. A tariff rate quota (TRQ) was established for seasonable vegetables such as red pepper, garlic and onion. The TRQ was created for 67 commodities and its average fill rate from 1995 to 1998 was 128 percent.

Table 10 provides a summary of WTO notifications for Korea apropos domestic support. The largest share in support is in the Green Box⁴, accounting for 68 percent on average from 1995 to 2000. Green Box measures have been largely for infrastructure and farmland improvement and structural adjustment. Korea utilized the current aggregate measurement of support (AMS)⁵ almost up to the bound AMS. As for domestic support, obligatory reduction of AMS has been a binding constraint for Korea unlike most other OECD countries. Public intervention through a rice procurement programme has to be scaled down every year since it accounts for over 90 percent of AMS use. Consequently, the proportion of rice purchased by the government to total production dropped from 29 percent in 1995 to 16 percent in 2004. Another important category of support is the de minimis provision.⁶ Albeit well below the limit of 10 percent of production (for developing countries), these instruments have been useful in addressing product-specific income issues emerging from rapidly changing market environments.

After the UR negotiations, Korea implemented the WTO commitments. Following these commitments, all imports of agricultural products were further liberalized, and tariffs and domestic subsidies were reduced. Consequently, the government faced strong opposition from farmers because the subsidy decreased and the import volume of agricultural products increased. Korea usually uses around 95 percent of its total permissible domestic support (AMS) unlike other members of the WTO.

Table 10. A summary of the WTO notifications for domestic support

Unit: 100 million won

Source: Ministry of Agriculture and Forestry (MAF), annual notification to the WTO.

3. Policy directions, achievements and emerging issues

3.1 Recent policy directions

3.1.1 Increased government budget on agriculture

During the UR negotiations (1986–1993), the Korean Government established a Comprehensive Agricultural and Rural Development Plan which increased the government budget for agriculture in anticipation of the adverse impacts of the UR. As Table 11 shows, the share of agriculture in the GDP is decreasing while the share of agriculture in the national total budget has not dwindled proportionally and the agricultural budget is increasing each year in terms of absolute value. From 1993 to 1997, the share of agricultural budget in the total budget remained much higher than the past. This indicates that since the conclusion of the UR negotiations, the government has allocated more resources to the agriculture sector.

Amidst all the internal and external challenges, the Korean Government is striving to maintain an adequate level of agricultural production and enhance the multifaceted role of agriculture. From the perspective of economic efficiency, the future for Korean agriculture may not be so bright because it is based on family farming with an average land size of 1.4 ha. However, it is worth noting that farming is a social and environmental activity and provides diverse benefits that cannot be attained through market mechanisms. Korea has introduced policies that have helped to maintain and develop not only agriculture but also rural communities by putting special emphasis on the positive functions of agriculture.

Table 11. Trends in the total national budget and agricultural budget by year

Unit: 100 million won, %

Source: Ministry of Agriculture and Forestry (MAF), budget summary and Statistical yearbook of agriculture and forestry, various years.

3.1.2 Reforming agricultural structure to enhance competitiveness

In trade liberalization resulting from the UR, domestic agricultural products had to enhance price and quality competitiveness to compete against cheaper imported agricultural products. As such, the government has heavily invested in improving the infrastructure for agricultural production. In addition, the government has made substantial investment and offered loans with low interest rates for the modernization of distribution and processing facilities and farm expansion projects. Table 12 shows the government's allocation of agricultural budget over the past ten years.

Table 12. Allocation of agricultural and forestry budget by project

Unit: billion won

¹ The status of government investment and loans.

² Since 1998, the classification has been modified.

Source: Kim et al. (2003).

