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Structural Change and Agricultural Protection:
The Costs of Korean Agricultural Policy
1975 and 1990
Abstract: The economic development of South Korea is often held up as a model to be followed by
many developing countries. We use 1975 and 1990 data in a general equilibrium framework with
highly disaggregated agricultural sector specification to evaluate the opportunity cost of agricultural
protection. We show that for Korea the cost of protection increases with the level of economic
development.
Xinshen Diao
John Dyck
Chinkook Lee
David Skully
Agapi Somwaru
Economic Research Service
U.S. Department of Agriculture
Washington D.C.
AAEA Annual Meeting
August 8-11, 1999
Nashville
* The views expressed in this paper are those of the authors and do not reflect the official position of the Economic
Research Service, the U.S. Department of Agriculture or any other office of the Federal Government.
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Structural Change and Agricultural Protection: Costs of Korean Agricultural Policy
1. Introduction--Why reconsider Asian agricultural protectionism?
There is a large and impressive literature on agricultural protection in Asia. Does it merit
another examination? There are several reasons to take a second look. A new round of WTO
negotiations will soon commence. The Uruguay Round substantially increased the scope of WTO
discipline over members’ agriculture trade policies. But there is much unfinished business. In
particular, developing countries have been granted latitude for intervention in their agricultural sectors.
The economic development of Japan, South Korea [henceforth Korea] and Taiwan is often held up as
a model to follow and developing countries may consider adopting the East Asian pattern.
How does the study differ from earlier ones? Two reasons: first, Korea has been amply modeled;
however, the analysis of both trade policy reform and domestic policy reform has been narrowly
focused: it is either partial equilibrium or, if general equilibrium, too aggregated. Aggregation involves
information loss; a thorough analysis of the costs of protection requires cross-commodity and crosssector detail. The models employed here retain more sub-sector detail than earlier studies. Second,
our analysis models two like structures: one for 1975 and one for 1990. The two models allow us to
compare the cost of protection (the opportunity cost of not liberalizing) at quite different levels of
development. We show that for Korea the cost of protection is increasing with the level of economic
development. It would have been better to liberalize sooner rather than later.
2. The development of Korean agricultural policy
Until the late 1960s the Korean government followed a policy of ‘three lows’: low grain prices,
low interest rates, and a low exchange rate (i.e., an overvalued domestic currency). The flow of free
or concessionally priced grain through the U.S. food aid program kept Korean consumer prices low
but also decreased farmers’ incentive to produce grains (Kuznets 1994).
Korea’s governments since the late 1960's sought to keep the welfare of the rural population
from falling behind that of the urban population in a period of rapid economic development. Until the
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1970s, the primary impact of Korean agricultural price policy intervention effected a transfer of
resources out of agriculture: a tax. However, the following decades showed high transfers to farm
households. In 1980-84, 34.1% of farm GDP resulted from direct and indirect policy-induced
transfers (Moon and Kang, 1991). The effect on consumers was unevenly distributed, with impacts on
lower-income urban households proportionately greater than for higher-income households. After
1975, one policy goal, boosting agricultural income, was met at least partially, but at the cost of higher
food prices which have tended to force real urban wages higher, contradicting another government
policy goal.
Another stated objective of Korea’s food policy has been attainment of food security in basic
grains. In its determination to achieve total self-sufficiency in rice and barley, the Korean government
took steps to reduce consumption in addition to boosting production. What progress Korea made in
boosting agricultural income and domestic grain production came partly through higher prices paid by
consumers but also through heavy government expenditures, an unwanted outcome. Korean
government purchases of rice at a high price and subsequent resale at a lower price have entailed a
large annual deficit over the course of three decades. The opportunity cost of these expenditures is
likely to have been high.
3. The model and data
We developed a computable general equilibrium framework to present a fuller assessment of
the effects of Korea’s policies on the whole economy as well as on the food and agriculture sectors.
The policy outcomes revealed in counterfactual simulations of liberalized trade policy are compared to
actual outcomes. The simulations, described below, show that most, but not all, of Korea’s goals for
its society could have been better achieved with the adoption of different policies.
