This chapter describes the overall economic, social and environmental context in which the food and agriculture sector in Korea operates, and the natural resource base upon which it relies. It provides an overview of the general geographical and economic characteristics of Korea; outlines the share of the agri-food complex in the economy; identifies the main structural characteristics of the food and agriculture sector; provides an overview of the main food and agriculture outputs and markets; and analyses the main trends in agricultural productivity, competitiveness and sustainability. It finally raises a number of issues the agri-food complex is likely to face in the future.
Innovation, Agricultural Productivity and Sustainability in Korea
OECD Food and Agricultural Reviews
Chapter 2. Overview of the food and agriculture situation in Korea
Abstract
2.1. General natural and economic context
General economic context
Remarkable economic growth in the last four decades has made Korea one of the largest economies in the world (Table 2.1). The level of GDP per capita increased from 65% of the OECD average in 2000 to 86% in 2015. Korea achieved the fastest growing per capita income among the OECD member countries over the past 25 years (OECD, 2016a).
Korea’s economic growth has been led strongly by its exports, which account for more than half of GDP. Sustaining double-digit growth in exports made Korea the sixth largest exporter in the world. Its domestic market is relatively small and the economic dependency on exports is large. The country’s competitiveness in export markets is particularly important for its sustainable economic growth.
Korea is scarce in both land and water resources. It has the highest population density and the lowest availability of arable land per capita among OECD countries (0.03 ha in 2013) (World Bank, 2016). As of 2015, the total cultivated area in Korea was 1.7 million ha. Farmland takes 17% of the total land area. Despite intensive efforts to increase this area through drainage, irrigation and reclamation, the cultivated area has tended to decline due to industrial and urban development. The share of cultivated land in total land area fell from 22% in 1980 to 17% in 2015. Of the 1.7 million ha of cultivated land, 54% is paddy field and 46% is upland. Freshwater resource per capita is also one of the lowest among the OECD countries. The limited land and water resource endowment in Korea leads to strong competition in the use of land and water between agriculture and other sectors.
Table 2.1. Contextual indicators
Note: * or latest available year; ** PPP: Purchasing Power Parity.
Source: FAO (2016a), FAOSTAT (database), Food and Agriculture Organization of the United Nations, http://faostat3.fao.org/home/E; OECD (2016b), OECD.Stat (database), http://stats.oecd.org/; World Bank (2016), World Development Indicators (database), http://data.worldbank.org/indicator.
Korea achieved remarkable growth throughout the 1960s to the 1980s, when the annual growth rate of real GDP often exceeded 10% (Table 2.2). The political crisis and oil shock in 1980, when Korea experienced a negative growth in real terms, was the only exception. However, economic growth has gradually slowed since the 1990s with the country achieving high-income status. Korea experienced a financial crisis at the end of 1997 as part of the regional financial crisis, but quickly recovered its growth path in the early 2000s.
More recently, annual real GDP growth slowed to 2.8% in 2011-2015. The slowdown in world trade since 2010 has been especially detrimental to Korea, as exports account for nearly 60% of total demand (OECD, 2016a). Nonetheless, Korea maintains a higher growth rate than the OECD average. This sustained high economic growth demands a rapid change in Korea’s economic structure, and the role of policies to assist the process of structural adjustment is particularly important.
Table 2.2. Real GDP growth
Note: Annual percentage change.
Source: World Bank (2016), World Development Indicators (database), http://data.worldbank.org/indicator.
Demographic change
Projections for demographic change have important implications for the Korean economy. The population expanded by 2.3 times in the last 60 years, but the annual growth rate has declined from around 2% to 0.5% after 1990 (KREI, 2015). The total fertility rate has declined to 1.23 children per woman and has become one of the lowest in the world. According to official projections released by Statistics Korea, the population in Korea is expected to peak in 2030 (Figure 2.1).
As a result of a low fertility rate and a longer life expectancy, Korea is experiencing rapid ageing, which is expected to continue in the long-term. The share of population over 65 years old is expected to increase from 14% to 30% in the next 20 years. Similarly, the elderly dependency ratio (percentage ratio of over 65 years old and the 15-64-year-old population) is expected to rise from 18% to 72% in 2014-50, which is the highest growth rate among all OECD countries. The demographic change in Korea is so rapid that its population is expected to go from the fourth youngest in the OECD in 2012 to the third oldest by 2050 (OECD, 2016a). The working age population between 15 and 64 years old started to decline in 2017 and is expected to decline by 15% between 2010 and 2040.
The ageing of the population has advanced quicker in rural areas, where young generations have migrated to urban areas. The elderly dependency ratio (the ratio of over-65-year-old population over the working age population) among the rural population is already 19%, as opposed to 12% in predominantly urban areas (OECD, 2017a). The elderly dependency ratio increased to 27% in rural areas, which is above the national level of 19%. In 2010, the ageing index (ratio of over 65 years-old population over the population below 15 years old) of cities (Dong) and rural areas (Eup and Myeon) were 55.7% and 145.7%, respectively (KREI, 2015).
Figure 2.1. Projection of Korea’s demographic structure, 2000 to 2060
Source: KOSTAT (2012), Population Projections and Summary indicators (Medium projection) Statistics Korea.
2.2. Importance of agriculture and the food sector in the Korean economy
The remarkable growth of the Korean economy in the last four decades drastically changed the role of agriculture. Until the 1960s, agriculture generated almost half of Korea’s GDP. In 1970, agricultural production continued to contribute 25.5% of GDP and the labour force employed in the agricultural sector accounted for 50.5% of the country’s total labour force (OECD, 2008). As the industrialisation process progressed, however, the share of agricultural production in GDP declined to 2.1% in 2014 (Table 2.3). Similarly, agriculture’s share of employment fell to 6.1%. Despite this decline, agriculture accounts for relatively larger shares of GDP and employment compared to other OECD countries. Agriculture continues to be a main user of land and water in Korea, indicating a major role of agriculture in natural resource use.
As a large net importer of food products, agro-food imports are important in Korea’s overall trade balance. They represented around 18% of merchandise imports in 1970 but dropped to 5% in 2015 as non-agricultural imports grew at a much faster rate. The share of agro-food products in total exports declined significantly to less than 1% in 2015, showing a marginal role of agriculture in total exports.
Table 2.3. Importance of agriculture in the economy, 2014
Note: or latest available year.
Source: OECD (2016d), System of National Accounts, OECD Annual Labour Force Statistics; UN Comtrade (2015), United Nations Commodity Trade Statistics (database), http://comtrade.un.org/; FAO (2015a), FAOSTAT (database), Food and Agriculture Organization of the United Nations, http://faostat3.fao.org/home/E, FAO (2015b), AQUASTAT Main Database, Food and Agriculture Organization of the United Nations.
Despite agriculture being one of the main activities in rural areas, it is not a main employer there (Figure 2.2). Kim et al. (2014a) showed that the service sector is the largest employer (45%), followed by manufacturing (39%, of which processing and manufacturing of food accounted for 21%). By contrast, agriculture, forestry and fisheries accounted for only 0.6% of employment and declined by 7.6% annually from 2000 to 2011, while employment in manufacturing and services increased by more than 3% annually.