The Korean Government has started to relax regulations related to farmland ownership and land transactions. The strictly implemented principle that only farmers should be allowed to own farmland is now being eased. Farmland in Korea is classified into two categories: government-designated agricultural promotion areas and non-designated areas. Government support has concentrated mainly on the designated areas. However, there are more restrictions on the designated agricultural promotion area in the sense that it should be used for farm activities. The farmland possession ceiling in the government-designated agriculture promotion area was increased to 10 ha from 3 ha in 1993 and was completely removed in 1996. The 5 ha ceiling on the non-designated area was removed in January 2003. The strict ban on non-ownership by farmers of farmland was also eased in January 2003 to allow non-farm households to possess a maximum of 1 000 m²farmland/household to promote hobby farming. The government has permitted agricultural corporations to acquire farmland since 2003.

Korea has adopted many measures to restructure its rice industry. A superior rice production and distribution system is also being promoted. Other initiatives include developing high quality varieties, standardizing cultivation management, improving the fertility of farmland and expanding drying and storing facilities.

Reform is also taking place in the distribution system for agricultural products. More systematic and specialized distribution centres are being established. In the future, production, storage, sorting, processing and marketing will be done under one umbrella. This will be achieved by managing strict membership-based production centres, developing new brands and joint marketing. With the development of e-commerce, direct transactions between consumers and producers are also increasing at an unprecedented rate.

The inspection of agricultural chemical residues has been strengthened. A traceability system and good agricultural practice (GAP) are being introduced for safety management of agricultural products.

3.1.3 Promotion of environmentally friendly farming

With growing public awareness on environmental issues, consumer interest in organic agricultural products has also increased. The government has carried out a five-year plan for the promotion of environmentally friendly farming since 2001. The government provides support to farmers who produce environmentally friendly products through a direct payment scheme. The beneficiaries of this scheme are required to take training courses and record the amount of chemicals they use.

Stores that handle only organic agricultural products are being operated in metropolitan areas to give consumers better access to them. Department stores are also encouraged to expand the corners allotted for these products. The growing prevalence of e-commerce has also given rise to door-to-door delivery services allowing producers to sell to consumers directly. Although certified environmentally friendly agricultural products accounted for only 3 percent of the total agricultural products distributed in the market in 2003, the government intends to increase the rate to 10 percent by 2010. Sustainable agriculture is one of the government's most important goals.

3.1.4 Maintaining rural vitality and establishing a social safety net

The Korean Government is working to stimulate rural vitality which continues to decline as young people and capital are attracted more and more to urban areas. Rural investment centres are providing more information to urban residents who wish to invest in rural areas. The government is also making efforts to provide more incentives for such investors. For example, the capital gains tax is exempted when a person acquires additional houses in rural areas. The government is currently implementing plans to facilitate farm village tours, or green tourism. Plans include opening a Web site containing all related information, developing village tour programmes, publishing and distributing tour guide books and sponsoring field trips for rural community leaders to developed countries.

Korea has a highly vulnerable agricultural income structure as off-farm income is only 32.9 percent of total farm household income (2004). In order to prevent income fluctuations and secure stable income for farmers, the government has provided disaster insurance for more farmers. Currently, the government is providing support for retired senior farmers and has initiated pilot programmes to introduce direct payment for landscape preservation, environmentally friendly livestock farming and payments for farming in disadvantaged regions.

The government will guarantee basic living standards for all farmers, including the less competitive ones who quit farming. Pensions and medical insurance will also be granted to farmers to enhance welfare and maintain vitality in rural villages.

3.2 Policy achievements

3.2.1 Productivity improvement in agriculture

Thanks to the government's expansion of investment subsidy and financing for the agriculture sector since the 1990s, the agriculture sector turned from negative growth in the late 1980s to 3 percent or above in the mid-1990s. The reduction of farming population and farmland size and the declining profitability of agricultural investment have curbed private capital from flowing into the agriculture sector. Instead, the government has served as a driving force for agricultural growth by expanding its investment and financing activities. Meanwhile, the government's expansion of investment subsidy and financing has resulted in more supplies of agricultural products and the stabilization of agricultural and general product prices. Since the mid-1990s, the prices of major agricultural products have declined, narrowing the price gap between domestic and imported agricultural products. The fruit price dropped by 35.2 percent between 1994 and 2001, while the vegetable price fell by 13.1 percent (Kim 2003). Despite falling agricultural product prices, farm income per household increased in terms of absolute value due to enhanced productivity.