The model is constructed to underscore cross-commodity and cross-industry linkages (79 subsectors). Inputs include labor, land, capital and intermediate goods. Labor is mobile across all sectors
and sub-sectors. Capital is distinguished as sector and sub-sector specific. Sector specific capital is
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mobile among the sub-sectors within a sector; sub-sector specific capital is immobile beyond its subsector.
The model includes intermediate demand generated from production activities and final demand
determined by a representative household. In the representation of trade, domestic and foreign goods
are specified as imperfect substitutes, following an Armington specification. The trade policy
instruments in the model include tariffs, import bans and producer subsidies. Quotas and other nontariff barriers are represented as tariff equivalents.
Table 1. Protection Rate by Aggregate Sectors
Primary ag.
Processed ag.
Textile
Other maf.
Services
Tariff
equivalent
rate
20.1
19.3
35.6
7.5
0.2
1975
Price ratio
146
179
148
111
101
Share of
GDP
11.5
17.1
5.6
15.3
50.5
Tariff
equivalent
rate
17.4
21.8
14.1
8.3
0.3
1990
Price ratio
160
185
118
109
101
Share of
GDP
8.8
2.2
3.9
23.9
61.2
The model is based primarily on the 1975 and 1990 Social Account Matrices (SAM) of Korea
developed by the Bank of Korea. Measures of agricultural protection are crucial for the analysis.
Support to Korean agriculture relies predominantly on border protection. For this reason, the import
tariff rates, tariff equivalent rates for quotas and other quantitative restrictions on imports, as well as
import bans are major policy instruments in the model. Direct payments are represented by producer
subsidies. The import tariff rates are obtained from the Bank of Korea SAMs, with some revisions
from the Tariff Schedules of Korea. For other policy instruments we utilize OECD (1998) and
USDA/ERS (1993) publications. Due to the data limitation, the study does not take into account the
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nontariff barriers in nonagricultural sectors (table 1).
4. The economic cost of agricultural protection
Korea was still a relatively poor, although rapidly industrializing, economy in 1975.
Agriculture accounted for about one third of GDP, and domestic prices were not yet too far above
world levels. Fifteen years later, in 1990, Korea was far richer, agriculture’s share of GDP had fallen
to one-ninth, and domestic agricultural prices were well above world levels. One might conclude that
a high rate of protection for a minor and declining sector does not place a major burden on the
economy, and, in the light of Korea’s high rate of growth, however measured, that agricultural
protection in Korea could not have been particularly costly. Our analysis is structured to empirically
evaluate this argument for Korea. Indeed, we show that the costs were significant.
We have constructed two CGE models, one for 1975 and one for 1990. Both models include
considerable detail within agriculture, such as primary agricultural production and agricultural
processing, as well as the sectors in which agricultural materials served as inputs, such as textiles. The
sectoral detail of the models allows greater confidence in tracing the outcome of our experiments. The
focus of the policy experiments is agricultural trade policies. However, among agricultural and
agriculture-related sectors, there existed a wide range of protection rates. Furthermore, tariff
escalation is observed in several sectors. For example, raw sugar and hides face lower tariffs than
refined sugar and leather products. Keeping within-sector activities separate and identifiable at
different levels of food and fiber processing allows the construction of a realistic model of Korean
agriculture and its non-agricultural linkages that can be employed to simulate the lifting of protection.
The simulations yield the efficient, undistorted, market generated counter-factual allocation of
resources and trade against which one can measure the allocative costs of protection. In the following
subsections we discuss the simulation results of the effect of agricultural protection on 1) the
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aggregate economy; 2) the economic structure and production structure within the agricultural sector;
3) imports and final demand; and 4) rural household income.
Agricultural protection was a major distortion factor in the economy.
Two experiments are conducted: removal of protection on the agricultural sector (EXP-1),
and removal of protection on all sectors (EXP-2) for 1975 and 1990. Comparison of the two
simulations reveals that agricultural protection was a major trade distortion in both 1975 and 1990.
