Agricultural Policy Monitoring and Evaluation 2019

Chapter 17. Korea

Support to agriculture

Korea has gradually reduced its support to agriculture relative to its gross farm receipts, and modest progress has been made towards more market-oriented agricultural policies in the last decade. The level of producer support of gross farm receipts (%PSE) has decreased from 70% in 1986-88 to 52% in 2016-18, however, it is almost three times the OECD average. Market price support (MPS) dominates in producer support, maintained by a system of tariff rate quotas (TRQs) with high out-of-quota tariffs.

The government has introduced a range of direct payment programmes from the late 1990s, initiated a variable payment for rice and an agricultural insurance scheme from 2005. The share of budgetary payment has decreased in 2018, due mainly to the reduction of variable payments on rice.

In total support, support to general service (GSSE) accounted for 13%. The expenditure on the development and maintenance of infrastructure accounted for 62% of the GSSE. Total support to agriculture (TSE) as a percentage of GDP has declined from 8.6% in 1986-88 to 1.8% in 2016-18, mainly because of overall economic growth.

Main policy changes

Enhancing productivity has been a core goal of agricultural policies in Korea. However, more diversified objectives to meet various societal demands towards agriculture and rural areas have been set in the policy plan for 2018-22.

The government plans to introduce a new direct payment system that would integrate payments for rice, upland crops and less favoured areas. In 2019, the grounds for a new programme are being laid, which includes setting an action plan and discussing with stakeholders. To alleviate the current dependence of rice farmers on direct payments, incentives for crop diversification such as support to drainage, seeds and agricultural machines have been provided since 2018. The subsidised agricultural insurance programme continues to increase its commodity coverage to 78 agricultural products in 2019.

For sustainability, the diversification of energy supplies towards renewable source, including solar power has expanded in Korean agriculture. The regulation on pesticide use was converted from a negative list system to a positive one from 2019. As a result, from January 2019, only pesticides registered on the list are allowed for use in Korea, whether they are produced domestically or imported, and the use of unregistered pesticides is prohibited. As a way of managing livestock diseases, tightened criteria have been implemented for livestock production facilities including storage and handling of manure.

To promote innovation and improve the competitiveness of agriculture, the Smart Agriculture Project making use of Information and Communications Technology (ICT) has been a priority for public expenditure since 2014. The project covers not only collaboration with producers, retailers and ICT industries but also the settlement of a younger generation in rural areas.  

Assessment and recommendations

• Korea has made some progress towards agricultural policy reform since the early 2000s, but support to producers remains almost three times the OECD average, and continues to be dominated by market price support (MPS), which distorts production decisions.

• Agricultural policies should be reoriented towards enhancing long-term competitiveness and improving sustainability. In the future agricultural policy set, reforms of direct payment schemes are likely to play a crucial role. Careful planning of their implementation is required in order to decouple these payments further from specific commodity production and price, and target them to explicit societal objectives, such as environmental protection and the provision of public goods.

• The agricultural insurance scheme has consistently increased its coverage. However, the share of government subsidies to insurance schemes is still high, which hinders market-based decisions and on-farm risk management. The subsidy rate should be gradually reduced and the role of the private sector should be increased. The government should increasingly focus on providing the necessary information on crop growth and markets to the private sector in order to facilitate the development of agricultural insurance markets.

• Promoting environmental-friendly agriculture and preserving the ecosystem need to become priorities to assure long-term growth in agriculture. Given the high surpluses of nitrogen and phosphate, there is room to reduce them and hence improve environmental performance. The policy instruments should be based more on the polluter-pays principle, while the current scheme has been implemented mainly through producer incentives such as abolishing input subsidies and providing direct payment schemes.

• Public investment in agricultural research and development (R&D) and innovation has grown over time. Particularly, the Smart Agriculture Project has been a priority for public expenditure since 2014. However, the current government-led R&D scheme has a financial limitation to meet all the diverse needs of producers and markets. By encouraging investment and participation of the private sector in these R&D projects, a more competitive and demand-driven system could be established. The government should focus its engagement more on areas of public interest where the private sector would under-invest, and co-operation between the public and private sectors needs to be strengthened.