Expanded government support for the agriculture sector has boosted the mechanization rate of rice farming from 84 in 1992 to 95 percent in 2002. The area of modernized greenhouses has also increased from 45 to 8 983 ha. As a result, fruit and vegetables are available all year round.

Agricultural distribution facilities have improved. The number of agricultural wholesale markets rose from six to 30, and the number of rice-processing centres dramatically surged from two to 328 between 1992 and 2002. Heavy investment in irrigation facilities has reduced production anomalies caused by natural disasters such as droughts and floods.

3.2.2 Addressing food security

One of the most important objectives of agricultural policies is to maintain an adequate level of domestic production of staple food for food security. In this regard, Korea has achieved a nearly 100 percent self-sufficiency rate for rice while the total grain self-sufficiency rate has dropped since the 1980s. The self-sufficiency rate for wheat and maize is less than 1 percent, and for soybeans less than 10 percent. The self-sufficiency rate for all grain has been below 30 percent since 1995 (Table 13).

Food security concerns in Korea have different dimensions compared with other countries in the sense that many think that the country needs to maintain food production capacity in preparation for the re-unification of the Korean Peninsula.

Table 13. Self-sufficiency rates for major grains (%)

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

3.2.3 Increasing large-scale full-time farms

The accelerated expansion of farm size boosted the number of rice farms with 3 ha or more from 42 000 in 1992 to 78 000 in 2002. Meanwhile, in the livestock sector, there is rapid expansion of farm size, and the number of full-time farms is rapidly increasing. If a full-time farm is a farm that raises 50 or more Korean native cattle and milk cows, 1 000 or more pigs or 30 000 or more chickens, the share of full-time farms raising Korean native cattle increased from 0.5 percent in 1996 to 2.9 percent in June 2005. Over the same period, the share of full-time farms raising milk cows or pigs increased from 5.6 to 43.2 percent and from 5.6 to 23.9 percent, respectively. The share of full-time farms raising egg-laying chickens and broilers increased from 12.5 to 23.0 percent and from 12 to 53.7 percent, respectively. Meanwhile, full-time farms account for a greater share of total livestock production. As of June 2005, full-time farms recorded the following production percentages: 84.0 (total meat chickens), 77.1 (pork), 69.5 (milk cows), 66.4 (egg-laying chickens) and 31.5 (Korean native cattle).

Table 14. Full-time farm status by livestock type (June 1995 to June 2005)

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

3.3 Emerging issues to be resolved

3.3.1 Contradiction between growth and farm income

The radical increase of investment by the government and farm households since the end of the 1980s has enabled the agricultural industry to maintain a stable level of growth. Nevertheless, farm economy has deteriorated ever since.

The government policy focused on boosting the price competitiveness of agricultural products through the expansion of farm size. This has resulted in an increase in agricultural production and drop in prices. Ultimately it has led to decreasing farm income. From 1986 to 1990, agricultural production grew 1.3 percent on average per annum, and increased to 2.3 percent between 1994 and 2002. Actual farm income per household rose 6.9 percent annually (average) from 1986 to 1990, but due to a decline in commodity prices, dropped 1.7 percent on the annual average from 1994 to 2002. Thus despite growth in agriculture, farm income per household declined, showing a stark contrast between growth and income.

As a result the income gap between urban and rural households is increasing. There was almost no income difference between urban and rural households in 1990. But in 2002 the average income of farm households was only 73 percent of that of urban households (Table 15).

Table 15. Ratio of farm household income over urban household income

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

Figure 1 shows the ratio of farm household income to the income of all households for selected OECD countries. In Korea, Switzerland and Canada, farm household income is less than that of all households.⁷ The Netherlands, Denmark and Japan have higher farm household income compared to the income of all households.

