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dissertation entitled

IMPLICATIONS OF KOREAN RICE, BEEF AND FEED GRAIN POLICY
UNDER THE TRANSITION
FROM A DEVELOPING TO A DEVELOPED ECONOMY--l967 TO 1986

presented by

Sangmu Lee

has been accepted towards fulfillment
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emote»!

 

IMPLICATIONS OF KOREAN RICE, BEEP AND FEED GRAIN POLICY
UNDER THE TRANSITION

FROM A DEVELOPING TO A DEVELOPED ECONOMY-~1967 TO 1986

BY
SANGMU LEE

A DISSERTATION
Submitted to
Michigan State University
in partial fulfillment of the requirements

for the degree of

DOCTOR OF PHILOSOPHY

Department of Agricultural Economics

1990

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The principal results of policy analyses were: (1) rice
policy“was.relatively'successful in.increasing farmer's income
with limited government cost.in.period 1 (1967-76) when supply
and demand for rice were increasing. In period 2 (1977-86)
when supply remained steady and demand for low quality rice
decreased rice policy was less effective in increasing
farmer's income and huge government costs were incurred due
to the increased government purchases and the accumulation of
carry-over stocks. (2) Repeated opening and banning of beef
importation increased price fluctuations for beef because of
rigid and inappropriate implementation of these changes
including significant time lags. Deregulation of domestic beef
marketing, however, brought more competition to the market and
improved the quality of marketing service. (3) More
liberalized import policy and removal of domestic marketing
regulations for feed grain encouraged free competition and
contributed to rapid growth of a feed industry with stabilized
price of outputs.

Korea is presently in a period when all policies and
institutions are being reviewed from a democratic policy
making perspective in an attempt to institute desirable reform
that will further Korean economic development. Agricultural
jpolicies and institutions are included in this.process. Reform
in the policy making process should be sought that will
prevent policy failures caused by rigidities and a system that
fails to reflect fundamental changes in society and does not

represent the preferences of a majority of the people.

To the Spirit of my Grandparents
Who raised me, a parent-less child,

To be a Man

ACKNOWLEDGEMENTS

The completion of this dissertation, one of the most
important fruits of my study in Michigan State University in
1975-76 and 1986-89, would not have been possible without
steady back up of the governments of Korea and U.S.A., and a
number’ of careful guidance and. hearty supports of many
respectable individuals.

USDA provided financial supports for my study programs
for three and.a half years which I am mostly grateful. Special
thanks go to my friend Dan Conable, Agricultural Counsellor
in the U.S. Embassy in Seoul in 1984-87 who played key role
to initiate my program of additional study for Ph.D., and to
Dr. Chuck Aanenson, former Director of middle income country
program, ITD/OICD in USDA, who made it possible to extend my
staying in the U.S. so as to complete writing of this
dissertation.

Korean government thankfully allowed my study as a part
of training programs for government officials. I would like
to thank many people, who greatly helped and encouraged me to
continue this study, in the Presidential Office and Ministry
Of Agriculture, Forestry and Fisheries.

Dr. Glenn L. Johnson warmly welcomed me and recommended
for me to be able to proceed to Ph.D program in MSU in 1986,
and gave me the first and continuous guidance for that with
his profound teachings of philosophical orientation and

research methodology for economists.

vi

Dr. John N. Ferris gladly accepted to serve as my major
professor and afforded a full support for my study. And Dr.
Vernon L. Sorenson kindly provided thoughtful guidance for
writing this dissertation as my dissertation supervisor.

Dr; James D. Shaffer and Dr.‘Warren.J. Samuels, the other
members of my guidance committee, gave me many lessons by
their teachings and helpful suggestions. Dr. Harold M. Riley
and Dr. John M. Staatz made some important comments and
advises for my study and for this dissertation.

I appreciate the assistance of Mr. Young-Chan Choe for
general advice for my study, Mr. Yong-Taek Kim for analysis
of demand and supply of rice and Mr. Dae-Bong Kwon for
printing the first draft of this dissertation.

I also acknowledge the arrangement and help ofer. George
Pope, present Agricultural Counsellor in the U.S. Embassy in
Seoul, Mr. Ralph Gifford, Agricultural Attache, Mr. Kyoung-Ho
Ahn and Mr. Scott Snyder to improve the English expression.
Mr. Yoon-Jae Park and his colleagues in Korea Computer Inc.
greatly contributed to type, correct and print the final draft
of this dissertation.

Finally, I thank my wife Eun-Kyung Cho and our children
Soo-Yeon, Soo-Kyung and Soo-Chahn for their endless patience
and invaluable supports. And I will not forget the hearty
encouragement of my dear friends Dr. Young-Kook Kang and Mr.
Kwang-Soo Shin and their families for giving my family good

rests and joyful friendship during our stay in the U.S.A.

vii

Copyright by
SANGMU LEE

1990

TABLE OF CONTENTS

Page

LIST OF TABLES... .................. . ............ . ..... xi
LIST OF FIGURES O O O O O O 0 0 0 O O 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O Xii
GmSSARYOCOOCOOCOOOOO0..0.0.0...OCOOOOOIOOOOOOOOOOOOOO Xiii

Chapter
I. INTRODUCTION.............. .............. ........ l
A. Situation and Problem......................... 1
B. Research Objectives and Hypotheses............ 3
C. Research Methods and Information Sources...... 6
D. Research Procedure: Organization of Thesis.... 8
II. THEORETICAL AND CONCEPTUAL FRAMEWORKS.... ....... 13
A. Definition of Transitional Period............. 13

1. Review of Economic Growth and Development
Theories.................................... 13

2. Distinction Between Developing and Developed
Economies and Classification of Countries....30

3. Specific Characteristics of Transitional
Period...................................... 36

B. Extension of Environment-Behavior-Performance
Model to A Korean Agriculture Case Study...... 41
1. Environmental Variables of Agriculture...... 42
2. Participants and Their Behavioral Patterns.. 54
3. Performance Evaluation of Policy and
Institutions................................ 66

III. MAJOR TRENDS AND CHANGES IN KOREAN AGRICULTURE
RESULTING FROM ECONOMIC GROWTH AND DEVELOPMENT... 77

A. Brief History of Korean Economic Development.. 77
l. Outward-Looking Development: 1962-1971...... 78
2. Shifting Emphasis to Import Substitution:

1972-1978................................... 80
3. Political Crisis and Economic Setback:

1979-1980................................... 84
4. Restructuring for Continued Growth with

Stability: 1981-Present..................... 85

viii

IV.

V.

B. Description of Transitional Characteristics
of Recent Korean Economy...................... 87
1. Population, Labor Force and Employment...... 90
2. Productivity and Real Wages................. 92
3. GNP Growth, Consumption, Savings and
Investment............................. ..... 95
4. Industrial Structure, Inter-Sectoral
Resource Flows and Internal Terms of Trade...98
5. International Trade and Foreign Exchange....102

6. Price, Income and Welfare..... ...... . ....... 104
7. Demand Patterns for Agricultural Products
and Food Security..... ...................... 108

C. Changing Roles of Agriculture and
the GovernmentOOOOOOOOOOOOOOOOO OOOOOOOOOOOOOOO 114

RECENT POLICIES AND INSTITUTIONS IN AGRICULTURAL

AND RURAL SECTOR ...... O O O O O O O O OOOOOOOOOOOOOOO O O O 123

A. Environment and Problem Setting ............... 123
1. Environmental Variables of .

Korean Agriculture......... ........ . ........ 123

2. Behavioral Patterns of Participants ......... 133

B. Goals and Objectives............ ...... . ..... ..l40

1. Priority of Policy Goals in Agricultural

and Rural Sector in Korea...................140
2. Conflicting Goals of Agricultural and

Rural Policies..............................143
3. Lack of Clear Goal Identification

and Consensus...............................145

C. Adopted Policies and Institutions... ........ ..147
1. Food Security and Agricultural
Input POIiCieSOQOQQQQQQ'eeeeeeooe eeeee e eeeeee 147

2. Price Policies, Market and Trade
Regulations.................................152
3. Rural Income Support and Welfare Policies...157
4. Agricultural Cooperatives and
Marketing Organizations.....................161

IMPACTS OF RECENT POLICIES AND INSTITUTIONS: _

ECONOMIC ANALYSES OF POLICY PERFORMANCES.........166
A. Price Support and Consumer Price Control

of Rice.......................................167

1. Policy Conduct and Performance..............167

2. Adopted Models for Analysis.................174
3. Effects of Supply and Demand Shift and

Import Price................................182

4. Overall Evaluation of Policy Performances...189

ix

VI.

B. Beef Marketing and Trade Policy...............205
1. Background of Recent Policy Changes........205
2. Policy Changes and Consequences.............207
3. Overall Evaluation of Policy Performances...217

C. Feed Grain Import and Feed Industry Policy....223
1. Policy Differences from Food Grain

Management..................................223

2. Comparison of Policy Performances...........227

CONCLUSION AND RECOMMENDATIONS...................233

A. Summary of Policy Performance Evaluations ..... 233
1. Environmental Changes in

Transitional Period.........................233

2. Comparison of Policy Performances...........234

3. Confirmation of Initial Research Hypotheses.236

B. Possible Guidelines of Desirable Policy
Directions....................................238
1. Major Proposition Supported.................238
2. Guidelines of Desirable Policy Alternatives.238
3. Suggested Reforms in the Policy Making
Process.............................. ....... 246

LISTOFREFERENCESOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO249

A. For Conceptual and Analytical Frameworks......249

B. Previous Studies in Related Areas and Korean
Economic Development..........................253

C. Statistical References and Data Sources.......255

.
A."

10.

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12.

13.

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20.

21.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

LIST OF TABLES

Page

Development Indicators for Different Groups of
Countries............................................ 35
Selected Sets of Performance Evaluation Criteria..... 72
Changes in Population and Employment................. 91
Agricultural Productivity of Land and Rice Yield..... 93
GNP Growth, Consumption, Savings and Investment
Indicators........................................... 97
Industrial Origin of GNP..............................98
Farm Household Economy Indicators.....................99
International Trade and Foreign Exchange Indicators..103
Real Income of Farm and Urban Households.............106
Per Capita Food Consumption.........................109
Domestic Food Production............................110
Food Imports........................................113
Rice Production, Import and Purchase Amounts........170
Food Grain Management Fund..........................173
Gross Farm Earnings from Rice.......................192
Rice Price Increase and Fluctuations................193
Net Farm Income from Rice...........................195
Government Cost for Rice Program....................199
Demand and Supply of Beef...........................205
Cattle Raising Encouragement and Calf Price Rise....208

Results of Institutional Reform of Beef Marketing...215

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III.

LIST OF FIGURES

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1. Graphic Summary of Fei-Ranis Closed Economy Model.....21
2. Agricultural and Industrial Productivity of Labor.....92

3. Real Wages of Agriculture and Industry................94

4. GNP Growth of Agriculture and Industry ........... .....96
5. Internal Terms of Trade.................... ......... .101
6. The Ratio of Primary and Secondary Exports. ......... .104
7. Trends of Price Index..................... ........ ...105
8. Government and Market Prices of Rice ...... ...........168
9. The Impact of Government Purchase............ ....... .175

10. The Impact of Release...............................178
11. Overall Impacts of Government Intervention..........181
12. Effect of Supply Increase to Government Purchase....182
13. Effect of Demand Shift to Government Purchase.......187
14. Beef Import and Prices of Beef and Cattle...........210

15. Price Trends of Rice and Feed.......................227

xii

ADC

AFDC

AMDC

EPB

FAO

KASS

KFA

KREI

MAFF

MIF

NACF

NFCF

NLCF

OECD

ORD

USDA

GLOSSARY

Agricultural Development Corporation
Agriculture and Fisheries Development Corporation
Agricultural Marketing Corporation

Bank of Korea

“Economic Planning Board

Food and Agriculture Organization of UN

Korean Agricultural Sector Study

Korea Feed Association

Korea Rural Economics Institute

Ministry of Agriculture, Forestry and Fisheries
Ministry of Finance

Ministry of Trade and Industry

National Agricultural Cooperatives Federation
National Fisheries Cooperatives Federation
National Livestock Cooperatives Federation
Organization of Economic Cooperation and Development
Office of Rural Development

United States Department of Agriculture

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CHAPTER I

INTRODUCTION

A. Situation and Problems

Especially in the periods of transition from less
developed or developing countries to developed or matured
economies, there have been many undesirable1 agricultural and
rural policies and related institutions in terms of
performance evaluation. These undesirable policies and
institutions have negative effects not only on improving the
performance and adaptation of national economies but also on
developing a sound and continuously growing world economy.

Recent economic and social situation in Korea is a good
example of this. The failure of major economic policies and
institutions to effectively adjust to notable changes in
environment and structure of a transitional economy has led
to Korea's presently undesirable situation.
2

These failures often function as negative reinforcers

which may lead to the obsolescence of an economic system, or

 

1 This term seems to be rather ambiguous and subjective
than objective. But I used it because I could not find any
better substitutes for that. I take this term from the
viewpoint of all of the Korean people which also may not be
accurately definable. This will be discussed further later on
especially in Chapter II.

2 Skinnerian concept. See B.F. Skinner, Beyggg_§;§gggm
agg_giggity, New york, 1971 and John Platt, "Beyond Freedom
and Dignity-~A.Revolutionary Manifesto", The Center Magazine,
Vol.V, No.2, March 1972, pp.34-52.

1

2

at least may not produce sufficient positive reinforcers for
sustaining innovative evolution of that system. Main reasons
for these failures often originate from ineffectiveness and
rigidity of the system itself. This is due to an unchanged
preference articulation systeml, i.e. political institutions
or policy making processes which may not reflect fundamental
changes in basic conditions or simply may not represent the
preferences of the majority of the people.

It would be fair to say, however, that too radical a
reformation or revolution of that preference articulation
system may lead to other types of possible failures such as
a fundamental instability of the whole system or extreme
conflicts without negotiation or compromise among factions.
This situation may lead to total destruction of the system,
and should be prevented through continuous adjustments and
reforms.

In order to break through this undesirable situation, it
is essential to initiate gradual but fundamental changes, not
revolutionary ones. Changes in political and socio-economic
framework and in basic guidelines of economic policy and
institutions should bring about more suitability, efficiency

2

or effectiveness, equity or fairness and progressiveness to

 

1 Concept from James D. Shaffer, "Food System
Organization and Performance: Toward a Conceptual Framework",
Eggs, May 1980, pp.310-318.

2 These indicators for performance evaluation will be
defined and further discussed in Chapter II.

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cope with dynamic changes in environmental structures of the
society.

Here, the key factor necessary for this break-through is
the existence of an initiating power1 which should handle
those changes and set up new guidelines for those reforms from
goal setting to performance evaluation and feed back.

This study aims to review the Korean experience in policy
formation and adjustments to transitions in a developing
economy, to search for evidence of failures in agricultural
and rural policy and institutions, and to provide some
relevant guidelines for necessary reformation.

This Korean case study is important and worthwhile not
only' in. giving' practical recommendations for the Korean
economy but.also in providing guidelines which may be usefully
applied to similar cases in the future development of the

third world economies.

 

8. Research Objectives and Hypotheses

The first objective of this study is to provide a
theoretical review of the Korean agricultural and economic
development, especially in recent transitional periods with

regard to major forces, results and implications of socio-

 

1 Includes political initiators (leading elites whose
power base should be the supports from wide range of various
interest groups and the majority of the people), and
administrative undertakers (dedicated and skillful bureaucrats
who should take charge of goal identification, planning,
implementation, evaluation and feed back).

economic changes.

Secondly, this study examines evidence to test several
hypotheses to be presented later. These hypotheses relate to
agricultural or rural policy performance based on mosaic
experiences of Korean. case through some ,possible jpolicy
analyses based on the Environment-Behavior-Performance
frameworkl.

Thirdly, this study suggests possible guidelines for
future policy development. These guidelines include desirable
policy directions and processes.of institutional reform.in'the
Korean economy which might be useful if applied to other
similar cases in the third world economic and agricultural
development.

The major propositions on which this research is based
are: (1) As the socio-economic development processes occur,
it is more suitable or progressive for the national economy
to move the focus of agricultural policy from encouragement
of domestic production for food security at any cost mainly
through government subsidies to encouragement of each economic
unit's capability to adjust to market demand and supply2
through the improvement of market conditions, and thereby to

allow market functions to determine more efficient resource

 

1 I think this is an advanced form of Structure-Conduct-
Performance framework of Industrial Organization approach.
See Shaffer, op.cit.

2 i.e. 'increasing the capacity of market coordination'

allocation;

(2) It is more suitable and desirable for the society as
a whole not to maintain or expand the system of central
planning, but to reduce government intervention and market
regulations to eliminate possible chances of corruption and
distortion, i.e. unnecessary barriers against free entry and
competition, and consequent granting of unfair privileges to
selected monopolies, thereby hurting equitable distribution
of income, wealth and power among members of the society.

The hypotheses which will test support for the above
propositions will be the following. First, the actual effects
of government subsidies or interventions such as the price
support program for rice became cost-ineffective and
inequitable in terms of total welfare of society, especially
in recent transitional period.

Secondly, the result of deregulation toward market
functionalization, decentralization, privatization and trade
liberalization including recent deregulations in domestic beef
marketing and feed. grain imports actually did not hurt
farmers' welfare, but significantly increased consumers'
welfare and reduced unfairness and inefficiency.

These hypotheses will be tested and evaluated through
empirical economic analyses of related' the Korean policy
experiences by measuring changes in consumer and producer
surpluses and deadweight losses, income transfers among

producers, consumers and tax-payers, etc.

6
C. Beeeareh Methods and Information Sources

This study may be classified as a subject-matter
research, not a purely disciplinary or a particular problem-
solving research.l Philosophical orientation is basically
pragmatism, eclectically with positivism and normativism.2
Value judgement is inevitable in the case of descriptive or
diagnostic analyses of qualitative knowledge (or knowledge of
values) as well as prescriptive analyses which deal with
decision rules and power distribution. Although this value
judgement depend upon, at least in part, some positivistic
value free knowledge.

However, the most important and, at the same time, the
most difficult task in this kind of analysis is to identify
the common denominator for the value judgement among all
members of a society, especially for the establishment of
performance evaluation criteria, which should match the
existing socio-economic environment with the scope of future
progressiveness.3

The basic micro and macro data to be used for testing
the hypotheses will be related statistical data and survey

reports produced by Korean government (EPB, MAFF), Bank of

Korea, and other related institutions such as NACF, NLCF, AMC,

 

1 See Glenn L. Johnson, B§§§§IQD Methadolegy to;
Eeenemiege, Macmillan, New York, 1986. Ch. 2. pp. 20-25.

2 Ibid., Ch. 3. pp. 68-72, Ch. 9. pp. 112-117.

3 This will be further discussed in Chapter II.

7
ADC and KREIl. Those data will include the amount of demand
and supply, price- of inputs and outputs, income, land,
population, imports and exports, government subsidies, etc.
Some qualitative information related to the Korean experience
will be used to support the tests, such.as government records,
monographs, and documents, previous research papers and

reports (e.g. KASS2

report), and my 16 years personal
experience as a mid-level policy making staff member in the
Presidential Office and the Ministry of Agriculture, Forestry
and Fisheries in Korea.

Historical chronology based on related documents,
memoranda on government actions, and results of interviews
with the key persons who were involved in important policy
making processes over the past two decades are other sources
of information about the causality and functional relations
among certain activities and phenomena. If necessary,
available data for cross country comparison such as some
‘ previous experiences of already developed countries and/or

current experiences of still developing countries will be used

to support the results of test.

 

1 For the abbreviations, see fiLQggABX.

2 Korean Agricultural Sector Study done by joint research
team of Michigan State University and the MAFF (especially
NAERI, National Agricultural Economics Research Institute,
former body of present KREI) of Korea in the early 19705.

8
D. Beeeagch Egocedure: Organization of Thesis

Chapter II will present the theoretical and conceptual
framework for this study. First of all, it is essential to
define 'transitional period' and the terms 'developing' and
'developed'. There is no universally agreed upon definition
of these terms. But there may be dominant characteristics of
those terms, as we can see in references by the World Bank,
OECD, FAO, and in theories or models of agricultural and
economic development. This study will follow those dominant
views, although it will be necessary to re-define the dominant
characteristics of 'transitional period'.

Basic analytical scheme of this study will be the
"Environment-Behavior-Performance under Uncertainty Model",
a variety of the Structure-Conduct-Performance Approach. This
approach stresses the importance of institutional and policy
changes as a means of improving each participant's behavior
and thereby aggregated performances so as to lead to
continuous evolution through iterative reciprocal influences
of performance, environment and behavior. Thus, possible
variables of environment, participants and their behavioral
patterns in the IKorean. agricultural sector, and. related
conduct and performance variables will be presented to extend
the E-B-P approach to this study.

The most important process of analysis is performance
evaluation. Again, there seems to be no universally accepted

or absolute criteria of analysis. However, at least four

9
things should be taken into consideration:

(1) Comparison of actual results to initial targets;

(2) Identification of real beneficiaries (i.e., those
whose preferences were counted or those who were benefited,
where, when, how much, in what way ?):

(3) Estimation of total costs to the society and
distribution of those costs (i.e., who paid the cost and how
costs were paid, or who was hurt, where, when, how much and
in what way ?);

(4) Evaluation of the impact of above criteria in terms
of efficiency, equity, and progressiveness, considering
potential trade-offs and compensation among those criteria.

Here, the most critical task is how to set up agreeable
common. denominators for' evaluation among ‘members of ‘the
society. However, actual performance evaluation criteria will
not be utilized, instead actual results or consequences of
concerned policy and institutions will be provided in terms
of each of above (1), (2), (3) aspects of criteria, which
contribute to testing of the hypotheses suggested earlier.

In Chapter III, descriptive analysis of transitional
characteristics in Korean agriculture and national economy
will be presented, along with the brief history of economic
development of Korea.

Emphasis will be put on structural changes in recent
decade of 1977-86 with regard to population and employment,

productivity’ and real 'wages, GNP' growth and investment,

10
industrial structure and inter-sectoral resource flows, price
and income, demand patterns for agricultural products and.food
security. And during this period, changing role of agriculture
and changing functions of the market and government will be
emphasized.

Chapter IV will deal with recent Korean agricultural
pOlicy and institutions in terms of environmental variables
of market structure, socio-economic and political systems with
respect to changing behavioral patterns of all participants
(consumers, producers, traders, government and bureaucrats).

Initial goals and objectives will be discussed with some
emphasis on two faces of conflicting goals (national vs.
sectoral or regional, long-term. vs. short-term) and. the
process of goal-setting. Maj or policy areas of concern include
food-security, agricultural input policies, price policies,
market regulations, trade restrictions, rural income support
and welfare policies, agricultural cooperatives and.marketing
organizations.

Performance evaluation will be highlighted in Chapter V
through ‘various economic analyses to seek. the empirical
evidence to test the hypotheses mentioned earlier.

First, the impact on rice farmers of the price support
system through subsidies, government intervention and trade
restrictions, and consumer price control through price freezes
and market regulations will be comparatively evaluated. The

impact of the price support system between the two decades

 

ll

O-r‘

ll
(1967-76/1977-86) will be compared. by’ examining' relevant
methods of efficiency (or dead-weight losses) and measurement
of welfare according to the partial equilibrium model of
micro-economics and Benefit/Cost analysis.

Secondly, the impact of beef import policy changes will
be analyzed, and the changes in domestic beef marketing will
be discussed, through comparison of performance indicators
(e.g. fluctuations of prices, market spread, meat quality and
quality of related services) before and after the change was
executed in July, 1985.

Thirdly, the performance of feed grain subsector, already
more privatized.and liberalized in terms of both foreign trade
and domestic marketing since the early 1980s so as to
encourage more, competition in the feed industry, will be
evaluated relative to rice and barley subsectors, which are
still not changed, remaining under government monopoly of
trade and licensing of domestic marketing activities.

Major economic variables for the evaluation will be
consumer' prices vs. world. prices, .productivity, cost of
production and marketing, farmer's income, cost of government
programs, government budget, etc.

For. variables impossible to quantify such as the
possibility of leakages, corruption, wastes and power abuses,
qualitative evaluation tools will be applied. Fairness,
progressiveness, and suitability may not be quantifiable

concepts, and will thus be presented by non-quantitative

12
reasoning.

Finally in Chapter VI, conclusions, recommendations, and
guidelines for future policy development will be presented
with suggestions for the process of policy reform including
goal identification, setting up of targets and priorities, and
standard operating procedures by which institutions for reform
and feed back may be implemented.

In summary, this research will center on economic
analyses of policy performances with respect to rice, beef
and feed grain subsectors in Korea with reference to the

'transitional period' of last two decades.

CHAPTER I I

THEORETICAL AND CONCEPTUAL FRAMEWORKS

A. Defipipiep efi Ipansitional Period

1. Bexiew e: Eeepomic Growth and Development Theogies
Since .Adam. Smith. published. his 'The Wealth of ‘the

 

Nations' in 1776, there have been various theories and models
of economic growth and/or development. Because the major
concern of this study with regard to the development process
is the 'transitional period', the primary focus of this review
of the related theories and models is how each theory treats
the process of transition.

W1

The main interests of English Classical Economics were
the growth of the wealth of nations and distribution of that
wealth. Since World War II, new interest in 'Old Growth
Economics' has been revived in the form of 'Development
Economics'. As G. Meier noted, until recent days development
economists have still been concerned with the variables of
classical analysis: capital accumulation, technical progress

and population growth in the course of economic progress.

 

1 For' the summary of classical theories, see L.G.
Reynolds, "The Tradition of Development Theory", Ch. 2 in
Image ape Bealipy 1p Eeepo mie Development Yale University
Press, New Haven, 1977, pp. 20- 31. and Gerald Meier, "Old
Growth Economics", Ch. 5 in me ' from ov t

o ' 3, Oxford University Press, New
York, 1984, pp. 106-125.

13

14

Of special relevance was the classical concern that
enough capital be available to provide employment for
everyone, that the labor surplus be absorbed productively.1

Classical theories with the exception of Marx's stage
theory did not provide concepts related to transition or
structural transformation in the process of economic
development. They suggested only 'progressive state',
'stationary state' or 'full communism' as the final outcomes
of the process. Marx mentioned the transition from one stage
to the next in his stage theory, but this reference appeared
in the form of deterministic prophecy.

However, final states they assumed, except Ricardo's
pessimistic stationary state, can all be interpreted as the
goal of economic growth and development or, at least, as the
state of a developed economy. The path to that state might be
implicitly assumed as the process of growth and development,
which includes many possible 'transitional periods'. Here the
important features of transition include the degree of capital

stock, technical progress and population growth.

eo s o e a 's ‘ c o
The stage theories of German Historical School do not
appear to deal directly with the theories of economic growth

or development. But those theories did originate from a

 

3 G. Meier, op.cit., p. 129

15
recognition that differences existed between countries at
various points on. a different time line of development
(different situational variables for different phases of
economic development) and were mainly concerned with the
historical stages and distinctions at each stage in the
development process.

Each author suggested different stages of economic
development. F. List's development time line included the
primitive, the pastoral, the agricultural, the agricultural-
manufacturing, the agricultural-manufacturing-commercial
stages, and B. Hildebrand's included the natural, the money
and the credit economy, etc. Though this school did not
concern itself directly with development, it did make an
important contribution as the actual starting point of
'relativism'. As such, it was the theoretical foundation for
later 'Development Economics' which 'rejected, in A.O.
HirscMan's terms, the 'mono-economics claim'.1 The German
school also influenced growth stage models (e.g., Rostow's)

and structural transformation theories.2

 

1 See A.O. Hirschman, "The Rise and Fall of Development
Economics", Ch. 1 in ss 5 s a ' ' o 0 cs

Eelipiee_apd_fieyppd, Cambridge University Press, New Yerk,
1981, pp. 1-24.

2 See Y. ‘Hayami and V.W. Ruttan, "Agriculture in Economic
Development Theories", Ch. 2 in icu tu ve men :

MW. Revised edition. Johns Hopkins
University Press, Baltimore, 1985, pp. 11-40.

16
Though not explicitly stated, these theories implicitly
assumed a 'transitional period' from one stage to another.
However, the key factors of transition are industrial
structure for List (similar'to Colin.Clark's), degree of using

credit as a means of exchange for Hildebrand, etc.

Qevelopmepp Economics after World War II

Generally speaking, the Keynesian or Neo-classical growth

 

theories of Harrod-Domar, Tinbergen and Kaldor did not assume
any specific transitional period because they recognized the
growth process as a continuous one in a single sector economy.
Their main interest was in saving, investment and the ratio
of capital/output to technological progressl.

In ’addition to Keynesian or Neo-classical growth
theories, Post World War II 'Development Economics' theories
became a new branch of economics. Factors in the rise of
'Development Economics' include the awareness of existing
poverty in most parts of the world, the experiences of
economic growth in Western Europe, North America, Soviet Union

and Japan, the movement toward independence and decolonization

in the third world, the flow of foreign aid encouraged by the

 

1. For the summary of these models, see D.W. Jorgensen,
"The Role of Agriculture in Economic Development: Classical
versus Neoclassical Models of Growth" in Sppeiepenee
, ed. by’C.R. Wharton.Jr.,

Aldine, Chicago, 1969, pp. 320-48.

av

.V

a!
'V

OV'

)vO
b e

D

a"
dkgl

a

'n’fi'
:. V.

['9‘

g I
A
. V. D»
. “HA \lulre ‘5‘

17

1 in population.

competition of Cold War, and an explosion

Earlier theories of this 'Development Economics' included
several types of models, which dealt with the problem of very
slow or no growth in the traditional economy. As Lewis
classified,2 the 'threshold models' assumed some minimum
level or obstacles to be overcome before the economy can.move
towards continual or sustained growth (e.g., Rostow's pre-
conditions for take-off, Leibenstein's low-level equilibrium
trap, Nurkse's vicious circle of’ poverty, negative
externalities, the two-gap model, etc.). 'Threshold models'
insisted that to escape this state (Rostow's take-off or
Gerschenkron's great spurt) there needed critical minimum
efforts (Leibenstein) or big-push (Rosenstein-Rodan) or
massive infusion of capital. Or they insisted the need for
industrialization in accordance with a pattern of balanced
growth (Nurkse), and leading sector (Rostow) or unbalanced
growth. strategy' maximizing' backward. and forward linkages
(Hirschman).3

Second type of development theories include 'the models

of paralysis' in ‘which entry into the world. market is

 

1 See Paul Streeten, "Development Ideas in Historical
Perspective: the New Interest in Development", Ch. 6 in Irma

Adelman ed., m' ow d es u , St. Martin's
Press, New York, 1979, pp. 56-57.
2

See W.A. Lewis, "The State of Development Theory",
MW. Vol- 74 (1). March 1984. pp- 1-10-

3 Also see A.O. Hirschman, op. cit., pp. 7-11.

18
debilitating based on the 'export pessimism' (Prebisch, H.
Singer), such as growth pole models, Neo-Marxian dependency
theories or colonial exploitation models. (P. Baran, A.G.
Frank, Dos Santos, S. Amin, A. de Janvry, etc.)1

A third type was 'the models of handicaps', which dealt
with natural handicaps (e.g., chronic low rainfall) or
political handicaps (e.g., continuous and significant
political disturbance like civil war).

Models of first category attempted to distinguish the
differences between backward (or under-developed) and advanced
(or developed) economies and developed concepts related to
transition or structural transformations, which will be
further discussed in next sections. Second category models
discussed the transition of economies from self-sufficiency
into dependency through their incorporation into the world
capitalist system. Third category models were not concerned
about transitional processes.

Later, came the theories for the growth of resources
dealing with size of labor (e.g., population theories, labor
force participation, dual markets, human capital, education
theories), capital (e.g., theories of savings, private and

public, explaining why the savings ratio is constant or

 

1 See C. K. Eicher and J. M.’ Staatz, "Agricultural
Development Ideas in Historical Perspective", Ch. 1 in
NW Johns H0pkins
University Press, Baltimore, 1984, pp. 10-13. and Hayami and
Ruttan, op. cit. pp. 33-39.