• Policies encouraging farmers to use renewable energy helps long-term sustainability of agriculture. In order for renewable energy sources to settle in rural areas, the government should increase efforts to enhance participation of farmers in public or private projects promoting renewable energy.

Figure 17.1. Korea: Development of support to agriculture

Note: * Share of potentially most distorting transfers in cumulated gross producer transfers.

Source: OECD (2019[1]), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Support to producers (%PSE) has declined gradually over the long term, but still represented about 52% of gross farm receipts on average in 2016-18, close to 3 times higher than the OECD average. The share of potentially most distorting transfers (based on output and variable input use – without input constraints) still dominates at 90% of that total (Figure 17.1). Increased producer support in 2018 was largely due to a larger price gaps between domestic and border prices, as border prices declined more than domestic prices (Figure 17.2). Prices received by farmers were almost twice the level on world markets as measured by the NPC in 2016‑18. Transfers to specific commodities, mainly MPS, represented 93% of total support to farms in 2016‑18. The share of the Single Commodity Transfers (SCT) in commodity gross farm receipts is over 60% for soybeans, red pepper, barley, garlic, and pig meat (Figure 17.3). The expenditures for general services (GSSE), mainly directed to development and maintenance of infrastructure, were equivalent to 11.2% of the agricultural value added in 2016‑18, well above the OECD average. Total support to agriculture (TSE) as a share of GDP has declined significantly from 8.6% in 1986-88 to 1.8% in 2016‑18, however, it remains 1.7 times higher than the OECD average.

Figure 17.2. Korea: Drivers of the change in PSE, 2017 to 2018

Source: OECD (2019[1]), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Figure 17.3. Korea: Transfer to specific commodities (SCT), 2016-18

Source: OECD (2019[1]), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Table 17.1. Korea: Estimates of support to agriculture

Contextual information

Featuring a relatively high GDP per capita, Korea is a land-scarce country with the highest population density among OECD countries. Moreover, only 18% of the land area is used for farming, and this area has been reduced by 17% over the period 1995‑2017; 84% of agricultural land is arable. Crops account for about 60% of the total value of agricultural production, a declining share compared to the mid‑1990s as the livestock sector expanded rapidly to meet a growing domestic demand. Most farms are small family farms with less than 2 hectares of agricultural land. Land consolidation is very slow with the share of land cultivated by farms with more than 5 hectares below 3.6% in 2017.

The importance of agriculture in the economy has been decreasing rapidly, its share in GDP and employment more than halving since 1995 to reach 2.2% of GDP and 4.8% of employment in 2017. Agro-food products accounted for 5.3% of total imports and 1.1% of total exports.

Table 17.2. Korea: Contextual indicators

	Korea		International comparison
	1995*	2017*	1995*	2017*
Economic context			Share in total of all countries
GDP (billion USD in PPPs)	600	1 998	2.0%	1.9%
Population (million)	45	51	1.2%	1.1%
Land area (thousand km2)	96	97	0.1%	0.1%
Agricultural area (AA) (thousand ha)	2 048	1 701	0.1%	0.1%
			All countries1
Population density (inhabitants/km2)	453	513	48	60
GDP per capita (USD in PPPs)	13 296	38 350	7 642	21 231
Trade as % of GDP	23	34	9.9	14.7
Agriculture in the economy			All countries1
Agriculture in GDP (%)	5.9	2.2	3.3	3.5
Agriculture share in employment (%)	11.8	4.8	-	-
Agro-food exports (% of total exports)	1.3	1.1	8.1	7.5
Agro-food imports (% of total imports)	7.0	5.3	7.4	6.6
Characteristics of the agricultural sector			All countries1
Crop in total agricultural production (%)	77	60	-	-
Livestock in total agricultural production (%)	23	40	-	-
Share of arable land in AA (%)	87	84	33	34

Note: *or closest available year. 1. Average of all countries covered in this report. EU treated as one.

Source: OECD statistical databases; UN Comtrade; World Bank, WDI and national data.