Source: OECD (2003b).

Figure 1. Ratio of farm household income to all household income in selected high-income countries

The income gap among farm household classes is widening, deepening the polarization of farm households. This is a major policy issue. Small-scale farms keep recording a drop in income, while large-scale farms keep recording income growth. From 1994 to 2002, farm households with 0.5 ha or less showed 5 percent reduction in nominal farm income. However, farms with 3–5 and 5 ha or more recorded 11 and 44 percent income growth respectively (Lee et al. 2003). Thirty to 40 percent of all farms generate income from their land that is lower than their household expenses; the bottom 20 percent of farms earn farm income that does not meet 50 percent or more of their household expenses. This has inevitably exacerbated the farm debt situation. In addition, farm income of farmers older than 65 is only 40 percent of the farm income of farmers who are in the 40–49 age group. The older farmers obtain about 30 percent of their income from remittances and they accounted for 35 percent of all farmers in 2003. Farm income disparity is difficult to resolve.

Compared to other Asian countries, Korean farms have very low off-farm income rates (share of off-farm income to total household income), although it is rising (Table 16). In Japan, off-farm income accounted for 87 percent of total farm household income in 2001. In Taiwan Province of China, the off-farm income rate was 82 percent. However, Korea records only 53 percent for off-farm income.⁸ This means that compared with other East Asian countries, farm income in Korea i influenced more by agricultural price fluctuations.

Table 16. Share of off-farm income in farm household income

Unit: %

Source: Lee and Kim (2004).

3.3.2 Rapid restructuring of agriculture

With the establishment of the WTO, Korea has made major efforts to re-orient its agriculture sector to the market economy while implementing its own commitments to the WTO. However, an ageing agricultural population and rapid farm restructuring have made it difficult for Korea to achieve tangible results. From these experiences, Koreans realized that it is hard to complete reform within a short period of time. Table 17 shows the amount of time that developed countries and Korea spent in reducing agricultural share in the GDP from 40 to 7 percent. For Korea, the 40 percent of the firs transformation point is reached in 1965 and 7 percent in 1991. The time lapse between 40 an 7 percent is 113 years for the United Kingdom, 165 years for the Netherlands and about 100 years for other countries. However, the time lapse is only 26 years for Korea. In other words, the production structure in Korea changed three to seven times faster than the cases in developed countries. I 2003, the GDP share of agriculture in Korea was only 3.6 percent. In Asia, Taiwan Province of Chin also showed very rapid restructuring of agriculture.

Table 17. The time lapses between 40 and 7 percent GDP for selected countries

Note: The earliest official data available for Taiwan Province of China were 1952 data; its share of agriculture in the GDP was 32.2 percent in 1952.

Source: Lee (1998). Data for Taiwan Province of China were added by the author.

Equilibrium in productivity between sectors can be attained only if the employment structure is adjusted as fast as the change in the share of the GDP. For agriculture this implies a rate of decline in the labour force matching the rate of decline in the GDP. In Korea, because the production structure changed quickly, the employment structure was also adjusted rapidly to an extent that no other country has experienced in history (Table 18).

Table 18. Time lapses in decline of employment in agriculture from 40 and 16 percent for selected countries

Source: Lee (1998). Data for Taiwan Province of China were added by the author.

Restructuring faced setbacks during the financial crisis in 1997, which caused the prices of oil and food to skyrocket. Korea is highly dependent on the imports of these products, and with higher prices, the overall management cost of agriculture increased sharply. In addition, the terms of trade deteriorated as prices of agricultural products fell, following the drop in demand. As a result, many farmers incurred further debts. The recent increase in debt/income ratio has been a serious problem for many farmers (Table 19).

Table 19. Farm household income and debt

Unit: thousand won

Source: Ministry of Agriculture and Forestry (MAF), Statistical yearbook of agriculture and forestry, various years.