19
rising), and entrepreneurship (theories of quantity and
quality of entrepreneurship).

Other theories relate to the patterns of (or imposed by)
growth rather than the causes of growth. These includes
changes in relative proportions of the labor force in
agriculture and services (from W. Petty's observations revived
by Colin Clark, Simon Kuznets and H. Chenery), other kinds of
sectoral changes or any propensity that is thought to be a
function of income per capita (e.g., the sectoral composition
of imports and exports, the share of income and non-income
taxes in government revenue, etc.), or evolution of the urban
labor market (emergence of non-competing groups, the
bifurcation into superior and inferior tracks, and creation
of reserves of surplus labor in disguised or undisguised

unemployment).1

m' "u - t cono ’ el me o
W.A. Lewis focused on capitalist profits as the main
source of saving for investment and assumed the division of
the economy into 'capitalist sector' and 'non-capitalist or
subsistence sector'. Despite receiving many criticisms, the
Lewis model has been valued as one of the origins of modern
'Development Economics' which explains the major features of

the real world situation: the initial labor slack in a

1 See W.A. Lewis, op. cit., p. 6

()

20
preindustrial economy, the agriculture-industry wage gap, the
lag in real wages during the early decades of industrial
growth, the initial rise in profit share of output and its

1 This theory is

later stabilization or decline, etc.
significant as the first economic development model which
explicitly stated the difference between advanced and backward
economies and the period of transition, labelled in this
theory as the so called 'Lewis turning point' .

Fei and Ranis developed and re-structured the Lewis
model. They researched the detailed inter-relationships
between traditional and modern sectors of a dual economy,
including not only the sharing of supply of labor but also
consumption of the goods produced by one sector and consumed
1317 Workers inthe other sector, investment by property owners
of one sector in assets of the other sector, etc.

This sectoral division is between agriculture and non-
a91’-'1°-<-‘J.11ture. Agriculture is organized by landlords who employ

‘ wage earners, paying them a constant institutional wage (CIW

in diagram B in Figure 1) .

N

"E 1 For the summary of Lewis model, see W.A. Lewis,
°°nomic Development with Unlimited Supplies of Labor",
M c 0 'cs d So ' tud'es, Vol. 22,
ay 1954, pp. 189-91. and. L.G. Reynolds, op.cit., pp. 40-43.

(A) . ,.

 

 

   

 

1

  

(B)

45

 
  
   

 

' S

 

   

cum
----‘ I----O.- ----.-——-

 

 

 

 

 

 

f

HMS!

on: [ Mme ms: Tum
mac: CMCIALIZATION
roam POINT

 

At first, marginal productivity of agriculture is assumed
to be zero (phase one) like in Lewis model, but later it
increases from the 'shortage point' (point D) which is
equivalent to the 'Lewis turning point', the point at which

redundant labor has been withdrawn from agriculture.

 

1 Transcript from Fei, J.C.H. and G. Ranis, v o
' u 0 ° d Po ' , Richard D.

Irwin, Homewood, Ill., 1964, p. 202 (Diagram 20 of Ch. 6)

22

After this point, withdrawal of additional labor will
reduce agricultural output and shift the internal terms of
trade against industry, raising the industrial wage or
marginal output of the industrial sector above a constant
level (point P' in diagram A). This result may lead to the
worse case 'Ricardian food bottleneck' situation, in which
high food prices would choke off further industrial growth.

But as long as the marginal productivity of agriculture
is lower than fixed institutional wage (phase two), the labor
supply curve in agricultural sector remains horizontal (SU)
as in Lewis model. At point U, when disguised unemployment in
agriculture has been totally absorbed, the marginal
contribution of labor to output becomes equal to or greater
than the institutional real wage, and the agricultural sector
is commercialized (phase three).

From this 'commercialization point', the agricultural
real wage begins to rise and this leads to an accentuated
increase in the industrial real wage level (from point X' in
diagram A) and the industrial employers begin to compete
successfully with the landlords for the use of, by now
'limited' (not unlimited), supply of labor.

There are two factors in this 'closed economy' model
which may lead to postponement of the Lewis turning point or
'shortage point' and prevention of the Ricardian food
bottleneck: increase in agricultural productivity by technical

progress, and population growth. The increase in agricultural

6%

bu

Deve

23

labor productivity by capital investment in the agricultural
sector either from inside (saving of landlords) or outside
(government, foreign aid) enables withdrawal of additional
labor from agriculture without reducing output. Thus balanced
growth continues as long as the numbers of workers displaced
from agriculture by technical progress equals the number
required in industry, as determined by the labor absorption
function.

In other words, balanced growth is possible as long as
the internal terms of trade is maintained at the constant
level, or relative growth rate of industry to agriculture is
the same as the relative demand elasticity for industrial
goods and agricultural goods. If industrial growth is faster,
it may lead to Ricardian food-bottleneck. In the opposite
case, the food price goes down and may choke off further
investment in agricultural growth, speeding arrival at the
Lewis turning point.1

This model suggests that several phases compose a
transitional period: including the phase prior to 'shortage
point', and the phase between that and 'commercialization
point'. The process by which balanced growth occurs assuming

the existence of two turning points is the main focus of my

1 For the summary of Fei-Ranis model, see L.G. Reynolds,
op. cit., pp. 43-45, D.W. Jorgensen, op.cit. pp. 323-29 and
John C.H. Fei and GustaV' Ranis, "A. Theory of Economic

Development", Apeziean Economic Review, Vol. 51, Sep. 1961,
pp. 533-565. ‘.

24
discussion about the transitional period.

On the other hand, Jorgensen presented another form of
dynamic dual-sector economic growth model different from the
classical approaches of Lewis and Fei-Ranis.1 This model
recognized the possible existence of stationary state in a
backward economy during which the rate of change in
agricultural output per head is equal to zero (low-level
equilibrium trap) and suggested the way out of this trap as
the generation of a positive and growing agricultural surplus,
either by introduction of new capital investment and
techniques in agricultural production or by improvement in
medical knowledge to reduce the birth rate. However, this
model did not discuss a transitional period.

Since the mid-19705 there have been a number of efforts
to 'open up' the closed dual-economy models and explore the
possibility of exporting labor-intensive industrial products
and importing capital goods and land-extensive agricultural
commodities to offset ‘the domestic constraints on growth.2

The Fei-Ranis interpretation of the experience of Korea
and Taiwan within the framework of an open dualistic model is
an example of these efforts. In addition to the 'shortage

point' and 'commercialization point' of closed model, they

identified three more points of transition in the process of

 

1 Summarized in D.W. Jorgensen, op. cit., pp. 329-39.

2 See Hayami and Ruttan, op. cit., pp. 31-33.

25
development of open dualistic economies. Those are the
'reversal point' , at which the agricultural labor force begins
to decline absolutely, the 'export-substitution point', at
which labor-intensive. industrial exports replace (or
substitute-for) the traditional agricultural exports, and the
'switching point', at which a region.of poor’natural resources
changes from a net exporter to a net importer of agricultural

commodities.1

t e C te Mo e 3 nd eo 'es

Around the year 1970, mainstream Development Economics
began to give greater attention to employment generation, real
income distribution and 'basic needs' such as nutrition and
housing in response to D. Seers' proposition that the
definition of development be reconsideredz.

These growth-with-equity concerns stimulated a number of
important theoretical and policy debates in 1970s and 1980s.
These debates included the interactions between income
distribution and .rates of economic growth, employment

generation, and whether employment-output trade-offs existed

 

1 See John C.H. Fei and Gustav Ranis, "A Model of Growth
and Employment in the Open Dualistic Economy: The Cases of

Korea and Taiwan". Iournal_of_szelopment_§tudie§. Vol- 11.
Jan. 1975, pp. 32-63.

2 Dudley Seers, "The Meaning of Development", presented
at the 11th World Conference of the Society for International
Development in New Delhi, Agricultural Development Council,
New York, 1970.

26

in industry and agriculture. These concerns implied a much
greater role for agriculture in the development programs of
most Third World countries.1

The dynamic multi-sector Mellor-Lele model was one of
the major contributions in this regard, with the works of B.F.
Johnston and P. Kilby emphasizing 'reciprocal interactions
between agricultural development and the expansion of
manufacturing and other non-farm sectors'.2

Mellor-Lele model adopted the concept of linkages which

3 and stressed the importance of

was developed by Hirschman
consumption linkage for generating effective demand and fiscal
linkage for mobilizing capital investment. It emphasized job
creation to increase employment over output growth to increase
average income and.highlighted the role of agriculture on the
road to industrialization.“

Another important contribution to this debate was the

 

1 C.K.Eicher and J.M. Staatz, op. cit., pp 13-15.

2 Bruce F. Johnston and Peter Kilby, W
21‘ 011-. 01' Cor-u ‘ 1 '
Wee, Oxford University Press, New York, 1975.

3 For the concepts of linkages, see A. O. Hirschman, "A
Generalized Linkage Approach to Development, with Special

Reference to Staples", Ch. 4 in Essays 1h Irespaseing:
Es2n2mi2s_to_Eolitiss_and_Bexond pp 59- -97-

4 See John Mellor, "Agriculture on the Road to
Industrialization", Ch. 2 in heveleppep; Stragegies
Beeepeigexeg, edited by J.P. Lewis and V. Kallab, Transaction
Books for the ONerseas Development Council, New Brunswick,
N.J., 1986, pp. 67-89. and "Rural Growth Linkages", Ch. 7 in

The New Eeohom' a’ee pf erewth, Cornell University Press, Ithaca,
N.Y., 1976, pp. 161-191.

27

'induced innovation model of agricultural development' ‘by
Hayami and. Ruttan. They argued that- there are multiple
technological paths of agricultural growth, each embodying a
different mix of factors of production, and that changes in
relative factor prices can guide a country's researchers to
select the most efficient path. Furthermore, they argued that
relative_ factor prices not only affect technological
development but also often play an .important role in
determining the design of social institutions.1

On the other hand, there have been a number of micro-
economic jpolicy' analyses 'within :neoclassical general
equilibrium framework concerning economic and agricultural
development. These studies usually emphasize interactions
among the determinants or driving forces of development, e.g. ,
'technical, institutional and human improvements along with
growth in- the stocks of' physical, human and biological
capital'z, or technology-institutions-policy interactions
related to the three components of agricultural policy: price

policy, food security, and international trade.3

 

1 For the summary of Hayami-Ruttan model, see Eicher and
Staatz, op. cit., p. 16, pp. 43-44, Hayami and Ruttan, op.
cit., Ch. 4, pp. 73-114, and "Induced Innovation Model of
Agricultural Development", Ch. 4 in Ag;ieplpppal_pexelephepp
1n_§he_1h1;g_flerld, ed. by Eicher and Staatz, pp. 59-74.

2 Glenn L. Johnson, "The Urgency of Institutional Changes
for LDC, NIC and DC Agriculture", presented at the gymposium

WLWs—tanse. Feb. 1988. p- 1-

'3 Eicher and Staatz, Part III "Policy Analysis in a
General Equilibrium Framework", Introduction, pp. 113-118.

28

But these theories do not focus. on the issues of
transition or of a transitional period, so that there are
fewer theoretical contributions regarding states and methods
of transition. Instead, recent modifications emphasize the
role of institutions or interactions. among technology,
institutions and policy, which might have distinctive
characteristics in different phases of economic development.

The latest contribution in this area seems to be the
'Transactions Cost/Institutional (TC/I)‘, approach to
institutional change on the basis of power structure analysis.
First, this approach questions the relevance of neo-classical
or conventional assumptions of rationality (or maximizing
behavior), perfect information and given market' structure with
zero transactions cost.

Rejecting those assumptions as unreal, the TC/I approach
suggests 'bounded rationality' and 'opportunistic behavior'
under 'uncertainty from imperfect information', and 'market
structure not. a given exogenous but itself’ a dependent
variable based on power relations such as property rights',
hence 'transactions costs not zero' and 'asset specificity'
and other forms of governance for reducing those transactions

costs.1

 

1 For the summary of TC/I approach, see G.L. Johnson,
Ibid., pp. 2-7, J.D. Shaffer, "0n the Structure of Power in
the U.S. Political Economy--Some Issues and Alternatives",

I ,e-, 1° 125‘ :10. 10° 11.0. ‘0 , 5, Farm
Foundation, Chicago, 1975, pp. 14-30, O.E. Williamson, "The.
Economics of Governance: Framework and Implications",

W. Cambridge University Press, 1986. pp.

‘ 0.- ‘u v.10.

29
This approach is better able to explain the reasons for
institutional changes and their effects on economic growth
and development in the real world, especially in LDCs during
a period of transition. It might be more realistic to expand
the area of analysis to political economy, including system
of preference articulation and property rights, issues which

should not be omitted for the study of development process.

'Fei-Ranis Open Economy Model' seems to be most able to
explain the process of Korean economic development, and it
focuses on the transitional period, which is one of the
principal subjects of this study. In Chapter III this model
will be the primary tool of analysis.

The 'Vent-for-Surplus' model or 'Resource Exploitation'
model (H. Myint)1, which suggested colonial plantation as
impetus for opening surplus resources (uncultivated fertile
land at the time of colonization) by encouraging export to
the‘world.market, might also be extended to explain the reason

that successful export promotion in Korea and other so called

 

171-202, and D.C. North, "Institutions” Transactions Coststand

Economic Growth", Eeppem1e_1pgpi;y, Vol.XXV (5), 1987, pp.
419-28.

1 See Hla Myint, "The 'Classical Theory' of International
Trade and the Underdeveloped Countries", Eeopomie geuphal,
V01. 68, June 1958, pp. 317-37.

30
Newly Industrializedeountries which had only a trained labor
force (or already invested. human .capital) as a surplus
resource for economic growth and development.

Additional application of theories of 'consumption and
fiscal linkages' 'and 'reciprocal interactions between
agriculture and industry' (Hirschman, Mellor-Lele, Johnston
and Kilby) and " induced innovation" model (Hayami-Ruttan)
might be useful in explaining Korea's transition.

Another consideration is how institutions and power
structures are related 'to technological progress, policy
innovation, and high transactions costs if one assumes 'real
world conditions' of bounded rationality, opportunistic
behavior, imperfect information, and market structure as a
dependent variable based on systems of property rights and

decision rules (TC/I approach).

2. ' t' 'o e w e eve o ' and ev 0 ed conom'es
and glaesificatioh of Countpies

Many theories and models of growth and development have
distinguished either explicitLy or implicitly between
developing (or backward, under-developed or less-developed)
econOmies and developed (or advanced, industrialized or
matured) economies. For' instance, classical theories
implicitly assume that a developed economy must have a certain
size capital stock, labor force and market with a certain

level of technical progress in both agriculture and industry,

31
in a stationary manner.

From . a neo-classical or conventional economics
perspective, two empirical characteristics of a backward or
under-developed economic system are low per capita income and
a high proportion of the total population engaged in

1 Low income per head means a low level of

agriculture.
consumption and saving, low investment, small size capital
stock, low technology, low productivity, less output, a low
rate of return or value-added, low rate of income growth, and
so on (low-level equilibrium trap and vicious circle of
poverty, etc.)

A relatively large proportion in the agricultural (or
traditional, non-capital) sector either in terms of GDP,
population or export and import is another key element of
backwardness which is directly related to the concepts of
Classical Dual-Sector models. These concepts include a high
possibility of disguised or undisguised unemployment with
redundant labor force; low marginal productivity (even zero
in Lewis model); low wage rate (institutionally fixed or
constant because of unlimited labor supply); low standards of
living which fail to satisfy basic needs for the
uncontrollably increasing population<growth; significant.wage

gap between agriculture and industry; the lag of real wage

growth: high profit share in industrial sector, etc.

1 D.W. Jorgensen, op. cit., p. 322.

32

Many other characteristics of under-developed or less-
developed economies have been suggested by other authors:
negative externalities or handicaps (natural, political and
cultural environment hostile to economic development); lack
of incentive for technological and/or managerial progress;
limited small market size and shortage of effective demand;
unfavorable terms of trade for industrialization; shortage of
human capital and entrepreneurship; unequal distribution of
income, wealth and power; high transactions costs due to a
poor information system and lack of proper institutions, and
others.

S. Kuznets pointed out several characteristics of modern
economic growth, some 'of which have implications for
identification of the characteristics of modern developed
economies. These include; high rates of growth of per capita
product; a.high.rate of technological improvements a high rate
of structural transformation of the economy, ’and rapid changes
in social structure and ideology including urbanization and
secularization.1

Structural transformation includes a shift away from
agriculture to industry and services, a change in the scale
of productive units and related shift from personal enterprise

to impersonal organization of economic firms, a change in the

 

1 See Simon Kuznets, "Modern Economic Growth: Findings

and Reflections", Americap Eeehomie Review, Vol. 63 (3), june
1973, pp. 247-58. ~

IA'
u

01‘

'in

ta
rel
of

as

cm
Ec<

dew

Ur.

33
occupational status of labor, a change in consumption
structure.

There are no clear cut definitions of 'developing' or
'developed' economies, no universally agreed classifications
or standards of 'developing' or 'less developed' and
'industrialized' or 'developed' countries. Because the process
of economic growth and development is a continuous one with
no clear cut discontinuity between traditional and advanced
stages, all development indicators are in some sense inter-
related, and each country has different varieties and degrees
of'development.in.cultural, social and.political terms as*well
as economic terms. Even the word 'development' does not have
a clear cut definition. because such a definition would
inevitably contain value judgments based on selective
individual perceptions.

However, there have been different classifications or
categorizations of countries by economic development employed
for either practical or research purpose. Examples include the
World Bank's categorization (low-income, middle-income
countries, high-income oil exporters, and industrial market
economies1) and Kuznets' economically developed and less-
2

developed countries , among others.

Some authors have' chosen to make distinctions of

 

1 See IBRD, W d ev omen eot 988, Oxford
University Press, New York, June 1988, pp. 218-19.

2 Kuznets, op.cit., p. 248.

bl

34

developing region on the basis of per capita GNP less then
2,000 U.S. dollars in 1980 prices (Lewis)1, or to define
developed countries as the member countries of OECD. Sometimes
'Least Developed' or 'Newly Industrialized' countries have
been singled.out, and those classifications have varied widely
from agency to agency.

For example, World Bank's Development Report, which is

2 divides developed (industrial market)

summarized 'below,
economies and others (low and middle income countries) on the
basis of population growth, per capita GNP, distribution of
GDP by industrial grouping, labor force in agriculture and
urban population, and daily per capita calorie and enrollment
of secondary education.

Reports by other agencies will show similar indicators
with some 'variation resulting from the differences in
definitional divisions and methods of measurement.

Although there are no universal standards by which
countries are classified, there are dominant views. This paper
will employ classification standards used by the World Bank,
which represents generally accepted divisions and criteria for
determining stages of development. According to the World

Bank, there. were 39 low-income countries with per capita

incomes of U.S. $ 425 or less in 1986; 58 middle-income

 

1W.A. Lewis, "The State of Development Economics", p. 1.

2 Summarized from "World Development Indicators", IBRD,
Op. Cite, pp. 222-870

35
countries, 4 high-income oil exporters; and 19 industrial
market economies; excluding 9 non-reporting non-members (USSR,

Czechoslovakia, Bulgaria, East Germany, etc.)

TflflarL-DemnemmumEnmieuanLJ9tJnfnnamtsnmEMLoszmnndss

:mns zerflmenm BLEUEflmomm Imnumdal
, Pop. Growth (80-66) 8 1.9 2.3 0.6
GNP/capita (1986) U.S.$ 270 1,270 12,960
'mntgnnmhIMMs '
(80-86) . 8 ' 7.5 2.3 2.5
Distribution of GDP (86)
Agriculture 8 32 15 3
Industry 8 35 36 35
Services 8 32 48 61
Gross Domestic
Investment 8 29 23 21
Savings 8 25 24 21
Growth of consumptiont80-86)
Government 8 5.4 1.8 2.9
Private 8 5.4 2.0 2.6
Labor Force in
Agriculture (86) 8 72 43 7
Urban Population (86) 8 22 48 75
Daily Per Capita ‘
Calorie (86) Cal. 2,329 2,719 3,357
Enrollment in (86)
Secondary Education 8 34 49 93

Thus the term 'developed, advanced or matured economy'
in this study refers to the countries included in the

'industrial market economies' category as classified by the

W01

Au:

Ge:

Sw:

as

0f

36
World Bank» Spain, Ireland, New Zealand, Italy, U.K., Belgium,
Austria, Netherlands, France, Denmark,- Australia, West
Germany, Finland, Japan, Sweden, Canada, Norway, USA, and
Switzerland. Consequently, all other countries are classified

as 'developing, less-developed or under-developed economies' . 1

There are at least two fundamental turning points in the
process of economic development. The first is the starting
point of actual economic growth at which point a country
escapes the long stagnant traditional stage (the low-level
equilibrium trap or vicious circle of poverty). This point is
referred to the 'Lewis turning point' or 'shortage point' of
the Fei-Ranis model and is the point at which initial labor
surpluses are exhausted. (there is no longer zero marginal
productivity of labor and horizontal labor supply curve so
that real wage must rise).

This is the beginning of Rostow's 'take-off stage'
associated with substantial development of factory industry
in some.leading sectors (savings and investment with technical
improvement are the key factors), or 'Reynolds turning point'
from extensive growth (growth of productive capacity fully
absorbed by population growth) to intensive growth (sustained

rise in per capita income). This turning point is typically

 

1 For more detailed information about this classification
of World Bank, see IBRD, op. cit., pp.216-19.

37

characterized by an acceleration of agricultural (or
occasionally mineral) output and a rising trade ratio.1

There' must be some time differences among these
conceptual turning points or transitions. Reynolds pointed
out that after his turning point there is usually a lag of
several decades before factory industry becomes prominent, so
that Rostow dated the 'take-off' in Argentina as 1933-55
compared with 1860 of Reynolds turning point, 1953-58 and 1895
in Taiwan and 1961-68 and 1910 in Korea.2

This study, h0wever, focuses on the transition from a
developing (already passed the starting point) to a developed
economy. Thus the turning points of interest in.this study'are.
the ones referred to the 'commercialization point', 'reversal
point', 'export substitution point' and 'switching point' in
the Fei-Ranis model, or the periods between the first and the
next. turning' points [which coincide. to that. of Rostow's
'maturing stage' or 'the period of structural transformation'3
into a developed economy.

In.this period between the first and next.turning points,

the most significant changes are a rapid decline in the

 

1 See L.G. ReynOlds, "The Spread of Economic Growth to

the Third World: 1850-1980". I2nrnal_of_EsonomIQ_Litsrature.
V01. XXI, Sep. 1983, pp.94l-80. .

.2 Ibid., p. 943.
3 See B.F. Johnston and J.W. Mellor, 'The Role of

Agriculture in Economic Development", Amerieah_pgeghemae
Beyiey, Vol.51 (4), Sep. 1961, pp. 566-93.

38
percentage of the labor force engaged in agriculture (or
absolute decline of agricultural labor force; the 'reversal
point' of Fei-Ranis model) and rapid urbanization (or out-
migration from rural area to urban cities).

These shifts are accompanied by changes in industrial
structure (a shift away from agriculture and light or labor-
intensive industries toward heavy, capital-intensive and/or
high technology manufacturing and service industries) , changes
in productive units (an increase in scale and transformation
into impersonal organization of economic firms), and changes
in.¢consumption structure (decrease in ‘the propensity ‘to
consume and rapid improvement in the quality of life on the
basis of satisfaction of basic critical needs of the general
public toward mass consumption of diversified and high-class
quality products).

'During this transitional period: population growth rate
decreases (especially birth rate); disguised unemployment in
agricultural sector is reduced.or«eliminated.and absorbed into
industrial and service sectors: marginal productivity of labor
and real wage rates in agriculture reach or surpass a certain
level of institutionally fixed wages; progress in technology
and management based on accumulation of human capital and
entrepreneurship progresses: rates of growth.of productivity,
outPUt. and income rises rapidly along with profit shares,
grOSS savings, and investment for capital formation; the size

°f Market (domestic and foreign trade) expands as a result of

39
urbanization and growth of population and income either before
or during the periods of this second transition.

Moreover, sectoral composition of trade may change
drastically (even reversed as in the case of 'export
substitution point' or 'switching point' of Fei-Ranis model),
internal and external terms of trade and relative factor
prices may change significantly, the real wage gap between
agriculture and industry narrows or’ be eliminated,
intersectoral relations including resource flows and various
kinds of linkages may change significantly with the change of
the role of agriculture in the process of economic
development, and the status of distribution of income, wealth
and power may change considerably.

On the other hand, these economic changes do not occur
by themselves. Fundamental changes in social, political and
cultural changes also oCcur are a result of a transformation
of beliefs, habits and institutions of the society and may
produce painful temporary situations.1

Societal transformation includes secularization of the
belief system (or traditional value system or ideology):
transformation in political and socio-economic institutions
1Jmcluding readjustments of family-ties, power relations

(distribution of property rights, authority and political

1 See W.A. Lewis, "Is Economic Growth Desirable ?",
Appendix in The Theory of Economic Growth, Irwin, Homewood,
Illinois, 1955, pp. 431-35 and S. Kuznets, op. cit., pp. 248-
49.

40
power), preference articulation system (rules for decision
making), and incentive system (rewards and punishments); and
changes in behavioral patterns of the members of the society
(including individual personalities, bounded rationality and
opportunism, degree of access to information, uncertainty,
and transactions costs).

Societal transformations accompany the mechanism of
social adjustment namely differentiation, integration and
disturbance.1 Structural differentiation is the evolution from
a multi-functional role structure to the establishment of more
specialized and more autonomous social units. Integration
increases order among social relationships (the state, law,
and political groups) as the old system is made obsolete by
the process cf differentiation. Disturbances occurs as a
result of discontinuities or uneven advances in
differentiation and integration and may appear in the form of
mass hysteria, political anomie, outbursts of violence, or
religious and political movements.

Thus, the period of transition from a developing to
developed economy neither has a clear-cut definition nor is
it easily characterized. Rather, it involves a complex social,
political and economic transformation, and each area has a

different time frame and different characteristics of

 

1 'See Neil J. Smelser, "Mechanisms of Change and

Adjustment to Change". .in W
Qhange edited by J.L. Finkle and R.W. Gable, John Wiley &

Sons, New York, 1971, pp. 27-42.

41

transition with critical importance for the future. Each
transformation contains either chances of hope for the
economic prosperity or danger of destructive crisis and to
irreversible loss at the same time. ~

In Chapter III, the past two decades of Korean economic
development 'will be examined in order to re-define and
characterize the -'transitional periods' in the process of
Korean economic development. Special attention will be given
to characteristics of economic transitions already outlined,
especially changes in the role of agricultural sector and the

government.

B. 34,-. in. o .v" ., e. -=-;.v3- -'-,--41. - .o.-_ .
MAW

Political economy can be perceived as a complex game
composed of Environment-Behavior-Performance, and political
economics is the study of political relationships with primary
emphasis on the evaluation of performance that results from
the establishment of various environmental structures (of
property rights and/or decision rules) and conduct or behavior
(of allocative and/or distributive decisions determined by
exchange relationships and/or societal preferences concerning

collective actions).1

 

1 See J.D. Shaffer and A.A. Schmid, Introduction in
cum 1' COJ’I.CS: . , amew- . -. :na- sfs o_ . mu;

W. 910- 3-21-

42

According to the Environment-Behavior-Performance
approach, which is an extended Structure-Conduct-Performance
framework1, each participant responds (behavior or conduct)
to the environmental situation (structure or opportunity set) ,
and aggregated consequences (performances) change the
environment (benefits and costs for different individuals and
groups may.alter the power relations and decision rules which
are the basis of structure) and also change the participant's
perceptions of the environment and what constitutes
appropriate behavior. This sequence continues as the system
evolves or deteriorates.

The task of the E-B-P approach is the classification of
strategic characteristics of the environment, participants
and their behavioral modes and outcomes, and development of
meaningful hypotheses about their relationships. This approach
will provide the foundation for Chapters IV and V of this

Korean case study.

1. Enxir9nmental_Yariablss_9f_89risulture
The' environment can be thought of conceptually as
overlapping opportunity sets including the physical (or
natural) environment, the political and economic systems as
an external environment of organizations (factor and product

markets, the system of rights and regulations, perceived

 

1 J.D. Shaffer, op. cit., pp. 310-13.

43
social and political pressures and expected markets, and the
technical transformation.functions) and the internal structure

of organizations.1

Napural Environment with Previous Capital Investment

Natural endowment of land (including area, location,

 

fertility, .and topographical and geological quality),
population (size of labor force, determinants of food and
other'basic:needs), climate (natural conditions forflproduction
and consumption: rainfall and temperature, days of no frost
and of sunlight, etc.), water resources (sea, river, lake and
ground water), mineral resources .(raw materials for
manufacturing and energy generation), and other natural
resources (landscape, forest, native animals and plants, etc.)
are all variables 'of natural or physical environment for
economic and agricultural development.

These variables. are key determinants, of production
capacity as well as consumption size; major sources of varying
relative factor prices or cost structures in agriculture,
industries and transportation which may lead to different
paths of production, specialization and consumption
differentiation; and one of the key reasons for uncertainty.

However, the natural endowment of a nation may not be

the crucial factor in its agricultural or economic

1 Shaffer, op. cit., p. 311.

44
development. Rather, how a certain country has cumulatively
invested for physical and human capital formation so as to
improve the quality of already existing natural endowment
(productivity of those resources as well as the capability of
using and managing them) may be a more important factor.

Moreover, investment of physical and.human resources not
only mean higher productivity but also create wider range of
opportunity sets (more options or alternatives to make choice)
for all the participants. Investment leads to an increased use
of those resources and may contribute to a reduction in the
possibility' that arbitrary’ or :monopoly' power can affect
resource_allocation decisions. Also, investment reduces the
uncertainty of production (e.g., irrigation facilities for
reduction of drought damages) and may give participants more
predictability and ability to make long-run plans.

On the other hand, investment of physical and human
resources may have negative effects i.e., misuse or overuse
of resources which result in waste or inefficient over-
investment, and pollution or exhaustion of resources in a

short period.

'5 o 'c a u 1 a1 ck un
Historical, cultural, religious and ideological
background are other important environmental variables or
oPportunity sets which may form and constrain the decisions

or- choices of the participants.

45

Most developing nations including Korea have two common
historical experiences: a period during which their country
was governed by colonial rules; and a relatively short period
of managing their own economic growth and development as a
sovereign. state ‘after"having’ received. independence“ This
historical background yields some common problems.

First, independent.nation-building is the first priority
of some under-developed countries, implying primary concerns
with national defense and maintaining domestic stability
through law and order.

Secondly, systems highly dependent on external forces
and supplies are highly likely to remain'dependent despite
efforts to the contrary.

Thirdly, lack of confidence is evident in the process of
implementation of public policy and, dissemination of new
technical or managerial know-how. Even the governments of
developing states are sometimes perceived to their own people
as the instruments of eXploitation by external forces and/or
ruling elites.

These problems result in incresingly unreasonable and
opportunistic behavior which may lead to more uncertainty and
possibility of social trap1 and negative reinforcement against
economic development and social progress.

On the other hand, cultural and religious traditions,

 

1 For more about 'social traps', see John Platt, "Social

Traps". W August 1973. pp- 641-51-

46

customs and belief systems including ideologies may deeply
constrain. the range of choice (opportunity sets) in the
development process in the form of perceived social and
political pressures. In many transitional cases, struggles
and conflicts occur between old tradition and a new system of
beliefs which may make identification of social goals and
norms for development more difficult.

The role of ideology is very important in this regard.
An ideology is a general agreement about acceptable behavior
or a system of thought which underlies society and justifies
or criticizes the rules by which that society operates and
the outcome of that operation. Many ideologies are based on
normative precepts which can. not be judged in a truly
objective treatise, although they provide an explanation for
the distribution of values which implies an explanation of a
greater or lesser degree of inequality in the real world
distribution.