Figure 2.2. Employment status in Korean rural areas, 2011
Note: Numbers may not add up to 100 due to rounding.
Source: Kim et al. (2014a).
2.3. Characteristics of the Korean agriculture and agri-food sector
Primary agriculture production
Responding to a growing domestic demand, agricultural production in Korea more than doubled between 1970 and 2000. However, the expansion of agricultural output has stagnated since the early 2000s. At this stage, a higher level of income no longer increased food consumption in a quantitative term, but shift to more value added products is likely to continue. Moreover, trade liberalisation in certain commodity markets may have limited growth in domestic agricultural production.
The structure of agricultural production has evolved significantly during the last decades. Rice was by far the most important single product and the dominant grain in Korea, as shown by its contribution to agricultural production and land use. The importance of rice in the value of agricultural production decreased rapidly over the last 45 years: from 37% in 1970 to 17% in 2015 (Figure 2.3). Rice production peaked at 6 million tonnes in 1988 and then declined to 4.2 million tonnes (on a milled rice basis) by 2015. During this process, the production of a high-yield rice variety was abandoned (OECD, 2008). Despite a smaller share of rice in agricultural production, rice production still accounts for approximately half of Korea’s cultivated land area.
Figure 2.3. Composition of agricultural production value in Korea, 1970 to 2015
Note: Numbers may not add up to 100 due to rounding.
Source: MAFRA (2016a).
While cereal production has declined over time, the shares of fruits and vegetables, and livestock products in agricultural production have increased. The main fruits and vegetables produced in Korea are apples, pears, mandarins, persimmons, grapes, peaches, garlic, red pepper, onion, Chinese cabbage, radish, cucumber, watermelon, tomatoes, and strawberries. Additionally, ginseng is an important specialty product.
The livestock sector experienced the highest growth among the agricultural sectors in the last four decades. The value share of livestock products in agriculture increased from 15% to 43% in 1970-2015, which contrasts with rice production. Domestic livestock is dependent on imported feed, with feed maize constituting the country’s top agricultural import (FAO, 2016b). While livestock now generates nearly a half of the total agricultural production value, only a small proportion of the farm population is engaged in it. Of 1.9 million farm households in 2015, beef cattle farms accounted for 8.7%, dairy cattle for 0.5%, pigs for 0.4% and chickens for 0.3% (KOSTAT, 2016a).
Food manufacturing industry
Korea’s food industry, which includes food manufacturing and services, is growing fast. Between 2005 and 2014, it expanded by 78% in nominal terms, while agriculture, fishery and forestry grew by 27% in the same period. Manufacturing of food and beverages shows the highest growth rate: 84%. As a result, food manufacturing now has a higher value of production than agriculture, fishery and forestry, although the value-added is still larger in agriculture, fishery and forestry (Table 2.4). Employment in the food manufacturing industry is still lower than in agriculture, forestry and fisheries, but grew at 2.4% annually in 2005-14, while employment in agriculture, forestry and fisheries declined sharply.
Table 2.4. Development of food manufacturing industry in Korea
Note: The employment of food, beverage and tobacco manufacturing includes enterprises with fewer than 10 employees and excludes all of the tobacco manufacturing industry.
Source: Korea Agro-Fisheries & Trade Corporation (2016), Food Statistics 2016.
The food manufacturing industry has a strong linkage with the domestic agricultural sector. Based on the Bank of Korea's input-output table, Korea Agro-Fisheries & Trade Corporation (2016) shows that a 1 unit increase in food manufacturing production in 2014 resulted in direct and indirect production inducements of 2.3 units of production in the economy, including 0.36 units in the agriculture, forestry and fisheries sector. The production inducement effect of food manufacturing on agriculture, forestry and fisheries is significantly higher than that of other industries.
Kim et al. (2015a) show that final consumption accounted for 24% of the total production value of primary agricultural, forestry and fishery products in 2013. This means that more than half of the value of these primary products was used as an input to the food manufacturing industry (Figure 2.4). By contrast, the share of domestic raw materials used by the food manufacturing industry was 31% in 2014 on a weight basis and 47% on a value basis. On a weight basis, domestic primary agricultural production accounted for more than 90% of the final product for Kimchi (a spicy and sour Korean dish made of fermented vegetables) and dairy. In the “other food” category, rice cake used 47% of inputs from domestic sources, but the share of domestic material for confectionery was 17%.
Figure 2.4. Destination of Korea’s domestic supply of agriculture and fishery products, 2013
Source: Kim et al. (2015a).
Consumption and trade
Rapid income growth in Korea diversified food consumption away from rice. Demographic shifts will have a greater impact on food consumption patterns in the future. The westernisation of diets has increased consumption of livestock products, fruits and vegetables (Figure 2.5). This dietary shift also transformed the composition of nutritional intake in Korea: the share of carbohydrate in total energy intake shrunk from 81.4% to 64.1% in 1971-2013, while the share of fat increased from 5.7% to 21.2% during the same period (KREI, 2015).
While rice continues to be a staple of the Korean diet, per capita annual consumption declined continuously from 136 kg to 62 kg between 1970 and 2016, and it is expected to fall further in the future. In contrast, vegetable consumption has increased from 60 kg to 158 kg, and fruit consumption increased from 10 kg to 67 kg between 1970 and 2015.
Figure 2.5. Food supply per capita by commodity in Korea, 1971 to 2011
Source: FAO (2017).
The largest demand growth has been recorded in livestock products. Per capita annual meat consumption jumped from 5.2 kg in 1970 to 46.8 kg in 2015. Pork accounts for around half of the meat consumption but beef is the most important meat on a value basis. Per capita consumption of dairy products increased from 1.6 kg in 1970 to 75.7 kg in 2015. In contrast with most OECD countries, milk is mainly consumed in fluid form. While the consumption of milk has been stable in the last two decades, the quantity of cheese consumption expanded more than 10 times between 1995 and 2015, contributing to the expansion of dairy product imports. These trends show the shift of consumption among Koreans from staple rice to more value-added livestock products, fruits and vegetables.
Korea started to import table rice in 2005 as a result of rice renegotiation at the WTO in 2004. At that time, the minimum market access quota increased from 1% to 4% of the consumption of the base year (1988-90) and Korea continues to maintain near self-sufficiency of table rice (Figure 2.6). Although soybean imports are subject to a TRQ system, domestic consumption depends largely on imports, particularly for animal feed use. Among livestock products, the domestic consumption of eggs is fully met by domestic production, but the self-sufficiency rate of pork started to decline since late 1990s. Similarly, import dependency gradually of milk increased overtime as non-fluid milk consumption increased. Cheese accounted for more than half of imports of dairy products in 2016.
Figure 2.6. Self-sufficiency rate by commodity in Korea, 1986 to 2015
Source: MAFRA (2016b), Grain Policy Data.
Korea's agri-food exports have increased 9.9% annually since 2004, reaching USD 6 465 million in 2016. However, the growth of agri-food exports underperformed relative to the exports of other products. The value of agri-food imports increased more rapidly than exports, increasing the net import position. In 2016, Korea’s agri-food imports were 4.6 times larger than its agri-food exports. Among the imports, grains including cereal grains and pulses have the largest share, reflecting its comparative disadvantage in land-intensive products (Table 2.5). Corn is the largest imported grain and is used mainly as animal feed. The United States is the largest import partner, accounting for 20% of imports, followed by the People’s Republic of China (hereafter “China”).