3.3.3 Rising farm income instability due to policy change

So far, the Korean Government has protected rice more than any other commodity, by implementing border protection measures and the two-price scheme. Rice consumption drastically fell each year, but under strong government protection, the rice price was not determined by the market but fixed by the government. This resulted in a rice production surplus. Per capita rice consumption declined 40 percent from 136.4 kg in 1970 to 83.2 kg in 2003. During the same period, however, the rice production volume increased from 3 939 000 tonnes to 4 451 000 tonnes. The government's procurement policy (i.e. the government buys rice from farmers at the administered price) is regarded as a market price support policy, and therefore is put in the Amber Box. This means that under the WTO ruling, the policy has to be scaled down each year. Since then, government support for rice has become possible only within the limits of annual AMS committed to the WTO. This has critically limited the government's capacity to determine the administered price and the rice purchase volume. Among the AMSs reported to the WTO by the Korean Government, rice accounts for 97 percent on average (Table 20).

Table 20. Rice share of total AMS notified to the WTO

Unit: billion won

Source: Ministry of Agriculture and Forestry (MAF 2003).

Ultimately, the government's rice procurement system was repealed in 2005. Instead, the public stockholding system, categorized in the Green Box was introduced. The government can purchase predetermined volumes of rice at the current market price solely for food security. Thus, the rice price in the domestic market will fluctuate more widely.

The Korean Government also has introduced a direct payment policy in anticipation of further agricultural market liberalization. The basic idea of the direct payment policy for rice farms is to set the target price and compensate rice farmers for the difference between the target price and the market price of the year in the form of a fixed and variable direct payment (Figure 2). The government pays rice farmers a fixed amount every year, an average of 600 000 won/ha (9 836 won/80 kg) irrespective of the market price. If 85 percent (the compensation level) of the difference between the target price and the producer's price is greater than the fixed amount direct payment, an additional variable payment will fill the gap. The target price is 170 070 won/80 kg, which is based on the average rice incomes from 2001 to 2003, and will be maintained for three years from 2005. If it needs to be changed, the consent of the National Assembly should be obtained after three years.

Figure 2. Rice income assurance direct payment

Despite this institutional support, farmers are concerned about the uncertainty of their future. In 2005, the first year of scrapping the government's rice procurement policy and introducing the public stockholding policy, the producer's rice price, as of October 30, 2005, was traded at 139 168 won/80 kg - down 14.3 percent from the earlier year. This made farmers anxious. As a result, the government announced a stock increase of 150 000 tonnes of rice over the originally planned 570 000 tonnes of public stockholding in order to stabilize rice prices.

3.3.4. Rural population decline

The rapid population decline in rural areas is sapping the rural economy. The share of rural population in the total national population showed a dramatic decline from 42.7 percent in 1980 to 20.3 percent in 2000 (Table 21). The number of Myeons (small towns) with less than 2 000 people noticeably surged from 9 in 1985 to 170 in 2000.

Table 21. Trends of urban and rural populations

Unit: thousand people

Source: Kim and Lee (2004).

Waning regional agriculture is one of the main causes of rural population decline. The share of rural residents working in agriculture declined from 57 percent in 1990 to 39 percent in 2000. Young people are leaving rural areas because educational, medical, cultural and other amenities are better in urban areas.

3.3.5 Surfacing environmental issues

Since the expansion of agricultural production, the Korean Government has subsidized chemical fertilizers for farmers to purchase. As a result, agricultural productivity has improved, but excessive use of chemical fertilizer has resulted, putting much stress on the rural environment. If demand and supply for agricultural nutrients are compared, for example, nitrogen and phosphoric acid were oversupplied by 111 and 125 percent respectively in 2003. These excessive supplies of nutrients inevitably resulted in the pollution of soil and rivers in many regions, pointing to the need to reduce consumption of chemical fertilizer (Song et al. 2004).