The' presence,. imposition or alteration of these
ideologies may represent economic behaviors on the part of
both the mass of the people and the ruling elites. Like all
Other influences, the influence of ideology depends to a large
degree on the ability of one group to control the relative

Prices of favorable and unfavorable information for other

‘1.

an

QF‘ F i

:6 \ut

\

47

groups.1

we u e

Power means the ability to control and influence events
and/or the capacity to participate in a .decision making
process of choice among alternatives. Society operates under
‘conditions of scarcity and interdependence such that choice
is'not autonomously unconstrained but circumstantially limited
to available alternatives, and the scope of one's choice or
freedom is a function of the range of available alternatives
and of their relative cost.

Economy is a system of mutual coercion in which the
choices of each individual have eventual impact upon the
opportunity sets and choice of others. Distribution of
opportunity sets among individuals (or decision making
structure) represents the disaggregation and distribution of
societal scarcity down to the level of individual, including
many' possible ‘varieties of ‘asymmetrical or ‘unegual
distribution of opportunity which may result in many different
structures of advantage and disadvantage. Social decisions are
a function of the structure of opportunity sets as well as of

the choices made by individuals from within their respective

 

1 The role of ideology is well summarized in Randall

Bartlett, Chs. 17- -18 in Egg}; 0:319 20 ogngatigns of Politiggl
Roger, The Free Press, New York, 1973, pp. 166- 85.

AFFRV‘
'ybv. I
O.

U
‘I“
in“u

"VA
A
My

48

opportunity sets.l

Power. structure includes the distribution of economic
and political power, systems of rights and regulations
including incentive system for social reward and punishment,
and decision rules of societal preference articulation.
Distribution of power (or the degree of power concentration
or dispersion) may originate from distribution of income and
wealth, and result in various social and economic privileges
and sanctions which may in turn affect the distribution of
power again. In other words, economic and political power are
inseparable because those with more wealth and better
organization have more incentives and greater ability to
influence the decision rules.2

The system of rights and regulations includes that of
property] rights and. enforcement. of' contracts, subsidies,
taxes, etc. Property ru1es prescribe the means of access to
and control of assets or resources. Property is a set of
rights and simultaneous obligations (one person's rights

Signal another's obligations), which is not the thing owned

but an instituted relationship among members of a society

1 See Warren J. Samuels, "Welfare Economics, Power and
PrOperty", Ch. 1 in E on 'cs' nstitut o a
'v edited by W. J. Samuels and A. A. Schmid, Kluwer
Nijhoff Publishing, Boston, 1982, pp. 9- -15.

2 James D. Shaffer, "On the Structure of Power in the
United States Political Economy: Some Issues and
Alternatives", presented at b c o 'c Educat'o

anfgrengg, Clymer, New York, Sept. 1975, pp. 11-15.

49
established by law, custom, and covenant. Ownership can be
classified into three categories of ownership; private
(capitalism), public (socialism) and common (communism).1

There are three types of exchange relationships; status-
grant, administrative and bargained relationships.2 All modern
economic systems have elements of all three types of exchange
with an infinite number of variations in property rights and
exchange relationships. The ways and means of enforcement of
contract and regulations, principles of taxation, and
subsidies (or rules of compensation) should be included in
that context.

Decision rules or rule of representation are the rules
for making and interpreting other rules: who gets to vote on
what?; whose preferences count and how are they taken into
account?; who controls the agenda?3 Decision rules are the
institutionalized process of decision making or the system of
societal preference articulation by law, custom and covenant,
usually combined with the market and political processes.

Generally speaking, in many developing countries,
political and economic organizations and institutions on the

national level, not the old customs or traditions of local

 

1 See Shaffer and Schmid, "Community Economics", pp. 12-
14.

2 See J.D. Shaffer and A.A. Schmid, "Marketing in Social
PerSPective" Ch- 2 in Agricultural_uarkef_Analxsis edited by

V.L. Sorenson, Michigan State University, 1964, pp. 11-24.

3 Shaffer and Schmid, "Community Economics", pp. 15-16.

50

villages, are more likely to be unstable and arbitrary.
Because their histories are short and establishment is weak,
not developed through a long-term trial and error process with
necessary modifications reflecting people's voices. Newly
formed national institutions are not based on broader social
consensus or people's support but are more likely to depend
upon direct control of physical and material forces..

It is more likely that a dual structure will exist in
many developing societies. This reflects a significant gap
between the ideal (or currently not achievable goal) and an
unsatisfactory but existing reality; thus ,- people become more
easily frustrated, alienated, contaminated, corrupted and fail

to exercise an appropriate sense of responsibility.

53IHQEBI2_2i_Ea£§QI.§DQ_£IQQE§§_M§IB§§§

The. market provides a mechanism for collecting and
summarizing an enormous quantity of idiosyncratic information
about the ‘ environment and preferences in an easily
understandable form (price), which at the same time conveys
to the system's participants incentives to produce and
conserve. The key issue is how to institute a regulatory
system that price carries. the information and incentives
consistent with preferences for system performance and the
reality of environment.

Government and markets are joint' mechanisms of

articulating societal preference and shaping the opportunity

51

sets of firms and households. Government regulatory systems
sanction a pattern of private power including facilitating
and limiting collective actions. In this sense, the market is
an instrument of a regulatory system, and market power is the
ability to influence opportunity sets at the same time a
function of market structure and political influence.1

The strategic aspects of market structure (degree of
competition and monopoly or monopsony) are: degree of buyer
and seller concentration (or market share); degree of
homogeneity or product differentiation; and conditions of
entry or level of entry barriers.

' Degree of concentration includes the numbers of buyers
and sellers and size dietribution of firms, which are often
limited or encouraged by a variety of property rules such as
anti-trust laws. Degree of homogeneity or differentiation of
products depends to a large extent on property rules such as
patent systems of exclusive rights to trade-marks, brand
names, written materials or inventions, and on qualification
systems of the quality of labor and other factors of
production or commodities for consumption.

Conditions of entry or level of entry barriers depend

basically on the cost structure, but are also significantly

related to property rules such as product differentiation or

 

1' J.D. Shaffer, "Food Systemf Organization and
Performance",
p. 315.

52
qualification as one of the most important entry barriers.
Other conditions of entry include various government
regulations or restrictions on entry and competition such as
licensing or sanctioning and sometimes zoning.

Special grants of privileges directly related to these
entry barriers are often controlled by special interest groups
in collusion with political ruling elites especially in many
developing countries, including Korea.

According to theories of transactions-cost economics,
there are underlying dimensions of economic organizations
(e.g., firms and markets); namely asset specificity,
uncertainty and frequency, and structural variation of
transactions costs based on the degree of those dimensions.
In order to minimize transactions costs, there may be some
alternative applications of organizational structure and
conduct such as vertical coordination or integration, non-
standard contracting, organization of work, regulation
(franchise bidding, two-part pricing, etc.), and various
internal organizations of modern corporation.1

The key point is that these applications are the results
of conducts from the degrees of environmental dimensions
(asset fixity, uncertainty and frequency), but at the same
time, other structural determinants shape the opportunity

sets. Transactions cost is the fundamental criteria of those

 

1 See O.E. Williamson, op. cit., pp. 179-99.

'I‘IML'b-l

53
dimensions and applications.

Uncertainty of markets and the incomplete nature of
contracts are incentives for vertical integration and growth
of modern corporations. In order to protect long-term
investments, the "techno-structure attempts to reduce
uncertainty by obtaining a measure of control over external
environment (e.g., product. differentiation, vertical
integration or price discrimination), and influencing on
demand by advertising, influencing the regulatory system, and
stimulating government purchase, etc.

Thus these large-scale, sometimes multi-national,
enterprises are the imperative of modern techno-structure
which has a significant effect on shaping of market structure
through their concentrated power.1

As Thurow pointed out, real world markets are not the
place in Which the conventional assumptions of neo-classical
economics are valid as the price-auction equilibrium market.
Labor and other factors of production as well as products are
neither homogeneous nor perfectly mobile; perfect information
and exogenous preference (or given taste) are not real; the
participants are not sole maximizers of utility or profits;
the process of market adjustments is not rapid enough to reach

actual equilibrium; there exist many forms of non-price

 

1 See J .K. Galbraith, "Power and Useful Economists",

0 ° v , March 1983, pp. 1-11 and J.D.

Shaffer, "On the Structure of Power in the United States
Political Economy", pp. 11-15..

54

competition and limited responses on both supply and demand,
etc.1

This critique seems to be more relevant in the case of
incomplete and imperfect agricultural markets in many
developing countries where the systems of production,
transportation and distribution are relatively poor, the
information. network: is ‘very ‘weak, :market facilities and
standards are not adequate for efficient exchange and
coordination, market size is relatively thin and small, price
mechanism of supply and demand are volatile, and government

interventions and regulations are relatively direct, wide and

frequent.

Z-WW

A participant can be either an.individual or a certain
form (legal, formal or' non-formal) of organization. The
participants of political economy are generally categorized
into several conceptual groups including consumers (or
households), producers (or firms), and governments (and/or
bureaucrats).2 ..

Here, traders engaged in marketing are included as

producers in the sense that marketing can be another form of

 

1 See Lester C. Thurow, a s s: T tat f
Economics, Random House, New York, 1984, Chs. 1 and 7.
2

Bartlett included bureaucrats as- different participants
from.governments. See R. Bartlett, op. cit., Ch. 1, pp. 17-26.

55

production. of utility' (time,' location, etc.), and self-
production (or self-consumption) without exchange are ignored.
However, in an examination of the behavior of Korean
agricultural and rural sector, other conceptual groups such
as the owners of factors of production (land, labor and
capital) and other forms of organizations of interest groups
(unions, associations, etc.) should not be neglected.

Participants develop multiple goals and many techniques
to satisfy their goals within their opportunity sets or
environments. A participant's basic perception is selective
and influenced by his experience. His capacity is limited and
the fundamental nature of his environment is that of
uncertainty. Hence, realistic behavioral assumptions are not
those of ‘neoclassical economics but those. of bounded
rationality} mOral. hazard. and. opportunism, imperfect
information, incomplete contingency, learning process, among
others.1 .

'Conduct' sometimes refers to the behavior of
organization, including both standard operating procedures as
a set of decision rules for collective action and individual
techniques within an organization. There may also be some

differences between individual and organizational behavior.

 

1 See Shaffer, "Food System Organization", pp. 312-13.

More references may include O.E. Williamson, w

' ° - ' 5, Free Press,
New York, 1975, Ch. 2. and R.A. Heiner, "The Origin of
Predictable Behavior", Amgzig§n_£ggngmig_ggyieg, Vol. 73, No.

3, Sep. 1983, pp. 560-95.

56

Because the private-personal preferences and the individual-
societal preferences may be different, collective action may
differ from. the self-interested. preferences of ‘the
individuals.1

Individual members may also respond differently to the
organizational preference articulation system. According to
Hirschman, these responses include different levels of loyalty
and slack which affect the conduct of organization, especially
the system of recuperation (exit and voice) or response to

deterioration of organizational performance.2

s eh v' 'cu tu a u ts

Consumption is a cumulative process of choice among
alternatives, and all voluntary choice behavior is determined
by the phenomenal field as perceived at the time of action
within the context of each person's situation and goals.
Consumers must develop a number of consumption plans for
coping with complex situations that require the purchase of
goods. The individual always seeks to maintain, enhance or
actualize the self personality and the consumption plans
attempt to avoid.inconsistency with that self-image. Hence

the individual differentiates particular products in terms of

 

1 See Shaffer, op. cit., pp. 313. and Lester C. Thurow,
"Toward a Definition of Economic Justice",1ne__£gblie

Intereet, Spring 1973, pp. 56-80.

2 See A.O. Hirschman, Exit, Vgice egg Loyelty, Harvard
University Press, 1970, pp. 1-126. ‘

57
value generation that has been learned and developed through
imitation and emulation as a result of interaction with
groups.1

Actual demand curve should not be reversible because
consumers continue to learn. There are several thresholds in
this learning process, namely perception and reaction
thresholds related to price and physical quality of products
as well as time-lags of changing consumption decision or
'demand'. Thus, there is no response in the very short run
and usually the long-run demand is more elastic than short-
run demand. Demonstration effects and kinked demand curves
are good examples of the explanation of learning and threshold
framework.

Basic indicators ‘of consumption behavior are the
elasticities of demand (price, income, cross) derived from
substitution and income effects on the basis of indifference
curves or utility map and budget constraints. Utility
functions vary according to the differences of individual
preferences and income growths shift out demand curves by
increasing purchasing power.

In the case of basic foods, the perception and reaction

thresholds are extremely strong and the demand is relatively

inelastic in terms of price and substitution, especially in

 

1 Summarized -from. Shaffer, "Notes for' a Theory of
Personality for a Theory of Consumer Behavior", Unpublished
File Notes, Dep't of Ag. Econ. Michigan State University.

58
subsistence stage. Along with economic growth, purchasing
power must grow beyond the subsistence level and consumers
begin to prefer higher quality products rather than minimum
necessities by quantity and diversification of consumption,
while the share of expenditures for food consumption in their
budget declines.

In addition, agricultural products have specific
characteristics which affect consumers' behavior such as
higher dependence on natural conditions, seasonality of
production and consequent price fluctuations, relative
difficulties (and therefore greater costs). due to quality

control, transportation, storage, processing and marketing.

v' ' s

W

In general, direct agricultural production activities
are carried out mostly by individual farmers or traditional
family farming, but various firms and organizations may also
participate in agricultural production either directly or
indirectly. A firm is a typical form of production unit in
modern capitalist economy, which is a form of bureaucratic
organization) operating within limits under uncertain
conditions composed of members with disparate goals and
individual discretion.

In-the agricultural sector, 'a firm may directly take part

in farming, supply agricultural inputs to the farm, process

59

andi market farm products, or act as owner/manager of
agricultural resources such as land and capital facilities.
Other organizations include various forms of interest groups
such as agricultural cooperatives, associations and unions
that.may'attempt.by collective actions to increase their'power
in collective bargaining and influence public policy making
process.

Producer behavior depends particularly on market
structure (size distribution and degree of concentration,
product homogeneity and conditions of entry barriers and
competition) . An agricultural commodity market is usually said
to be a typical example of 'near-perfect competition', such
that almost every participant in the market becomes a price
takers. .

In contrast, agricultural input markets in developing
countries are more likely to become highly concentrated and
regulated and subsidized markets in which the government
intervenes so that. pricing, sales ‘promotion and quality
control policies are essential to the firms engaged in those
industries. .

A .farm household or family farm is, a unique and
comprehensive economic unit of production, consumption,
savings and investment. It can be the main source of
agricultural labor force and/or ownership of agricultural land
and other resources. It can be a management unit for capital

investment, production and.marketing with risk-taking or just

60
a simple production unit.

It can also be a major consumption unit of consumer items
and agricultural inputs as well as one of the most important
sources of domestic savings and investments (often indirectly
through rent and tax). Sometimes human capital investments
from.this source are.significant'in.several developing’nations
such as Korea.

Finally, it can be a‘ member unit of agricultural or rural
organizations such as agricultural cooperatives, commodity
associations and political movements that take part in the
process of collective decision and action.

Traditionally,_ farmers are said to be conservative
because of their long experience of adaptation to existing
eco-systems. Thus, usually their technological and.managerial
adaptations are relatively slow, and their attitudes are
likely to be against radical social and political changes.

Often in developing countries which have experienced the
suffering of colonial rule, farmers are reluctant to follow
guidelines provided even by their own government. This
reluctance is due to the difference between individual-private
and governmental preferences and transmitted distrust of the
rulers.

On the other hand, the role of land owners and their
attitudes and' behavior are particularly important in
developing nations where land ownership is. the primary

property right while the possibility exists that the primary

61
form of ownership reflects a semi-feudal landlord and tenant

system.

Iregers end Their Behevior

Traders hold a unique position in the political economy
of developing countries, where the agricultural or rural
sector has relatively greater importance while the market
system is relatively underdeveloped. The behavior of traders
as middlemen becomes a key factor in performances of markets
and the national economy.

The middleman is often treated as an evil in most
traditional societies, suspected of Opportunistic and
monopolistic exploitation of both consumers and producers by
profiteering and deception. Thus, many ordinary people believe
the government has to supervise and regulate the evil
activities of traders. This is the key justification of
government intervention and regulation in the markets. Thus,
general distrust of the middleman, and thereby of the
transactions, may well increase transactions costs and
ultimately total marketing costs, leading to restriction of
markets and limitation of opportunities.

Many studies show, however, that actually it is not the
traders who are evil but that trading is a‘very risky business
due to volatile prices and substantial storage losses and
transportation losses. The so called 'efficient but poor'

observation is equally applicable to both traders and

62
markets. And total market margins including the costs of
physical distribution and of making transactions are
relatively low in traditional marketing systems compared to
industrial economies, exactly the opposite of traditional
stereotypes about traders jxxaa developing country's market
environment.

More‘important is the structure of markets especially
such features as the cost structure of transportation and
storage, the system of regulation and taxation on marketing
activities, size distribution and entry barriers, the degree
of vertical integration and/or horizontal coordination, and
other market conditions including the availability and
accuracy of market information, the system of grading and
standards of measurement and physical market facilities.

All traders including the collector, transporter, storer,
processor, wholesaler, retailer and distributor respond to
market structure. Traders, either individually, collectively
or cooperatively, always reflect the political system with its
,bounded rationality and opportunism in the same way that other
participants of the system do. However, it is noteworthy that
these traders are usually in better position to get more
marketinformation through their closed networks than ordinary
consumers or producers, and sometimes they may monopolize or
manipulate that information and use it to make extra profits.

_It may be also possible, especially in developing

countries, for traders or their organizations, in collusion

63
with ruling elites, to influence the system of regulation and
entry barriers to secure and extend their privileges in the
market, At. any’ rate, the Ibehavior' of 'traders as .active
coordinators of demand and supply (short-run and longer-run,
domestic and international) under conditions of uncertainty

and limited resources must not be neglected in an analysis of

the system performances of market economy.1
geyernmente. Bureaugrats agd Soeial Orgenizetigne

Central and local governments roles as public bodies may
play any role in the market or national political economy: a
consumer or purchaser, a producer or supplier, a trader or
processor, transporter, storer, distributor or any other role.
More important, government roles should include the
establishment of legal structure of markets and the system of
exchange or transactions, investment to improve the market
conditions, and supervision of the market process to secure
the transactions, and coordination and/or arbitration of the
conflicting interests when necessary.

Governments must behave for the sake of public interest

on the basis of societal preferences to secure and maintain

 

1 For more information about this section, see J.D.
Shaffer, et.al., "Influencing the Design.of Marketing Systems
to Promote Development in Third World countries", presented
at the “on W o ' u al Ma ts 'n
W, Hyderabad, India, Oct. 1983, and J.M.
Staatz, "Observations on Agricultural Marketing Research in
Africa", presented at the A 11 Me n s o the

Studies_essesiafien. Los AngeleS. Oct- 1984-

64
the support of majority of the members of society. Thus,
democratic governments seek the support of the people. This

1"The behavior

action might be called vote-maximizing behavior.
of governments is characterized by the structural nature of
political systems (democratic, aristocratic, authoritarian or
revolutionary) and the degree of popularity and stability of
those systems.

'Bureaucrats' means generally the people engaged in the
government work. But 'bureaucracy' also has another meaning
as a general system of hierarchical management of modern
organizations including large corporations, governments and
political parties. The government must work with various forms
of associations and corporations that exist to advance
Specific interests. In attempting to respond the needs of each
group, the government may well develop bureaucratic agencies
and the variety of protective rules and income transfer laws.

A bureaucracy has its own life. In a changing society,
the bounds of bureaucratic control frequently become
inappropriate to the problems with which it is intended to
deal. Bureaucratic interests are frequently structured to a
narrow interest and responsibility, but with a capacity for

extensive external effects. It creates position of extensive

Power and control, often undisciplined and susceptible to

1 See R. Bartlett, op. cit., Ch. 1.

65

1

corruption and slacker. Each individual in the bureaucracy

may behavein his own self-interest. This might be termed

2 These behavioral patterns

'security maximizing behavior'.
may result in some typical bureaucratic laws such as 'the law
of compulsive.innovation' (A new appointee is usually pressed
to initiate some kind of innovation in his assigned job.) and
'the law of inescapable discontinuity' (Changing staff usually
makes the job discontinuous because of the law of compulsive
innovation and interrupted succession).3

Social, economic and political organizations including
labor unions, trade associations, professional associations,
cooperatives, consumer organizations and political parties
are non-negligible participants in the national political
economy. They may also act as consumers of goods and services
or producers, but their more important roles seem to be to
rally strength. so as to improve their position in -the
collective bargaining process, to collect and distribute
necessary information for their members and to influence or
participate in the process of public decision making.

3. v ' st'

Performance is the flow of consequences from a particular

 

1 See J.D. Shaffer, "On Institutional Obsolescence and
Innovation--Background for Professional Dialogue and Public
Policy", AQAE, May 1969, pp. 245-67.

2 R. Bartlett, op. cit.

3 See Anthony Downs, "The Success and Failures of Federal

Housing Policy", W, Winter 1974, pp. 124-45.

66
set of structure and conduct, or the aggregate outcomes of
reciprocal and iterative interactions of environments and
behaviors. Performance changes the environmental opportunity
sets of physical and political-economic structures which in
turn affect performance.

The outcomes of one period become the inputs to
subsequent periods in the evolving process of political-
economic systems. An‘ expected outcome of distribution of
benefits and costs as a performance variable may become an
incentive for a certain behavior, or in other words, the
perceived consequences influenced by experiences may become
the most immediate incentives for the participants to act in
a specific Way.¥

Policy and institutions are the results of performances
themselves, but at the same time they are attempts to bring
about certain expected outcomes. And those outcomes will alter .
the opportunity sets and behaviors of the relevant
participants which in turn affect the performances and on and
on.

Alterations of economic and political structures
(property rights, regulations and decision rules) can occur,
or these can be incentives for change in certain behaviors
which Can alter the performance of the whole system. However,

it should be noted that, often in the real world, actual

 

1 Shaffer, "Food System Organization", p. 312

67
results of policy and institutions may well differ from the
intended or expected outcomes. This is due mainly to the
failure of policy designers to perceive accurately existing

structures or expected consequences.

Agriegltural Policies and Their Justifications

In virtually .every country, governments intervene in
agricultural markets. They subsidize and/or tax farmers. They
try to stabilize prices and/or support producer prices. They
impose import tariffs and quotas; they try to support the
income and quality of life of rural people to narrow those
disparities or gaps between them and urban people. They
restrict production and sometimes try to restrict consumption.
They provide food subsidies for urban people and/or support
to improve conditions of rural people's nutrition and health
conditions. They support the use of new high yielding
varieties and other agricultural inputs. They invest directly
in or support investments in agricultural capital facilities
such as irrigation systems, processing plants, or marketing
facilities.

They offer extension services and support education for
rural people. They try to control marketing and they provide

credit, often below market rates.1 These programs are included

1 See Joseph E. Stiglitz, "Some Theoretical Aspects of
Agricultural Policies", W, Vol. 2, No. 1, Jan.
1987. IBRD, 1987, pp. 43-60. .

68
in the category of agricultural and rural policies and
institutions (established organizations, decision rules,
incentive systems for implementing those initial programs or
policies). .

The :market failures approach. provides five standard
reasons for government interventions ‘(or policies and
institutions) in agricultural markets: incomplete markets in
insurance, futures and credit; public goods and increasing
returns: imperfect. information: externalities: and. income
distribution.

But the fact that markets face certain problems does not
in itself justify government intervention but only identifies
the potential area of intervention, since the government also
is likely to face similar problems if it intervenes. Trnis
an analysis of the appropriate policy for a particular country
must begin by specifying the reasons for market failures and
the possible instruments that the government may use to remedy
them.1 And it should provide relevant performance indicators

for the evaluation of those policies and institutions.

Eeriermenee indicetere
Policy making is an evolving process which requires

development of a feed back and monitoring system. Developing

 

1 Ibid., pp. 43-45.

69
performance indicators is critical to that process for
comparison and evaluation of alternatives. It is a major
conceptual task to define the relevant dimensions of
performance and to design 'the economic indicators of
performance such as employment, total production, product mix,
inflation, distribution of benefits and costs, etc.1

There are four broad aspects of development process which
'can be adopted as performance indicators: human improvement,
social progress, technological advance and economic
betterment. Human improvement and social progress indicators
include population, nutrition, health, education and social
integration indicators.

Indicators of technological advance and economic
betterment are productivity or yields, infrastructures, size
of capital stocks, employment, industrial and export
structures, national income or GNP, distribution of income
and wealth, price fluctuations or inflation, etc.2

The important indicators of food system performances
include the reliability of food supply, nutrition or quality

of diet, productivity, efficiency, distribution of benefits

and costs, employment, quality of environment, resource

 

1 Shaffer, ibid., p. 315

2 See E-Fo Szczepanik, WWW
Lexel§_9f_nexe122menf. FAG. Rome. 1975-

7O
depletion and so on.1
For the evaluation of economic analysis of Korean
agricultural policies, such as in Chapter V of this study,
important indicators including as producer income (level,
growth and distribution), productivity, cost of production,
quality of products, consumer price (level and degree of
fluctuations), marketing costs and ‘margins, quality of
marketing service, cost of government programs, distribution
of privileges, and other macro-economic variables such as GNP

growth, employment, inflation, foreign trade (exchange rate,

balance of payment), will be adopted.

2 E E J !.. ; i! .

The 'desirability' of policy and institutions or the
expected outcomes or actual results of them are the ultimate
criteria for planning and evaluation of those programs. But
an operational definition of the term 'desirability' seems
impossible: desirability in what sense? or for whom?

Because 'desirability' is a matter of value judgment
depending upon each individual's selective perception, and
there must be countless possible criteria which vary for each
person without a common denominator of inter-personal

validity. And each person employs different subjective

 

1 See J .D. Shaffer, "Future Research on Food Systems
Organization and Performance", Ag. Econ. Staff Paper # 82-83,
Michigan State University, 1982, p. 2.

71
criteria for various time dimensions and different subjects
without a continuously consistent measure of intra-personal
validity.

However, in order to evaluate performance, the most
essential task is to establish the most relevant criteria of
desirability, primarily ones agreed to by the majority of the
people concerned. Several authors of industrial organization
studies have outlined the possible criteria for the evaluation
of markets and industries: Joe Bain's two sets of satisfactory
performance dimensions (workable competition) of markets and
the economy; Sosnick's twelve criteria; Padberg's two sets of
quantitative and qualitative criteria: and Jesse's eight
performance objectives based on Shaffer's list of 'bill of
rights'.1 Table 2 summarizes those selected sets of criteria
by different authors.

Those various criteria can be integrated into four
categories: efficiency, equity, progressiveness and external
effects. First, 'efficiency' includes technical, production,
exchange, economic and pricing efficiency, and lexfel and
growth of output and profits, promotion costs.

'Equity' is the composition of output, volume and

stability of employment, stability of output and prices,

 

1 See Edward V. Jesse, "Measuring Market Performance:
Quantifying the Non-Quantifiable", NC Project 117 Working
Paper No. 15, Michigan State University, Mar. 1978.

72

Table 2. Selected Sets of Performance Evaluation Criteria

 

Belg Ma e formance ' Economy Performance
(1959)
1. Technical Efficiency 1. Volume of Employment
2. Profits 2. Production Efficiency
3. Output (relative to 3. Stability of Output
efficient capacity) and Employment
4. Promotion Costs . 4. Rate of Output Growth
5. Product Characteristics 5. Composition of Output
6. Progressiveness 6. Income Distribution
Seeniek 1. Technical Efficiency 2. Progressiveness
(1964) 3. Product Stability 4. Profits
5. Level of Output ' 6. Exchange Efficiency
7. Promotion Costs- 8. Unethical Practices
9. Participant Rationality 10. Conservation
11. External Effects 12. Labor Relations
Beggerg Quantitative Qualitative
(1975)
1. Technical Efficiency 1. Availability of
2. Profits Economy Alternatives
3. Promotion Costs 2. Production Safety

3. Constructive Product Image
4. Adequacy of Consumer
Information

Shefijer(1972)/Jeeee(1978):Generalized Performance Objectives

1. To assure an abundant and reliable supply of food at
economical prices. To stimulate the production and

distribution of sufficient food to provide the possibility

of nutritionally adequate diets for all. .

2. To facilitate and promote the production and distribution
of that combination of foods and related services which best

reflect the preferences of consumers and real relative cost

of production.

3. To create incentives for increased productivity in each
activity of the total system..

4. To provide productive and rewarding employment
opportunities in the system.

5. To distribute rewards of the system fair and equitably.
To especially assure that the consequences of government
policies and programs are, in aggregate, fair and equitable

6. To discourage uneconomic uses and spoilation of natural
resources and the environment.

7. To encourage socially desirable population settlement
patterns.

8. To encourage a sense of belonging and effectiveness among
participants in the system.

 

73
distribution of output, income and power, labor relations,
adequacy of consumer information, fair conduct, unethical
practices. 'Progressiveness' includes, in a broader sense,
characteristics of products, participant rationality, Product
suitability, availability of economy alternatives, and
constructive product image.

And 'external effects' covers various concepts of
externality, conservation, product safety, and certain
unethical practices.

At least four things should be taken into consideration
as the criteria of performance evaluation in this study as
mentioned in the first Chapter: .

(1) Goals as primary criteria (i.e., comparing actual
results to initially aimed targets):

(2) Identifying’ the. real beneficiaries (i.e., whose
preferences were counted or who were benefited, where, when,
how much, in what way ?);

(3) Estimating the total costs to the society and the
distribution of those costs (i.e., who paid the cost and how
should be paid, or who were hurt, where, when, how much and
in what way ?):

(4) Evaluating the short-run and long-run impacts of
above criteria in terms of efficiency, equity or fairness,
progressiveness and external effects, and consideration of

possible trade-offs and compensation among them.

74'
e 5 me t 0 We fare C an es as Ma 0 Performa c s

It is very difficult to measure the performances of
policy and institutions. Marion and Handy presented five
fundamental weaknesses of measures of performances. In
general, 'they require some judgmental norms. They are
difficult to combine into a single overall index of
performances. They concentrate on only limited dimensions of
performance. They are historical in nature, not particularly
useful for prediction. And they can be misleading with respect
to causal relationships.l

But even with this set of fundamental weaknesses in mind
it does seem possible and inevitable to define available
methods of measuring the impacts (welfare changes) of
alternative policy and institutions for the evaluation and
comparison of those performances.2

’Theoretically, the Hicksian willingness to pay model has
been the most preferred measure of generally equivalent
variation of the appropriate measure of welfare change under
certainty. The Marshallian consumer surplus approach is the

same as the Hicksian approach only in case of absent income

effects or constancy of the marginal utility of income.

 

1 See B.W. Marion and C.R. Handy, a e e o e:
22W. Agr- Econ- Rep't- NO- 244. BBS/USDA.
1973. -

2

See Jesse, op. cit.

75

On the other hand, more recent literatures investigate
the case of uncertainty by the option price approach, saying
that the maximum ex-ante sure payment which equates expected
utility in the new situation to expected utility in the
initial situation is the relevant measure and that payment is
known as the option price. If the marginal utility of income
function is independentof the state of nature, the option
price should be equal to expected the Hicksian willingness to
pay. And if it is constant, then the expected Marshallian
surplus is the appropriate measure of welfare changes.1

However, many policy analysts did the evaluation by
measuring welfare changes such as the changes of consumer
surplus, producer surplus, transfer of income, program costs,
taxpayer's burden as the major performance of policy and
institutions. This evaluation was done on the basis of the
Marshallianfpartial equilibriumlconcepts, implicitly assuming

the constant marginal utility of income function independent

1See T. Graham-Thomasi and R.J. Meyers, "On Uncertainty
and the Measurement of Welfare Change", Unpublished paper
Presented at Dep't seminar of Ag. Econ., Michigan State
University, Oct. 1986.

76
of the state.1 Or they used various methods of benefit/cost
analysis for certain projects, as in many public choice
models.

This study does not need to use an exactly identified
method of measuring welfare changes under uncertainty with
theoretical accuracy. In fact, it is almost impossible to
actually calculate the effects of agricultural policy and
institutions,by’thiS‘method, mostly because of data.problems.