Table 2.5. Major trading commodities in Korea, 2016
Top items
Source: Korea Agro-Fisheries & Trade Corporation (2016), Food Statistics 2016.
Japan used to be the main export market for Korean agri-food products, but its share declined from 49% in 1995 to 18% in 2016 as exports to China and Viet Nam increased. China, Japan and the ASEAN countries accounted for around 52% of Korean exports in 2016. Government and industry are exploring the opportunities for agricultural exports to exploit the rapidly expanded FTA framework and international recognition of Korean food culture. Since the 1990s, the Korean government has been actively promoting the export of agri-food products by providing assistance at each stage of the export process: developing products tailored to local consumers’ preference, providing market information, finding new buyers, conducting overseas market research.
Farm structure
Farm size distribution
One of the distinguishing features of Korean agriculture is the dominance of small-scale farms. Although the average farm size per household is gradually increasing, it is still 1.5 ha (KOSTAT, 2016a). More than 69% of farms have less than 1 ha and only 8% have more than 3 ha. Most Korean farms are mixed general farms, although the number of specialised farms, notably in the production of livestock and greenhouse vegetables, has increased. Until the beginning of the 1990s, small farms and relatively big farms decreased continuously in number, while mid-sized farms increased. However, a polarised distribution of cultivated land has appeared since the 1990s: the ratio of mid-sized farms with arable land of 0.5-2.0 ha dwindled, whereas the share of farms with cultivated land areas of less than 0.5 ha and over 2 ha increased. While small size farm accounts for a large share of farms, the concentration of farmland in bigger farms is rising at a quite rapid pace.
Small scale farms have a large share among farm population but their share in total land use has decreased. In 2015, farms cultivating less than 1 ha accounted for 69% of the farm population but 22% of total land. On the other hand, farms greater than 3 ha accounted for only 8% of all farms but cultivated 44% of total land (Figure 2.7). Such polarisation of farm structure is a common feature of structural change across OECD countries (Bokusheva and Kimura, 2016). However, land use in Korea could be more concentrated to larger sized farms: the share of total land cultivated by farms of more than 10 ha increased from 3% to 14% between 2000 and 2015 in Korea, but this share rose to 48% by 2015 in Japan.
Figure 2.7. Farm size distribution in Korea, 2000 and 2015
Source: KOSTAT (2016a).
Under the polarised farm structure, per farm average size is not an appropriate indicator to assess the degree of structural change, as it does not change if the total number of farms and the area of farmland remain constant. Considering this limitation of mean farm size, Bokusheva and Kimura (2015) used hectare-weighted median (mid-point) farm-size as an alternative indicator. The mid-point farm size corresponds to a farm size that separates the farm size distribution into two parts: 50% of the total area of the national farmland (or the total number of animals) operated by the farms of a larger size and the other 50% by the farms of smaller size than the mid-point. In Korea, the mean and midpoint farm size is particularly different for rice farms, where small-scale producers dominate the sector. While mean size of rice farms increased only by 0.3 ha in 2000-15, mid-point size increased from 1.5 ha to 2.8 ha in the same period (Table 2.6).
Table 2.6. Evolution of farm size in Korea, 2000-15
Source: KREI’s calculation based on KOSTAT (2016a).
The increase in farm size was particularly rapid in livestock sectors where domestic demand has grown. The livestock sectors face fewer constraints to farm-size expansion than the land-intensive crop sector. The Korean beef cattle breed (Hanwoo) dominates the number of cattle, although dairy cattle numbers grew rapidly up to the early 1990s. In 1996, there were 2.8 million heads of Hanwoo cattle, decreasing to 1.4 million heads in 2002 in the wake of the financial crisis in 1998 and the tariffication of beef imports in 2001 (KREI, 2015). By 2012, numbers recovered to exceed 3 million heads following the restructuring of the beef sector. The growth in hog and chicken production has been significant –the number of hogs increased 192% and the number of chickens more than 217% between 1983 and 2016.
Cross-country comparisons of farm size show that the operational size of Korean livestock farms are already comparable with some EU countries, while the size of crop farms is much smaller (Figure 2.8). For example, the mid-point size of Korean dairy farms was 81 dairy cows in 2010, which is similar to countries such as the Netherlands (88 cows) and Germany (75 cows), and more than France (56 cows).
Figure 2.8. Farm size in selected OECD countries, 2010
1. 2010 is replaced by the nearest available year: by 2009 for the United Kingdom (England), by 2011 for Canada, and by 2012 for the United States.
2. For the Netherlands, data are on all farms having cropland and dairy cows respectively.
Source: Bokusheva and Kimura (2016), http://dx.doi.org/10.1787/5jlv81sclr35-en; KREI’s calculation based on KOSTAT (2016a).
The mid-point size of dairy farms and beef cattle farms increased by 1.8 and 2.0 times in 2000-15, respectively. The expansion of hog farm size was 2.5 times in the same period, measured by the mid-point number of pigs. The herd size expansion was particularly remarkable in the poultry sector, which has become the most concentrated livestock sector and has also seen rapid development of vertical integration. In 2015, over 90% of meat chickens and meat ducks were raised within vertically integrated operations (OECD, 2016c). The mid-point sizes of broiler and egg farms increased to 75 000 chickens and 85 000 hens, respectively. However, with limited land the growth in livestock output has led to strong increases in stocking densities, increasing environmental pressure from manure emission.
Age distribution
Declining labour input through lower farm population and mechanisation has been the main driver of productivity growth in agriculture. The number of farm households has declined more than 50% since 1970 as a result of the outmigration of younger generations to the urban areas and limited new entrants to the agricultural sector. The number of household members per farm household declined sharply from 5.8 in 1970 to 2.4 in 2015. As a consequence, ageing of the farming population advanced rapidly. The proportion of the farm population over 65 years old increased from 5% in 1970 to 38% in 2015. Agricultural activity became a form of a social safety net for the older-age rural population, as they are not sufficiently covered by the existing pension systems (OECD, 2016c).
The share of aged farmers is particularly high for rice farms, where 59% of farm managers are over 65 years old (Figure 2.9.A). In contrast, livestock farms are dominated by younger farm managers. The share of livestock managers aged over 65 was less than one-third. The average age of livestock farmers is 59.4 years old, which is significantly lower than the average age of crop farms (66.2 years old). The age distribution by farm size class shows that small-scale farms are dominated by aged farmers (Figure 2.9.B). Indeed, in 2015 the main operators of 56% of farms less than one hectare were over 65 years old. Large-scale commercial farms are rather dominated by younger farmers.
Figure 2.9. Age of managers by farm type and farm size in Korea, 2015
Note: Numbers may not add up to 100 due to rounding.
Source: KOSTAT (2016a).