Between 1995 and 1997, the soil surface nitrogen balance of Korea was the second highest among OECD countries, following the Netherlands (OECD 2003c).⁹ In 2002, Korea topped the list in this category among OECD countries. Consequently the Korean Government stopped subsidizing chemical fertilizer from 2005 and is actively encouraging farmers to use livestock manure as a substitute.

As part-time and small-scale livestock farms transform into larger farms, the number of livestock has increased, generating large amounts of manure. This is an additional environmental problem which can be partly solved by encouraging farmers to use more organic fertilizer.

4. Challenges for Korean agriculture

4.1 Soft landing on the WTO/FTA plateau

The DDA will create more challenges for farmers in Korea. Many proposals tabled in negotiations thus far suggest deeper cuts in border protection and domestic support.

A study by the Korea Rural Economic Institute (KREI) estimated the potential impact of the DDA on Korean agriculture (Lee and Lim 2003). Two scenarios were assumed: (1) a fast tariff reduction scenario, applicable to developed countries; and (2) a slow tariff reduction case for developing countries on the basis of Stuart Harbinson's revised paper of March 2003.¹⁰ The result showed that Korean farmers would lose 7.5 percent of farm income by 2010 compared to their farm income in 2000, 2001 and 2002 if the slow reduction scenario is applied. Korea would lose 35.6 percent of farm income over the same period if the fast reduction scenario is applied. The KREI research suggests that the direct payment required to compensate for farm income loss would be 2 007 billion won (US$1.7 billion) under the fast tariff reduction scenario. This amount is about half of the agricultural budget (excluding fixed expenditure) in 2002, and the budgetary outlays should be consistent with the domestic subsidy reduction requirement under the DDA. Korea will have to resolve falling farm income issues sooner or later. It is therefore important to take advantage of flexibility in the transition period in reducing tariffs and domestic support under the DDA. Most developed countries had already achieved considerable structural reform before the launch of the UR so they could implement policy measures without Amber Box constraints, which were introduced in the UR for the first time. The policy measures to maintain farm income will be strictly restricted under the DDA. Therefore, the future development of the DDA is likely to determine the future of Korean agriculture.

In the 2004 rice negotiations it was agreed that the rice tariffication will be delayed until 2014 in return for importing 4–8 percent of domestic rice consumption as MMA. The outcome of the negotiations has been ratified in the National Assembly with strong opposition from farmers.

Along with multilateral trade negotiations, Korea is also pursuing bilateral FTAs with some countries and economic blocs. It is considered inevitable for the Korean economy, which has poor resources and is heavily dependent on foreign trade, to facilitate trade with other countries. However, the agriculture sector in Korea will suffer from freer trade as many agricultural products are asked to be exempted from tariff under the FTAs. Korea concluded its first FTA with Chile in 2003 and with Singapore in 2005. The ratification at the National Assembly was a painful process facing strong resistance from farmers who were deeply concerned about import surges of agricultural products from Chile. Farmers asked for proper compensation for the loss and finally the government agreed to establish an FTA fund to help farmers who would be adversely affected by the FTA.

4.2 Maintaining an adequate level of farm income

An important policy objective is to maintain adequate incomes among farm households. The Korean Government needs to map out measures, which can absorb shocks from market liberalization under the free-trade scheme to resolve farmers' concerns about market liberalization and stabilize the farm household economy. OECD research (OECD 2003a) suggests that agricultural incomes should be approached by targeting direct income payments to households with a requirement of decoupling from production (i.e. decoupled direct payments). It showed that sector-wide price support is ineffective¹¹ and increases the domestic burden on consumers and tax payers while conveying a spillover effect on the world market. Korea needs to adopt the direct payment scheme which has been introduced by many advanced countries. The direct payment policy means that the government pays farmers directly a predetermined amount of money regardless of market price. In order to be consistent with WTO rules for the direct payment policy, the direct payment should be decoupled from production. Nevertheless, the direct payment requires a large budget so the government should try to get the approval of taxpayers about the level of direct payment.