Thus, Chapter V of this study, economic analyses of the
performances of recent Korean agricultural policy and
institutions, will follow' some previous examples of' the
Marshallian partial equilibrium approach rather than
developing more precise or appropriate theoretical models. It
may not be sufficient to provide accurate theoretical
satisfaction, but the simpler Marshallian approach, which is
the most practically available test within data constraints
at present, may be the most practical means by which to show,

compare and evaluate the Korean policy impact.

 

1 Examples are T.E. Josling, The Qgired Kingdom Grains
Agreement (1264); An Eggnomig Analysis, Institute of

International Agriculture, Misc. No.1, ' Michigan State
University, 1967 and P.L. Scandizzo and C. Bruce,
Merhodglogiee fer Meesuring Agricultural Price lnreryention
Effegts, The World Bank Staff Working Paper No. 394, IBRD,
June 1980, and J.P. Oehmke and Xianbin Yao, "The value of
Consumers' and Producers' surpluses in Government Policy
Objectives", presented paper at Dep't Seminar of Ag. Econ.,
Michigan State University, Mar. 1987.

CHAPTER III
MAJOR TRENDS AND CHANGES IN KOREAN AGRICULTURE

RESULTING FROM ECONOMIC GROWTH AND DEVELOPMENT

A. ' H's o o o ean Economic Develo ment1

Korean economic development has been cited for more than
two decades as one of the most remarkable successes in the
third world. From 1962 to 1986, the Korean economy grew at an
average annual rate of 8.5% in real terms. As a result of this
rapid growth, Korea today is recognized as one of the
outstanding newly industrialized countries (NICs).

However, the growth. process during' that. period. was
neither smooth nor uniform. From 1962 (starting year of the
first five-year national economic development plan) to 1971
(ending year of the second plan), the country enjoyed both
high growth and relative price stability. Between 1971 and
1979, this high rate of growth continued, but it was
accompanied by a high level of inflation. In 1980, Korea
experienced a severe economic setback in combination with a
serious political crisis. The economy began to recover since
1981 with sharply reduced inflation. In 1983, the country
attained both sustained high growth and price stability which

continued next three years.

 

1 This part is mostly summarized from Kihwan Kim, The
x. :5! Ol°ll : '-.S ," 0111:! ‘ u #1 _"--1S -1d uu
£rgepeg§_, Korea Development Institute, Seoul, 1985.

77

78
Since 1986, Korea has become a country with a positive
trade balance, after a long history of painful trade deficit
and negative balance of payment. In 1987, the country
recovered a fully democratic political system, escaping from
military based authoritarian regimes which.had governed Korea

for more than two decades.

1. Qgtward-Looking Development: 1962-1971

Before 1961, economic conditions in Korea were similar to
those of resource-poor, low-income developing countries. The
end of three-year Korean war in 1953 marked the culmination
of extended hardship for' the Korea people. Having' been
liberated from 35 years of Japanese exploitation at the end
of World War II, Korea was bitterly divided by international
politics of the cold war and thoroughly destroyed by the hot
war. At this time Korea had almost nOthing but starving
people, devastated land through war, with inefficient
government and corrupted bureaucrats, relying heavily on
inevitable foreign aid.

V After the student revolution against the dictatorship of
President Rhee Syngman in 1960, a democratically elected
government began to prepare the first five-year economic
development plan. This plan was turned over to the hand of
the military government in 1961 and the succeeding regime of
President Park Chung-hee. At that point, Korea, already

overpopulated, was experiencing an annual population growth

79
of nearly 3%, and there was widespread unemployment and
underemployment.

Per capita GNP in 1961 was a meager U.S. $ 82, and the
level of domestic savings was negligible. The nation had no
significant exports and had run chronic balance of payments
deficits ever since the founding of the Republic in 1948. In
1961 the country's total exports amounted to $ 43 million, or
less than a quarter of its imports.

In addition, the country had not yet met the critical
requirements for development. Throughout the 19505, the
political leadership failed to provide social stability and
economic policy direction. And under those conditions, it was
not to be possible to mobilize effectively the creative energy
of the Korean people.

In 1962 when the nation with its poor natural resource
endowment and small domestic market launched its First Five-
Year Plan, Korean planners and policy makers decided to-choose
an 'outward-looking' development strategy emphasizing foreign
trade rather adopting a traditional ' 'inward-looking'
alternatives based on import substitution. The essence of the
outward-looking strategy at that time was to promote labor-
intensive manufacturing exports in which Korea had comparative
advantage.

In order to implement this strategy, Korean government
spent most of its efforts to mobilize both internal and

external resources. For example, interest rates for bank

80

deposits were more than doubled to increase domestic savings
and. the comprehensive IForeign Capital Promotion .Act 'was
enacted to encourage the inflow of foreign capital. The
exchange rate system was readjusted to a unified system, the
Korean currency was devalued by nearly 100 % to eliminate a
bias against the export sector, and several export promotion
policies were implemented such as export financing and tariff
rebates on materials imported for export production.

The results of this outward-looking strategy surpassed
all expected outcomes. Between 1961 and 1971 the annual growth
of exports in real terms was more than 36%, and propelled by
this growth in exports, real GNP grew at an annual rate of
8.7% while inflation rate grew at a modest level compared to
the subsequent period. The key factors in this successful
outward-looking strategy were a well-educated labor force, by
virtue of the high value Korean people put on education, the
government stimulated desire for economic and social
betterment, a group of dynamic Korean entrepreneurs who had
the energy and spirit to exploit new opportunities, and a
large pool of highly trained and enthusiastic managerial
manpower. As well, the international economic environment.was

extremely favorable for outward-stretching development.

2. Em as s t Im o ubst' tion: 72-197
In the early 1970s, the Korean government began to modify

its outward-looking strategy by emphasizing import

81

substitution, particularly in heavy and chemical industries
and in agriculture. This shift was mainly due to worsening of
international economic environment manifested through food
crises, oil shocks and growing protectiOnism and the deepening
of domestic imbalances between agriculture and industry, rural
and urban societies. Thus it was forced to diversify trading
partners and restructure the commodity composition of its
exports in favor of more sophisticated, high value-added
industrial goods, and to develop its own agricultural
resources so as to achieve self-sufficiency of major staple
food grains and to increase farm household income, thereby
encouraging effective demand for consumer goods industries and
expanding domestic markets.

The Korean government established the 'National
Investment Fund' to finance accelerated development of heavy
and chemical industries at very low nominal interest rates.
In most cases these rates were negative in real terms. But
this policy resulted in unwise and excessive investments and
chronic excess demand for loans, stimulating the expansion of
domestic money supply and leading to another source of high
inflation. Furthermore, the low interest rate policy limited
the ability’obeanks to attract savings impeding normal growth,
of the economy.

To deal with increasing tariff and non-tariff barriers,
Korea developed new exports and diversified export markets

geographically. New product success was most noticeable in

82
electronics, steel and ships. Efforts to achieve geographic
diversification of exports were most successful in the Middle
East and Europe.

In the Middle East, Korea sold construction services as
well as goods. Despite the invaluable experience gained by
Korean workers and firms from participating in large
development projects, the immediate consequences of the Middle
East ventures were a mixed blessing. The departure of a large
number of skilled workers to the region pushed up domestic
wages and this, together with the growing demand for skilled
workers in heavy industries, widened the wage gap between
skilled and unskilled workers. In addition, the rather sudden
improvement in the balance of payments due to the remittance
of earnings from the Middle East expanded the domestic money
supply, aggravating inflation.

Hence, the government pressured employers to pay higher
wages for unskilled workers to narrow the wage gap, which
caused the average wage to increase faster than labor
productivity. The increase in the domestic money supply and
its consequences could have been dealt with through such
policy' measures as. currency revaluation or rapid. import
liberalization. But for a nation long accustomed to external
payments deficits, such measures were either unthinkable or
difficult to implement quickly. Thus the government tended to
fight inflationary pressures with price controls, producing

adverse effects such as over-intervention of government and

83
consequent market distortions.

I On the other hand, in order to achieve the twin goals of
increasing rural income and.insuring self sufficiency in major
food grains (rice and barley), the government adopted a grain
price support program and production encouragement policies
including the introduction of high-yielding rice varieties.
In the initial phase, the program was highly successful
particularly in increasing rice yield per hectare and reducing
.the urban-rural income disparity. However, the program failed
to serve the long-term interests of the nation. For instance,
operation of the program resulted in a substantial budgetary
deficit which added to inflationary pressures. In addition,
by encouraging the production of grains at a time when
consumer demand was shifting away from grain to non-grain
products, the program contributed to an imbalance in supply
and demand of agricultural commodities.

Nevertheless, high economic growth continued in this
period with an average annual rate of 10.8% in real terms.
And those policy thrusts contributed to the upgrading of the
export structure. Share of products of heavy and chemical
industries in total exports rose from 21.3% in 1972 to 34.7%
in 1978. However, it should not be overlooked that these
police goals were achieved at the cost of a high rate of
inflation. Between 1972 and 1978 the average annual rate of
inflation, measured in wholesale prices, was nearly 18%. And

some serious imbalances of the economy resulted, including a

84
huge over-investment in some heavy industries (e.g., ship
building and heavy machineries), extensive price distortions
and lack of competition due to government controls and
interventions, and a sharp increase in real wages exceeding
that of labor productivity. These imbalances led to the
weakening of export competitiveness and brought about a slow-
down in the overall growth of the economy, which was
accompanied by the political turmoil after the assassination

of President Park in 1979.

3. ' r's's and Ec om'c etback: 1979- 980

The years 1979 and 1980 were the most severe times of
political turmoil and economic disaster in the development of
the Republic of Korea. In 1979, the second oil shock occurred
as a result of OPEC's raising oil prices, which in the course
of succeeding twelve months nearly doubled oil import bill of
Korea. This naturally meant an additional burden on Korea's
balance of payments and made it impossible to step up efforts
to liberalize imports. In addition, the subsequent world-wide
recession limited the growth of Korean exports.

After the assassination of President Park in October
1979, the nation began to experience severe political turmoil,
which seriously discouraged investment and production under
growing political uncertainty. Moreover} Korea suffered a
disastrous harvest in 1980. Agricultural production dropped

22% (rice: 37%) because of an unusually cold and damp growing

85
. season.

Owing to these unfavorable external and internal
circumstances, Korean economy suffered a. sharp setback in
1980. For the first time in more than 20 years the economy
experienced negative growth of 4.8%, while inflation soared

to 28.7% in consumer prices and 38.9% in wholesale prices.

4. es tu 'n fo Co tinued G ow wi S abi ' :
12§lzfre§ent

The new government, which was inaugurated in September
1980, began to undertake wide-ranging policy reforms to deal
with this critical economic situation under the three major
goals of stability, efficiency and.equity. The needs for price
stability, continued economic growth, and improved income
distribution were obvious.

It was essential for the Korean economy to allocate its
limited resources more efficiently through the operation of
the free market, rather through past intervention when the
small size of the economy made efficient allocation through
highly centralized decision-making process still possible.
Free market could only have been secured if there were no
extensive price distortions caused by inflation.

The strategy to achieve these goals was basically to
liberalize external economic policies and to promote
competition in every sector of the economy internally. In the

area of external policy reforms, the new government began to

86
liberalize imports by removing many non-tariff barriers as
well as reducing the average tariff rates, and to open up its
foreign investment policy to allow direct sole foreign
investment without local partnership in most domestic
industries.

In the area of internal policy reforms, the Anti-Monopoly
Act was introduced to reduce-existing monopolistic business
practices and promote fair competition in all industries,
market mechanisms were encouraged through mobilization of
savings and allocation of investment by relinquishing
government holdings of the major banks and lifting
restrictions which had limited competition among different
types of financial institutions.

Direct government intervention and. regulation was
reduced, as can be seen through the policy of extending
preferential access to credit and phasing out preferential
treatment in taxation to so-called 'strategic industries'.
Government budget deficit and direct borrowing by the
government from the central bank for supplementing the deficit
was also significantly reduced.

Through these policy reforms and improvements in
political stability and the external economic environment,
the economy began to recover after 1981 with an annual growth
rate of 6.6% and inflation down to 14% from 32% of previous
year in terms of consumer price. Inflation fell to 7.3%in

1982 and 1.4% in 1986. Average annual rate of increase in

87
consumer prices in 1981-87 was 3.9%. Growth rate'was recovered
to 11.9% in 1983 and 12.3% in 1986. Average annual growth rate
in 1981-87 was 8.9% in real terms.

On the other hand, Korea's balance of payments improved
dramatically from $ 5.3 billion of current account deficit in
1980 to $ 9.8 billion surplus reflecting the rise in domestic
savings and price stability. Exports increased from $ 20.7
billion in 1981 to $ 46.2 billion in 1987, while imports
increased from $ 24.3 billion to $ 38.5 billion in that
period.

The 1987 political reform out of 26 years military based
authoritarian regimes to a full democracy should have a
tremendous impact on economic development in Korea including

the greater voice of workers, among other liberalizing

tendencies.
B. s ' o of an ' 'on C a ct 'st'cs of e en
W '

As mentioned earlier, prior to 1962 the Korean economy
was commonly defined as a labor abundant, natural resource
poor, open, dualistic economy. Before 1962, when the First
Five-Year National Economic Development Plan was instituted,
the Korean economy was a traditional backward economy in which
the agricultural sector plays a dominant role and labor-
surplus conditions prevail.

During the first transition in 1953-64, according to Fei

88
and Ranis, Korea initiated modern growth.via a primary import
substitution pattern like most other LDCs, focusing on
manufactured nondurable consumer goods. This first transition
must end quickly in countries of poor natural resource
endowment such.as Korea because of limited domestic market for
consumer goods and poor sources of economic growth (only
traditional agriculture and raw-material exports) moving to
next.transition of export substitution.1

The. second transition of exporting labor-intensive
manufactured products more than traditional agricultural
products beyond 'export substitution point', marginal
productivity of labor in the agricultural sector begins to
rise at 'shortage point' as the labor-surplus condition is
ultimately exhausted. This is 'commercialization point', at
which there is a marked upturn in unskilled real wages. Also
there might be an absolute decline in the agricultural labor
force termed 'reversal point'.

Entrepreneurs and laborers gained the experience and
skills needed to create efficiency-oriented industries capable
of penetrating world markets and the economic system developed
the capacity to make more effective use of its labor force,

so that the growth rate of real GNP per capita accelerates

substantially and is maintained at a much higher level. Fei

 

1 See J.C.H. Fei, K. Ohkawa, and G. Ranis, "Economic
Development in Historical Perspective: Japan, Korea, and
Taiwan", Ch. 3 in Ohkawa, G. Ranis and L. Meissner, lepeg_eng

the_nexeloping_gguntries. 1985. pp- 41-45.

89
and.Ranis assumed this period in.Korea was 1964-72.l .Actually
the real wages of unskilled labor began to rise from 1964, and
farm population began to absolutely decline from 1967.

After 'commercialization point' and 'switching point'
from net exporter to net importer of agricultural commodities,
the third transition of secondary import and export
substitution occurs, at which the ratio of imported producer
goods to domestically made producer goods starts to decline
and the ’new industries move into domestic production and
eventually into exporting. Again Fei and Ranis assumed this
point of transition in Korea was about 1972, although they
confessed that it is very difficult, both theoretically and
empirically, to characterize. and. define this later
transition.2

As seen above, Korean economy experienced the second
transition from around 1964-67, and the third transition
around 1972 according to Fei and Ranis. For convenience, I
assume the former period in Korean economy, which I term
'Take-Off Transition', similar but not exactly the same as
Rostow's 'Take-Off Stage' nor 'Take-Off Process' of Fei and
Ranis, as the decade from 1967 to 1976 (periods of the Second
and Third Five-Year Economic Plans). The latter decade from

1977 to 1986 (periods of the Fourth and Fifth Five-Year

 

1 Ibid., pp. 45-49.

2 Ibid., pp. 54-57.

90.
Plans), I will term 'Maturing Transition', again similar but
not the same as Rostow's 'Maturing Stage'.

I will now examine and compare the characteristics of
transitional changes between the two periods such as:
population and employment; productivity and real wages; GNP
growth and consumption, savings and investment; industrial
structure, inter-sectoral flows of resources and terms of
trade: international trade and foreign exchange; price, income

and welfare; demand patterns for agricultural products and

food security.

1- MW:

The most significant difference between the two periods
are changes in population and employment. Total population
increased 40% in 20 years (from 30.1 million in 1967 to 42.1
million in 1987), but annual population.growth rate was.halved
from 2.4% in 1966/67 to 1.2% in 1986/87, and the absolute
annual growth in population in a decade shrank from 6,413,000
in 1967-76 to 5,720,000 in 1977-86. This might be interpreted
as a reduction necessary to match population with employment
opportunities as well as food production.

Farm population sharply decreased by 52% in two decades
(from 16.1 million to 7.8 million). Since 1967, the year of
'reversal point' of Fei and Ranis model, percentage of farm
population dropped from 53.4% in 1967 to 18.4% in 1987, and

resulting urban population increase was nearly 20 million.

91
The out-migration of farm population from rural areas
was accelerated. in. the latter' decade to 4,605,000 from
2,996,000 in the former decade. This means that fundamental
changes occurred in the social, economic and political
structure of Korean agriculture, changes which deeply

influenced the behavior and conduct of every participant.

Table 3. Changes in Population and Employment

Unit 1967 ,l972 l977 198; 1987
Total Population mil. 30.1 33.5 36.4 39.3 42.1
2

 

growth rate % 2.4 1.9 1.6 1.6 1.
Farm Population mil. 16.1 14.7 12.3 9.7 7.8
growth rate % 1.9 -0.2 -3.7 -3.1 -5.0
share/total pop. - % 53.4 43.8 33.8 24.6 18.5
Total Employment mil. 8.7 10.6 12.9 14.4 16.4
Agriculture , " 4.8 5.3 5.4 4.6 3.6
Industry " 1.1 ‘ 1.5 2.9 3.1 4.6

 

* Source: BOK, Egonomigs Stapistics Yearbook, 1987
MAFF, Mejor Agrigplturel Starispics, 1988

On the other hand, total employment nearly doubled in
that period (from 8.4 million in 1967 to 16.4 million in
1987), creating 8 ndilion new jobs by virtue of continuous
high economic growth of 8.5% per annum, while the employment
increase rate slowed in the latter decade (from 4.1% average
annual increase to 2.7%) and the number of increased jobs
shrank to 3,424,000 in 1977-86 from 4,212,000 in 1967-76.

In the former decade, those increased jobs were dispersed
in agriculture (594,000), industry (1,786,000), social

overhead and other services (1,832,000). But in the latter

92
decade, agricultural employment was significantly reduced
(1,825,000), industrial employment was virtually the same
(1,701,000), and.social overhead.and.other services.employment

was greatly increased (3,549,000).

2. P ' 't a Rea Wa es
As shown in Figure 2, there has been a significant and

widening gap in labor productivity between agriculture and

Figure 2. Agrigplpprel apd lnduetriel Erodpgtivipy g: Lepgr

' nail. mn/uapita/gr (1980 price)

5 ...a.
.0
.00.“ O
0

Industrial hbor Mountain"

0
..o.’..
.-

‘ 3 _,...e--~'""”"Enm,eroial ization
‘Shortage ..-"' Pumt’
['0 mt fix"

   

   

 

 

* Data Source: BOK and MAFF, Ibid.

industry. The 'shortage point' of Fei and Ranis model is most

probably around 1967, at which time productivity of industry

93
begins to rise from horizontal line.

The 'commercialization point' is most probably around
1976/77, where the slope of industrial productivity turns
steeper, at the same time, agricultural productivity begins
to rise from a nearly horizontal line, as-Fei and Ranis
suggested. Thus in the latter decade of 1977-86, agriculture
became commercialized and the productivity gap between

agriculture and industry became wider.

Table 4 - WW9

~ Unit 1967 1972 l977 l982 l287
Value Added from mil.won/ha/yr
Agricultural Land (1980 price) 1.95 2.35 3.20 3.20 3.62

 

Rice Yield ton/ha 2.9 3.3 4.9 4.4 4.4

 

Source: BOK and MAFF, Ibid.

Agricultural productivity of land also increased
significantly in the last two decades from 1,951,000 won per
hectare per year in 1967 to 3,624,000 won in 1987 in 1980
prices. But the rate of increase slowed notably in the latter
decade from 64% in 1977/67 to 13% in 1987/77. Rice yields
per hectare have increased dramatically since 1972 (48% in
five years from 3.3 ton to 4.9 ton) mainly by introducing high
yielding varieties from IRRI to reach the peak in 1977. But
yields. did not. substantially increase after ‘that. point,
instead they fluctuated year by year with the exceptional

lowest yield at 2.9 ton in-1980.

94
Figure 3. Real Wages of Agriculture and Industry

than. non/capita/nénth (1980 price)

 

 

 

 

an
t' t' of
15”” Bee 56:51:? Industry
180* . Camercializatinn
Puxnt’

5. urtege Point’

8

7 o to i

me
8 fleeFfiaguw agriculture
5 \
VJ Commphzatmn
2

“826488897072747878382846

* Industrial Wage; deflated by Consumer Price Index
Agricultural Wage: deflated by Farm Purchase Price Index
** Data Source; BOK and MAFF, Ibid.
On the other hand, real wage estimations by limited

available data (industrial wages deflated by wholesale price

95

index and agricultural wages by agricultural GNP deflator
instead of by consumer price index which is not available)
also show similar trends in the Fei-Ranis model, like in
Figure 2, confirming the existence of those turning points.

In Figure 3, industry real wages make two turning'points,
one from 1966 to steady increase and one in 1975 to a steeper
increase.1 In the case of agricultural wages, although it is
not clear as in the industrial case, they probably started to

rise around 1977 from a stagnated line.

3. wt sum '0 Sav' s ves e

The scale of the national economy swelled 5.4 times in
real terms in the last two decades, with an average annual
growth rate of 8.5%, but that rate is declining in the latter
decade (from 9.6% in 1967-76 to 7.4% in 1977-86), while per
capita GNP increased 3.9 times in that period in real terms.

In current prices in U.S.$, per capita GNP reached near
3,000 dollars in 1987 ($ 2,826) from $ 142 in 1967. It
exceeded $ 500 in 1974 and.$ 2,000 in 1984. Presumably, people
might have had enough effective demand for basic foods since
1974, and since 1984 people might have become much less

satisfied with low-quality foods.

 

1 Fei and Ranis shows that the real wages of unskilled
labor began to rise since 1964, which is slightly different
from the result of this study. See ibid., p. 48, Figure 3.9

96
Again there was a significant gap between the growth
rates of GNP in agriculture and industry as shown in Figure
.4. Industrial GNP steadily grew and outpaced the relatively
stagnant agricultural GNP by 1975, and accelerated its growth
afterwards to drastically widen the gap.
Figure 4. GNP Growth of Agriculture and Industry

biul. non/9r" (1980 price)

 

 

 

30-529483“7072747B.328294

* Data Source; BOK and MAFF, Ibid.

Final consumption expenditure increased 8.2% annually in
1967-76, and at a reduced rate of 5.7% in 1977-86. The size
of private consumption was expanded more than 4 times in two
decades, but the share of GNP and food consumption share
decreased from 73% and 49% in 1967 to 56.5% and 37% in 1986

respectively.

97
On. the other' hand, the amount of domestic savings
increased 12 times and the percentage of disposable income
was more than doubled from 9.4% in 1967 to 25.5% in 1986,

while the proportion of government savings to total domestic

savings decreased from 64% in 1967 to 31% in 1985.

     

T111310 5. W1.

099-4! '1 °‘ < _ 111‘-
(1980 Constant Prices Per Year)

11111.3. 1.291 1.212. 1.9.11 1.28.2 ‘ 1.331
Total GNP bil.won l2,309 19,547 32,408 41,212 66,320
Per Capita GNP thoumon 409 583 890 1,048 1,576
' current 0.8.8 142 318 1,008 1,773 ’ 2,826
Priv. Consumption bil.won 9,003 14,273 20,609 27,621 33,456!
Share of GNP 8 73.1 73.0 63.6 67.0 56.5*
Food Cone. Share % 49.1 46.9 41.4 38.5 36.7*
Gov't Consumption bil.won 1,166 1,927 3,405 4,964 6,261.
boneltio Savings bil.von 1,160 2,232 6,759 6,343 15,1209
Share of GNP % 9.4 11.4 20.9 15.4 25.5*
Gov't Saving. bil.won 742 706 1,662 2,429 3,546**
Share of Domestic
Savings 64.0 31.6 24.6 38.3 31.3"
Foreign Capital
Total Inflow bil.won 1,011 988 186 2,875 -l,627*
Debt ' 465 676 -11 1,588 -2,853*
Transfer ' 546 312 197 1,287 1,225
Interest Rate '
Nominal % 26.0 15.5 16.0 10.0 11.5
ml ‘ 1200 -008 0.1 3.3 708
Investment Rate 8 20.3 20.9 27.7. 28.6 29.2
Fixed Capital
Formation b11.won 2,459 . 3,882 8,830 12,580 l6,235**
Gov't " 913 894 1,367 1,892 2,479!"
Percentage % 37.1 23.0 15.5 15.0 15.3*¢

 

7 1986 data, in 1935 data
Source: 80!! and MAFF, Ibid.

The total amount of foreign capital inflow including

98
foreign debt and transfer peaked in 1981 and was reduced to
become a net capital outflow in 1986. The nominal interest
rate was significantly lowered during the period, but.the real
interest rate, which was very low in 1970s due to high
inflation, became higher in 19805. While investment rate
increased from 20% in 1967 to 29% in 1987, and the total fixed
capital formation amount increased 6.6 times in 1967 to 1985
the portion of government decreased from 37% in 1967 to 15%

in 1985.

4. 'a t ctu e -se 0 a esou ce lows a d

a e s of T ade
As already mentioned, the most significant economic
change in the last two decades was structural transformation
of industry. The GNP share for agriculture decreased rapidly
while share for manufacturing and that for social overhead

increased significantly as seen in Table 6.

Table 6 . WWW
unit 1291 1212 1211 1222 1221

Agriculture, Forestry

& Fisheries % 30.1 26.1 22.0 14.6 11.4
Mining 8 Manufacturing % 20.6 23.5 28.9 29.8 31.5
(Manufacturing) ~ % 18.8 22.1 26.8 28.0 30.0
Social Overhead % 6.6 5.8 7.1 10.2 11.4
Other Services _ % 42.7 44.6 42.0 45.4 45.7

 

* Source: BOK and MAFF, Ibid.

Also, there was substantial out-migration from the farm
population to urban areas shown in section 1 of this chapter,

99
as the key resource flow of labor force from the agricultural
sector to other industries like manufacturing, construction
and services.
Another resource transformation may be that of land from

agricultural use to other purposes such as roads, factories,

houses, etc. Agricultural land decreased 7.3% from 2,312,000

hectares in 1967 to 2,143,000 in 1987.

Table 7. Earm Household Economy Indicators (Current Prices)

 

Qnit 1967 1972 1977 1982 1987
Gross Farm Earnings thou.

(A) won 151 428 1,334 3,998 5,984
Total Costs " 35 75 298 967 1,968
Rent & Fees (B) " 6 16 62 210 450
(B/A) % 4.0 3.7 4.6 5.3 7.5
Agri. Inputs (C) thou.won 15 30 153 524 984
(C/A) % 9.9 7.0 11.5 13.1 16.4
Hired Labor thou.won 10 19 62 143 209
Net Farm Income (D) " 117 353 1,036 3,031 4,016
(D/A) 77.5 82.5 77.7 75.8 67.1
Off-Farm Income thou.won 22 76 397 1,434 2,519
Transfer Income (E) " 9 21 118 596 1,205
Tctal Income (F) " 150 429 1,433 4,465 6,535
(D/F) 78.0 82.3 72.3 67.9 61.5
(E/F) % 6.0 4.9 3.2 13.3 13.4
Taxes (G) thou.won 3 7 46 171 45
(G/F) 3 1.7 1.6 3.2 3.3 0.7
Consumption thou.won 128 310 976 3,258 5,201
FOOd " 63 149 418 1,086 1,401
Non Food (H) " 65 161 553 2,172 3,300
, (H/F) % 43.3 37.5 33.9 43.6 53.1
Education (I) thou.won 8 18 79 345 586
(I/F) % 5.3 4.2 5.5 7.7 9.0
Transfer Out (J) thou.won 10 21 108 548 NA
(J/E) % 111.1 100.0 91.5 91.9 NA
Savings (K) thou.won 14 103 401 968 1,219
(K/F) 3 9.3 24.0 23.0 21.7 13.7

* Source; MAFF, Ibid., e o o a o se o d

W: 1988.

100

Farm households pay rents, water fees, and prices for
agricultural inputs and interest rates out of their gross farm
earnings, pay taxes out of their net income, and then consume
and save the rest of their income. Table 7 shows that the
share of rents & fees and agricultural inputs out of gross
farm earnings both have been increasing during the two
decades, while taxes and paid interests out of net income have
been very small.

Thus, it appears that agriculture did not contribute much
to capital formation for economic growth in the former decade
of 'Take-Off Transition', but in the latter decade the
production linkage has increased notably.

However, the share of education expenditure from total
farm household income, already not insignificant from the
early years, has been steadily growing as a unique form of
human capital investment of Korean agricultural sector.

The share of food consumption expenditure has been
decreasing while that of non-food increasing rapidly,
indicating increasing consumption linkages toward the non-food
sector. The farm household savings ratio has decreased
Significantly in the latter decade, while the share of
transferred income (remittance from family members working
away from home, contributions for family events from friends
and neighbors, subsidies from governments, other grants) has
been growing along with increasing transfer-out payments

(contributions to friends and neighbors for their family

101
events, farm products sent to family'members working away from

home, other donations); however, out-payments are slightly

less than transferred income.

Figure 5. Internal Terms of Trade

 

 

 

Index
3
1.2 {15“
. f - \
H Fa A. ' 102 3.4-... x‘ ,
v. I '. \ ;}{i“ I'J“
is. .o'— T— ‘ -- ‘1... V f
...o I, . o..~?.£..oo"%moooo
.09 I I“ 0'...
[’10‘0-5.‘3; I 10531!
. I...
0.8 13° 10:
. Ifg'
0 7 ,r’ gtmsmer Prme
{‘45. . .'
013

* Farm Price; TOT of Farm Sales/Farm Purchase Price Index
Wholesale Price; Food/Non Food Wholesale Price Index
Consumer Price; TOT between Food/Non Food Price Index

** Base Year; 1980. *** Data Source; BOK and MAFF, Ibid.

On the other hand, Figure 5 shows that internal terms of
trade between food and non-food items, both in wholesale and

consumer prices, were sufficiently favorable for the growth

of the industrial sector in the former decade of 1967-76,

102
became unfavorable in the early years of the latter decade of
1977-86, but seem to be maintaining balanced parity in the
19808 so far.
However, the farm price parity (farm sales price/farm
purchase price) was far above the others in the former decade
because the government support price system benefited farmers,

which became no longer true in the latter decade.

5. International Trade and Foreign Exchange
Exports and imports have both expanded drastically;

exports grew from U.S. $ 0.3 billion in 1967 to 47.3 billion;
in 1987 in current prices and imports grew from 1 billion to
41 billion, but the annual growth rate of both export and
import was reduced notably-in the latter decade of 1977-86.

Trade balance and total balance of payments, which had
recorded deficits throughout two decades, became surpluses in
1986. Net.barter external terms of trade fluctuated but seemed
better in the former decade of 1967-76 than in the latter.
Income terms of trade substantially. improved mostly as a
result of the increase in the export quantum index.

On the other' hand, foreign exchange stock: was not
sufficient in the former decade, but became much better in
the latter decade. Exchange rates were significantly devalued
during the period mainly because of high domeStic inflation,
except in 1974-78, when they were fixed by government to

reduce the. influence of external inflation due to the oil

103

shocks and food crises. It has been revalued since 1987.

