Research Reports
Agricultural Policy Reform of Direct Payment and Structural Adjustment in Korea
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AuthorOh, Naewon
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Publication Date2008.06.01
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Original
Decoupling agricultural support from production decisions has become one of the central issues in agricultural policy, both nationally and internationally. The WTO proposed decoupled farm subsidies to support agricultural producers without distorting commodity production or trade. Prior to the WTO system, agricultural supports were provided to producers through target pricing or various input subsidy policies.
The Korean government is expanding direct payments to keep the structural adjustment of agriculture on track for improving competitiveness and for stabilizing farm household income according to international trends. Although the direct payment may contribute to the stabilization of farm household income, this program is found to have limitations in improving the structure of agriculture.
In this study, we investigated ways to reform agricultural policies on direct payments as surveys reveal that the agricultural structure changes along with the changes in domestic and foreign conditions.
This study finds that it is desirable to reform the direct payment system under the following basic principles so that it can contribute to the agricultural development: first, conversion to farm household unit income stabilization method instead of commodity-based income stabilization; second, continuation of the coupled direct payment for the time being; and third, conversion to risk management and income stabilization instead of income support.
Payments were triggered when average farm gross income fell below a predetermined reference gross income for an eligible commodity. However, it also enforces the adding up of the change of gross income by commodity in farm household units.
The reference trigger is set at 90% of the reference gross income and the stabilization ratio is categorized according to gross income decrease ratio. If the reference trigger is too high, the responsibility consciousness of a farm household will be lowered and it will be hard to get an agreement from the non-agricultural sector. But if the reference trigger is too low, there will be few management stabilizing effects. The eligibility of participants should be open to all farm households.
The maximum benefit per participant is set at 50 million won after considering the equity between large and small farm households and the equity with low-income non-agricultural workers. The administration imposes duty on eligible participants to raise policy participation and faithfully carry out management registration. The participation fee is set at 1~2% of the reference gross income to refund in case of cessation.
As this policy is aimed at stabilizing farm household income, all agricultural commodities shall be included step by step by considering circumstantial conditions. First of all, soybeans, livestock products (dairy products excluded), and fruits will be the priority commodities. The nationwide statistics on these items with regard to such considerations as average price and yield can be obtained relatively easily, and the expected damage on these products from the Korea-US FTA is thought to be comparatively large. Also, we judge that an exception of non-commercial farms (below a meaningful level in farmhouse units) does not impede policy reform and can reduce administrative cost.
Basically, the agricultural income stabilization program is an alternative to the direct payment program that is made to complement any losses that can be incurred from FTAs. Therefore, this program, a substitute to the current direct payment, can be introduced along with a farmhouse registration system when the Korea-US FTA or the DDA goes into effect. This program's integration with the direct payment program on rice, the largest farm income source, should also be considered. However, the integration can be reviewed after 2013 or 2014 when the target price of the rice direct payment program is recalculated.
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