Agricultural protection reduced real GDP 1.4 percent in 1975 and 2.2 percent in 1990 or agricultural
protection accounts for 93% and 92% of the loss (table 2). It must be noted that due to the data
limitation, the removal of nontariff barriers in nonagricultural sectors is not taken into account in EXP2. Because Korea’s nonagricultural sectors may have been highly protected by nontariff barriers, such
results may underestimate the distortion effects of nonagricultural protection in the economy.
Because agriculture’s share to GDP fell from 28% to 10% between 1975 and 1990 one might
expect the absolute cost of protection to be smaller in 1990; similarly, one might expect its share of
the loss be smaller. Two reasons account for larger loss in 1990. First, the average level of
agricultural protection was higher in 1990 than in 1975. The greater distortion leads to a more
inefficient allocation of resources. Second, the distribution of protection among agricultural goods
was more distorted in 1990. Between the periods the standard deviation of agricultural protection
rates increased for total agriculture and primary agriculture (increasing by 10% and 40 %,
respectively), and fell slightly for processed agriculture (-7 %).2
2 The Ramsey-optimal rule of commodity taxation is that tax rates should be inversely proportional to demand
elasticities. [Atkinson & Stiglitz (1972)] Thus, a reduction in the coefficient of variance does not always indicate a
welfare improvement; however, the divergence of rates is much greater than the divergence of demand elasticities, so it
is very likely that 1990 is more distorted than 1975.
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Table 2. Impacts of Trade Liberalization on Selected Economic Indicators in Korea
Percent change from the base
1975
1990
EXP-1
EXP-2
EXP-1
EXP-2
Real GDP
1.43
1.53
2.17
2.36
Agricultural GDP
-25.27
-23.96
-41.03
-40.65
Manufacturing GDP
13.82
13.94
7.53
8.90
Service GDP
11.29
10.64
7.40
7.02
Consumer Price Index
-1.84
-2.04
-1.83
-2.83
Primary agriculture
-1.97
-2.01
-22.00
-22.27
Processed agriculture
-6.82
-6.70
-2.20
-2.58
Producer Price Index
-5.73
-6.58
-5.05
-5.97
Primary agriculture
-14.40
-14.44
-50.08
-50.31
Processed agriculture
-27.73
-27.65
-29.89
-30.17
Equivalent Variation
1.81
1.94
5.89
5.87
Total Exports
2.70
2.82
2.51
8.11
Total Imports
2.13
2.22
2.49
8.06
The simulations show that agricultural protection causes the GDP shares of both
manufacturing and services to fall (table 3). A disproportionate burden of agricultural protection was
borne by manufacturing in 1975, while in 1990s, the burden was more equally distributed between
manufacturing and services. Because capital and land are not mobile between agricultural and nonagricultural sectors in the model specification, labor mobility accounts for all inter-sectoral factor
adjustment. Agriculture protection induces 2.1% of total labor to remain in agriculture in 1975 and
1.5% in 1990. Because agriculture’s share of total employment was smaller in 1990 than in 1975, the
proportionate adjustment increases: 28% versus 17% of the agricultural workforce shifts to nonagricultural employment in 1990 and 1975, respectively.
Agricultural products accounted for 24 percent of the intermediate inputs used by
manufacturing in 1975; this share fell to 7 percent in 1990. Thus agricultural protection has a smaller
impact on manufacturing employment in 1990. The simulation results show that the service sectors
now absorb proportionately as much agricultural labor as manufacturing.
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Table 3. Sectoral Share of GDP with and without Agricultural Trade Liberalization
1975
Base
EXP-1
Difference
% Difference
Agriculture
Manufacturing
Services
1990
Agriculture
Manufacturing
Services
12.4
26.2
61.4
10.3
27.3
62.5
-2.1
1.1
1.1
-16.9
4.2
1.8
5.3
30.0
64.7
3.8
30.2
65.9
-1.5
0.2
1.2
-28
0.7
1.9
Agricultural liberalization and economic structure
Agricultural liberalization in 1975 reduces agriculture’s share of GDP from 28% to 21%, the
level reached by Korea in 1980. Liberalization in 1990 reduces this share from 11% to 6.4%, a level
below that reached in 1996. One interpretation of these results is that agricultural protectionism
retarded Korean economic structural change by five to seven years, and that the retardant effect
increases the longer liberalization is postponed. Protectionism also retarded structural change within
agriculture. Agriculture’s share of GDP fell from 29% to 11% between 1975 and 1990, but the share
of primary agriculture fell proportionately less: from 8.1% to 7.4%; the bulk of decline was in
processed food and fiber which fell from 17% to 2.2%.