Farm household income
Farm household income in Korea grew stably after the recovery from the financial crisis in the late 1990s. Average farm household income grew annually at 0.7% in 2003-16 in real terms. This is mainly driven by an increase in non-farm income and transfer income.1 On the other hand, average real farm income has been decreasing since the early 2000s. As a consequence, the share of farm income in farm household income declined from 48% to 30% between 1995 and 2015 (Figure 2.10). In particular, the share of farm income for side-business farms and self-sufficient farms fell to only 3.4% and 1.3% of farm household income, respectively.2 These types of farm households accounted for 34% of the total number of farm households in 2015 (KOSTAT, 2016b). The dependency on off-farm income is much lower for livestock farms than crop farms. In 2015, the share of farm income in total farm household income was 73% among livestock farms, while it was 30% among all farm types (KOSTAT, 2016b).
Figure 2.10. Composition of farm household income and disparity with urban households in Korea, 1995 to 2015
Note: Numbers may not add up to 100 due to rounding.
Source: KOSTAT (2016b).
Although wages earned outside of agriculture are the most important source of non-farm income, transfer income has increased its significance as Korea introduced major direct payment systems from the early 2000s. Agricultural subsidies accounted for 20% of the income of specialised farm households and 47% for general farm households in 2014 (Figure 2.11).3 The share was 16% and 27% for side-business and self-sufficient farm households, respectively. Other types of transfer income such as payments from the social security system including public pension are also important sources of income for most farm households, in particular for general farm households.
Despite a real increase in the level of farm household income, the disparity between urban and farm household income has increased over time. The level of farm household income relative to urban household income declined from 96% in 1995 to 64% in 2015 (KOSTAT, 2016c). However, the income of specialised farm households is higher than other types of farm household, maintaining their relative level of income at 82% of urban households in 2014. The largest income gap with urban households can be found for small-scale producers who depend on farm income (general farm households). Their household income is only 34% of urban households.
Figure 2.11. Composition of farm household income by farm household type in Korea, 2016
Source: KOSTAT (2016b).
The widening income gap between urban and farm households is a major concern for policy makers in Korea. Real farm income has been declining since the late 2000s, as the growth in farm expenses exceeds that of farm receipts. While the growth in non-farm income led to an overall increase in real farm household income, average farm household income is falling behind urban households. In particular, small-scale aged farmers find it difficult to increase non-farm income as off-farm employment opportunity is limited. In this situation, agricultural subsidies linked to agricultural production have a limited capacity to address income disparity as small size farms with income problem receive less subsidy.
Korea’s low-income problem is concentrated in the elderly population. The relative poverty rate of the country’s over-65 age group was 49.6% in 2013, which is almost four times higher than the OECD average of 12.6%. Their absolute poverty rate – defined as the share of persons with an income below the minimum cost of living – was 30% in 2014. The high elderly poverty rate reflects both the decline in family support and the weakness of other private and public sources of old-age income support (OECD, 2016a). The poverty situation is more serious in rural areas, where the ageing of the population is much more advanced than in urban areas. The Korea Welfare Panel Survey shows that the poverty rate of urban areas was 13.4% while that of rural areas was 27.9% in 2015.4
2.4. Productivity and competitiveness of the Korean agro-food sector
Productivity performance in primary agriculture
Total factor productivity (TFP) – the ratio of total output quantity divided by the total input quantity in a given sector – is a standard measure of productivity. According to the US Department of Agriculture, the TFP growth in primary agriculture in Korea has been historically higher than the OECD average (Figure 2.12). Although the TFP growth in Korea was one of the highest among OECD countries in the 1990s, it slowed from 3.6% in 1991-2000 to 1.8% in 2001-12.
Figure 2.12. Agricultural Total Factor Productivity growth, 1991-2000 and 2001-2012
Note: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Source: United States Department of Agriculture (2015), Agricultural Productivity Database, Economic Research Service.
The decomposition of TFP growth into total output and input growth in different time periods shows the dynamics of productivity growth (Figure 2.13). The growth of output was the highest in the 1970s but slowed down to nearly zero in recent years. In the last two decades, productivity growth has been driven mainly by declining input use, in particular labour input. The trend of growth in Korea’s real agricultural labour productivity showed an annual growth rate of 6.0% in the 1970s and peaked in the 1980s at 6.6%. However, the growth rate dropped to 3.5% in the 1990s and has been stagnant at 0.6% since the 2000s (KREI, 2015). Animal and feed inputs have grown and the fertiliser and land inputs declined, reflecting Korea’s structural change from crop to livestock production.
Figure 2.13. Decomposition of Total Factor Productivity growth in Korea, 1961 to 2013
Source: United States Department of Agriculture (2015), Agricultural Productivity Database, Economic Research Service.
Box 2.1. Dynamics of productivity growth in the Korean rice sector
The productivity growth in agricultural sector is driven by farm-level innovation (including farm management practices) and changes in sectorial structure. Measuring productivity at the farm level could identify the channels through which changes in productivity at farm level are translated into productivity growth at sector level (Kimura and Sauer, 2015). Through co-operation with the OECD network for farm-level analysis, KREI used a Farm Production Cost Survey to measure the total factor productivity of rice production between 2003 and 2015. The non-parametric index method is applied to measure TFP both at sector and farm level (see Box 1 in Kimura and Sauer, 2015).
The measurement of the sector-level productivity shows that the TFP of the Korean rice sector grew at 1.4% annually in 2003-15 on average (Figure 2.14). As labour input in the rice sector declined by 4.1% annually in this period, the growth rate of labour productivity was the highest among the single factor productivity indicators, at 8.7%. Meanwhile, capital grew at the highest rate among the inputs, reaching an annual growth rate of 4.1% and leading to lower growth rate of capital productivity compared to other partial factor productivity indicators. The productivity growth of the Korean rice sector is largely driven by improvements in labour productivity.
The measurement of productivity at the farm level sheds light on the dynamics of productivity growth in the Korean rice sector. While unweighted average farm level productivity grew at 2.4% annually in 2003-15, market share weighted average TFP grew at 4.4% annually (Figure 2.15). This means that the farms that have high market shares achieved a higher productivity growth. Indeed, the average productivity growth by three farm size class (the largest and the smallest 25% of farms and the remaining middle size farms) shows that the largest 25% of farms achieved by far the largest productivity growth. The productivity gap between the smallest 25% and the largest 25% of farms increased from 3.0 to 3.9 times between 2003 and15. The analysis indicates that the productivity growth of a small number of large-size farms is driving the TFP growth of the Korean rice sector.
Figure 2.14. Sector level TFP growth in the Korean rice sector, 2003 to 2015
Source: KREI based on Rice Production Cost Survey.
Figure 2.15. Farm level TFP growth in the Korean rice sector, 2003 to 2015
Source: KREI based on Rice Production Cost Survey.
The sector-level productivity could be decomposed to productivity improvement at the farm level and resources reallocation to more productive farms. Olley and Pakes (1996) developed a decomposition method that can show the extent to which resource allocation across farms contributes to the sector-level TFP. In the case of the Korean rice sector, the productivity gain from the resource allocation to sector-level productivity increased from 59% in 2003-05 to 100% in 2013-15. This means that the sector-level productivity in 2013-15 is twice higher the case where resource allocation is random between farms with different productivity levels. The increased contribution of resource allocation indicates that more productive farms increased their market share. The statistics shows the concentration of production to large-size farms, which have been expanding their operational size (Table 2.7). The share of rice production by the largest 25% of farms increased from 60% to 69% in 2003-15, while the market share of small and middle-size farms declined over time.