Table 8. In;g;na§igggl_irgg§1and Foreign Exchange Indicatgrs

 

 

 

Unit 1967 1972 1977 1982 1287
Export bil.U.S.$ 0.3 1.6 10.0 21.9 47.3
Growth Rate %/annum 38.6 46.6 17.1 17.2
Import bil.U.S.$ 1.0 2.5 10.8 24.3 41.0
vGrowth Rate %/annum ,29.1 35.9 18.9 10.0
Trade Balance bil.U.S.$ -0.7 -0.9 -0.8 -2.4 6.3
Total BOP " -0.2 -0.4 0.0 -2.6 9.8
Net Barter TOT % 138.8 138.3 117.4 102.2 114.7
Income TOT (1980=100) 6.6 32.4 93.8 127.9 234.7
Foreign Exchange
Stock bil.U.S.$ 0.4 0.7 4.3 7.0 9.2

Exchange Rate won/0.8.5 271 399 484 732 820

 

* Net Barter TOT; Export Price Index/Import Price Index
Income TOT; Export Price Index*Quantity Index/Import
Price Index*Quantity Index
** Source;.BOK, Ibid.

Korea seems Ihave .already’ experienced. the 'switching
point' of Fei and Ranis model prior to 1960 and became net
importer of agricultural commodities at that time, because
high population density and limited arable land in Korea
inhibited agricultural surplus from the beginning.

Also, Korea experienced the 'export substitution point'
in 1964, when the export of labor intensive manufactured goods
exceeded that of agricultural products and raw materials, as
shown in Figure 6. Afterwards, .the ratio of agricultural

products and raw'materials significantly decreased while that

of manufactured goods increased much.

104

Figure 6. ' o P 'ma and Second ort

 

 

5..
9).

 

    
   

 

 

 

 

“q ’ _.s.~'._,o...a """""""

m I ..... ".'.of.0000'..'o ..... 0

pg .--" Mfactured Goods

1., t . .

l .. Mathiqbshtutmn

”U 0.

an“ agricultural mt: a

2" VM': flan Hateful:

1'0 —
I T lg'l’ l' l 'l r l I I
303234333073727 737980823433

* Data Source: BOK, Ibid.

6- WW

As mentioned earlier, inflation rate in 1973-81 was
relatively high compared to lower rates before 1972, mainly
because of the world food crisis in the early 19705, two oil
shocks, and an extraordinary bad crop year in 1980 in Korea.
Since 1982 inflation has been significantly reduced by virtue
of better environmental conditions of world economy and strong
stabilization policies in domestic economy.

Figure 7 shows that all three price-indexes (consumer
price, wholesale price, farm.purchase price) have had similar

trends, except that farm purchase price index was relatively

105
lower and more stabilized than those of wholesale and consumer
prices in the last two decades, and that the consumer price

index was slightly higher and more inflationary in 19803 than

wholesale price index.

Figure 7. Trends of Price Index

Index
2 0

 

88'70727478799082M889r

* Base Year; 1980. * Data Source; BOK and MAFF, Ibid.

On the other hand, it appears that some prices of
agricultural commodities were more volatile, both in terms of
seasonality and year by year, during the latter decade of
1977-86 compared to former decade of 1967-76. This is a result
Of sharp increase in demand for high' quality agricultural
commodities and more , fluctuating supply responses to price

Changes in commodities such as meat and vegetables. The most

1106
dramatic fluctuations in the latter decade were those of red
pepper and Chinese cabbage for 'Kimchi' in 1978, and beef and
cattle prices in early 19805. This will be discussed more in
Chapter IV and V.

Real income of farm households increased significantly
in the last two decades because of agricultural productivity
increase and that of off-farm income. Table 9 shows that the
portion of off-farm income increased substantially in the
latter decade of 1977-86 (from 27.7% in 1977 to 38.5% in
1987), which indicates that in the former decade of 1967-76
agricultural productivity increase was the leading factor in
the increase of farm household income, while in the latter

decade off-farm income was the leading factor.

Tablfi 9. BIfl1_InQ9II_91_Zl:l.lfl§_n2hln_nflnllhfllfll
IEMS lflfll .MUBv :uuz ‘JHMI .flfll

Current Parn Income thou.won 150 429 1,433 4,465 6,535
Real Parr Inconefi ' 2,131 3,086 3,873 4,519 , 6,463
Index (1977-100) 8 55 80 100 117 167
Share of Off-Para
Insole % 22.0 17.7 27.7 32.1 38.5
Current urban Inca-e thou.won 174 396 1,271 3,805 6,740
Real urban Incone** ' 1,596 1,987 3,122 4,123 6,365
Index (1977-100) 8 51 64 100 132 204
Parity (*/**) % 134 155 124 110 102

 

Source: BOK and MAFF, Ibid., EPB,
0 deflated by Fara Purchase Price Index (1985-1.00)
9* deflated by Consumer Price Index (1985-1.00)

When compared with urban household income, parity was

107
much more favorable for farm household in the former decade
than in the latter decade. However, differences of survey
methods and measurement items between the two surveys call
the accuracy of this comparison into question.

Income distribution in the Korean economy was evaluated
by many authors and World Bank publications as relatively
equal, comparable to that of advanced economies through-out
the process of economic growth and development.1 And this
conclusion also appears to have held in the latter decade of
1977-86. However, there have recently occurred frequent
protests and arguments against unfair and unequal income
distribution between different classes and regions which might
reflect the possibility of more unequal distribution of
income, wealth and power in the latter period, or which may
reflect the growing perception of relative poverty among rural
and urban poor as a result of having a growing voice in.a more
democratized political system.

Needless to say, the level of welfare or quality of life
of the Korean people improved significantly over in the last
two> decades. However, in. the former' decade, improvement
focused on satisfaction of the basic needs of nutrition,
clothes and.housing with concentrated investments on social

indirect capital such as roads, electricity, etc.

 

1 For this, see E.S. Mason et a1., W

o o , Harvard
University Press, 1980, Chapter 12, pp. 408-44.

108
In contrast, in 'the latter decade, quality of life
improved beyond the basic needs for more diversification and
higher’ quality 'which include Ihealth care, education. and

recreation.

7. Qemend Pattenns for Agrieultural Pnoducts ang Eeeg

Seeunity ‘

Most significantly, demand patterns for agricultural
products, mainly food, were changed from a preference toward
satisfying the minimum basic needs of quantity (e.g., staple
grain) to that of diversified higher quality foods (e.g.,
livestock products, fruits and vegetables).-

As Table 10 shows, nutritional status of Korean people
has improved very much in the last two decades. First, total
energy intake per capita per day increased from 2,216 Kcal in
1967 to 2,746 Kcal in 1986 which has been evaluated as already
more than enough for normal Korean male adult. Protein
intake, especially animal protein, is still rapidly increasing
as well as fat intake, especially from plant oil.

Since 1970, per capita grain consumption in total has
been decreasing. Most significant is the drop of barley
consumption, which is almost disappearing from Korean diet.
Rice consumption began to decrease from 1979 (135.6 kgs per
capita per year) to 127.7 kgs in 1986. Japanese per capita
rice consumption.per'year, for the reference, in 1985 was 74.6

kgs which has been continuously decreasing from 118.3 kgs in

1962.

109

Per capita consumption of livestock products has been

increasing rapidly through the

last two decades.

Meat

consumption has doubled and milk consumption increased 4-7

times in the last decade. These trends are the main reason

for a drastic increase in feed concentrates supply and feed

grain imports since the mid 19705.

Table 10. 23I_sanita_2999_sgneunntign

 

unit 1221 1212 1211 1222 ' 1295
Energy Intake .Kcal/day 2,216 2,415 2,427 2,533 2,746
Starch Share 3 36.5 34.0 77.2 74.1 71.2
Protein Intake gr/day 60.4 67.1 73.9 73.3 39.4
Animal Protein Share 3 17.0 19.1 27.3 29.0 32.93
rat Intake gr/day 13.3 ~22.6 29.2 44.0 53.6
Plant 011 Share 3 11.5 23.0 31.3 44.5 43.63
Grain Consulption kg/yr 133.333 225.9 203.9 191.3 179.0
Rice 3 124.5 ' 134.5 126.4 130.0. 127.7
Barley 3 36.333 37.5 23.5 13.3 3.6
Wheat 3 13.333 34.9 30.3 29.7 31.5
Total Meat kg/yr 3.433 5.5 3.1 11.2 14.3
Beef 3 1.033 1.2 2.2 ‘2.7 3.5
Pork 3 1.933 2.7 3.9 6.1 7.7
Chicken 3 0.533 1.6 2.0 2.5 3.1
Milk 3 0.333 2.1 7.0 15.1 27.3
Eggs each/yr 3033 34 97- 115 145
Fruits kg/yr 11.333 14.6 21.1 30.3 35.2
Vegetables 3 45.533 62.3 62.5 130.4 114.6
See product. 3 19.533 21.3 29.5 36.4 - 41.3
3 1935 data 33 1965 data

Source: MAFF, Ibid., KREI, tged_nglgnee_finggt, 1985.

Fruit consumption began to increase from 1975 and the

increase rate has accelerated, while vegetable consumption

110

has stagnated since early 19805. Sea products consumption
including fish and seaweeds has been steadily increasing with
some fluctuations because of variations in the annual amount
of catch.

On the other'hand, domestic food production.in.total did,
or could, not increase sufficiently' enough. to ‘meet the
increase in demand. With limited arable land of slightly over
2 million hectares (around 0.05-0.08 hectares per person), it

seems impossible to satisfy the demand for all the food needs

of nearly 40 million people.

Table 11. Domesnie Foog Pnoducgion

2211 1222 1211 1211 1222 1221
Arable Land mil. ha 2.26 2.24 2.23 2.18 2.14
Planted Area " 3.56 3.08 3.03 2.68 2.60
Total Grains " 3.22 2.54 2.28 1.91 1.78
Barley " 1.20 0.78 0.55 0.34 0.21
Average Cropping Ratio % 158 137 136 122 120
Grain Production mil. M/T 6.5 6.7 8.0 6.8 6.7
Rice ‘ " 3.5 4.0, 6.0 5.2 5.5
yield M/T/ha 2.39 3.34 4.94 4.33 4.36
Livestock Head
Korean Cattle 'mil. 1.32 1.34 1.51 1.53 1.92
Dairy Cattle " - 0.03 0.11 0.23 0.46
Pig " 1.38 1.25 1.48 2.18 4.28
Chicken " 11.9 24.5 30.2 46.6 59.3
Vegetable Prod. mil.M/T 1.58 2.76 6.29 8.25 7.24
Fruit Production " 0.31 0.49 0.77 1.19 1.62

 

* Source?

MAFF, Ibid.

Moreover, planted area and average cropping ratio of

arable land have decreased through the last two decades. This

111
is mainly because of the disappearance of barley almost the
only major winter crop in Korea. Barley planting area
decreased from a peak of 1.2 million hectares in 1965 to
around 0.2 million hectares in 1987 without sufficient crop
substitutions.

Rice production increased significantly since the
introduction.of'new'high.yielding varieties from IRRI in 1972.
The peak production was 5,965,000 metric tons in 1977, with
the highest yield of new varieties of 5.5 metric tons per
hectare. In 1978, the planting area of new varieties peaked
at 76% of total rice planting area. Since then, as people's
tastes came to disfavor the low quality of the new varieties,
their portion has decreased and the total rice production has
stagnated.

Another significant change in agricultural production
has been livestock heads. The number of Korean cattle
decreased from 1974 to 1981 because of over-slaughter as a
result of rapidly increased beef consumption. But from 1982
that number began to increase to 2.5 million in 1985 mainly
because of beef and breeding cattle stock imports, and a
cattle raising boom stimulated by an extraordinary cattle
price hike from 1980 to 1983 (calf price jumped from 159,000
won in 1980 to 574,000 won in 1983 in 1980 price, 3.6 times
in three years).

While the number of pigs and chicken increased very

sharply since 1975; tripling and doubling respectively over

112
a decade, with some fluctuations in pig number (1981: 1.8
mil., 1933: 3.6, 1935: 2.3, 1937: 4.3).

Vegetable production increased substantially in 19705,
but stagnated in 19805. Fruit production has accelerated the
rate of increase since the late 19705.

Therefore the self-sufficiency rate of total food
(including feed grains) has been decreasing, in spite of
government efforts to achieve self-sufficiency of staple
grains of rice and barley; thus, food imports have been
continuously increasing, but the share of foods among total
imports has decreased significantly (around 5 % since the late
19705 except in the case of extraordinarily bad crop year of
1980/81). Those decrease is an indication that food
entitlement or reliance of food supply is no longer a serious
problem in Korea.

In other words, in the latter decade of 1977-86 the food
security problem was no longer a serious priority, not because
that self-sufficiency of domestic food supply was actually
achieved but because of increased capacity of food (and feed)
imports through increased foreign. exchange. earnings from
exports. The only exception was the unrealistic, high-cost
government policy goal which.maintained 100% self-sufficiency
of basic food grains to secure the food supply from domestic
sources and prepare for possible emergency, even despite
sharply increasing feed grain.imports which.can surely'be used

as an satisfactory food supply.

113

Most food imports with the exceptions of sugar, coffee
and beverages have been grain imports. In the latter decade
of 1977-86, feed grain imports increased so rapidly that the
share of feed grain exceeded that of food grain in 1983. In
1987, the share of feed grains import in quantity was 64%.
Imports of livestock products, vegetables, fruits and sea
products also increased.in that.period, yet not in significant
level of amount. 1 i

The amount of imported grain increased very rapidly to
reach 10.3 million metric tons in 1987, mainly due to an
increase in feed grain import. Thus the share of imported
grain as a percentage of total grain supply increased to more

than 50% in 1983 and reached 62% in 1987.

Table 12 - W

Unit 1222 1211 1211 1221 .1221

Total Food Imports* mil. Us 89 386 613 1,241 1,223
Share of Total Imports % 19.3’ 15.3 5.7 5.1 3.5
Grain Imports mil. US 83 265 517 1,044 1,115
Food Grains " 76 212 296 600 458
Feed Grains " 7 53 221 444 657
Share of Feed Grains % 8.4 20.0 42.7 42.5 58.9
Total Grain Supply mil" M/T 9.3 9.6 11.1 13.9 16.5
Grain Imports . _ 0.6 3.1 3.8 5.9 10.2
Share % 6.1 31.9 34.3 42.8 61.9

 

* sugar, coffee, beverages were excluded.
** Source; BOK, EPB and MAFF, Ibid.

Excluding feed grains, the share has stagnated around

30%, food grains consist mainly of wheat for flour milling.

114
The biggest imported grains in quantity in 1987 were corn
(4,792,000 metric tons), wheat (4,223,000 M/T) and soybean

(1,131,000 M/T), while rice.has not been imported since 1984.

C. cnenging Boles of Agriculture and the Government

Johnston and Mellor indicated five roles of agriculture
in economic development: to provide increased food supplies;
enlarge agricultural exports; to transfer manpower from
agriculture to non-agricultural sectors; to contribute to
capital formation; and to increase rural net cash income
(purchasing power) as a stimulus to industrialization.1

As discussed in previous sections of this chapter, the
role of agriculture in Korean economic development has changed
significantly during the last two decades. First, the share
of agriculture in terms of engaged population or employment
and GNP or industrial structure have decreased drastically,
the same as many other processes of economic growth and
development.

Therefore, agriculture is no longer the major industry
of the Korean economy, neither is it the main source of GNP

or employment nor the main power base of .Korean politics,

despite rhetoric to the contrary.

 

1 See B.F. John5ton and J.W. Mellor, "The Role of

Agriculture in Economic Development", Aneniean Eeonomie
Beyiey, Vol. 51 (4), Sep. 1961, pp. 571-81.

115

Already in 1964, 'export substitution point' of the Fei
and Ranis model, a very early stage of economic development
in Korea, agriculture was not even an important source of
export and capital formation with the exception of unique
human capital investment of Korean farmers for their
children's education. This situation is different from the
cases of Taiwan and many other LDCs where the agricultural
products were still the important sources of export and
capital formation in the middle of their economic development.

Secondly, significant changes in the demand patterns of
agricultural commodities (changes in income elasticities of
each item, the level of income, Engel coefficient or the
structure of consumption expenditure, and changed tastes for
diversified and higher quality demand) reduced importance of
the food sector both in the household and the national
economy, and at the same time decreased the role of domestic
agriculture as the main source of food (or feed) supplies.

' The food security situation became no longer a serious
problem nor was it the first priority policy goal in actual
economy, except among rigid policy makers of the Korean
government.

Furthermore, the functions of marketing and processing
seem to have gradually shifted away from farms to more
specialized service firms, and at the same time the portion
of raw products out of total value added in the food sector

seems to have decreased significantly as additional services

116
have been required to meet the increasing demand for more
convenience to consumers, as in other industrialized
countries. This means a significant amount of transfer of
value added from the farm sector to the non-farm service
sector or reduction of possible income sources for the farm
sector.

On the other hand, internal terms of trade between food
and non-food prices both in wholesale and consumer' prices have
become less favorable for industrialization in the latter
decade of 1977-86. This condition may have originated from
rapidly increased demand for high quality food items and
insufficient supply responses either domestic (because of
rigid production system) or, foreign (because of import
restriction).

But these more favorable internal terms of trade for
agriculture do not directly relate to increased returns for
the farm sector, the very problem in recent Korean economy as
well as politics. Rather returns to the farm.sector seem to
have decreased as we can see from the data on terms of trade
between farm sales and purchase prices (see Figure 5, p. 101)
and income parity data (Table 9, p. 106). This should be the
main subject of discussion in Chapter V.

Consequently, the portion of off-farm income has become
(or should have become) a greater part of average farm
household income so as to compensate some of the losses in

farming income, which in turn should.have reduced the relative

117
importance of the farm sector in the rural economy.

Thirdly, the agricultural sector could no longer be an
'unlimited' source of labor supply as labor productivity and
real wages of agriculture began to rise . while those of
industry began to accelerate the increase rates since the
'commercialization point' somewhere in 1975-77 (Figure 2, p.
92 and Figure 3, p. 94). This means there should have been
more competition in labor markets for agriculture as well as
industry 1 altering labor supply curves (or* marginal
productivity of labor), as well as demand for labor, which
means a possible reduction of disguised or undisguised
unemployment in the agricultural sector at the same time a
part of cost-push for agricultural production.

On the other hand, the gap in labor productivity between
agriculture and industry has become wider. This widening
should be reflected in returns to respective sectors. One
reason for this may be a lack of improvement in quality of
labor in the agricultural sector composed of still—not-much-
changed traditional small farm system without sufficient
mechanization.

Average farm size did not increase much (from 0.9 ha in
1967 to 1.15 ha in 1987) with much slower decrease of the
number of farm households (25% decrease from 2.5 million to
1.9 in the same period) to compare with 'that of farm
population (51% decrease from 16.1 to 7.8 nullion) mainly

because older people remain on the farms.

118

The distribution of farm size also did not change very
much. Management of farming was not improved significantly,
while the increase of land productivity stagnated at near
maximum levels. These changes appear to be related to
weakening competitiveness of Korean agriculture.

Fourthly, despite decreasing share in total population
and GNP, the role of the agricultural sector as market of the
non-agricultural sector has become more important.

Agricultural input markets became bigger and more
specialized by increasing commercially purchased inputs rather
than own farm supplies (see the share of agricultural inputs
in gross farm earnings in Table. 7, p. 99).

In other words, the backward.production linkages between
the agricultural sector and manufacturing and service sectors
became bigger and more important. Typical examples of rapidly
grown markets in this period are complex feeds and farm
machineries.

Also, as farm household income has increased, non-food
consumer goods markets such as clothing, housing equipments,
electronics have become much bigger and important in rural
areas. - These markets contributed as a secondary force of
development in consumer goods industries (especially durable
goods) as ‘well as foreign. export. markets (see non-food
consumption share in farm household income in Table. 7).

In other words, the consumption linkages between the

agricultural sector and the manufacturing and service sectors

119

'became much bigger and more important mainly because rural
areas became much closer to the cities as a result of rapidly
improved transportation and communication systems.

Finally, as in other cases of the economic and
agricultural development process in most industrialized
countries, multi-products subsistence farming patterns have
changed to more specialized,“ near-single product,
commercialized farming. This phenomenon might be termed
'reverse diversification' which carries an increased risk in
farm management.

Although this situation might have become a part of
development on the basis of comparative (or competitive)
advantages of resource endowment, accumulated technology, or
access to markets, but more probably skewed decision on
selection.of farm products (mostly cash crops for'sales) among
limited alternatives resulted in more skewed supply responses
of certain commodities, which in turn might have led to more
variability and fluctuation of prices and consequent
instability of the markets. Altogether these changes have
affected the vulnerability and instability of farm household
income and rural people's welfare.

On the other hand, this development of farming
specialization has contributed to better and more united
organizational activities of related farmers and industries,
forming special interest groups to increase their voice and

strengthen their power to influence policy making processes.

120
This specialization parallels an increased desire for more
open democracy during the last decade.

In summary, during the last two decades, demand patterns
and market structures of agricultural inputs and outputs have
undergone significant changes while the biological environment
has not changed, and agricultural productivity based on
technology and management has been improved but not
sufficiently to meet the changes of demand and market
structures.

These changes have resulted in more vulnerability and
instability of farm prices and income due to increased risk
and uncertainty, and relatively lower returns to the farming
sector due . to a widened productivity gap and shifting of
marketing and processing functions away from agriculture.

Also, the linkages of production and consumption between
agriculture and non-agricultural sectors have become much
bigger and important, while the tensions of food security have
eased mainly because of the increased capacity of food imports
through export earnings.

Along with these changes in the role of agriculture,
there have been significant social and political changes
represented by loosened traditional family ties (from large
multi-generation extended family to small two-generation core
family‘system) , urbanization, pluralization, and strengthened
ivoices.for democratization and-equitable distribution.

Hence, the behavior of each member of society has adapted

121
considerably to significantly changed systems of information
and‘ incentives, and these systems in turn have affected
changes 'in. political and. socio-economic institutions and
transactions costs, as well as the role of government.

First, the role of government as the major force
initiating economic growth and development and as the planner
of national economy has been reduced. The government role as
director and controller of development process at the same
time investor and fund raiser of most development projects
either'by domestic savings or foreign capital inflows (see the
government's shares of domestic savings and fixed capital
formation in Table 5, p. 97) has also been reduced.

On the other hand, the multiple roles of government as
the producer and deliverer of public goods and services and
as the creator of decision rules and incentive systems either
through sanctions or subsidies have been maintained or even
strengthened. Also, the government roles as the regulator and
supervisor or guarantor and coordinator of the economic system
on the basis of fair and equitable distribution and social
security and justice have become more important.

Unfortunately, the military based authoritarian regimes
of last 27 years from 1961 to 1987 in Korea appear to have
contributed to make the people believe that the role
(authority or power more exactly) of government is infinite
and omnipotent.

Consequently, there is general confusion, without clear

122

distinction, concerning the roles of government and private
sector as well as the interests of general public and ruling
power groups, and consequent arbitrary and over actions of
government intervention, restriction and regulation in many
cases, or sometimes insufficient.necessary'actions, very'often
based on.biased.understandings and.misleading interpretations
of reality mixed with skewed.ideologies and.wishful thinking.

This may not be provable, but it appears to be an urgent
necessity to redefine and reestablish the role of government

in this critical point.

CHAPTER IV
RECENT POLICIES AND INSTITUTIONS

IN THE AGRICULTURAL AND RURAL SECTOR

A. Envizennen; eng Benaviong Problem Setting
1. Environmental Variables of Konean Agriculture

Environmental variables include a natural environment
with. previous. capital investment, Korea's Jhistorical and
cultural background, the economic and political power

structure and structure of factor and product markets.

,2 a , v' onl-n w: , ' -v5-- ag'_: .1 - tmen

The Republic of Korea, which generally refers to the
southern parts of the Korean peninsula, has 9,917,000 hectares
of total land with a total population of 42 million people in
1987 and 2,143,000 hectares (21.6% of total land) farm land.
This means there are only 0.05 hectares (slightly over 0.1
acre) per'person and 1.15 hectare (less than.3 acres) per farm
household. This per capita average arable land is too small
to possibly supply all the food necessary for the entire
population and earn enough farming income to support the
family life of farm households.

Korea is located in a temperate region between north-east
China and Japan, a part of Asian monsoon zone of traditional
rice culture. The quality of arable land is generally fertile

but with some shortages in minerals and more acid soil, a

123

124

result its of long history of cultivation. Korea has a
moderate monsoon climate, and most rainfall comes in June-
August, with hot summer (fit for rice growing) and cold.winter
(not available for cropping from November to March except for
a few winter crops such as barley, garlic, onion or high-cost
vinyl-roofed hot-bed cropping), possibly the biggest reason
of supply fluctuations.

Seasonal drought often becomes a problem in spring for
rice transplanting and in fall for vegetable growing (e.g.,
Chinese cabbage for Kimchi), possibly the biggest reason of
supply fluctuations.

Until recently; most. physical capital investment in
Korean agriculture was concentrated on improvement of
irrigation and water management, land reclamation and
consolidation to increase land and labor productivity, extend
cropping time and region for more crops, and reduce supply
fluctuations from unexpected drought.

However, as seen in the previous Chapter, since the late
19705 productivity of land (e.g., rice yield) has stagnated
at almost the maximum level with continuously decreasing per
capita arable land. Supply fluctuations have increased rather
than decreased because more specialized and commercialized
farming has increased the variability of farmers' supply
responses.

Farm population is 7,771,000 people (18.5% of total

p0pulation) with 1,871,000 farm households, and 15.7% of farm

125
population are over 60 years and 22% are under 13, and
3,580,000 people are reported to be actually engaged in
agricultural production. (1.9 people jper farm. household).
Almost every farm laborer is literate and roughly a half of
the total agricultural labor force has a middle school level
education or more.

A recently developing problem is that more older people
and females than younger male laborers are remaining on the
farm, a situation which has deteriorated the quality of the
agricultural labor force and an additional reason for the
widening gap of labor productivity between agriculture and
industry.

Some seasonal labor shortages in peak seasons of rice
transplanting and harvest have occurred, pushing real
agricultural wages up, combining with already high land and
energy prices to make total cost of agricultural production
even higher, weakening further the competitiveness ovaorean

agriculture.

'5 r' a a d Cu tu a ac ou d
Because of Korea's geo-politically critical location as
a bridge between the continent and the ocean, the Korean
peninsula has suffered from frequent invasions from both sides
and consequent social and political catastrophes throughout
its history. Japanese domination in 1910-1945 was the first

time Korea completely lost sovereign independence in a more

126
than four thousand years history of maintaining racially
homogeneous Korean nations.

The subsequent division of Korean peninsula into the
South and the North and.the Korean war in 1950-1953 were other
national disasters which created a huge political and economic
burden for the newly born Republic.

The extreme struggle of imported ideologies between
capitalism and communism and actual confrontation between the
South and the North contributed to an increase in the power
of military forces, justified military intervention in the
political process by coup d'etat, and justified the
establishment and long continuation of the authoritarian
regimes. Such requires in 'turn. have severely' restricted
freedom of thought, speech and press, and organization, and
have damaged system of democratic preference articulation and
the role of public opinion in the open policy making process.

Also, the need for recovery from the destruction of war
and for further economic development as well as to maintain
national defense and social security has resulted in increased
dependency on foreign capital, military and political forces,
which in turn have seriously affected the basic structure and
behaviorof Korean society and its people. The most critical
problem resulting from this continued dependency on foreign
aid and the legacy of colonial rule may create a lack of
confidence by the people in their own government, a

potentially serious kind of social trap.

127

On the other hand, Korea's long history of Confucian
traditions of family ties and respect for superiors and elders
has» also contributed to the spread of nepotism and
authoritarianism, important foundations for Korean people's
behavior of support for the authoritarian regimes.

Other customs including traditional holidays, foods and
the like have also affected demand patterns of agricultural

products and reflect changes in people's tastes.

o ' an 't' we ct

The Republic of Korea has thus far maintained a sort of
democratic system based on capitalist principles, although
some may argue that it was not a full and open democracy.
Economically, since land reform in 1949-1950, inequalities in
income and wealth distribution have be been relatively small
until recent times. Private property rights and ownership were
protected and the free market exchange system was supported
by the Constitution.

Politically, power has usually been concentrated among
a small ruling elite backed by military forces and high
ranking bureaucrats in collusion with a few big enterprises
(often dependent. upon foreign capital directly or via
government sources) and their special interest groups. The
press was controlled and open discussion of public opinion
was inhibited.

Activities of labor unions and private organizations were

128

restricted, while agricultural cooperatives and other non-
government organizations had been virtually under control of
or in collusion with the government (e.g., associations of
agricultural input suppliers and of traders and processors of
agricultural products), with the exception of several
voluntary organizations with small membership but a consistent
record of opposition to the government and its policies.

With the exception of a few short periods during general
elections, political parties were not vital and the National
Assembly, compared to representative assemblies of other
nations, was not influential in policy processes including
goal identification, evaluation, and feed-back.

All power was ultimately concentrated in the President
himself. Every new'year, the Ministers were required to report
to the President their Ministries' plans and policies of the
year, plans which became authorized government policies only
through orders from the President. New Year Reports were
prepared by a few high ranking bureaucrats without sufficient
open discussions either through the parliamentary process or
'by the public 'media and related interest groups. Local
governments, without local autonomy, were totally under the
control of central government.

Budget of central government was approved by a Congress
which was always dominated by the ruling party headed by the
President, and local governmental budgets were approved by

the Ministry of Home Affairs or the Office of Premier for the

129

City of Seoul without local parliaments. Virtually all
discretion concerning taxation and subsidies, regulations and
restrictions were in the hands of central government, solely
controlled.by’the President.and his subordinates or followers.

Legally authorized opposition parties were too weak to
act as viable power groups in opposition to the government
and ruling party, so that voluntary, actual but unauthorized
opposition groups of dissidents voiced opposition through
violent street demonstrations. Most people eventually became
involved in or supported opposition activities against the
authoritarian regime, activities that eventually brought about
the revolutionary reform of the political system and a full

and open democracy in 1987-88.

2LI2Q22I2_Qi_E2EEQI_QDQ_EIQ§2§§_MQIKQL§

The most important indicator of market structure is the
degree of competition or monopoly (or monopsony). Generally
speaking, Korean agricultural product markets are nearer to
perfect competition, as neoclassical economics assumes, in
terms of numbers of suppliers and consumers, primarily price
takers with relatively low level of concentration rates.

However, the recent tendency of specialized farming has
changed this situation as the numbers of suppliers have
decreased significantly (e.g., the number of chicken farms
dropped from 1.3 million in 1965 to 0.3 million in 1985) and

increased concentration rate (e.g., only 1,400 chicken farms

130

raising over 10,000°heads or 0.5% of total chicken farms
supplied more than 63% of total domestic supply in 1987).

This does not directly mean decreasing competition, of
course, but does demonstrate significant changes in market
structure including better organized voice of suppliers and
increased chances of collective action as well as increasing
price variability and fluctuations leading to market
instability as discussed in the previous chapter.

On the other hand, as processing industries including
some big food.chains like Kentucky Fried Chicken.have recently
grown, these large direct purchasers of raw products which
have altered the demand structure with an increasing degree
of product differentiation at the same time should have
increased degree of vertical integration within the industry.

In the case of agricultural input markets, the numbers
of suppliers are very few under the government licensing
system, a sort of oligopoly. But there are a large number of
purchasers, so the: degrees of concentration and. product
differentiation must be relatively high. Recently, due to an
increase in specialized farming, a more direct contract and
delivery system has developed between farmers and suppliers
as well as some technical extension services.

In general, the biggest entry barrier to this market is
import restriction on many agricultural products as well as
inputs. Sometimes export is also restricted for the purpose

of preventing domestic price hikes. The domestic market has

131
long been regulated through overall government intervention.

All grain and meat traders and processors must have
government licenses either for government control of the
market in case of emergency or for sanitary purposes.
Government agencies or’ parastatal marketing institutions
including agricultural cooperatives usually intervene in food
grain markets and sometimes in meat markets.

In ‘the case. of agricultural inputs, production. and
marketing of all commercial products must.be approved.for sale
by government agencies on a case by case basis. And there are
on-the-spot surprise inspections throughout the country in
addition to regular inspections for all marketed inputs and
outputs.