Table 4 reports the distribution of total output for agriculture. Historical (base) data show that
as shares in primary agriculture, vegetable and fruits remained stable between 1975 and 1990, but high
rates of protection induced the share of rice to rise from 4.4% to 17%. Our simulations capture part
of the structural adjustment due to liberalization by allowing partial capital mobility among agricultural
sub-sectors. Agricultural liberalization reduces the output share of primary agriculture by 0.4% in
1975 and by 1.2% in 1990. Among sub-sectors, rice’s share declines, respectively, by 1.1% and 16%,
while the share for vegetable and fruits expands by 7% and 26%. The disaggregation allows us to
show how agricultural protection fails to protect all agricultural activities. Some activities, like
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vegetable and fruit growing, are hurt by protection; moreover, the delay in policy reform increases the
loss in allocative efficiency of resources.
Table 4. Distribution of Total Agricultural Output
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1975
EXP-1
%
4.6
-8
1990
Base EXP-1
%
3.1
1.9
-39
4.4
26.7
10.8
4.8
2.6
10
12.6
3.3
29.5
12
3.1
1.5
11.1
10.7
-3
11
11
-35
-42
11
-15
17.5
28.6
9.1
5.8
10.5
5.9
5.3
1.6
48.4
15.3
2.8
0.5
9.3
4
-91
69
68
-52
-95
58
-25
4.7
1.5
1.5
28.3
3.8
9.4
3.4
5.1
1.7
1.6
27.7
2.3
7
0
9
13
7
-2
-40
-26
-100
4.9
1.5
3.6
8.9
0.5
1.7
1.7
0.9
2.1
2.1
4.1
0
1.8
1.8
-82
40
-42
-54
-100
6
6
Base
Share of primary agriculture in total ag.
Share in primary agriculture
Unmilled rice
Vegetables
Fruits
Beef cattle
Hogs
Poultry and eggs
Share of processed agriculture in total ag.
Share in processed agriculture
Beef and pork meat
Poultry meat
Milk products
Polished rice
Polished barley
Flours
Refined sugar
Agricultural protection, trade and welfare
Simulation results in table 5 reveal that in both years and for both primary and processed food
final demand rises while intermediate demand falls. Imports of processed agricultural goods replace
domestic processing and this reduces the intermediate demand for agricultural output. The net
Table 5. Impacts of Trade Liberalization on Trade and Consumption
Percent change from the base
Exports Imports
Absorption Exports
Primary agriculture
3
-3
-7
14
Forestry and fishing
6
2
-1
8
Processed agriculture
-31
54
-3
-15
Textile
3
1
1
-1
Other ag-related
5
-2
-0
2
manufacturing
Mining and manufacturing
6
-3
-1
4
Services
3
-4
0
4
Imports
-28
-4
231
6
-4
Absorption
-23
-3
-1
1
-1
-3
-1
-1
1
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effect is a reduction in imports of primary agricultural goods. The import share of consumption of
primary agriculture still rises because of the large decline in domestic output.
Table 6 presents the shares of imports in total domestic consumption for selected commodities
calculated from the data and simulation results. In both 1975 and 1990, most highly protected sectors
had small import shares. For example, imports of refined sugar were under an effective ban in 1975,
and barley imports were still banned in 1990. Removal of these bans ends import substitution
production: domestic demand is fully supplied by imports. For all commodities, liberalization raises
import shares, and the demand response is greater in 1990 than in 1975, further evidence of the
economic cost of delaying liberalization.