Table 2.7. Evolution of average farm size and market share in the Korean rice sector
Source: KREI based on Rice Production Cost Survey.
However, this decomposition is static and cross-sectional and does not take into account the effect of farm entry and exit. Melitz and Polanec (2012) extended the static decomposition proposed by Olley-Pakes to allow for entry and exit, which is called dynamic Olley-Pakes decomposition. The application of this method indicates that on average 76% of productivity growth in the rice sector in 2003-15 can be attributed to the resource allocation effect to more productive farms, while within-farm productivity growth accounts for 12%, and entry and exit also for 12%, of the sector-level productivity growth on average.
The analysis indicates that future productivity gains in the rice sector come from further concentration of land to large-size farms and the improvement of their productivity. The productivity of small and middle-size farms that account for a majority of the rice farm population is low, but efforts to improve their productivity contribute less to sector-level productivity growth as their market shares are shrinking. In other words, the low productivity of small and medium-size farms is not a major constraint to productivity growth of the sector. Policies should rather focus on improving the productivity of the large-size rice farms through providing more tailored support that meets their needs, such as technical advisory and risk management.
Competitiveness of the food manufacturing industry
The food manufacturing industry achieved a remarkable growth in the last decade in Korea. Indeed, the growth rate of production, employment and exports in 2005-14 exceeded most of the benchmark OECD countries (Table 2.8). However, the absolute size of the food industry is still small and exports are limited. The share of food industry in the manufacturing sector was 5.4% in turnover and 6.7% in employment, which is the lowest among the benchmark OECD countries. The growth rate of labour productivity in 2005-14 was lower than most of the benchmarking countries, including EU28 and the United States.
Table 2.8. Performance of food manufacturing industry in selected OECD countries, 2014
1. Annual % change over 2005-14.
Source: KOSTAT (2017b); Ministry of Economy, Trade and Industry of Japan (2017); Census Bureau for United States (2015); Eurostat (2017); and UN Comtrade (2015).
The competitiveness of Korean food manufacturing and its sub-sectors with its major competitors is assessed via the analytical framework developed in Wijnands et al. (2007) and Wijnands et al. (2015). The indicators selected to quantify competitiveness includes two trade-related indicators (market shares on the world market and trade specialisation) and three economic performance indicators (annual growth rates of real turnover, relative growth rate in total manufacturing and labour productivity growth). These indicators capture competition on the world market as well as competition for means of production on the domestic market. The assessment of overall competitiveness is based on the average of five indicators. The benchmark countries and regions comprise Japan, the United States, Germany, France, Italy, the United Kingdom, the Netherlands and EU28.
The overall competitiveness of the Korean food manufacturing sector is assessed slightly above the average, while the United States scored the highest (Figure 2.17.A). While Korea scored the highest for the growth rate of real turnover, its growth performance relative to the manufacturing industry is poor as the other manufacturing sectors grew faster. Although the world market share of Korean food products increased, the comparative advantage of the food manufacturing industry declined at the same time. Although food manufacturing is growing more rapidly than for other countries, the comparative advantage of the sector in the world market declined and the relative growth performance within the domestic manufacturing sector is low. The labour productivity growth of the sector is below the average.
Within the food manufacturing industry, “other food” (rice cakes, bread, snacks, noodles, sugar, tea, coffee and spices) accounts for the largest shares (Figure 2.16). The beverage industry has relatively higher shares in turnover and export, but low shares in enterprises and employment, indicating the concentration in large enterprises. The “other food” and “beverages” industries accounted for 60% of Korea’s value of food exports in 2014 and 40% of the turnover in the food manufacturing industry. The meat industry generates greater employment than the beverage industry but is domestically oriented and exports are very low.
Figure 2.16. Composition of food manufacturing industry in Korea, 2014
1. “Other food” includes rice cakes, bread, snacks, noodles, sugar, tea, coffee and spices.
Source: KOSTAT (2017b), Mining and Manufacturing survey; UN Comtrade (2015).
The assessment of the competitiveness of nine sub-sectors of Korea’s food manufacturing industry shows the strongest growth in real turnover in the meat, fruits and vegetables, beverage and other food industries in comparison with the benchmark countries, while the relative growth performance of the dairy industry is the weakest (Figure 2.17.B). The meat, and fruit and vegetable industries are the only ones where the relative growth performance within the domestic manufacturing industry is above the average of benchmark countries. On the other hand, the relative growth performance of the “other food” and beverage industries is the weakest among the benchmarking countries despite the higher growth rate of these sectors.
On the trade-related indicators, the relative increase in world market share was the largest in the oil and fat industry, followed by grain mill and other food industries. The increase in market share in meat and fish products was below average. The loss of comparative advantage of dairy and fruits and vegetables was particularly large as imports of these products increased over time. The relative performance of labour productivity growth was the strongest in fish, fruits and vegetable, other food and animal feed industries, whose performance was above the average of benchmark countries. The performances in labour productivity growth in the remaining five sub-sectors of food manufacturing industry were below average. In particular, the productivity performance of the meat and grain mill industries was the worst.
Overall, the average score of five indicators shows that the fruits and vegetables, oil and fats, and fish industries are the most competitive food industries in Korea, although these sectors do not necessarily have large shares in the food industry. On the other hand, the dairy and grain mill industries are found to be the weakest as they are losing comparative advantage and suffering from lower labour productivity growth.
Figure 2.17. Competitiveness of the food manufacturing industries in Korea
Note: The location of each indicator is based on the Z-score that compares the values for individual sub-industries to the overall average. Methodology in Wijnands et al. (2015) is applied to derive the z-scores. EU28 is not included in calculating mean and standard deviation.
Legend:
O: Overall competitiveness;
S: Annual growth of the share of turnover within whole manufacturing industry, 2005-14;
T: Difference in regional trade agreement indicator between 2014 and 2005 (value in 2014 minus the value in 2005);
M: Difference in world market share between 2014 and 2005 (value in 2014 minus the value in 2005);
L: Annual growth rate of labour productivity (real turnover/employee), 2005-14;
P: Annual growth rate of real turnover value, 2005-14.
Source: KOSTAT (2017b), Mining and Manufacturing survey; UN Comtrade (2015).
2.5. Sustainability performance of Korean agriculture
Concern has been growing about the sustainability of Korean agriculture due to the potentially negative impacts of agricultural production on soil and water quality, and the agricultural ecosystem. An ecosystem under agricultural management which is connected to other ecosystems is greatly affected by non-agricultural pollution sources as well, and the impacts of climate change on agricultural production is also a rising concern (OECD, 2001).
Korean agriculture achieved a substantial improvement in total factor productivity during the past three decades, despite a persistent decrease in the agricultural labour force and farm land. Meanwhile, the cost shares of intermediate inputs and capital continue to increase. The productivity growth of Korean agriculture is led by an increase in intermediate inputs and capital while saving labour and land inputs. Among the intermediate inputs such as seeds, pesticides, fertilisers and animal feeds, the share of animal feeds dramatically increased owing to the growth of livestock industries (Kwon et al., 2015).