Since 2000, the Korean economy has enjoyed dynamic growth and low levels of unemployment. Annual inflation rates have decreased to levels below 2% since 2013. Korea is one of the largest net agro-food importers in the world. Since 2011, however, the agro-food trade deficit has declined as exports increased while imports remained relatively stable. While over 85% of agro-food exports are products for final consumption, about half of imports are for further processing by the Korean industry. Key imported agricultural commodities include maize, soybeans and wheat for animal feed.

Figure 17.4. Korea: Main economic indicators, 1995 to 2018

Sources: OECD statistical databases; World Bank, WDI and ILO estimates and projections.

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Figure 17.5. Korea: Agro-food trade

Note: Numbers may not add up to 100 due to rounding.

Source: UN Comtrade Database.

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At 1.7% per year, total factor productivity (TFP) growth in Korea was slightly higher than the global average over the period 2006‑15. It helped maintain production with lower use of primary production factors, in particular land and labour. Nutrient surplus results from high fertiliser use and livestock density linked to land scarcity. Although the level of nutrient surplus per hectare has declined over the last two decades, it is still significantly above the OECD average. Greenhouse gas (GHG) emissions from agriculture slightly decreased. This was a combination of the reduction of methane and nitrous oxide emissions, due to lower rice area and associated fertiliser use, which was partly offset by higher methane emissions due to an increase in livestock numbers. The share of agriculture in water consumption is higher than the OECD average since rice paddy fields account for close to 53% of agricultural land area.

Figure 17.6. Korea: Composition of agricultural output growth, 2006-15

Note: Primary factors comprise labour, land, livestock and machinery.

Source: USDA Economic Research Service Agricultural Productivity database.

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Table 17.3. Korea: Productivity and environmental indicators

	Korea		International comparison
	1991-2000	2006-2015	1991-2000	2006-2015
			World
TFP annual growth rate (%)	4.0%	1.7%	1.6%	1.5%
			OECD average
Environmental indicators	1995*	2017*	1995*	2017*
Nitrogen balance, kg/ha	258.2	221.9	33.2	30.0
Phosphorus balance, kg/ha	57.5	46.3	3.7	2.3
Agriculture share of total energy use (%)	2.8	0.9	1.9	2.0
Agriculture share of GHG emissions (%)	5.3	3.0	8.5	8.9
Share of irrigated land in AA (%)	44.2	42.8	-	-
Share of agriculture in water abstractions (%)	62.7	60.6	45.4	42.5
Water stress indicator	32.1	33.0	9.7	9.7

Note: * or closest available year.

Source: USDA Economic Research Service, Agricultural Productivity database; OECD statistical databases; FAO database and national data.

Description of policy developments

Main policy instruments

Tariffs and tariff rate quotas (TRQs) are among the main policy instruments for market access and related market price support accounted for 90% of the producer support estimate in 2018. In-quota rates range from 0% to 50% while out of quota rates are between 9% and 887%. With the conclusion of the Uruguay Round, trade restrictions on all agricultural products except rice were converted to tariffs. Non-tariff measures on rice were replaced by a tariff scheme from 1 January 2015, with a tariff rate of 513% on imported rice (this tariff rate is still under process of verification by the WTO). A TRQ volume of 408 700 tonnes is maintained at a 5% tariff rate. Rice is imported exclusively by state trading enterprises (STEs).

A public stockholding scheme for rice, also known as the Public Storage System for Emergencies, was established in 2005. Under this scheme, the government purchases rice from farmers at the market price during the harvest season and releases the stocks during the non-harvest season at the market prices. The government purchase programme for soybeans dates back to 1968. Purchased quantities have increased in recent years due to efforts to encourage crop diversification from rice to other commodities.

Direct payment programmes have been implemented starting from 1997. Today’s programmes include early retirement payments, a rice income compensation, and payments for the promotion of environmentally-friendly agriculture, for maintaining agriculture in less favoured areas, and for rural landscape conservation.

The most important direct payment programme is the rice income compensation scheme introduced in 2005. This scheme includes both fixed and variable payments. While the fixed payment is a decoupled income support based on farm size, the variable payment is determined according to the difference between a target price and each year’s harvest-period price. If the harvest-period price is lower than the target price, farmers receive 85% of the difference, after deduction of the fixed payment. The target price is adjusted very five years reflecting the five-year price change.