Table 6. Change in Share of Imports in Total Consumption for Selected Commodities
1975
1990
Base
EXP-1
Base
EXP-1
Polished barley
38.5
67.1
0
100
Polished rice
13.6
28.1
0
19.5
Flours
2.4
3.3
3.9
11.2
Milk products
5.6
14
19.5
47.4
Vegetable oil
5.1
8.7
17.2
27.8
Soft drinks
1.9
4.3
2.6
7.1
Coffee and tea
1.9
4.3
4.2
15.2
Processed sugar
0
100
0.7
9
Starches
1.5
4.6
2.9
7.1
Processed feeds
1.5
24.5
0.3
0.4
Poultry meat
0.9
1.2
0.2
0.4
Beef and pork meat
0.8
5.4
22.2
86.5
The high level of protection for Korean rice has muted the incentives for farmers to shift to
other crops. In 1990, rice imports were still effectively banned, increasing the gap between the
domestic and world prices. In the Uruguay Round Korea agreed to allow rice imports to increase to
4% of domestic consumption by 2004. In our 1990 simulation, imports of rice exceed the 4% WTO
minimum access commitment. Liberalization effects a 30% reduction in output in 1990, and rice
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imports account for 20% of domestic consumption. Consumer rice prices fall by more than 50% and
induce a 22% increase in final demand.3
Agricultural liberalization and farm household income
One objective of Korean agricultural policy is to enhance farm household incomes. Protection
has increased gross receipts for protected commodities, but much of this increase is captured as rents
on inelastically supplied factors. The intersectoral effects of agricultural protection may have also
diminished rural households’ opportunities to migrate into non-agricultural work or to switch from
protected crops to other agricultural activities. Real urban wage increases in Korea, in part due to
agricultural protection, have induced more investment in labor-augmenting technology than would
have occurred under a liberal trade regime.
The model provides two measures of farm household income: net farm revenue and the returns
to labor in agricultural sectors. For primary agriculture, liberalization reduces primary agricultural
income by 13% in 1975 and by 36% in 1990. However, income from non-agricultural sources
accounts for a growing share of total farm income. Table 7 shows how the diversification of farm
household income moderates the direct effect for the average farm households. Clearly, households
with a greater (lesser) than average share of off-farm income will face a smaller (greater) loss than that
reported in the final column of table 7.
Table 7. Impacts of Trade Liberalization on Farm Income
Percent change from the base
Farm income
Urban income
Off-farm share of farm
household income
1975
-13.2
+0.9
18.1
1990
-36.0
+1.5
43.2
Effect for average
farm household
-12.2
-19.8
3 The model employs a Stone-Geary demand system to represent non-homothetic demand functions, this is particularly
important for rice, an inferior good for Korean households. See figure on per capita consumption. The price elasticity
of final demand for rice is -0.2. This elasticity is much lower than for other food commodities in the model: the price
elasticity of final demand for vegetable and fruits is -0.5 and -0.4 for beef.
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Lower farm revenue means lower returns to the owners of farm sector-specific capital and
land. Liberalization reduces the return to sub-sector specific capital equipment and effects a reduction
of asset-owner net worth. We simulate models with and without cross-sector labor mobility.
Allowing rural-urban migration moderates the reduction in agricultural wages significantly, as one
wage rate clears the national labor market.4 Consistent with our other findings, the effect is greater in
1990 than in 1975.
5. Conclusion
The costs of agricultural protection to the Korea economy were substantial in 1975 and 1990.
And, because many of the policies of 1990 are still enforced, the cost remains substantial today.
Although primary and processed agriculture accounted for about one quarter of GDP in 1975 and
one-eighth in 1990, the real welfare cost of agricultural protection increased even as agriculture’s
share of GDP fell.
While the costs are substantial and growing, the benefits are few. Farm household income has
risen toward parity with urban households. But over half of the income is now derived from non-farm
sources. While ‘self-sufficiency’ has been sustained for rice and barley, their importance in food
consumption has diminished, and Korean imports of other agricultural products have grown.
Agricultural protection has not improved food security.
4 Hatton and Williamson (1992) have initiated an ambitious comparative analysis of the urban-farm wage gaps and
intra- and inter-national migration.
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