In short, virtually all agricultural markets are under
the control of government, at least in the official sense.
All restrictions, regulations and interventions carry
considerable public costs while creating and granting some
privileges for a select group of people and reserving
government power to control markets.

Besides, agricultural product market conditions have not
improved much until recent times. Legalized, modernized
central wholesale market system.began to actualize since with
the establishment of the Seoul Central Wholesale Market of
Agricultural and Fisheries Products in.1985. Prior to this,
most wholesale markets were not legally authorized and

properly taxed, but instead actually existed and functioned

132

according to traditional methods of exchange (not auction)
without a formerly standardized measurement and quality
control system. Only a few Agricultural Cooperatives Wholesale
Markets, much less competitive than illegal markets because
of the additional costs of following legal orders and official
tax burdens, were legally authorized by the government prior
to 1985.

Market facilities, transportation and distribution
systems as well as public market information networks were
either poorly developed or had not yet even been established
until the mid 19805, although social infrastructures for
transportation and communication were rapidly expanded
primarily through government investments.

Traditional local markets held every five days in rural
areas still played an important role, and market information
was informally monopolized and sometimes manipulated by
traders. A futures market system.still does not exist. Neither
has an auction system been settled. Hence, price mechanisms
have been very much in complete, informal and inefficient to
link and coordinate supply and demand.

Retail markets have rapidly developed since the late
19705 to modernized chain stores, department stores and super-
markets but still with a.large number of traditional small
retail shops, street. peddlers and roadside stands. This
development of retail markets is a step toward overall

marketing improvement.

133
2- WWW

Generally speaking, behavioral assumptions of bounded
rationality and opportunism under imperfect information and
uncertainty appear, to be particularly relevant to Korean
political economy and all the participants of agricultural
input and product markets, which are incomplete, informal and
inefficient with a poor information system.

Moreover, the increased variability of supply of
agricultural products increases uncertainty. Existing dual
structure of legal but poorly functioning markets and illegal
but actual markets of agricultural product increases
opportunistic behavior among market participants as well as
bureaucrats. Frequent and sudden.government interventions are

additional source of rising uncertainty and opportunism.

Waller

Quantity of demand and demand elasticities of price and
income for' agricultural. products Ihave fluctuated. widely.
Typical examples are a significant decrease of demand and
declines of income elasticity of demand for staple food.grains
including rice, along with a substantial increase of average
disposable. household income, and an- opposite increase of
demand elasticity and shift in demand toward livestock
products and high quality fruits and vegetables.

Other changes in consumer tastes include diversified

preferences and increased demand for more convenience, which

134
has initiated rapid growth in specialized food processing and
fast food industries.

Engel's law of declining share of food expenditure by
higher income has contributed to an increase in willingness
to pay (or effective demand) for higher quality (fresh, tasty
and safe) food, the main reason for relatively high prices of
food items under import restriction.

Prior record 'of unusual consumer ”behavior in Korea,
especially in 1972-81 of high inflation period, is also
noteworthy. During this period there existed imaginary and
speculative demand and conspicuous consumption phenomena which
made the demand curve temporarily reverse. A positive sloping
demand curve made prices more fluctuated and policy responses

quite complex and more difficult.

o c ‘ e v'

Korean farmers are relatively conservative. They prefer
to remain in farming as long as possible rather than pursuing
non-farm work, although they hope their children may get a
better job outside of farming. This situation is reflected by
the fact that farm population.decreased.at.a.greater rate than
the number of farm households. But their attitudes toward
adoption of new technologies or managerial skills are not too
conservative; rather, they are very pragmatic and active in
observing and learning ways to earning more income.

As discussed earlier, more specialized and commercial

135

farming has increased the chance of risk and uncertainty of
farm managementand greater variability and instability in
agricultural prices and markets. It is not clear whether
Korean farmers are risk averse or not, but the development of
commercial farming without clear understanding of increased
risk and uncertainty has most likely made Korean farmers more
opportunistic and irresponsible in their decisions.

Many farmers do not like to keep contracts with
purchasers when the market price rises above the contracted
price. On the contrary, they often ask contract purchasers or
government to buy more than the amount of contract from them
when market price falls.

This opportunistic and irresponsible behavior, recently
strengthened organized voices of special farming groups and
traditional distrust to the government due to the memory of
Japanese colonial rules and cumulated policy failures of past
governments, have also contributed to policy making
difficulties.

However, needless to say, farmers are all price takers,
uninvolved in sales promotion) activities except a few
advertisements by agricultural cooperatives or indirect sales
promotion by large food processing enterprises.

On the other hand, agricultural input suppliers have in
effect formed government licensed oligopolies, with sales
price and.product quality approved by the government.on.a¢case

by case basis. Thus, agricultural input suppliers have been

136
more interested in how to keep good relations, with the
government and related bureaucrats, not how to improve the

product quality and competitive pricing of their products.

WM

As in many other developing countries, in Korea traders
have been usually treated as evil middlemen who exploit the
interests of farmers and consumers. In the past, the people
and the government have not properly taken into account
important functions of traders, including creation of
additional utility of place, time and convenience, linking
and coordination of supply and demand, transmission of market
information, and overall financing and risk taking in these
processes.

Ordinary people have been confused by and failed to
distinguish actual marketing costs and_trader net margins. In
reality, the share of trader net margins in total marketing
spreads (differences between farm price and wholesale or
retail prices) may not be great when one considers_the high
risks of trading. 2

However, most traders of agricultural products are still
engaged in traditional methods of exchange which may seem to
be not clear and fair'or to have more chances of deception and
price :manipulation. rather' than. a formal auction system.
Managerial and marketing technologies and skills have not

improved very much, so the transactions costs are relatively

137
higher compared with the already expanded infrastructure of
communication and transportation.

Informal organizations of traders are traditionally so
strongly oriented toward mutual exchanges of information and
working capital that their organizational power can dominate
the marketing channels of certain commodities such as meat,
fish and some specific fruits and vegetables.

Often traders act as a sort of exclusive cartel or
informal trust under entry barriers determined by the
government. In order to protect their vested interests or
extend their privileges, they may attempt to strengthen their
organizational power even more and try to keep close relations
with the government and related bureaucrats. Sometimes they
also try to change unfavorable government policies in their
favor by threatening possible sabotage which could cause
market instability or a break down in the market.

Recent tendencies toward vertical integration in the food
industry seem to have initiated significant changes in trader
behavior such as an increase. in formal contract making,
attempts to improve quality of products and services as well
as managerial skills and marketing technologies, and the
efforts to legalize enterprises and publicize market
information. These changes are a hopeful signal for the future

development of agricultural marketing.

138

W

An authoritarian regime, whose power ultimately centers
on one man, makes the behavior of government an 'everything
.possible' situation based on self-justification without
sufficient open, public discussions. This is another origin
of overall government regulation and intervention, sometimes
-called every-time every-where interference.

Authoritarian Korean governments were power maximizers,
not real popular support maximizers, although they required
some formal activities for nominal vote maximization. For the
purpose of maximizing power monopolized by a few ruling
groups, there were various types of oppression of the
opposition, restriction of freedom of thought, speech, press
and. organization, and. collusion of Jbig enterprises :with
military, political and technocratic powers.

Under these circumstances, the nature of government
policies and decision rules appeared arbitrary, impromptu or
instant, formal and aggressive, based on self-made ideologue
and wishful thinking without firm and consistent principles.

Alternating between extreme rigidity and infinite
flexibility, leaders made policy without providing enough
information about policy making procedure or open debates
among policy alternatives. This made predictions of future
policies even more difficult, providing additional sources of
uncertainty to private participants.

Bureaucrats, often called technocrats, in public

139
administration usually adapted to the circumstances and were
contaminated by monopolization of power. Usually they behaved
as if they were loyal to the President, not the country and
the people. They seemed to be the promotion seekers or
maximizers of job security. Attempts to read the President's
mind became the foundation of their activities, especially in
the case of high rank officials.

The President's preference dictated that many of the
Ministers in 19705 attempted to be the person of three
'-sh'es; rush, dash, and push. Of- course, the laws of
compulsive innovation and inescapable discontinuity pointed
out by A. Downs were also relevant in Korean bureaucracy.

On the other hand, tamed by downward orders and chronic
low salary, most lower level bureaucrats deteriorated in
quality with over crowded number became ease and idle with
highly opportunistic behavior. At the same time through the
exploitation of their power over private citizens, most of
them became accustomed to abusing power, wasting public
expenditures, engaging in various types of corruption, and
skillfully avoiding their responsibilities by imputing them
to others. These were basic reasons of organizational
inefficiency or cost ineffectiveness in the public sector as
well as main sources of people's distrust toward the

government and its policies.

140

B-W

1. 't f P 1' Goals in ricultural n u a
W

At the beginning of the First Five-Year Economic
Development Plan in 1962, the main.catchphrase was "Let's live
better!" and three targets of growth were 'more production,
more export, and more construction'. In the latter decade
since the Fourth Plan in 1977, the main goals of economic
development shifted from 'only growth' to 'growth with
stabilized and self-sustaining national economy and improved
quality of life of the people', and the three targets became
'stabilization, efficiency, and balance'.

Hence in the agricultural and rural sector, the main
policy goals in early period.were'more domestic production
of foods and more income for farm households, which has
continued until the present. In the latter decade of 1977-86,
two more goals of 'food price stabilization and improvement
of agricultural marketing' were added.

However, until recently, the first priority of Kbrean
agricultural policy has been. to supply necessary and
sufficient quality foods for the people, if possible through
domestic production at 'stabilized and reasonable' prices.To
many Korean government policy makers in the last two decades,
the high dependency on foreign supply of foods was considered
a serious threat to national defense as well as to a self-

sustaining national economy.

141

At the same time, it seemed to be a dangerous source of
instability in the domestic economy, especially after the
world food crisis around 1973 and.the first oil shock, Already
afraid that extremely high and fluctuating world food prices
might continuously disturb domestic markets in case of high
dependency of food on foreign supply, Korean policy makers
were further troubled by the extraordinary bad crop year and
political crisis of 1980. 1

The second priority of agricultural and rural policy
goals was to increase farm household income so as to improve
the quality of rural life while increasing effective demand
for industrial products to back up industrialization. The
critical reference of farm household income was that of urban
laborers' income. Although income parity had been
statistically favorable to farm households throughout the last
two decades, the quality of rural life was considered as
significantly inferior to that of urban life. This perception
originated mainly from the relative inferiority of rural
infrastructures of transportation, communication, recreation
and health care, and inferior opportunities of employment
creation and quality education in rural areas. The Korean
government tried to achieve a parity of welfare between rural
and urban lives by supporting farm income without focusing on
more investment to expand rural infrastructure and create more
chances. of quality education and permanent employment

opportunities in rural areas.

142

Thirdly, 'the recent objectives of price stabilization
and market improvement of agricultural products were
implemented with the objective of reducing inflation and
instability of overall Korean economy in the late 19705.
Planners and coordinators of national economy, mostly
represented by EPB of Korean government often considered the
price of food or agricultural products initiator or leader of
overall inflation and instability.

Although it seems. clear' that. price fluctuation. and
instability of agricultural market have been the basic reason
for instability of farm household income and rural economy,
most policy makers in the agricultural sector in MAFF did not
take this relationship very seriously. Instead, they were
reluctant to restrain price hikes and focused their interests
on supporting prices without sufficient means to prevent
possible drastic price drops in subsequent'periods. MAFF often
considered marketing improvement simply as a means of
increasing the share of farmers by reducing the share of
traders, while EPB treated market improvement as a means of
reducing possible opportunities of speculation which makes
price fluctuations greater, and ignored the possibility of its
contribution to stabilizing the price.

Hence, fundamental policy goals were neglected. These
goals include vitalization of the Korean agriculture as a
self-sustaining industry with sufficient competitiveness and

increased linkage with other sectors of national economy, and

143
increase of the capacity for coordination and self-control of
supply and demand of agricultural markets on the basis of
balanced bargaining power of each participant in the private

sector.

2. C l ct'n Goa s of r'cultural and R al Pol' ies

As in many other countries, there have been several
conflicting policy goals concerning the survival and
development of the Korean agricultural and rural sector. First
of all, 'conflicts between national and sectoral goals or
between goals of agricultural and non-agricultural sectors
have been fundamental and critical. These conflicts usually
become practical power struggles between national economic
planners and coordinators (EPB, or Ministry of Finance) and
agricultural policy makers (MAFF) and policy makers from other
sectors from other sectors (e.g., Ministry of Trade and
Industry).

Examples include struggles to determine the target levels
of internal terms of trade between agricultural and non-
agricultural prices, incbme parity between rural and urban
residents, level of protection ,or trade restriction, and
allocation of financial and administrative resources for each
sector.

Food price dilemma, or two faces of food prices as an
incentive for domestic food production and returns to the

farmers on the one hand, and as the cost of living for

144
consumers, the price of standard wage goods for industry, and
the key determinant of treasury cost on the other, are typical
forms of the kind of struggle which arises whenever it is
necessary to decide the price level of government intervention
in agricultural product markets.

Also there have been many conflicts between national and
regional goals or among various regional interests, between
short-run and long-run policy goals or between goals for
present and future generations. It should not be neglected
that the conflicts between public and private interests have
not been ‘clearly identified. Private. interest has been
virtually ignored in.the name of a public interest.which often
confused and mixed real national or public interest and the
interest of the government and bureaucrats or the interest of
power groups dominating the government.

In this sense, without sufficient open discussions and
excusable-justifications by the majority of the people, the
principle of private ownership was damaged. A typical example
may be the restriction of cropping other than rice on fields
available for rice production in order to maximize the area
of rice cultivation. .Another' policy' damaging to jprivate
interests was restriction of rice consumption by appointing
no-rice day a week and requiring that students' lunch boxes
and restaurants mix a government-ordered percent of barley or
other coarse grains, merely to achieve the government policy

goal of self-sufficiency in rice.

145
3. o a oa den 'ficatio and Consensus

Under authoritarian regimes, principal administrative
slogans were 'maximization of bureaucratic efficiency' and
'perfect order with no .disturbance', which resulted in
ubiquity of one-sided downward order and blind obedience
within the bureaucracy. Orders of the President, Premier,
Minister or heads of public agencies, usually driven by
impromptu and instant one-man decision making which skipped
the process of debates or discussions to reach compromises
and consensus, frequently preceded legal authority.

The government tried to extend this practice to all the
private sectors, neglecting individual private preferences or
interests. This practice was the basic reason for lack of
clear problem definition and goal identification of policies
on the basis of necessary compromises and consensus, often
ignoring opposite or minority opinions and under-estimating
the functions of private markets.

Every year the targets of planned production and
consumption and public investment programs of the government
budget were established by central government ministries. This
was the case even for agricultural commodities, production of
which depends on unpredictable weather conditions and
consumption of which on uncontrollable private tastes of
individual demand. Of course there may exist some general
forecasting estimation or projection by which financial and

administrative resources were allocated but the problem.was

146
that these planned targets are imposed on the local
governments, lower level agencies and the parastatal
organizations as practical goals to be achieved.

These targets or goals, set up by a few technocrats
following the orders of the President and the like, usually
did not reflect the critical reality or the people's
interests. The achievement of these targets, sometimes
including an income target for the average farm household,
was considered to be the contribution of the Ministers and
related bureaucrats, and their level of achievement was one
of the major rulers of evaluation of their performances. An
extreme example was the target of rice transplanting dates
and areas set up by MAFF. In order to achieve the target, some
local government officials tried to complete. picking of other
crops still growing in private paddy fields.

Most other administrative targets of development
projects, investment programs and input supply plans were also
created through arbitrary and one-sided downward decisions
without participation of those actually involved. The same
situation existed in the case of establishing new institutions
to implement those targets and plans. This policy making
process degraded the performance quality of each policy and
institution, and increased transactions costs (especially the
sunk costs of over-investment or misallocation of resources
for mistaken plans or targets and false institutions which

must cover costs of dismantling or correcting those errors).

147
C. ° 'es a ' t’tut'o 5
1. Wm

Food security has been the first agricultural policy
priority of Korean government up to now, although the
environment and behavior have completely changed. Moreover,
the Korean .governments has concentrated its power and
resources primarily on achievement and maintenance of 'self-
sufficiency of staple food grains (rice and barley)‘, not on
clear and continuous re-definition of problems and re-
identification.of goals, even under’a situation inwwhich.self—
sufficiency of food was nearly impossible and feed grain
imports were inevitably increasing.

One representation of this misplaced policy emphasis is
the organizational framework of MAFF through 1986, in which
four out of six Ibureaus ‘were (primarily responsible for
production and.price policies of rice and.harley. In addition,
more than two thirds of agricultural research and extension
were mainly devoted to an increase in rice production. All
possible networks of local administration, parastate and
agricultural cooperatives were mobilized to increase rice
production from seed-bed to harvest. Even many ordinary
citizens were mobilized in the name of 'voluntary help' to
supplement labor shortages in peak seasons of rice
transplanting and harvest.

The most prominent policy in this area from 1972 was the

introduction of high yielding rice varieties from IRRI. These

148

newrvarieties of additional 30-40% yield.but lower'quality for
Korean consumers were rapidly disseminated after being adapted
to Korean climate and soil, peaking in 1978 when such
varieties covered 76% of all rice planting area. Local
government imposed annual quotas which planned the area of
rice planting and designated the percentage of new varieties.
The head of each local government was responsible to achieve
his area's target. More fertilizer and irrigation facilities
with technicalextension works were provided for the expansion
of new varieties. And the products of lower-quality rice were
purchased by the government at the same price as high-quality
traditional varieties of rice to maintain the production
incentives.

other policy examples representing the magnitude of
governmental efforts to increase rice production include the
following. Most paddy fields were prohibited to transform for
other purposes beSides rice production and most arable land
available for staple food production was limited use only for
food crops and not other cash crops.

Most long term agricultural projects with a huge
government investment were concentrated on development of
irrigation facilities to enlarge the area of paddy field and
securing of rice production from possible drought. Most
agricultural inputs (seeds, fertilizers, chemicals, etc.) were
preferentially provided through government subsidies only if

used for rice and barley production and most short-term farm

149

loans were granted to cover the expenses of rice growing.
Farming calendar for rice production determined and dictated
to the farmers each year by MAFF and ORD (Office of Rural
Development in charge of agricultural experiment and
extension). Sometimes it was reported that local government
officials picked not-yet-mature onions from paddy fields to
prepare for rice transplanting against the owner's will to
keep the government schedule.

Most tasks of extension workers were the supervision of
rice growing conditions and encouragement of greater rice and
barley production. Spraying of pesticide or insecticide was
compulsory if any diseases or insects were found in one's
paddy.

All these.activities*were carried.out to reach.the target
amount-of rice production in a semi-military atmosphere. After
harvest, the best contributors to achieve the targets were
selected from all local and central government agencies and
parastatal organizations and honored with prizes. Farmers who
produced the highest rice yieldwere also selected and honored
with prizes.

Agricultural land reform had already taken place in 1949-
50 by confiscating arable land from each owner who owned in
excess of 3 hectares per family with compensation (although
compensation could not be productively transferred to other
industries and was not storable as another form of wealth),

and distribution of that land (plus the land previously owned

150
by Japanese before the liberation) to landless peasants free
of charge.°

The result of this land reform in Korea did not bring
positive effect in the sense of increasing land productivity
because farmers lacked subsequent motivation and capacity to
make additional investments, while the reforms left a negative
legacy of being an official obstacle to the allowance of land
leasing in casezof the necessity of increasing farm.size above
3 hectares. ’

However, recent surveys show that over 30% of total farm
land was in fact rented and 63% of all farmers have in effect
become tenantsl, even though tenant farming had been
officially prohibited by the Land Reform Act of 1950 which,
until 1988, remained legally valid but not practically
effective. . ‘

In short, the problems related.to farm land such as those.
of absentee land owners, allowance of farm land leasing with
regulating maximum rent, releasing restrictions of farm land
use have not yet been properly handled by the government.

On the other hand, huge capital investments for land and
water development to increase capacity of agricultural
production while decreasing both the chances and possible

damages of flood and drought have already been completed or

 

1 Source; MAFF. MW (in Korean).

not published internal data collection in the Ministry, Dec.
1988, p. 42.

151
are still on going. These investments still represent nearly
30% of total annual budget of MAFF.

Agricultural input markets, government dominated or
controlled formerly, have been gradually privatized. Many have
specialized in production as well as marketing. The portion
of government subsidies for' products ‘which. meet. certain
quality standards has been significantly reduced.

However, basic fertilizers for rice growing have been
supplied through long-term contracts, ending in 1989, between
government guaranteed agricultural cooperatives and joint-
venture manufacturers supported by Korean government and
foreign capital. Fertilizer is distributed by parastatal
network of agricultural cooperatives with a huge cumulative
loss to the Fertilizer Account. And government licensing and
inspection systems for almost every input supplier have been
maintained as the primary entry barrier and constraint to
encourage competition in those industries.

Another extraordinary aspect of food security policy was
consumption control of food grains. As mentioned earlier, in
order to maintain the self-sufficiency of rice, the Korean
government tried to restrain rice consumption and substitute
it with barley, wheat or other coarse grains, mostly through
nationwide campaigns initiated by government but sometimes
regulating rice cooking in restaurants and checking students'
lunch boxes. One day a week was appointed as 'no-rice day'.

Rather than following an unrealistic policy of self-

152

sufficiency, Korean government should have focused policy
efforts on increasing self-sustaining capacity of national
economy and strengthening the competitiveness of Korean
agriculture as a successfully surviving and developing
industry. Such a policy could have been accomplished by
encouraging farm size expansion, technical innovation to
reduce cost, improvement of farm. management (especially
financial and risk management), and increasing ability to
adjust to both domestic and international markets.

Other relatively neglected dimensions of agricultural
policy' are. concerns about. environmental 'protection, food
safety and conservation of green space and cultural traditions
in rural areas necessary to preserve remaining sources of

recreation and roots of Korean national identity.

2wWMaranfiJradflmlatiens

These issues seem to have originally been a part of food
security policies to achieve self-sufficiency of rice and
barley as well as to increase farm income, which depended
mainly on production and sales of rice and barley. The price
support system was adopted primarily as an incentive for
increased production.

However, it should not be neglected that rice price was
one of the major parameters in wage goods price which had to
be kept relatively low to support export competitiveness of

the growing manufacturing sector. Moreover, the government

153
needed enough stock for emergency under what the government
terms war-like conditions.

Hence, Korean policy makers decided that ubiquitous
government intervention and market regulations based on a huge .
comprehensive program of government purchase and release of
rice and barley were essential. The government program
included. nearly every aspect_ of the, process of grain
marketing; storage, milling, transportation, packing and even
retailing of purchased stock. Furthermore, all staple food
grain markets and related facilities were officially regulated
and formally controlled primarily through. a government
licensing system, however, failed to eliminate flourishing
illegal, informal, real markets.

All foreign trade of food grain was monopolized by the
government; thus, private import was prohibited with the
exception of a relatiVely small amount of wheat for flour
milling. Detailed description and analysis of this program
and related regulations will be presented as the main subject
of the first section of Chapter V.

Policy interests in other prices were actualized since
the late 19705, when the prices of meat and vegetables (e.g.,
red pepper, onion, garlic and Chinese cabbage) became.highly
unstable and greatly fluctuated both seasonally and year-by-
year during a period of high inflation. Policy makers tried
to stabilize and contain prices through price-supports and

price-controls.

154

Policy makes thought they could control prices by
managing the quantity of supply and demand. They tried to set
up certain price ranges for each commodity as a target of
stabilization. When price fell below the lower limit of the
range, government and parastatal organizations purchase excess -
supply or keep part of supply from being marketed. When the
price rises above the upper limit, government and parastatal
organizations release their stock, import the amount required
or impose price ceilings. As in the case of rice consumption
control, sometimes they tried to control demand.

For these programs, two special funds were formulated:
'The Livestock Development Fund' for meat and 'Agricultural
Price Stabilization Fund' for ‘fruits, vegetables, other
special cash crops and fishery products. I

Imports were generally prohibited in the name of
protection of Korean agriculture and farmer's income, while
exports were sometimes encouraged to expand demand and earn
more income for farmers, especially in the case of domestic
price decreases, but sometimes exports were restricted to
prevent extra price hikes in case of domestic price rises.

Domestic marketing was also frequently restricted and
regulated, but less so than food grain marketing, usually in
the name of quality control to protect consumers (e.g.,
sanitary purposes or to maintain freshness) but actually for
price control in case of government necessity.

All these policies have originated from a lack of

155
confidence in the market economy and distrust of the function
of the private sector, which consequently has severely
distorted the market and weakened the private sector to become
an evolving social trap. The floor'price for producer's income
support often led, to the a trap of over-production and
increased deficits and the governmental costs, and so on.

If the government purchase price is too low, it is
nothing but _another source of criticism against the
government. If it is. too high, there will be a short-run
dashing competition to sell to the government, possibility of
a long-term over-production trap, frequently resulting in a
shortage of buying capacity and difficulty of allocating it.
A possibly worse result could be a crash in the actual market
price and the immediate ‘protest of 'those excluded from
purchase and exploding distrust to the government, parastatal
organizations and agricultural cooperatives.

Supply control through limiting acreage or withdrawal
from the market simply did not work, and export refunds were
not implemented, mainly because of opportunistic behavior by
farmers and traders and the high administrative cost of
implementation. In short, price supports were not effective
because financial and administrative capacity of government
was not sufficient to continue the supports.

Price control or ceiling prices for consumer protection
or anti-inflation also did not work effectively. In general,

the timing and pricing of the release of government (or

156
parastatals) stocks and/or imports was inappropriate, usually
too late, and either the release price was too high or too
low.

In. case. of too' high a release price, such a control
simply did not accomplish its intended purpose. In case of
too low a price, there was a panic of people rushing to buy,
again bringing about severe market distortion and damage of
trust. in government from the people who could not fulfill
their needs. Moreover, this flexibility of policy decisions
might have greatly increased additional uncertainty and the
opportunistic behavior in the markets with an increased chance
of additional corruption.

Administrative price controls of maximum prices or price
freezes without resolving the imbalance of supply and demand
simply did not work. As in other countries, it only resulted
in quality deterioration, quantity deception through cheating
on scales, illegalization of natural responses by ordinary
consumers and traders, and increasing incentive for the spread
of black markets. .

Restrictions on domestic marketing were not very
effective in achieving the initial purpose of quality control,
mainly due to a lack of sufficient administrative inspection
capacity. Some restrictions became unnecessary through rapid
spread of cooling systems and refrigerators; for example, the
restriction on the meat marketing zone to maintain freshness.

Instead, they became rigid entry'barriers to the market at the

157
same time severe constraints on (competition which became
possible sources of unfair privileges for a few selected
people, and eventually the main obstacles to the development
of the market and related industries.

Here, the missing or insufficient policy areas seem to
be the efforts to increase each participant's capability to
adjust himself to the market situation of demand and supply,
and to balance bargaining power among the participants (e.g.,
encouraging cooperative actions of weaker sides) , with efforts
to improve conditions of :market infrastructures such. as
marketing facilities and standards, technologies and
management skills to reduce marketing costs, marketing
information networks for more efficient and equitable price
formation, etc.

The policy performances of the regulations on domestic
beef marketing and trade policy of beef will be analyzed in
the second section of Chapter V, and feed grain import policy
and competition in feed industry will be examined in the last
section as typical examples of past Korean price policies,

marketing regulations and trade restrictions.

LEW
Until very recently, over two thirds of farm household
income had been from rice and barley farming (51% of total

gross farm earnings came from rice and barley in 1987,

158
compared to 70% in 19651). Hence, to policy makers, rural
income support was to increase production of rice and barley
while supporting prices.

On the other hand, before frequent short term excess
supplies and drastic price drops fall below the. cost of
production in the late 19705, farm income support through
means other than rice and barley usually meant an increase in
production of cash crops and livestock products.

Thus in 1969, the Korean government adopted the Special
Income Increase Program.for Farmers and.Fishermen, which later
became a part of the Saemaul (or the New Community) movement
in 19705 and changed its the name to the Complex Farming
Encouragement Program in 19805. The basic scheme of the
program was to give long-term low-rate public loans to farmers
for introduction or expansion of cash crops, livestock and
fishery farming' with some input subsidies 'and 'technical
assistance.

In its nearly stages this program was relatively
successful in increases farm income along with increasing
domestic supply of certain commodities of rising demand, but
became critical in the late 19705 as prices.began.to fluctuate
widely due to occasional over production within thin and
regulated domestic markets along with tight trade restrictions

and increasing risk and uncertainty.

 

1988

1 Source; MAFF, neje: Agnieuinnnal Statistics (in Korean),

159

Frequent but insufficient and unpredictable government
intervention became an additional source of uncertainty and
opportunistic behavior. This blind investment, stimulated by
the government program, did not consider either cost
structures and.market capacity or improving managerial skills
of financial, marketing and risk management of farmers and
often resulted in total failure of such individual programs
and bankruptCy of many individual farms. These results were
another source of serious distrust and attack on the
government.

However, income from farm earnings must have a
fundamental limit because of limited ultra-small farm size
and less chance to increase size either by increasing land
(due to limited total arable land with too many farm
households) or extending the cropping season (due to climate
condition and high investment requirements to overcome such
conditions). Land productivity has already reached a maximum
level, over which the law of diminishing returns with
increasingly rising unit cost becomes clearly relevant, in
the case of all but a few farm products.

But the Korean government has not invested necessary
efforts to another 'policy alternative to support rural income,
'the increase of off-farm income, as was done in Japan and
Taiwan (The share of off-farm income in total farm household

income in 1985 was only 35% compared.with 81% in Japan and 63%

160
in Taiwanl). Moreover, roughly a half of off-farm income is
transferred (not earned by one's self) income either received
from children or mutually granted at ceremonial occasions,
unlike in Japan and Taiwan where most off-farm income is wages
and salaries (81% in Japan, 67% in Taiwan compare to 39% in
Koreaz).

Out-migration from rural to urban areas has been due
mainly to differences in job opportunity and quality of life,
especially that of health care and education, between rural
and urban areas. This in turn has resulted in widening the.gap
of productivity, income and economic vitality between the two
regions slowly becoming another social trap consisting of over
crowded cities and backward rural areas.

In the early 19705, the New Community Movement made some
contributions to expand rural infrastructures such as roads,
water supplies for daily life, electrification, sewage,
communication, etc. But because of lack of follow-up public
inve5tment by the government it did (or could) not contribute
much until very recently, to extend quality education, health
care and recreation or to improve the quality of daily life
in rural areas sufficiently as in urban areas. The convenience
of shopping, public baths, beauty services, and other cultural

and leisure services in the cities to the contrast of the

 

1 Source; Ibid.

2 Source; Ibid.

161.
basic hardness of farm works were the very reasons for out-
migration to the cities.

Several times Korean government has tried to increase
off-farm income in the name of Rural Industrialization Program
and Side-Job Encouragement Program, neither of which have been
successful because business sizes were too small to be
competitive as an economic unit, with insufficient public
services and relative disadvantages of location: costs of
transportation and communication were higher; land price was
not cheaper enough to be an incentive; access to the market
and getting necessary information were difficult; and it was
unable to make contact with business related decision makers.
There was not even any government agency actually initiating
and coordinating the program nor was there necessary support

and cooperation among related Ministries.

4. :- 7 - - a Coo-e a 'v- :13 1a,.- 7 . 3_-ag'_. no:

In the early 19605, the 'Comprehensive Agricultural
Cooperatives' system was established by combining the former
Agricultural Credit Union and the Farmers Cooperatives, which
was maintained its original organizational framework as three
step organization controlled by the government until recently.
NACF (National Agricultural Cooperatives Federation) was
totally under the control of MAFF for general matters and
nearly all programs and MIF (Ministry of Finance) for money

and credit matters. County Cooperatives were controlled by the

.162
provincial governments, and Unit Cooperatives were
administered. at the. grass root 'village level by county
governments.