The agricultural disaster insurance scheme, initially introduced for apples and pears in 2001, was gradually extended to 62 crops and 16 livestock categories by 2019. The government subsidises 50% of the insurance premium. A pilot project of an agricultural revenue insurance scheme was introduced for onions, soybeans and grapes in 2015, and the number of commodities covered increased in 2019 by adding Chinese cabbage, daikon, pumpkin, carrot, and scallion.

The 2007 Framework Act on Agriculture, Rural Community and Food Industry lays out the basic policy principles in agriculture, on which five-year implementation plans are established. The plan for 2018-22 has four main policy targets: strengthening the income safety net; innovation for sustainable agriculture; enhancing food safety in the supply chain; and improving rural welfare. Specific measures to pursue these objectives are included in Box 17.1. The Plan also foresees a strengthening of bottom-up participation in policy.

Box 17.1. Korea: Agriculture and Rural Community and Food Industry Development Plan for 2018-22

1. Strengthening income safety net

• Reduction of the area of rice paddy fields by providing incentives such as support to drainage, seeds and agricultural machines for other crops.

• Direct payments for rice less coupled with production.

• Strengthened environmental cross-compliance in the direct payment scheme.

• Expansion of crop insurance programmes.

• Promotion of rural diversification (food industry, tourism) to generate non-farm income for farmer households.

2. Innovation for sustainable agriculture

• Comprehensive support to young start-up farmers.

• Integration of digital technology into agriculture in production, distribution and risk management.

• Promotion of renewable energy production on farms, including photovoltaic, biomass and geothermal heat.

3. Enhancing food safety in supply chain

• Development of a bio-security system focusing on animal disease prevention.

• Support for environmentally-friendly livestock industry practices to reduce pollution.

• Development of a comprehensive animal-welfare road-map to provide standards for facilities, maintenance and rearing density.

• Development of a labelling system informing consumers about animal welfare and health in each livestock farm.

• Improvement of the pesticide registration and traceability management system.

4. Improving rural welfare

• Enhanced direct payments for retirement, farmland pension and basic pension to encourage aged or low-income farmers to retire from production.

• Support to infrastructure including housing, transport and medical facilities.

• Affordable transportation for the elderly and financially disadvantaged.

• Support for rural rental housing with energy saving facilities and barrier-free design.

• Development of a medical outreach service for health check-ups.

5. Bottom-up policy participation

• Agricultural governance to reflect local and regional characteristics.

• Policy design reflecting the opinion of farmers and other economic agents.

Source: Ministry of Agriculture, Food and Rural Affairs (MAFRA).

The five-year (2016‑20) promotion plan for environmentally-friendly agriculture sets targets to increase the share of pesticide-free (including organic) cultivation area and more generally to reduce the input of chemical fertilisers and pesticides in crop production through strengthening current direct payments for the promotion of environmentally-friendly agriculture, and support for organic fertiliser use.

Korea has increased investment on “smart farms”, using smartphones and remote control to check the crop growth information in real-time. As a result, the number of smart farms is on the rise since 2014.

Support for people moving to farm villages and rural areas to newly join the agricultural industry has been strengthened, in order to revive the rural community. Centres for people who return to farm villages and rural areas were created to provide advisory service and information on relocation policies and housing availability. Also, these centres run training programmes on farming technology, processing and distribution of agricultural products, and rural lifestyle.

Korea has fifteen bilateral and regional Free Trade Agreements (FTAs) in force. Rice is excluded from tariff concessions in all the existing FTAs, but significant tariff concessions for livestock and fruit products are included in some of the FTAs (OECD, 2018[2]). Tariffs on beef from the United States, Australia and Canada will be completely eliminated within 15 years after the respective bilateral FTAs have entered into force. It is also agreed to eliminate tariffs on pork originating from the European Union, the United States, Chile and Canada within a maximum of 10 years. Tariffs on chicken meat mainly coming from the United States and the European Union will be abolished within 10 to 13 years after the respective FTAs have come into force.