With a growing interest in the sustainability performance of agriculture, the Korean government launched the Environment-friendly Agricultural Development Plan in 2001 (MAFRA, 2011). The plan has been updated and revised every five years. Despite government-driven programmes towards enhancing sustainability, not every sustainability indicator shows a significant improvement. Uses of pesticides and fertilisers declined substantially during the period, 1990-2014, but the balances of nitrogen and phosphorous are still high, reflecting the structural change from crops to the livestock sector (Table 2.9)
Table 2.9. Selected Agri-environmental indicators of Korea, 1990 to 2014
1. 2004-06=100.
2. In nitrogen, phosphate and potash nutrients; Data source: Statistics Korea.
3. Nitrogen balance per ha of agricultural land. Number for 2002-04 is the average of 2000-02.
4. Phosphorous balance per ha of agricultural land. Number for 2002-04 is the average of 2000-02.
5. The number for 1990-92 is that of 1990; the number for 2002-04 is that of 2002; the number for 2012-14 is that of 2013.
6. The number for 2012-14 is retrieved from the Ministry of Land, Infrastructure and Transport (2016); all other data are from FAOSTAT.
7. The number for 1990-92 is that of 1990; the number for 2012-14 is that of 2013.
8. The number for 2002-04 is retrieved from the Korea Rural Community Corporation (2005); the number for 2012-14 is that of 2013 and retrieved from the Korea Rural Community Corporation (2014).
9. The number for 2012-14 is the average of 2008-10.
10. Data are retrieved from the Greenhouse Gas Inventory & Research Centre (2016).
Source: FAO (2017), FAOSTAT (database), http://faostat.fao.org; OECD (2017b), Agri-Environmental Indicator Database, http://stats.oecd.org; Greenhouse Gas Inventory and Research Centre (2016); Korea Rural Community Corporation (2005, 2014); KOSTAT (2017a), National key indicators, http://www.index.go.kr.
Nutrient surplus
Korea currently shows the highest nitrogen balance among all OECD countries (Figure 2.18). The average nitrogen balance per ha in Korea increased from 213.1 kg/ha in 1990-92 to 249 kg/ha by 2012-14. Most OECD countries succeeded in reducing their nitrogen balances over time. For example, despite the growth in livestock production, the nitrogen balance of the Netherlands fell to 148 kg/ha in 2012-14 from the 1990-92 level of 309 kg/ha owing to the policies of manure quota system and manure application limits (Box 3.3). Before 1990, the increase in nitrogen balance in Korea was mainly driven by the increasing use of chemical fertilisers. However, from 1990, livestock manure became the main source of the increasing balance indicator (Lee et al., 2000). The reduction in fertiliser subsidies in the 1990s and 2000s also contributed to the reduced use of fertilisers (Lee, 2003).
Figure 2.18. Nitrogen balance in OECD countries, 1990-92, 2000-02 and 2012-14
1. Data for 2012-14 average refer to: 2011-13 average for Australia, Germany, Japan, Mexico, Sweden, Switzerland and the United States.
2. Data for 2000-02 average refer to: 2004-06 average for Estonia.
3. Data for 1990-92 average refer to: 1990 for the United Kingdom, 1992-94 average for Slovenia, and 1995-97 average for Portugal, while for Estonia and Hungary data are not available.
4. For Switzerland, total agricultural area includes summer grazing.
5. The OECD total excludes Chile, Estonia, Hungary, Israel, Latvia and Lithuania.
6. Countries are ranked according to average annual percentage change 2000-02 to 2012-14.
Source: OECD (2017b), Agri-environmental indicator database, http://stats.oecd.org/.
Relatively little change over time in average phosphorous balance is observed (Figure 2.19). However, Korea’s balance indicator is the second highest among OECD countries. While most countries reduced the phosphorous balance, that in Korea has remained at the same level since 1990. Kim et al. (2015b) show a substantial regional variation in per ha N and P balances (Table 2.10). Both N and P balances are the highest in Gyeonggi province, which has the country’s largest dairy industry and the second largest swine industry. In order to achieve improvements in nitrogen and phosphorous balances, Kim et al. (2015b) suggested imposing regional nutrient quotas, but no such quantity restriction has yet been implemented.
Figure 2.19. Phosphorus balance in OECD countries, 1990-92, 2000-02 and 2012-14
1. Data for 2012-14 average refer to 2011-13 average for Australia, Germany, Ireland, Japan, Mexico, Sweden, Switzerland and the United States.
2. Data for 2000-02 average refer to 2004-06 average for Estonia.
3. Data for 1990-92 average refer to year 1990 for the United Kingdom, 1992-94 average for Slovenia, 1993-95 average for the Slovak Republic and 1995-97 average for Portugal, while for Estonia, Hungary and Luxembourg data are not available.
4. For Switzerland, total agricultural area includes summer grazing.
5. The OECD total excludes Chile, Estonia, Hungary, Israel, Latvia, Lithuania and Luxembourg.
6. The EU total excludes Luxembourg.
7. For Estonia, the average annual percentage change refers to change in phosphorus deficit.
8. Countries are ranked according to average annual percentage change 2000-02 to 2012-14, except the Czech Republic, Estonia, Hungary, Italy, the Slovak Republic and Sweden for which annual changes were not calculated.
Source: OECD (2017b), Agri-environmental indicator database, http://stats.oecd.org/.
Table 2.10. Estimated nutrient balance by province in Korea, 2014
Kg/ha
Source: Kim et al. (2015b).
Fertilisers and pesticides
Among the three major types of chemical fertilisers (nitrogen fertilisers, phosphate fertilisers and potash fertilisers), nitrogen fertilisers occupy almost half of the total chemical fertilisers in Korea. Total consumption of chemical fertilisers reached 951 000 tonnes in 1990-92 but declined consistently since then: 705 000 tonnes in 2002-04 and 461 000 tonnes in 2012-14. Per ha use of chemical fertilisers also fell from 407 kg/ha in 1990-92 to 262 kg/ha in 2012-14 (Figure 2.20). The structural change away from crop production as well as the abolishment of the fertiliser subsidy in 2005 contributed to the reduction of fertiliser inputs in Korea.5
Annual use of chemical pesticides was 26 000 tonnes in 1990-92 but dropped to 16 000 tonnes in 2012-14. Per hectare use of chemical pesticides also declined slightly, from 11.3 kg/ha in 1990-92 to 10.6 kg/ha in 2012-14. The declining rate of chemical pesticide use was not as high as that of chemical fertiliser use because pest and disease outbreaks occur frequently due to the high temperature and humidity of the monsoon climate. Multiple-crop farming also requires an intensive use of pesticides. Nevertheless, it is anticipated that the use of pesticides will not increase in the future, owing to the increased share of pesticide-free or organic products and more stringent safety regulations on chemical pesticides (Korea Crop Protection Association, 2015). The share of land under certified organic farm management in Korea is still relatively small but has been growing (Figure 2.21).