The head of NACF was appointed by the President through
the recommendation of the Minister of MAFF, and yearly plans
and budgets were approved by MAFF instead of the board of
representatives. The heads of lower level units were appointed
by the head of NACF following the recommendation of the
provincial governors (usually agreed by the concerned
congressmen of ruling party to the National Assembly). After
1980, the selection process became a mixture of limited
election and approval.

NLCF (National Livestock Cooperatives Federation) was
separated from NACF with its local branches and unit
cooperatives in 1980. The main organizational framework of
NLCF and NFCF (National Fisheries Cooperatives Federation),
established at the same time as NACF, was the same as that of
NACF.

In short, these so-called cooperative organizations were
nothing but the semi-parastatal institutions in terms of
organizational structure, the apparently inevitable result of
the overall political environment in Korea. This was because
potential political power of these organizations was too great
to allow their autonomy (freedom to become an opponent to the
government and ruling party). Actually these groups are still

the biggest organizations in Korea in terms of nationwide

163
networks and the numbers of members and employees.

Major functions of these organizations are three fold;
cooperative purchase and distribution of agricultural or
fisheries inputs and some consumer goods, cooperative sales
and marketing of products, and.credit‘union for'mutual funding
and supply of public loans usually subsidized by the
government. Among them, the second function of marketing has
been the smallest, weakest and the most riSky one in which
these organizations are reluctant participants.

Several parastatal institutions for agricultural
development include. .AFDC (Agricultural and. Fisheries
Development Corporation) which. changed its name to .AFMC
(Agricultural and Fisheries Marketing Corporation) in 1986,
and .ADC (Agricultural Development Corporation) a public
enterprise for land and water development.

The grain management program has been carried out
directly by government agencies including the Bureau of Grain
Management with Special Account for Grain.Management in.MAFF,
and Office of Inspection for Agricultural Products. NACF and
its network have been mobilized to implement the program under
the direction of MAFF with service charges of purchase,
storage and release. Transportation, milling and packing jobs
have been done by a few appointed private businessmen on an
annual contract bases.

NLCF and its network have been involved in livestock and

meat marketing programs such as purchase of beef cattle or

164
pigs from farmers in case of falling price; and import of meat
or cattle in case of rising price; and slaughter and storage
of purchased livestock, transportation, cutting, packing and
distribution of purchased or imported meat. The Livestock
Development Fund, handled by NLCF under control of MAFF, has
been the financial source of those programs.

However, the decisions of amount and price of purchase,
import, process and release have been made primarily by MAFF,
not NLCF nor its local units. They have earned the service
charges relating only implementation of those programs. NFCF
is virtually the same as NLCF except the difference of items
concerned.

AFDC (or AFMC) was engaged initially in storage and
processing industry development programs of agricultural and
fisheries products by improving technology and encouraging
private enterprises. It became more involved in agricultural
marketing since the late 19705, especially for importation
and release of vegetables with increasing prices (e.g., red
pepper, onion, garlic and sesame) and barter-trade fruits
(e.g., banana from the Philippines, Ecuador and Taiwan). The
management of Agricultural Price Stabilization Fund was
transferred to AFDC from NACF. As in the cases of NACF and
NLCF, decisions were made by MAFF, and AFDC earned only the
service charges.

In short, all the important decisions to intervene have

been made by the government and these institutions only.

165
executed. the decisions ‘with. given service charges. They
neither successfully functioned as a marketing board nor
adequately contributed to coordinate market supply and demand.
Rather, many people criticized that they contributed to market
distortion and uncertainty, which might have led to increased
instability instead of contributing to the initial purpose of
stabilization, because of their rigid actions in executing
government decisions (adding one more step of bureaucratic
procedure), inefficient responses to changes in the market
situation, and highly opportunistic behavior of their

employees.

CHAPTER V
IMPACTS OF RECENT POLICIES AND INSTITUTIONS:

ECONOMIC ANALYSES OF POLICY PERFORMANCES

It would be nearly impossible in this limited study to
analyze the impacts of‘iall the policies and institutions
mentioned in the previous chapter. Thus, three typical
policies have been selected to be analyzed as representative
of recent Korean agricultural policy and institutions; rice
price support, beef marketing regulation and feed grain import
policy.

Rice policy has maintained its main frame work for more
than two decades without notable changes in spite of
significant changes in environment and behavior. Hence this
analysis will focus on the differences of policy performance
between the two periods, 1967-76 and 1977-86, comparing the
impacts of the same policy on different environments.

On the contrary, beef policy has been changed several
times; import policy changes (first importation in 1976,
banned in 1980, import again in 1981, ban again in 1985) and
an important partial deregulation of the domestic beef market
in 1985. The main focus of this study will be to analyze the
impact of policy changes, comparing performances before and
after the changes.

Finally, there has been a big difference in import policy
between food grains and. feed grains; complete government

166

167
monopoly and cOntrol of food grain import and domestic
marketing versus allowing private importation of feed grains
and domestic competition in feed industry. So the differences
of performance between two subsectors of food grains and feed

grains will be the main point of analysis in the final part

of this chapter.

A. Pnice Support and Consumer Price Control of Rice
1. Beliey genduct ang Eenfionnance

Rice production increase and self-sufficiency have been
the top priority of Korean agricultural policy, and government
intervention for price support as an incentive for production
increases has been essential for that purpose. At the same
time, it has maintained a complete government monopoly and
Control system of importation and domestic marketing of rice
flor the sake of consumer price control an anti-inflation and
market control for emergency preparation.

The basic framework of this policy has been presented
already in the previous chapter. Every year, the yearly food
grain management plan has been set up by MAFF (agreed to by

E‘PB and MIF, approved by the cabinet meeting and finally by
the President) at rice harvesting time (usually in October).
This plan includes an estimation of demand and domestic
Supply, the amount of necessary imports, government purchase
and.re1ease guidelines and annual budget for the program.

The most important decision is to determine the price

168
and.amount.of government purchase of rice, which.is the center
of conflict between EPB, representing the general economy and
consumer interest, and the MAFF, representing farmer's income.
The representatives of the National Assembly and political
parties appear to have been on the farmer's side, strangely
enough without a big argument from the consumer's side.

Figure 8. Government and Market Prices of Rice

 

non/B0 kgs
00000
A ,r‘. p»... (a) ’x’
5'". f \ I a! ‘\ ’1 \\’_, .1
- 1’ _ ’ /\ . _,...I
I A rs... .. ..ee."e.
40m ( 1) ”.:....-~ .r’ j‘Lfl . \l’ (2)
1’ . I «Wm. .
I...’ e I 5" ...e.. "
~ (’6 \" " \
.f"
23333 ._ V/ \/ \Q/i..\
i \np—-w”n\.

 

 

(JJ).Government Purchase Price (2) Government Release Price
(13) Wholesale Price in Short Season (August)
(4) Wholesale Price in Post-Harvest Season (December)
(5) Import Price (FOB) 7
All deflated by Wholesale Price Index
'* Data Source; MAFF, EPB and BOK, Ibid.

Figure 8 shows government prices of purchase and release
and.wholesale prices of rice in the post-harvest season (the

lowest of the year) and.the short season (the highest) and the

169

import.price (FOB), all deflated.by the wholesale price index.
Most peOple on farmer's side have been primarily interested
in the increase rate of nominal (not real) price of government
purchase. However, the government purchase price had been
significantly higher than wholesale price in the post-harvest
season in real terms until 1981, and has often been higher
than the highest wholesale price.

On the contrary, the government release price has been
much lower than the wholesale price in the short season and
the government purchase price, and since 1975 has been even
lower than the lowest wholesale price. Import price has been
much lower than all the prices above except during the world
food crisis of 1973-75, and the price gap between import and
domestic has steadily became wider and after that crisis.

Table 13 shows the amounts of annual domestic rice
production, imports and government purchases. Domestic
production increased rapidly with the introduction of new
high-yielding varieties (1974-78) , and import decreased except
during the bad crop year of 1980/81. While the amount of
government purchases increased along with the production
increase of the new ‘varieties in order to support the
production incentives (the share of new varieties in total
purchase was more than 90 % since 1974/7-5, more than 98 %
since 1985/86), the amount of carry-over stock also increased
significantly, partly because of an increased government

purchase of low-quality new varieties not sold popularly in

170
the private market. The amount of government release was at

its peak in 1979-81.

Table 13.
(Unit: thou. M/T)
Carry-
Eeg_1221111 Insert 925: Eurshassinl 213 3512355
67/63 3,613 - 113 9 279 7.73 235
63/69 3,195 - 430 37 132 4.1 442
69/70 4,090 - 541 34 319 7.3 631
70/71 3,939 - 907 325 350 3.9 749
71/72 3,997 - 534 394 492 12.3 1,130
72/73 3,957 - 437 613 506 12.3 539
73/74 4,212 - 206 711 479 11.4 606
74/75 4,445 356 (19.2) 431 433 735 16.5 972
75/76 4,669 1,330 (29.6) 163 715 739 16.9 553
76/77 5,215 2,553 (43.9) - 906 1,043 20.0 343
77/73 6,006 3,643 (60.7) - 1,076 1,402 23.3 606
73/79 5,797 4,516 (77.9) 501 1,213 1,355 23.4 1,133
79/30 5,136 3,449 (67.2) 530 752 1,300 25.3 1,633
30/31 3,550 1,733 (43.3) 2,245 1,066 545 15.4 1,742
31/32 5.063 1,403 (27.7) 269 1,495 915 13.1 1,560
32/33 5.175 1,391 (36.5) 216 1,423 1,091 21.1 699
33/34 5,404 2,023 (37.4) - 1,511 1,219 22.6 911
34/35 5,632 1,342 (32.4) - 1,247 1,215 21.4 332
35/36 5,626 1,729 (30.7) - 1,423 1,090 19.4 602
36/37 5,607 1,236 (22.9) - 1,249 391 15.9 439
37/33 5,493 1,123 (20.5) - 1,239 733 14.3 352

 

Source: HAPF. DaIa_29l19stisn.92.§rain_nanasenent (in Korean). Bureau
of Grain Management, MAFF, 1988

The amount of government purchase is allocated to each

province by MAFF, to each county by the governor of the
province, to each village and farmer by the head of the county
or the village. Purchasing time is usually from November to
January. During'this time, NACF1and its local branches operate

temporary purchase markets. Farmers have to bring their

unpolished paddy, packed in straw bags (recently plastic bags)

of 80 kgs each, to the nearest purchase market.

171

After inspection and grading by government inspectors
(Office of Inspection for Agricultural Products in MAFF),
price is paid by NACF personnel on behalf of the government.
Purchased paddy goes to the designated storehouses (usually
local cooperatives) and is stored until transport or milling
orders are received from MAFF.

This government stock primarily goes to military
consumption and other government necessities (e.g., prison)
and is released to the private market especially'in.high-price
season of May to August. Some amount has to be kept in stock
as the so called 'emergency stock'. MAFF orders transport,
storage and processing of the stock every day for each purpose
to each designated contractor via local governments. The
government prices of purchase and release are fixed throughout
the nation all year without reflecting the cost differences
of storage and transportation.

The government release program is usually dominated by
.retail sales of government brand polished rice directly to
the consumers. Not until recently has it been released in
wholesale market or to millers in the form of unpolished
paddy. So the government business bears all marketing costs
through the inefficient mechanism of public enterprises in
order to sell the low quality government stock.

Quality is getting worse because of relatively longer
time needs to process for sale for government stock, making

the reputation of the quality of government brand rice (and

172
consequently the quality of government itself) worse.

There are no sales promotion activities or sales
incentives for private retailers. The margin for the
designated retailers of government brand rice is fixed all
year, at a much lower rate than that of private rice sales.
The retail bag size of government rice has been is also
unwieldy for use by direct consumers.

Naturally enough, most retailers are likely to be
cheating consumers by unpacking the government.rice and mixing
it with high quality private rice. The only thing the
government can do is to observe and coerce regulated sales of
government brand rice. If cheating is found, the license or
designation is revoked. Sometimes government officials have
to buy government brand rice through coercion, an outrageous
sales promotion tool, usually to be resold to private
retailers in exchange for high quality rice.

Because of the system of granting private contractors
exclusive privileges to earn jobs without competition, quality
of service is not improving. Service charges are fixed all
year throughout the nation. Contractors are interested only
in job seeking, not losing designation, and payment of their
charges. They are likely to become powerful in the local
community through those privileges, and often become
representatives in ‘the National Assembly. They are 'very
reluctant to reform this system of privilege, which is the

biggest obstacle to the policy reform in this area.

173
.Finally, all costs of this program are covered annually
by the Special Account of Food Grain Management, a part of
the government.budget. And the financial source of the program
is the Food Grain Management Fund, composed of original
government capital and special loans from the central bank
(BOK), or issuing the Food.Grain Management Bond and temporary

borrowing from NACF.

,Table 14- I99d_Qra1n_nanas9m5nt_Eun9_i2n1ti_2111_ugni_£nrrent_zrisel
mmmzi 1:12:32 1:21:35

Annual Fund Size (A) ' 78.5333126-424 593-870 1519-1679 1875-2158

Annual Gov't Budget (B) 512 587-1069 1632-8640 5356-9571 10745-14252
A/B (%) 15 22-40 36-27 28-18 17-15
Total Losses 2.8 152.6 366.1 725.0 1,460.9
BOK Loans*. - 260.0 66440 750.0 250.0
' Balance - 246.0 910.0 1,392.0 1,642.0
Gov't Bond Issue33 - - 450.0 1,480.0 2,800.0
' Repay - - 220.0 1,060.0 2,730.0

” Balance - - 230.0 650.0 670.0.

Total Debt Balance
Budget Compensation -

246.0 1,100.0 2,042.0 2,312.0
- - 358.0 1,13004

 

* Annual interest; 2 % before 1980, 5 3 since 1980
*3 "r " ; 17-26 8 before 1982, 9.2-12.8 % since 1982
33* 1970 Data (Fund was established in 1970) Source; MAFF, Ibid.

All expenses for the special account are provided from
the fund and losses are compensated often through the
government budget, but mostly cumulated as the increased

amount of special loans from BOK or the government bond. And

174

the central bank usually mobilized finances by issuing more
currency, one of the most critical reasons for the past
inflation, and the government bond was sold sometimes
forcefully to several private financial institutions which
became another critical source of government intervention into
the private financial market.

Table 14 shows some details of the Foodgrain Management

Fund, its size, losses, loans, bond issues and compensation.

2. e ode 5 na 5's
The simple partial equilibrium models of neo-classical
micro-economics, as in some other case studies, may be the
simplest and most practically available means to show the
impact of government interventions into the rice market in

Koreal .

Gevennment Puncnase in Post-Harvest Season

The nature of Korean government intervention to support
the price of rice in the post-harvest season is not a price
guarantee or deficiency payment but a price support payment
for a certain amount of supply (predetermining the amount of

government purchase to farmers at a given purchase price is

 

1 Examples are: T.E. Josling, op. cit.; P.L. Scandizzo and

C. Bruce, op. cit.; S.R. Pearson et.al., Eeog §elf-Reiiance end

333 - ,- _ -' T-a ' v1 .tf,- .e -. ' .. 7o -, Food
Research Institute, Stanford Univ., Apr. 1986; J.P. Oehmke and
Xianbin Yao, op. cit. '

175
similar to granting marketing certificates, a measure once
adopted in 19605 in U.S.A., but paid for by the government,
not by consumers via processors), ~01. a form of generating
additional effective demand (for storage) by government.
Figure 9 shows the impact of government purchase. The
specified time period is the three months of the post-harvest

season (November, December and January), the usual time of

government purchase.

Figure 9. The imnaet of Government Enncnase

 

 

 

O
10
:3

IO
*0

Here, the supply (SO) is defined as the amount supplied
to the market by farmers during the period,within the limit
of already given amount of production (0?). And demand (D) is
defined as market demand for consumption and storage during

the period.

PE is the initial equilibrium (E) price without

176

government purchase. PP is the government purchase price. AB
is the amount purchased to maintain the support price PP in
the market. If PP is‘ a sort of target price maintained to
support the producer, there must be a systematic relation
between the price and amount of government purchase. The two,
price and amount, must be determined at the same time to
satisfy this systematic relationship, or the amount of
purchase should be sufficient to maintain the price.

But Korean policy makers have determined the two
separately: the purchase price mainly depends on the cost of
production and inflation rate of the previous year; and the
quantity of purchase 4 depends on the amount produced and
available financial sources. Every year there has been a hot
debate on these two decisions. However, ultimately those
decisions have been made according to political situation of
the government.

Usually, the.amount.of actual purchase has been less than
enough (AB) mainly because of financial constraints. BC is the
actual amount of purchase. As a result, the market supply
curve will shift to SP, and government purchase amount BC is
withdrawn from the market in this period. PM will be the
market price and QM will be the amount covered in the market
at the new equilibrium point M.

Consequently, there will be two different prices during

the same period. The government purchase price was usually

177

higher than the market price for the same quality rice. (See
Figure 8, p. 168). Before 1981, the government purchase price
was much higher than the wholesale price in the post-harvest
season.) If not, it is not a support price and nothing will
be purchased.by the government. Actually in recent times, high
quality rice has not been purchased by government because
market price is higher than or at least equal to government
purchase price, which is mostly set for the low quality rice
of new varieties. (See Figure 8. Since 1981, the two prices
are almost the same. In 1981 and 1983-85, wholesale price in
the post-harvest season was slightly higher than the
government purchase price.)

Now consumers pay the amount of OPMMQM part of which,
PEPMMF, is a transfer payment to producers due to government
intervention. MFE is a dead weight loss of consumer surplus.
Government pays the amount of BC times PP to the farmers in
this period. The part of this amount above the initial supply
curve (SO) is a transfer payment to farmers and the rest is

cost of production covered by government purchase.

Release of Goveznnent Stock in Shent Season

The Korean government usually releases its stock of rice,
received either through purchase or import to the retail rice
market during the short season at a much lower price than

market price in order to slow down price hikes. Figure 10

178
shows the model. The specified time period.is the three months
of the short season (June, July and August), the usual time

of government release.

Figure 10. The Impact of Government Release in Short Season

\ .
FR

 

 

 

Of course, this model, as well as the previous model
showing the impact of government purchase, is an extremely
simplified.micro-economic partial equilibrium model, based on
all assumptions of 'micro-economic analysis (homogeneity,
perfect mobility, perfect information, constant taste and
technology, no transactions cost, etc). Thus it has its own
limitation of -assumed situation, and other realistic
approaches (e.g., TC/I approach) may not be relevant to this
model. However, this model is the most practically available
one showing the impact of the government program among present

analytical approaches.

179

Here, the supply (SO) is defined as the amount supplied
to the market by private suppliers (farmers, traders, etc.)
within the limit of storage amount. Thus QSo is difference
between the amount produced or imported, if any, and the
amount consumed without being sold, which is not known, plus
the amount of government purchase. And demand (D) is defined
as market demand for daily consumption.

PE is the initially projected equilibrium price without
intervention. If the government releases an additional amount
of rice to the market at the price PR, AB is the amount which
must be released to keep the market price at PR. But the
actual amount of release (high quality rice) is not adequate
(only AC). This has been the usual situation in recent times
since government stock is composed mostly of low quality new
varieties. With government release, the supply curve shifts
from S0 to SR to set a new equilibrium price PM, at point M.
And QM' is the amount covered by private market supply. In
this case, consumer surplus increases by the amount of PEPMME,
of which PEPMM'E is transferred from.producer surplus and EM'M
represents pure gains received by this program.

However, the government release price is fixed at PR
(retail price and sales margin for designated retailers), all
year throughout the country. So there are two different prices
again. Usually the price of low quality government rice is

designed to be lower than the market price of high quality

180
rice. The low quality rice is a completely different product
from high quality rice in the private market, having little
effect on stabilization of the market price of high quality
rice.

If government rice is the same as high quality rice, most
retailers involve themselves in sales deception (unpacking of
government brand bags to mix with private rice), so the
expected increase in consumer surplus goes to the hand of the
retailers. This leads Consumers to become distrustful of both

the rice traders and the government.

Ove m t f Gove nment nte ent'o

Now let's examine the overall impact of government
intervention using the annual demand and supply model. Here
in Figure 11, S is the annual supply and D is annual demand.
PP is the purchase price by government andiPR is government
release price. PE is the market equilibrium price without
government intervention and PW is the world market price in
case of importation.

AB is the amount purchased by the government to support
the price PP and CF is the amount released by government to
maintain the price PR. If AB is greater than CF, difference
will be the government carry-over stock. If AB is less than
CF, the difference is imported. And HI is the amount to be

imported in case of free trade without trade restrictions.

181

Figure 11. Ovenaii impacts of Government Intervention
P S

 

 

As mentioned previously, actual amount of government
purchase and release may not be the same as AB or CF and
actual government carry-over stock or imports may not be the
same as the difference between AB and CF. PwPEEB represents
the transfer payment to farmers by government purchase (or
the increase of’ producer surplus), while PEPRFE is the
increase consumer surplus due to government release.

Government cost for' the jprogram included the price
difference between purchase (PP) and release (PR) times the
amount of release in addition to the cost of handling
government stock (purchase, storage, transportation, milling,
packing and distribution) and the financial cost of interest
on money used to carry the program.

Additional payment above world price Pw represents the

social cost of protection, in the form of either transfer

182

payments to farmers or sacrificed consumer surpluses.

3. Etienne of Supply ang Demand Shift and Import Price
Snppiy cnange Effegt on Government Purchase

Domestic supply shifts rightward as the agricultural land

 

productivity, or yield, goes up and/or planting area expands.
Import is restricted in Korea. Usually the amount of annual
import is determined solely by the government, after domestic
supply is already known, in order to supplement expected
shortage. Thus, the total supply curve seems to be determined

primarily by domestic supply.

Figure 12. u ea v

 

 

Figure 12 shows the effect of supply increase on
government purchase. This is annual supply and demand model.
PEI is the market equilibrium price at theequilibrium point

E1, PP is government purchase price and API is the amount to

183
be purchased for the initial supply curve 51' When the supply
shifts rightward to $2,:mostly because of domestic production
increase, the market equilibrium point becomes E2 at the lower
price P32 and the amount to be purchased increases to AP2 at
the same purchase price PP.

Here, producer income increases from.P@100PPl to PPOQPZPZ
and transfer payment to farmers increases from PPPElElpl to
PPPEZEZPZ.

In Korea, this supply curve shifted very far to the right
in 19705 (total production increased from 4 mil. M/T in 1970
to 6 mil. in 1977, see Table 13, p. 170), mainly due to an
increased yield of rice (from 3.3 M/T per hectare in 1972 to
4.9 M/T in 1977, see Table 4, p. 94), but it has stagnated
since the peak year of 1977 (in 1987, rice yield per hectare
was 4.4 M/T and total production of rice was 5.5 mil. M/T,
both less than the respective amounts in 1977). A

There was more pressure on farmers to require greater
purchase at higher prices in 19705, when the population share
of rice farmers was still very big. Moreover, farmers needed
‘vital price incentives for increased production to achieve
self-sufficiency in rice supply. Hence, the government
purchase price in real terms increased steadily throughout
19705, as shown in Figure 8 (p. 168).

Although the increase rate has slowed since the mid-19705

when production increase was initiated mainly by the

184

introduction and expansion of high-yielding new varieties (the
price incentives became less necessary than in the past as a
result of maintaining the price of low quality rice at the
same level as high quality rice), and the population share
rapidly decreased while the agricultural production pattern
became more specialized to reduce the portion of rice in farm
household income.

The amount of purchase drastically increased in the mid-
19703 (to 1,402,000 M/T in 1977/73 from 479,000 in 1973/74,
three times in four years, see Table 13, p. 170) mainly to
cover incentives for newly produced low quality high-yielding
varieties.

Consequently, the market price in the post-harvest season
did not decrease in real terms with the exception of 1974 (the
first year of mass production of new varieties, see Figure 8).
It increased steadily until the crash in 1974, and remained
at nearly the same level after recovery in 1975 through 1980.
So producer income should have increased greatly in this
period both through the increase of transfer payments by
private buyers and through the government's support policies
(price increase inlearly 19705 and quantity increase since mid
19703).

Of course, government cost of the program should have
increased.proportionally'to the rapid increase in social cost,
although the net loss from this program depends not only upon

the purchase but also on release. This will be examined in

185
next section as a part of overall evaluation of policy
performances.

Since 1977, the jpeak ‘year' of rice yield, domestic
production of rice.did not increase much; rather, it decreased
slightly from 6 million _M/T in 1977 to 5.5 million M/T in
1987. So there was no supply shift to the right during this

period.

Demand Change Effect on Government Purchase

Major factors in the shift in demand are changes in
population, per'capitamdisposable income, and.consumer’tastes.
Clearly population increase shifts the demand curve to the
right, but income increase may not. In the low income stage
of chronic and/or general shortage of staple foods which
existed until the late 19705 in Korea, the income elasticity
of demand for rice was positive and relatively high because
rice was the first priority in diet and the favorable food
grain among possible substitutes (e.g., barley, sorghum, corn,
etc). In this case, income increase shifts the demand curve
to the right.

On the contrary, in the high income stage of increasing
demand for high quality foods of tasty and highly nutritious
livestock.products.and freshcvegetables and fruits rather'than
staple food grains, as in Japan since early 19605 and Korea

in 19805 (see Table 10, p. 109), the income elasticity of

186

demand for rice decreases and may even become negativel.

Rice is no longer the superior choice among alternative
high quality foods, and in this case, income increase may
shift the demand curve to the left. Moreover, income
elasticity of demand for new, low-quality rice varieties,
which are inferior to the traditional high-quality rice, has
become increasingly negative since the late 197052.

Now, in deteris paribus condition, the shift in the
demand curve means that the market equilibrium point is
shifting either to the right or left. In case of a shift to
the right (D2 to D1 in Figure 13), which may be true as long
as the rate of per capita rice consumption decrease due to
the negative income elasticity of demand for rice does not
offset the rate of population growth, the market equilibrium
point will shift upward (higher price) and rightward (more

quantity), from E2 to E1. This means a reduced amount in the

government purchase requirement (AQP to AlP) and a narrowed

 

1 Recent estimation by H.S. Yoon and M.H. Seong in 1988
shows that the income elasticity of demand for rice has been
continuously lowered, and became negative since 1979 for
non-farm household and since 1985 for farm household. See
Yoon and Seong, "The Nature of Demand Functions for Rice in

Korea", The Konea Rural Economics Review (in Kozean), KREI,
Vol. XI No. 2, June 1988, pp. 27-39.

2 Already since 1978, there has been the price
differences between the new varieties and traditional rice
in private market. An official price report by MAFF shows
that the prices in August 1978 were 23, 290 and 29,030 won
per 80 kgs bag respectively (25 % of difference).

Source , MAFF, WW1
Internal Data Booklet in MAFF,1985.

187
price gap in price between PP and equilibrium price (PE2 to
P31), as well as a decrease in possible loss of consumer

surplus and extra government payments to farmers.

Figure 13. Effeet of Demand Shift on Government Purchase

  
  

 
  

e

 

° Q13:2 QEl 0?

This may have been a major force supporting the
significant increase of domestic rice supply in the mid-19705,
although it has no longer been true since the late 19705
especially for the new, low quality rice varieties.

On the contrary, shifting the demand curve to the left
(D1 to D2):means that total demand for rice is decreasing (the
rate of per capita rice consumption decrease offset the rate
of population growth) so that the market equilibrium point is
shifting to the left (less quantity) and downward (higher
price), from E1 to E2, resulting in an increase in the

purchase amount (AlP to AZP) and a widening price gap between

188
PP and market equilibrium price (PEI to PEZ)°

Consequently, consumers' transfer payment to the
producers should be reduced while the government cost should
remain the same or increase. But the government could hardly
resist the increasing pressure to purchase more in the late
19705, and increased purchases (see Table 13, p. 170) in order
to restrain the market price from dropping. This means that
the. government payments increased. to compensate for' the
decreased amount of consumers' payment through a decreased in
private market demand.

Since 1980, government has tried to drop the purchase
price as a part of anti-inflation policies so that PP actually
dropped significantly in real terms from 1979 to 1981.
Government purchase prices have been maintained at levels
close to the market price level since then (see Figure 8, p.
168). But government purchase did not decrease until 1986,
when. the supply of low quality rice dropped below 25 % of
total rice production (see Table 13). This shift was due to
decreased private demand for low quality rice (shifting the
demand curve to the left), thus failing to reduce government
purchase amount as had been planned.

Market price for low quality rice should have been lower
than the market price for high quality rice (The MAFF price
report shows different prices for the two different quality

rices; in Dec. 1983, 56,080 for high quality and 52,560 won

189

per 80 kgs bag for low qualityl).

Import Brice Change Effect

Import price changes may affect the cost of import and
the cost of protection. The cost of import may be directly
related to the sales margin of imported rice, an important
source of government revenue from the rice program. If import
cost falls, the sales margin.at the given price of release may
become greater and the possible government revenue may also
increase for the same amount of import, contributing to a
reduction in the net loss of government program. In 1981-82,
a period during which import levels were high, net loss in the
government program was only 40 billion won in two years
compared with 358 billion won in 1984, a year of no importsz.

The cost of protection is total amount of additional
payment to suppliers by consumers by the government. These
costs will increase if the import price falls, as it has been

in real terms since the late 19705 (Figure 8), as much as

fallen price times quantity purchased or consumed.

4. Overall Evaluapion e; Bice Poliey Eerfiornanees

An overall evaluation of rice policy performances is

necessary to conclude this section. This evaluation will be

 

1 MAFF, Ibid.
2 Source; MAFF, Data Collection of Grain Management (in

Kereenl, Bureau of Grain Management, MAFF, 1988.

190
carried. out mainly’ through. a comparison of' performances
between the two different transitional periods of 1967-76 and
1977-86. The evaluation criteria will be, (1) the initially
intended goals, (2) the real beneficiaries and the amount of
benefits, (3) the actual cost bearers and the amount of total
cost, and (4) other short-run and long-run policy effects in
terms of efficiency, equity or fairness, progressiveness and

external effects.

v ' b t ded o ’c Goa

Initial goals of rice policy were three fold: (l) to
increase domestic production for self-sufficiency of staple
food grains for the purposes of emergency preparation and
achieving a self-sustaining economy, (2) to increase farmer's
income, and (3) to stabilize consumer price, especially during
the short season. Let's examine the actual results.

In the first decade 1967-76 (period 1), rice production
increased substantially (3.6 mil. M/T in 1967 to 6.0 in 1977,
67% increase, Table 13) due to an increase in yield (2.9 M/T
per hectare to 4.9 M/T, Table 4), but in the second decade
1977-87 (period 2) it stagnated or slightly decreased from.the
peak (from 6.0 mil. to 5.5 in 1987, from 4.9 M/T to 4.4).

The rice policy was relatively successful in period 1
but. not in jperiod. 2. In. period; 2, the policy goal of
production increase does not appear to have been necessary

(as a result of an already- achieved self-sufficiency of rice)

191
neither was it realistic (already at the maximum level of
yield with no more land available). However, it should be
noted that the main reason for success in period 1 was the
introduction of high-yielding new varieties of rice.

The self. sufficiency' of all grains, including feed
grains, which became as important as food grains and can be
substituted for food grains in case of emergency, fell
drastically in period 2 (from 65% in 1977 to 41% in 1987).
The point is that the policy goal of self-sufficiency of rice
seems no longer to be meaningful in this period.

Next, rice policy surely contributed to the growth of
farmer's income in period 1 through consequent production
increase and rise in prices. Table 15 shows that the average
rice production per farm household almost doubled in this
period, and the farm sales rice price index also increased
75%, so that average gross sales of rice increased 2.4 times
when the share of rice was still 58% of total farm sales.