In the context of the Paris Agreement on Climate Change, Korea has committed to a reduction of its economy-wide GHG emissions by 37% relative to a Business As Usual Baseline in 2030.1 In December 2016, the Korean government released its Basic National Roadmap for Greenhouse Gas Reductions by 2030. All sectors and all gases are included in the reduction commitment. The Roadmap includes a commitment for agriculture, which is expected to achieve 0.3% of the total reduction commitment. The government is currently undertaking a review of the Roadmap in order to produce an upgraded version. A National Climate Change Adaptation Plan, developed in 2010, is currently being implemented.

Domestic policy developments in 2018-19

A new direct payment programme has come under discussion, which combines the existing direct payments for rice, upland crops and less favoured areas into one scheme. In 2019, the grounds for a new programme are being laid, which includes persuading stakeholders and setting an action plan. The government aims to decouple payments further from production of a specific commodity (for example, rice), and reinforce the environmental cross-compliance of farmers. In addition, to alleviate the current dependence of rice farmers on direct payments, incentives for crop diversification such as support to drainage, seeds and agricultural machines have been provided since 2018.

To encourage on-farm risk management, agricultural insurance has increased its commodity coverage to 73 products in 2018 and 78 in 2019. The government made efforts to expand the subscription of farmers, by developing more market-based services reflecting structural changes in agriculture.

To promote the Smart Agriculture Project, the government has selected four sites in 2018-19 as “Innovation valleys” - smart farm complexes. The complexes are expected to create synergies through partnership or collaboration in the food supply chain, from R&D institutions and producers to food service and retail firms. The project could also attract the younger population to rural areas. The horticulture sector is now the main target, however, the livestock sector is set to increase its share in total smart farms (the horticulture sector had over three times as many smart farms as the livestock sector in 2018).

Laws and regulations have been revised to expand the share of renewable energies including solar power sources. Some of the farmland regulations, which hindered the establishment of solar power facilities on farmland, have been alleviated in 2018. For further usage of renewable energy sources in the future, sustainable business models based on co-operation between firms and farmers have been developing.

From January 2019, the regulation on pesticide use has been converted to a positive list system, which targets to prevent overuse or misuse of pesticides, and to manage products over the maximum residue limits of registered pesticides. As a result, only pesticides registered on the list are allowed for use in Korea, whether they are produced domestically or imported, and the use of unregistered pesticides is prohibited. In order to minimise confusion in rural areas and to ensure the soft landing of farmers, consulting services as well as training are provided to farmers. Meanwhile, to monitor compliance with regulations, more people are employed and inspection methods are elaborated.

The criteria for breeding facilities in animal farms have been tightened to prevent animal diseases and manage animal product safety. A comprehensive quarantine policy plan is to be established in 2019, focusing on the prevention of animal diseases and policy measures to block the spread of diseases after outbreak.

Trade policy developments in 2018-19

A multilateral Free Trade Agreement (FTA) negotiation between Korea and Mercosur countries started in 2018. A bilateral FTA negotiation with Mexico and a multinational FTA negotiation on the Regional Comprehensive Economic Partnership Agreement (RCEP) continues in 2019.

Amendments to the Korea-US FTA were agreed in 2018 and the amended FTA came into force in January, 2019. Also, the Korean government is engaged in negotiations for the improvement of current FTAs (or CEPA) with Chile (started in 2004), ASEAN (started in 2007) and India (started in 2010). The FTA with Central American States will become effective when both parties complete their domestic approval procedures.

Tariffication on rice has been implemented since 2015, and the WTO verification procedure with member countries is still under process. Until 2014, the rice tariffication was suspended based on the results of the Uruguay Round and rice negotiation at the WTO in 2004.

Exports of fresh produce, as well as processed foods, has continuously increased, but is largely concentrated on a small set of commodities, including paprika, strawberry, and tomato. The government has been promoting the export diversification by supporting activities such as developing products tailored to local consumers’ preference, finding new buyers, conducting overseas market research, and providing market information.

References

[1] OECD (2019), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

[2] OECD (2018), Innovation, Agricultural Productivity and Sustainability in Korea, OECD Food and Agricultural Reviews, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264307773-en.

Note

← 1.  Submission by the Republic of Korea: Intended Nationally Determined Contribution. NDC Registry: http://www4.unfccc.int/ndcregistry/Pages/All.aspx#collapseKORFirst.