Figure 2.20. Evolution of fertiliser and pesticide use in Korea, 1990 to 2014
Source: KOSTAT (2017a), National key indicators, http://www.index.go.kr.
Figure 2.21. Agriculture land area under certified organic farm management in selected OECD countries, 2002-04 and 2008-10
Notes: Countries are ranked according to 2008-10 averages.
1. Data for the 2008-10 average refer to: 2007-09 average for Canada, Denmark, Korea and Spain, 2007-08 average for Italy, and year 2007 for Greece.
2. Data for 2002-04 average refer to: year 2005 for Japan, 2003-04 average for Korea, 2003-05 average for Poland, and year 2003 for Greece.
3. For Switzerland, organic farming as a share of the Utilised Agriculture Area (ha) includes arable and permanent cropland but excludes summer pasture.
Source: OECD (2013), OECD Compendium of Agri-environmental Indicators, http://dx.doi.org/10.1787/9789264186217-en.
Land conservation
Despite the regulation on the conversion of high quality agricultural lands, decline of the total area of agricultural land has continued with increased demand for non-agricultural lands and public reclamation projects. The total agricultural land area declined by 18% between 1990-92 and 2012-14, reducing the share of agricultural land in total area of land from 22% to 18% in the entire period. In Korea, arable land and permanent cropland occupied 97% of the total agricultural land in 2012-14, while the share of pasture was 3.3%. Korean livestock farming is largely dependent on imported animal feed crops.
Soil quality management contributes to agricultural ecosystem conservation and directly affects crop productivity. Kim et al. (2014b) estimated that the available phosphate in soils exceeded the appropriate levels by 1.3 times for paddy land, 1.4 times for crop field, 2.1 times for permanent cropland, and 2.1 times for greenhouse land. The study also found empirically that the practices of environment-friendly farming contribute to soil quality management by increasing the organic matter content of soils.
Water
In 2007, the total amount of water available for Korea was 130 billion m3 of which 33.3 billion m3 was withdrawn (Table 2.11). The agricultural use represented 48% of total water withdrawal. Total water withdrawal increased persistently because of the increase in water demand caused by economic and population growth and the change in industry structure. The construction of the irrigation system largely contributed to the rapid increase in agricultural water consumption. The irrigation water application rate was 18.2 megalitres per hectare of irrigated land in 2008-10, which was the second highest among OECD countries, next to Japan (OECD, 2013).
Table 2.11. Water withdrawal by usage in Korea, 1965 to 2007
Billion cubic metres
Source: Ministry of Land, Infrastructure and Transport (2013), Water vision 2020.
While it is forecast that the agricultural water demand in 2020 will be smaller than the current level, the agricultural sector is still the most water-intensive industry, accounting for almost half of total water withdrawals. In the future, climate change may affect the irrigation and drainage system via an increased frequency of floods and droughts. An increase in temperature may raise both water evaporation and demand for water (FAO, 2016b: 6-7). The importance of securing and managing water resources is being greatly emphasised in Korea’s agricultural policy priorities (Kim et al., 2014b).
In 2012, the total groundwater use was 3.7km3 of which 2km3 was used for agricultural purposes. However, Korean rice production is heavily dependent on surface water, and the development of irrigation facilities has been concentrated in rice production areas. In 2013, 80.6% of total rice paddy area was equipped with an irrigation facility (KRC, 2014). However, the total area of irrigated farmland declined by 22% between 1990-92 and 2012-14 due to the conversion of farmland to non-agricultural use, as well as water scarcity (Kim et al., 2014b).
Energy and greenhouse gas (GHG) emissions
Farm mechanisation and the increase in greenhouse farming have resulted in a substantial increase in agricultural energy use. Energy consumption by Korean farm households in 2012-14 was 1.96 million toe (tonnes oil equivalent), which was above the OECD average and almost four times larger than that of Japanese farm households (Figure 2.22). However, the share of agricultural energy use in total energy use in Korea was smaller than the OECD average, reflecting the smaller share of agriculture in GDP.
Figure 2.22. Agriculture energy consumption in selected OECD countries, 2012-14
1. The OECD average excludes Chile, Germany and Lithuania. For Chile and Germany, Agriculture consumption data are not available.
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
Source: OECD (2017b), Agri-Environmental Indicator Database, http://stats.oecd.org based on the IEA World Energy Balances Database (2016).
Korea undertook several initiatives to target energy saving and achieve energy balance in rural areas. In 2012, an agricultural carbon offset system was introduced. Under the system, carbon credits (carbon reduction certifications) are given to farm households which reduce carbon emission by recycling waste heat and using biogas plants (Kwon, 2012). The system aims at conserving energy and promoting environmental conservation in rural areas. However, taxes on petroleum products are exempted when they are purchased by registered farmers or agricultural corporations for use with certain farm machines. Farmers also benefit from the reduced price of the electricity used for pumping, drainage and other agricultural purposes. Those two agricultural energy subsidies may provide disincentives for energy saving in the agricultural sector (Jeong, 2013).
In 2014, GHG emissions from the agricultural (and fishery) sector were 21.3 million tCO2, representing 3.1% of national emissions (Greenhouse Gas Inventory & Research Centre, 2016). Agricultural emissions come mainly from non-energy sources: emissions from rice cultivation, soils and manure management, and livestock enteric fermentation. For the past 20 years, the amount of non-energy source agricultural emissions did not change significantly although there was a change in their composition: the share of emissions from livestock enteric fermentation increased while that of methane emissions from paddy rice decreased. However, non-agricultural energy source emissions increased at a faster rate. As a result, the share of the agricultural and fishery sector in total greenhouse gas emissions has been declining (Figure 2.23). GHG emissions from agricultural production are mostly non-energy emissions. Emissions from rice production have been declining because of the decline in the rice cultivation area but the share of emissions from the livestock sector increased (Table 2.12).
Figure 2.23. Greenhouse gas emissions in Korea
Note: LULUCF refers to land use, land-use change and forestry, and includes both carbon emissions and sinks, and the value above represents the net absorbed amount of GHG emissions.
Source: Greenhouse Gas Inventory & Research Centre (2016), National greenhouse gas inventory report of Korea.
Table 2.12. Greenhouse gas emissions in the Korean agricultural sector, 1990 to 2014
Million tonnes of CO2 equivalent
Source: Greenhouse Gas Inventory & Research Centre (2016), 2016 National Greenhouse Gas Inventory Report of Korea.
Resilience to climate change
Agricultural production is highly dependent on climate conditions. Based on the long-term forecasts of Korea’s Meteorological Administration, Kwon and Cho (2015) predicted that the country’s summer and winter temperatures will increase under most climate change scenarios of the Intergovernmental Panel on Climate Change (IPCC). They forecasted, however, that the future precipitation level will differ markedly by scenario.
The impacts of climate change on agricultural productivity in Korea are not clearly known yet. Crop simulation studies conducted by Korean scientists showed that future changes in climate variables will negatively affect rice yields but will positively affect barley yields (Shim et al., 2011a, 2011b).