4.3 Sustainable agriculture

Sustainable agriculture is one of the most important goals in Korean agriculture. In the past when there was a critical shortage of food, the main goal was production expansion with little consideration for the environment. At present, rice glut is a problem. In this context, a shift in policy is occurring towards environmentally friendly agricultural production using lower volume of chemical fertilizers and pesticides. The Korean Government plans to reduce the use of chemical fertilizers and pesticides by 5 percent every year until 2013. If the plan goes well, the amount of chemical fertilizer and pesticide used in 2013 will be 40 percent lower than in 2005.

5. Conclusions

Korea has achieved very rapid economic growth since the 1960s. The share of agriculture in the GDP has declined from 17.6 percent in 1971 to 3.6 percent in 2003. During the same period, the agricultural population also fell drastically from 44.7 percent to 7.4 percent. Recognizing the diverse roles of agriculture, however, the government has maintained price support and border measures to maintain self-sufficiency for staple crops. However, the completion of the UR negotiations has prompted a move towards market liberalization. In order to improve the competitiveness of Korean agricultural products against foreign products, the government allocated more resources to agriculture after the UR. The heavy investment in agriculture increased agricultural productivity, but at the same time prices fell due to increased market supply. As a result, the income gap between farm and urban households widened. Traditional price support was considered a trade-distorting measure to be reduced or replaced by direct income support, which requires a large government budget. The government's rice procurement policy was abolished in 2005 and replaced by a public stockholding programme, which proved that market price and farm income are very susceptible to policy changes.

The development of the DDA negotiations could determine the future of Korean agriculture. The goal of the DDA negotiations is to achieve substantial reductions in tariffs and trade-distorting subsidies in member countries. A study showed that Korea would lose 7–35 percent of farm income by 2010 compared to the average income of 2000 to 2002, depending upon tariff reduction scenarios. Therefore, Korea needs to take advantage of current flexibilities and transition procedures in reduction of tariffs and domestic subsidies for a soft landing on the WTO plateau.

Bibliography

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¹ Throughout this report, Republic of Korea is referred to as Korea for the sake of brevity unless otherwise specified.

² Producer support estimate (PSE): An indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers, measured at the farm-gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income.

³ Nominal values converted into US$ 2004 constant. Using US$ GDP deflators, US$1.00 in 1970 was worth about US$3.8 in 2004. Thus, the values in Table 9 are expressed in US$ 2004 constant.

⁴ The AoA classified domestic support into the two categories of Green Box and Amber Box. Domestic support with no or minimal distortive effects on trade is referred to as the Green Box and trade-distorting support is the Amber Box.

⁵ AMS means the annual level of support, expressed in monetary terms, provided for agricultural producers, which has trade-distorting effects.

⁶ Under the de minimis provision, there is no requirement to reduce trade-distorting domestic support in which the value of the product-specific support does not exceed 5 percent (10 percent for developing countries) of the value of the product in question (or total agricultural production for non-product-specific support).

⁷ In Taiwan Province of China, the ratio of farm household income over all household income was 79.5 percent in 2001.

⁸ A researcher pointed out that differences in the development strategies of each country could explain the differences in off-farm income share between these countries. Korea's development strategy favours large companies and export companies which are located in most cases in urban areas while Japan and Taiwan Province of China have adopted a balanced approach. Therefore, farmers in Korea may have less chance of finding jobs in rural areas than in Japan and Taiwan Province of China.

⁹ Soil surface nitrogen balance is derived by subtracting the total nitrogen output (nitrogen content contained in agricultural products) from the nitrogen input (nitrogen content contained in chemical fertilizer + livestock manure) to soil.

¹⁰ Mr Harbinson chaired the agricultural negotiation committee in the WTO and drafted the first and revised modality papers in February and March 2003, respectively.

¹¹ According to the OECD study (OECD 2003b), market price support generates 20–25 percent of the income transfer effect, while the agricultural input subsidy policy and the direct payment policy generate 10 to 20 percent and 70 to 90 percent of the income transfer effect, respectively.