For rice, which is the single most important crop in Korea, several econometric studies estimated the impacts of climate variables on rice yields using historical datasets. Those studies, including Cho and Kwon (2014), Cho et al. (2013), and Kwon and Kim (2008), identified climate variables such as average temperature of each season, precipitation, sunshine duration and daily temperature variation affecting rice yields, and predicted that future rice production may decrease under climate change. Moreover, Cho and Kwon’s (2014) econometric model estimating the impacts of climate variables on productivity and variability of rice production simultaneously showed that future change in climate variables will increase variability, i.e. the risk to rice production under most climate change scenarios. Future possible loss in irrigation functions under climate change may also negatively affect rice production, which is heavily dependent on irrigation water.
Although climate change is forecasted to affect rice productivity negatively, it is still uncertain whether the overall economic value of climate change is positive or negative. Kwon and Cho (2015), using a city/town-level dataset, econometrically identified the determinants of crop choice in each city/town. Their estimation results implied that the future change in climate variables will reduce the area of rice paddy but raise the cultivation areas of vegetables and fruits in many regions. Because per capita consumption of rice is declining and per unit value-added of vegetables and fruits is higher than that of rice, it may be possible that producer’s adaptation response to climate change optimally increases the total agricultural value-added by altering product mix. In contrast, if the productivity loss in the rice industry is very high, then the overall economic impact will be negative despite adapting the choice of crop mix.
2.6. Challenges for the future
Remarkable economic growth in Korea in the last four decades has been led by export-oriented industrialisation. In this process, the significance of agriculture in value-added, employment and trade has diminished rapidly. The sector has been under pressure to meet changing domestic demands and to improve its productivity in a very limited time. At the same time, the policy environment has changed to increase the exposure of producers to international competition.
Korean agriculture has adjusted its structure, driven by a rapid change in the structure of food demand. The westernisation of the Korean diet, which is associated with income growth, reduced the per capita rice consumption and increased the demand for livestock products. While the share of rice in agricultural production value declined from 37% to 17% between 1970 and 2015, the share of livestock increased from 15% to 43% during the same period. The operational size of livestock production expanded rapidly and reached an equivalent size with EU counties.
Korea is one of the most land-scarce countries of the OECD. In fact, arable land per capita (0.03 ha) is the smallest among the group, and the land intensive crop sector thereby has a comparative disadvantage. Moreover, the fragmented land structure makes consolidation of cropland particularly challenging. The data shows that the concentration of land-use to large-scale farms has been slow. While more than 65% of Korean farms are less than 1 ha in size, the share of land cultivated by more than 10 ha of land remained 14% in 2015, while the share of land used by this size class of farm increased to 48% in Japan.
Korea achieved a higher productivity growth in primary agriculture than the OECD average for the last five decades, mainly driven by a declining labour input through rural to urban migration and farm mechanisation. The resource reallocation to more productive farms and to growing sectors such as livestock and horticulture also contributed to the overall productivity growth. For example, the productivity growth in the rice sector has largely been led by the concentration of land to a small number of large size farms with high productivity levels. Farm structure in Korea is expected to be further polarised to large-scale commercial producers and small-scale subsistent producers. Policies should facilitate the structural change and focus more on improving the productivity of large size commercial farms through providing more tailored support that meets their needs, such as technical advisory and risk management.
Rapid industrialisation in urban areas and the migration of the young population from rural to urban areas have led to rural areas being economically left behind. The expanding gap in income between farm and urban households is a major concern for Korea’s policy makers. The average farm household income has declined to 65% of the average urban household income, which is low when compared to almost all other OECD countries. Real farm income has been declining since the late 2000s as the growth in farm expenses exceeded that of farm receipts. While the growth in non-farm income led to an overall increase in real farm household income, off-farm employment opportunities are also limited in rural areas, in particular for the aged population. Under these circumstances, agriculture-sector-specific policy has a limited capacity to solve the low-income problem of small-scale producers. Broader rural development policy and general social security policy should play a greater role in addressing the income disparity issues between urban and farm households.
The future demographic change and slowdown in economic growth will have a significant influence on Korean agriculture through changing the food demand structure and increasing the cost of labour. The domestic food market is unlikely to expand due to the declining population and ageing. Per capita consumption of rice nearly halved in just 25 years, and rice consumption is likely to decline even further. Given the limited expansion of domestic food demand, future growth opportunities for Korean agriculture are increasingly dependent on the supply of value-added products to both domestic and export markets. Korean agriculture has the potential to be competitive in exporting the niche agricultural products and processed foods that reflect the country’s rich and unique food culture. To assure the long-term health of Korea’s food and agriculture system, it is critical to increase its capacity to respond to market demands.
Korea’s food industry has shown remarkable growth in the last decade. Promoting the food manufacturing industry would exploit the comparative advantage of Korea to export more capital and knowledge-intensive food products. The food manufacturing industry also has the potential to create employment in rural areas. However, an assessment of its competitiveness against major competitors shows that, while it grew faster, its growth performance was in most cases worse in terms of labour productivity as well as in comparison with overall manufacturing sector. Further restructuring is necessary to improve the food manufacturing industry’s competitiveness, for example by establishing a more competitive domestic agricultural sector and a more open agricultural trade regime.
Despite the declining share of primary agriculture in the economy, controlling environmental impacts of agriculture on natural resources is still important as the sector occupies 20% of the country’s total land area and accounts for almost half of total water withdrawal. Nitrogen and phosphorus surpluses remain among the highest of OECD member countries. Korea reduced the use of chemical fertilisers and pesticides, but the rapid expansion of intensive livestock production made manure emissions the main agricultural source of water and soil pollution. The increasing share of greenhouse farming is also making farming in Korea more energy dependent. Contamination and pollution of soil and water resources raises uncertainty about future productivity growth, as does climate change, which is expected to raise temperatures, the spread of pests and disease, and more frequent and more severe droughts and floods. Promoting the sustainable use of land and water and increasing preparedness to climate change is an important policy agenda to assure long-term growth in agriculture.
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Notes
← 1. A farm household is defined as one cultivating farm land over 0.1 ha, engage in farming activities including livestock husbandry more than 90 days a year, or having sales of agricultural products exceeding KRW 1 million (approx. USD 1 000).
← 2. A specialised farm household is defined as a farm household with a farm size larger than 3 ha or with annual sales of more than KRW 20 million (USD 20 000), and whose agricultural income exceeds non-agricultural income. A general farm household is defined as a farm household with a farm size between 0.3 -3 ha and annual sales between KRW 2 million (USD 2 000) and KRW 20 million (USD 20 000), and whose agricultural income exceeds non-agricultural income. Side-business farm households are those with a farm size 0.3 ha or larger or annual sales more than KRW 2 million (USD 2 000), and whose agricultural income is smaller than non-agricultural income. Subsistent farm households are those whose farm size is smaller than 0.3 ha with annual sales of less than KRW 2 million (USD 2 000).
← 3. The agricultural subsidy includes only budgetary transfer and does not include a form of market price support.
← 4. In the Korea Welfare Panel Survey, an incidence of poverty is defined as a household whose income level is below 50% of median income in the country.
← 5. However, ad hoc support for chemical fertiliser was provided to mitigate the impact of high input prices in 2008-09 and 2010-12.