On the contrary, in period 2 average production amount
increased only 9%, farm sales rice price index increased 16%
and gross earnings from rice increased 45% while the
portion of rice astotal farm sales decreased to 49%. The
difference between the increase rate of gross earnings and
that of production times sales price may be due to the
difference in sales rates of total production (in period 1

the sales rate was lower and became greater in period 2).4

192

Table 15. erpss Earm Earnings from Rice jPer Household)
Uni; T967 1977 1987 77/67 87/77

 

Average Prod. Amount M/T/farm 1.44 2.74 3.00 1.90 1.09
Rice Price Index*

(Farm Sales Price) 1985=1.00 0.52 0.91 1.06 1.75 1.16
Gross Rice Sales*

(1985 Price) thou. won 794 1,904 2,759 2.40 1.45
Share in Total
Farm Sales % 57 58 49 - -

 

* 1985 Constant Price Deflated by Consumer Price Index
** Source: MAFF, Mai9r.Agrissltsral_§tatistiss, 1988

In short, the rice policy seems to have successfully
fulfilled policy goals in period 1, but not so in period 2,
mainly because of its natural limits and the inescapable
necessity of adjusting to national-goal of anti-inflation.

The final goal of stabilization of consumer prices was
the reduction of seasonal price fluctuations between the post-
harvest season and the short season. To minimize the annual
price increase is a different policy goal of anti-inflation
outside the bounds of the rice program (production
encouragement, purchase and release).

Table 16 shows that annual price increases have been
related to supply conditions and general inflationary mood,
not a concern of the rice program except in terms of the
increase rate of government purchase price.

However, it is very difficult to evaluate the results
because there is no data available in absence of the policy,
since the Korean government has continued that policy from

19505 until present. Actually the seasonal price fluctuation

193
of rice (calculated by the difference in prices of the post-
harvest and the short season divided by annual average) has

varied year to year depending primarily supply conditions.

 

Table 16. Rice Price Increase and Fluctuations (Unit:%l

Annual % Change of Price Rice Price

 

Wholesale Rice Fluctuation
(Total) gov'r Enrcnase Tn Dee. In Aug. Rare*
67/66 6.5 8.6 14.8 5.4 22.3
68/67 8.1 17.0 26.8 4.5 12.7
69/68 6.9 22.6 14.6 22.3 9.8
70/69 9.4 35.9 27.1 15.5 10.5
71/70 8.6 25.0 26.6 26.6 10.0
72/71 13.8 13.0 13.6 36.4 17.0
73/72 6.9 15.1 22.1 -3.0 2.3
74/73 42.1 38.5 70.5 53.3 37.3
75/74 26.5 23.7 14.4 28.2 14.3
76/75 12.2 19.0 16.8 27.7 25.1
77/76 9.0 .12.1 7.6 2.7 12.4
78/77 11.6 15.4 27.4 13.0 16.3
79/78 18.8 22.0 27.1 40.3 25.5
80/79 38.9 25.0 48.6 14.4 14.7
81/80 20.4 14.0 -0.5 43.6 13.5
82/81 4.7 7.3 5.6 2.0 23.9
83/82 0.2 0.0 -1.0 -7.5 10.5
84/83 0.7 3.0 2.6 1.8 13.3
85/84 0.9 5.0 15.4 9.5 19.8
86/85 -1.5 6.0 3.3 4.9 10.3

 

* Seasonal Price Fluctuation Rate; (Highest Monthly Price
of the Year - Lowest Monthly Price)/Average Monthly Price
** Source; MAFF, Ibid.

The highest price fluctuation was 37.3% in 1973/74 the
year of the world food crisis, and the lowest was 2.3% in the
previous year of 1972/73. 5-year averages are 13.1% in 1967-
71, 19.2% in 1972-76, 16.5% in 1977-81, and 15.6% in 1982-86.

It is impossible to evaluate the policy impact in this regard

without knowing what prices would have been without the

194
program.

But there has been no significant reduction of seasonal
fluctuation of rice price in the last two decades, although
there has been a huge increase of government purchase amount
and subsequent costs for the program. Thus, it does not seem
unreasonable to conclude that this goal of consumer price
stabilization did not work very effectively compared with the

other rice policy goals.

Reel Beneficiaries and the Amount of Benerits

One would expect beneficiaries of the policy to include
rice farmers through supported price, consumers in the short
season' through stabilized. price, and. the general public
through secured self-sufficiency for emergency and a self-
sustaining economy. However, the interest of general public
from self-sufficiency seems no longer to be realistic,
especially in period 2.

.Consumers are rather the cost bearers of price support
and protection, and can hardly be the real beneficiaries even
in the short season. Actually there has been no significant
evidence of consumer price stabilization resulting from this
policy at any time during the last two decades.

Then, only the rice farmers remain. Undoubtedly the
farmers were benefited by this policy in period 1, as shown
in the previous section. The supply shift to the right without

significant market price drop must have increased producer

195
surplus. Moreover, the increased amount of government purchase
at much higher and steadily increased prices during that time
must have provided farmers a substantially increased income
from rice.

At that time, the population share of rice farmers
(nearly all the agricultural population) was roughly one half
to one third of the total population (53 % in 1967, 34 % in
1977).

Table 17 shows that, in this period, net farm income from
rice per household grew 2.4 times with the share of rice in
total farm. household income remaining at over 40%. The
national net income from rice also more than doubled with the
share in total GNP of 9-7%. This increased income obviously
must have induced additional effect of production, consumption
and financial linkages into other sectors of the national
economy, later one of the important driving forces for

continuous economic growth.

Table 17. Rep Earn Tneome rrom Rice
Unit 1967 1977 12§7 77167 R7477

Net Rice Income*

(Per Household) thou.won 621 1,479 1,852 2.38 1.25
Share in Total Income % 45.2 42.0. 30.0 - -
No. of Rice Farm thou. 2,497 2,190 1,832 0.88 0.84

Net Rice Income*
(National Total) bil. won 1,551 3,239 3,393 2.09 1.05
Share in Total GNP % 9.1 7.2 3.7 - -

 

* 1985 Constant Price Deflated by Consumer Price Index
Source; MAFF, Ibid.

196

But in period 2, because supply shift was no longer
possible, net income from rice did not increase much (25%
increase per household and only 5% in total in ten years).
The share of rice in farm household incOme and total GNP
declined very sharply to 30% and less than 4% respectively
with. the continuously’ decreasing' number’ of rice farming
households and farm population share (only 18.5 % of total
population in 1987).

On the other hand, government purchased rice was
naturally restricted to the new varieties because of
differences in quality and price. And the new varieties were
limited to adoption only in the southern parts of the country.
These restrictions should have limited the farmers actually
benefited by the extra payment of government purchase. Prior
to this, some subsistence farmers may have had.no rice to sell
or were net buyers of rice who should be excluded from the
expected beneficiaries (the portion of less than 0.5 hectare
of farm size was roughly 30 % of total farm households in'
1977-37).

Thus, the farmers truly benefited from this policy were
limited to those who had rice, particularly new varieties,
available to sell to the government. The larger farmers were
the more benefitted.

There must have been other of real beneficiaries, not
openly intended target groups but possibly the actual

constituents of this policy; the government and ruling party,

197
related bureaucrats, and rice traders, particularly selected
contract millers, transporters and Storage owners who
participated in implementation of government program.’

The rulers of the country needed some political symbols
of achievement, such as the 'self-sufficiency of staple food
grains' or 'increase farmer's income and stimulate the rural
economy to eliminate the rural poverty', etc. Actually the
late President Park; himself gained a reputation as the
initiator of a so called 'Green Revolution of Korea' and used
it to maximize popular support of rural voters who sent more
than half of representatives to the National Assembly.

Bureaucrats as job security maximizers must have viewed
this kind of government program as necessary to extend their
jobs and to get discretionary power and possible fringe
benefits from this policy. They also needed something to
demonstrate their capability and secure the credibility mainly
of the political leaders.

It is very easy to see that some rice traders were actual
beneficiaries. Contractors of government programs could
maximize the effective demand for their job without tough
competition. Sometimes they used this chance to make extra
money through the collusion of corrupt bureaucrats. Such
practices are not unusual either in Korea or in other
developing countries. Moreover, many rice traders may have
seized opportunities to make extra profits, ironically making

more in times of government control, by cheating on the

198
quality of rice and violating the standard price given by the

government.

Aeruel Cost Rearers and the Amounr of Total Cost

The major cost.bearers of this policy were rice consumers
and tax payers, i.e., all people living in Korea. First,
consumers have to pay the amount of transfer payments through
price supports and import restrictions. It seems impossible
to calculate actual amount because of difficulty in estimating
the supply and demand functions of rice in Korea due to the
problem of lack of raw data.

It should be clear that when demand increases, as in
period 1, the amount of consumers' transfer payment should
decrease, 'but when demand no longer increases or even
decreases so that the initial market equilibrium price goes
down as in period 2, the amount becomes much greater.

It is also clear that if the world price goes up, as in
1973/74 during the world food crisis, the amount of consumer
payment for protection must be reduced, but if it goes down,
as in period 2, the amount should increase ‘(see Figure 8, p.
168). The same conditions should exist in the case of possible
loss of consumer surplus as a result of protection. If the
world price goes down, the amount of that loss will become
greater. In short, the extent of sacrifice by the consumer
must be much greater in period 2 than in period 1.

Now, let's examine the governmental cost paid by tax

199
payers. Table 18 shows the amount of money used for purchase

and net loss by the program.

Table 18. Governmenr post for Rice Program (Per Annum)
Uni; l967-71 1972-76 1977-81 1982-86

 

Increase rate of

Purchase Price % 21.8 21.9 17.7 4.3
Amount of Purchase thou.M/T 314 710 1,243* 1,101
Amount of Release " 667 714 1,355 707
Amount of Carry-Over " 355 ' 779 1,191 1,335
Total Net Loss** bil. won 36. 1,159 2,767 3,267

Sales Loss** " - 440 1,119 689

Handling Cost** " 36 719 1,648 2,578

 

* Excluded 1980 of Extremely Bad Crop Year
** 1985 Constant Price Deflated by Consumer Price Index
Source; MAFF, Ibid.

In period 1, although the purchase price increased by
more than 20% annually and the purchase amount also
increased. significantly, total net loss ‘was relatively
small. Before 1972, it was negligible, although real rice
prices had been increased most sharply in this period
(Figure 8). This included an increase in purchase price in
real terms (13.9% per annum), since most of the cost was
covered by the sales margin of imported rice.

But in period 2, the net loss became extremely high,
although the rate of purchase price increase in current
terms became significantly lower (the real price increase
rate above inflation rate was 1.6% per annum in 1972-76,
2.2% in 1977-81 and 3.3% in 1982-86). The major reason for

this was the increase in purchase and carry-over amounts

200
and subsequent increase in handling costs for storage,
transportation, processing, and interest payment.

In period 1, supply shift, represented later in the
period mostly by the low quality new varieties, was the main
reason for the increasing amount of government purchase
required. There had been existing shortages so that
importation continued until 1975/76. Because of still
increasing demand for rice substituting barley, decrease in
demand for low quality rice had not yet started, and the
amount of release had also been increased so that carry-over
amount had not cumulated very much.

But in period 2, the necessary amount of government
purchase of low quality rice remained high on the supply
side, while because of reduced demand for low quality rice
in the private market, the required amount of government
purchase increased very rapidly.

However, the release of government stock of low quality
rice decreased substantially, mainly because of decreased
demand, so that the amount of carry-over stock cumulated
drastically, becoming the main reason for the cost.hike. The
amount of release in 1977-81 (1,355,000 M/T per annum) was
composed mostly of the release of high quality rice imported
to supplement the three bad crop years of 1979-81,
especially for disaster relief in 1980. Since 1983, there
has been no justifiable reason of importation. by the

government nor have there been actual import.

201

In 1982-86, roughly 80% of the total net loss came from
costs which can not be transferred to the interest of
producers or consumers, such as sales loss (the difference
between purchase price and release price). Such costs all
may go to the hand of rice handlers (storers, millers,
transporters and packers) selected by a few related
bureaucrats or be paid to the bank with further tightening
of supply and demand conditions in financial markets.

The opportunity costs of this governmental loss,
considering the limited available financial resources,
should be large enough to be too valuable for other more
productive and equitable uses which might have improved
agricultural industries and rural lives. Moreover, this 1055
must have become a major reason for the budget deficit and
occasional over-supply of money due to the special loans
from central bank resulting in the new issuing of more
currency.

Consequently, in addition to the spiraling process of
price hikes between the purchase‘ price of rice and the
consumer price index, these budget deficit and over-supply
of money should have resulted in a hardly escapable
inflationary trap, which in turn must have become a serious
burden to the national economy during the process of Korean
economic development. 1

Actual cost bearers are rice consumers, tax payers and

general public who bears the cost of inflation. More

202
specifically, among consumers low income consumers, whose
demand for rice as a staple food is more inelastic, must
have made greater sacrifices, and among general public the
wage or salary earners and money savers should have borne
the brunt of the burden of inflation.

The Korean tax system seems not to have been very
progressive in redistribution of income and wealth, but it
does appear to have maintained the system of the prior
taxation on wages and salaries and indirect taxation on
sales of consumer goods. In this sense, again, most taxes
must have been paid by wage or salary earners and ordinary
consumers. All these cost burdens are neither equitable in
terms of distributive justice nor fair in terms of
reasonable return to the real contributors of economic

growth and development.

aner Rossible lnpaets and E§£2§§§ on Externality

First, this huge government program which intervenes
in the whole framework of domestic rice markets and the
government monopoly on restricted imports of rice have
resulted in general market distortions both in allocative
and distributive senses, damaging efficiency and equity of
the national economy as shown in previous section.

Moreover, these distortions must have weakened the
function of market mechanisms and the private sector.

Usually this policy evolved to become another trap in which

203

weaker market function causes greater need for government
intervention and consequent market distortion, in turn
weakening the private sector and so on and on. One of the
policy mistakes in this regard is the flat price system of
government purchase and release all year round throughout
the nation, which must have severely restrained private
market functioning. Already the extreme degree and length
of these distortions may have made the private market
function almost impossible to recover.

Secondly, these ubiquitous government intervention,
regulations, and control over the private market became
serious entry barriers to related industries and severe
constraints on private competition in those industries
which, in Korean situation, should have resulted in a
greater chance of collusion among enterprises or between
related bureaucrats and political leaders or power groups,
leading to more opportunistic business patterns. Thus, the
government policy deteriorated the quality of products and
services and obstructed the progressive development of those
industries.

Thirdly, the system of comprehensive and ubiquitous
government control over private sector, which allows almost
infinite discretionary power to a few ruling elite and
bureaucrats may easily have led to the pervasive wastes and
leakages of public expenditure, corruption, and power

abuses. Notorious bureaucratic rigidity and red-tape has

204
added to more transactions costs and harmed an atmosphere
of creative motivation.

Lastly, the deterioration of quality of products and
services provided by the government (e.g.,.the government
brand rice as a symbol of low quality) has degraded the
quality of the government itself and significantly reduced
the people's confidence in it, in turn becoming another
serious constraint to the implementation of all other

government policies.

gunnary of Policy Eveluation

In short, the rice policy in Korea in period 1 of
supply expansion and still increasing demand can (be
evaluated as relatively successful policy especially for
increasing farmer's income at relatively low cost.

But in period 2 of no supply shift and decreasing
demand for low quality rice, the rice policy was neither
successful in increasing farmer's income nor in stabilizing
consumer prices, but instead left a huge government cost due
to the rapidly increased amount of purchase and carry-over
in addition to the increased consumer sacrifice and other

social costs.

205
B. f et' a d T e olic
1. RecRground of Recent Policy Changes

Before the second decade of maturing transition (1977-
86) when per capita beef consumption was less than 2 kgs a
year, beef policy was not that important to Korean
agricultural policy makers except as a way of increasing
rural income by creating a side job for farm households
other than traditional rice and barley cropping. Before
1976, there had been virtually no policy on beef import and
marketing because beef was considered to be a luxury good.

Since 1976, the first year of beef import, however,
beef has become one of the highly weighted wage goods.
Importation of beef . has become inevitable to meet the
drastic increase of demand with the limited domestic supply

as is shown in Table 19.

Table 19. Qeneng eng §upply of Beer
Unir T967 l272 l977 lee; 1987

Per Capita Consumption kgs/yr 1.0 1.2 2.2 2.7 3.6
Total Consumption thou.M/T/yr 27.3 40.2 81.6 106.5 152.0

Domestic Supply " 27.3 40.2 77.4 61.5 152.0
Imports " - - 4.2 45.0 -
(Share of Imports) % - - 5.1 42.3 -

Total Cattle Numbers thou.head 1,255 1,374 1,618 1,754 2,386
Numbers of Cattle Farm thou. 1,100 1,111 1,187 919 892
Average Cattle Farm Size head 1.14 1.24 1.36 1.91 2.67

Source; MAFF, Mejor Agrieulturel §tarisrics, 1988

 

Per capita consumption of beef began to increase from

the mid-19705 (1.3 kgs in 1973, 1.5 in 1974, 2.0 in 1975).

206
It reached 3.1 kgs in 1978, a.peak.year of consumption, then
decreased to 2.4 in 1981 due to the economic set-backs, and
increased again to 3.6 in 1987.

During this time, the herd size of cattle did not
increase enough to supply the amount of increased demand.
At first it increased to 1,858,000 head in 1974, then
dropped to 1,553,000 in 1976 because of over-slaughtering.

Thus beef imports were inevitable to supplement the
shortage of domestic beef supply and limited herd size of
cattle and to prevent further over-slaughtering in order to
maintain and expand.the herd size. The cattle size increased
slightly to 1,787,000 in 1978 through imports, but it again
decreased to 1,506,000 in 1981 because of a rapid
consumption increase in 1978-79 and import sanction in 1980
due to the political pressure from cattle raisers.

This must have been one of the main reasons for an
extraordinary cattle price hike in 1981-83 which resulted
in the cattle raising boom and consequent increase of cattle
size to a peak of 2,943,000 in 1985 and subsequent fall in
price of cattle which led to the bankruptcy of many cattle
farmers.

On the other hand, marketing regulations on beef were
originated for sanitary reasons at first under a situation
in which an insufficient cooling system failed to keep meat
fresh after slaughter. Some of those regulations remained

rigidly even after the cooling system became widely

207
available, thus becoming the only restrictions to free entry
into market competition, in effect protecting the privileges
of a few already existing enterprises. Some regulations
became tools of control and intervention by the government
for the purpose of stabilizing the prices of beef and
cattle, even though they were not the useful means for that

purpose but rather were constraints on competition.

2. Relicy Qhanges and gonsegnences

As mentioned previously, cattle raising was the most
popular farm household side job other than cropping. At the
same time, draught animals were necessary prior to the
mechanization of farm works. Hence the government policy
continued ‘to encourage farmers to raise cattle :mainly
through special public loan programs (long-term loans with
low rates of interest). to buy calves and to develop
pastures. This policy was very popular among rural people
because it was clearly an additional source of their income
without risk of a price drop until recently.

But this policy, on the other hand, became one of the
major forces to expand the demand for calves which raised
their price, and.was the primary initiator of upward cattle
price fluctuation. But many Korean policy makers did not
fully recognize the impact of that policy so that, even in
the period of peak prices for calf and cattle, Korean

government did not stop this policy of cattle raising

1208

encouragement which was contradictory to the efforts of
stabilizing calf price by importing calves at that time.

Actually in the period of 1981-83, the distribution of
imported calves at significantly lower price than the
increasing market price through the public loan programs
had received too much demand, mainly because of the price
difference and cattle raising boom, hardly to be resisted
by a government which badly needed political support from

the rural people.

Tflflsiflh1muahLBauumLJmammmmmsnLaninlemnmLRhu)
Inns 122t11 lintli let12 lflutsl 122t£1
Cattle Number thou. 1211-1230 1374-1641 1553-1762 1541-2215 2652-2336

Increase Rate %/yr 1.0 7.1 2.0 7.0 2.8
Number of Calf

by the Policy thou. 146 130 141 296 215
Amount of Loan

'for the Policy bil.won 9 16 17 169 130
Calf Import thou. - - 76 154 26
Calf Price3 thou.won NA 23433-168 222-263 224-1048 666-269
Increase Rate %/yr NA -28.2 19.5 47.2 -24.6

 

3 1985 Constant Price Deflated by Consumer Price Index 33 1974 Data
Source: MAFF. L1xsstssk.291152.2tatistiss (in Korean). 1988

Even after the<disastrous price fall of calf and.cattle
since 1984, this policy continued until 1985, this time in
the name of encouraging demand for calves, thereby
recovering the price. This policy was not effective and was

discontinued .in 1986.1 Table 20 shows the relationship

209
between this policy of cattle raising encouragement and the
price of calves.

The basic idea of beef import policy was the same as
that of rice, supplementing occasional shortages of domestic
supply controlled by the government to protect the farmer's
interest. Hence the amount of import was fixed annually by
the government, based on estimations of demand and domestic
supply of beef. At the first signal of a drop in cattle
prices, beef imports were banned in 1980 and during 1985-
1987.

The goal of this import policy was not clear, except
that the principle was perhaps to avoid the political
pressures by farmers who may have seen beef imports as a
direct reason of cattle price fall. It's aim‘was not clearly
identified such as to stabilize the market prices of beef,
cattle or calf for the long-term interests of producers and
consumers. It was not. included as a policy target to
increase the capacity of autonomous coordination of supply
and demand by private market forces.

MAFF policy makers simply considered price rises was
to be good for farmers. At first they did not think that
the price hike should not continue indefinitely or that it
would become the reason for subsequent price drops.
Therefore, import decisions were usually too late to be
effective to prevent the price hike from being too high,

and made the consequent price fall more drastic. Moreover,

210
because of the coincidence of the timing of imports followed
by the price fall, imports became blamed as if they were the
only direct cause of price drops and thereby increased the
resistance to imports.

Figure 14 shows that the time during which imports of
beef were allowed was the same time of prices of beef and
cattle rose(1978, 1981-83).

This means that the decision to import beef was not
made prior to price rises for the purpose of preventing a
price hike but after the price already began to rise for

the purpose of reducing the rate of price increase.

Figure 14. Reef imporr and Prices or Ree: end panels

100 lion/Its (IBBS'Constant Price Deflated by CPI): thou.M/I

 

 

 

9383898383

 

 

. . r . eT-F-F-F-F-f‘7r .9 . !-+-!"F
70717273747578W78798001020384058007

211

Hence, import could not be immediately effective in
reducing the rate of price hike but, because of time lag,
the delayed effects of import coincided with the timing of
price decreases from their peak.

Moreover, after the price began to fall from the peak,
some amount of beef was imported because contracts had
already been made (1979, 1984). These contracts man have
made the price drops more drastic. Again the decision to ban
imports was too late to effectively stop the price drop or
reduce its rate of decline. Or it became the reason for
subsequent imbalance in demand and supply, causing another
subsequent rapid price hike. '

It is easy to notice that the 1980 import ban
definitely affected the rapid price hike in 1981-83, and
that the import ban in 1985-87 became one of the main
reasons of rapid decrease in domestic herd size of beef
cattle and thereby the cause of another rapid price hike
which began in 1987. In 1988, the Korean government was
forced to decide to reopen beef import despite strong voices
of political resistance because the prices had been already
increasing very sharply, even more so than during in 1981-
83.

In short, import policy appears to be inevitable and
necessary, but was not very effective because of unclear
policy goals and means of policy implementation such.as late

decision and bureaucratic rigidity.

212

Another beef-related policy which should be mentioned
here is the government purchase and release program of
cattle and beef. Government and NLCF jointly implemented
this program with the 'Livestock Development Fund' to try
to support prices from 1984. In 1984-87, a total of 284,000
head of cattle were purchased by NLCF with 209 bil. won.
Then thevaere slaughtered, frozen, stored, transported, cut
and packed, and retailed by NLCF networks or contractors
under the control of government in a manner similar to that
of the rice program.

The effect of this policy is not presently clear, but
it seems that this intervention has caused.the same problems
that the rice program caused. And in spite of the
mobilization and loss of a great amount of funds for this
program, it was not very successful in achieving the goal
of supporting prices.

Some people may argue that a deficiency payment to
support the farmer's income plus a subsidy for private
storage to reduce.the short term supply amount may have been
more effective than this, but these ideas were not even
taken into consideration due to the difficulty of
implementation, both in terms of adminiStrative capability
and the opportunistic behavior of expected participants.

On the other hand, in 1985 the Korean government took
an important step toward policy reform in domestic beef

marketing, the first step of deregulation. As mentioned

213
before, some domestic marketing regulations on beef
originated from sanitary concerns which became unnecessary
constraints to the free entry and competition.

A typical example was the restriction of cattle
slaughtering area for the supply of beef to a certain
consumption area. Until July 1985, it was restricted to
bring beef, which was slaughtered in other areas, into the
area of capital city, Seoul. In other words, in principle,
beef to be consumed in Seoul area must be slaughtered in
Seoul area with.the very limited.exception.of licensed.entry
into Seoul.

Prior to 1970, this regulation was instituted for the
purpose of keeping meat fresh for direct consumption without
sufficient cooling. But it later became the source of
oligopolistic extra profits for two powerful slaughter
houses, the only ones in Seoul. They controlled the market
through an informally organized but very strong cartel
network and through their influence in the policy making
process as a result of very close relations with political
power groups. Later, one NLCF slaughter-house was allowed
to open and compete, but remained relatively weak.

Hence, beef marketing in Seoul area, roughly half of
the national total, was in the hands of two cartel
headquarters located in Seoul but controlling the whole
country. All cattle which had to be brought into Seoul for

slaughter caused an approximately 10% loss during the time.

214
of transportation which added marketing cost to farmers.
Slaughter-houses in Seoul were always over-crowded, while
most local slaughter-houses did not have enough jobs to
survive and often became involved in illegal slaughtering.'

Most collectors of beef cattle to supply into Seoul
had to have some kind of relationship with the two
headquarters. And all beef retailers in Seoul had to be
under their control. Even the task of issuing license to
bring beef directly into Seoul was delegated by the city of
Seoul to the official cattle slaughtering association,
namely the 'Livestock Business Cooperatives', controlled.by
the two slaughter-houses. This was a fundamental obstacle
which had to be eliminated for the livestock marketing in
Korea to develop.

The reform was completed in July 1985 despite severe
resistance from the slaughter-house monopoly. Restrictions
were removed with one condition that all commercial meat
transportation must be carried by cold storage cars. Let's
examine the results of this reform.

First, the portion of direct entry of beef increased
significantly, as seen in Table 21, comparing three-year
averages before and after the reform. Entry increased from
11% before to 27% after (91 to 285 head equivalent a day).

Another important effect of this reform was that the
number of official reports on inspected slaughter increased

2.6 times (from 359,000 to 946,000 heads for national total)

2115
compared. with an increase in ‘the estimated amount of
domestic beef’supply, almost.doubling from‘72,500 to 137,300
M/T.

This means that the portion of illegal slaughter was
reduced significantly as most of the difference in the
increase rate ‘must represent. the increase of official
reporting of slaughter, while some of increase may be due
to an actual increase in slaughter by the deregulation.
Before then, official reports of inspected slaughter could
not be used as reliable data for policy making because of
the unknown but obviously existing non-reported illegal
slaughter, and there were no other official statistics of

beef consumption.

TMfls IL aum1mLsf4nmtumtuuulJumsnLQLJusLJnrmuuns
Inn: fisfluaifitfiil armuuizsui

Total Supply of Beef in Seoul head/day 844 1,074
Amount of Direct Carry . " 91 285
Share of Direct Carry % ll 27
Total Domestic Supply of Beef thou.M/T/yr 72.5 137.3
number of Slaughter Inspected thou.head/yr 359 946
(National Record)
Rate of Wholesaler Margin3 % 36.1 35.9
Rate of Retailer Margin** % 28.7 38.2

 

3 Roughly Estimated by (Wholesale Price-Farm Price)/Wholesale Price ‘
3* Roughly Estimated by (Retail Price-Wholesale Price)/Retail Price
Source; NLCF ,

22222212. 1988

The estimation of consumption was done by calculating

216
of the difference in yearly cattle numbers and the estimated
numbers of new born calves and unusable dead cattle during
the year times the estimated average weight of slaughtered
cattle, which could not be estimated accurately. Thus, the
effect of marking the official report of slaughter reliable
was the first step to a more reasonable policy making based
on correct and accurate beef consumption and marketing data.

On the other hand, the expected effect of reductions
in the wholesale margin was not significant (36.1% to
35.9%). It did not increase as is usually expected at the
time of cattle price fall, when the wholesale margin usually
is supposed to go up, which seems to be the effect of the
deregulation.

However, the retailer margin unexpectedly increased
significantly (28.7% to 38.2%). This increase is due mainly
to the fact that the cattle market was still regulated at
farm level (All exchanges of cattle must be done within
designated local cattle markets likely to be controlled by
the few cattle traders closely related the wholesale
slaughter houses.) and.in the beef retail market (All retail
meat shops must get licenses from the local governments and
at the same time join in the 'Livestock Business
Cooperatives' for convenience of taxation, so as to
naturally formulate and maintain the cartel system).

It is noteworthy that the retail margin increase does

represent a sort of transfer of market power from

217
wholesalers, the big slaughter-houses, ,to many small
retailers. On the other hand, it also means that more costs
are being charged for additional marketing services of
cutting, packing, etc.

The quality of meat, including freshness, did not
deteriorate, according to some interviews with retailers
and consumers, but rather became better with significantly
improved marketing services of transportation, storage,
cutting and packing, etc. Still more important was that
illegal marketing, which of course did not obey quality
regulations, was significantly reduced, meaning an actual

improvement of meat quality.

3. Ov va '0 'c orm n s
tend o s o e 'c

The goals of beef policy were not clear from the
beginning. Before period 2, there was no policy except to
encourage cattle raising’ as additional source of farm
household income. The initial goals in the policy maker's
mind since the mid-19705 have been to increase supply to
meet the rapidly increasing demand for beef without price
drops to secure the producer's interest while continuing
the policy of encouraging cattle raising, and to expand job
opportunity in rural areas and thereby increase the earnings
of rural people.

At first, the goal of increasing rural income by

218

encouraging cattle raising seemed relatively successful in
terms of total outcomes. Livestock production as a whole
in terms of value added increased from 721 bil. won in 1977
to 1,194 bil. won in 1987 in 1985 constant price (66%
increase) and the share of livestock in total agricultural
production increased accordingly from 7.2% to 10.9% in the
same period. Average gross earnings from livestock per farm
Ihousehold grew from 435,000 won in 1977 to the peak of
1,276,000 won in 1983 and then decreased to 907,000 won in
1987 in 1985 Constant prices (more than doubling in ten
years).

But most people don't recognize this achievement,
instead blaming it as a severe failure because of repeated
drastic price drops which caused disastrous and reportedly
widespread farm bankruptcies. There is no statistical data
on these bankruptcies. Even if it was not.that.great number,
this result has been considered as the worst example of
recent Korean agricultural policy failure because the booms
and crashes were too shocking, and.1damages were too serious
for all rural people and the national economy as well as
politics.

Needless to say, another goal of preventing price drops
obviously was not achieved. There seems to be a five-year
cycle in cattle price and consequently in beef price (see
Figure 14, p. 213), although the reason is not clear

(probably'due to the life cycle of cattle). A realistic goal

219
was not to prevent price drops and to guarantee the price
above a certain level, a nearly impossible task, but was to
reduce fluctuations in that cycle.

If the policy goal was to reduce the rate of price
drop, it should have tried to reduce the rate of price hikes
first. But the import policy was not appropriately
implemented for this purpose, and the policy of cattle
raising encouragement through special loans for calf
purchase during a period of price hikes was a definite
mistake. Consequently, this reckless government intervention
in the domestic market and in trade made the situation.worse
than ever.

The target of the institutional reform of domestic
marketing was intended to remove the constraints of free
entry and competition so as to eliminate unfair extra
profits of oligopolistic slaughter houses and stimulate the
competition.in.the market. This policy was a limited success
in terms of bringing about quality improvement in meat and
marketing services and further development of livestock
marketing. But other policy goals were not‘ achieved
successfully because many other restrictions still existed'

in the cattle and retail beef markets.

Who 5 d Who 0 e t ost 0 Bee
Reliey ?

Many people argue that very few gained from this beef

220

policy. They may have been some beef exporters in foreign
countries, mostly Australia, who could expand their sales,
and a few speculators at the moment of price hikes. And a
few farmers supported by government loans who successfully
managed their cattle farms must also be included in the
category of gainers, (still 892,000 farm households were
raising at least one cattle in 1987, among them 12,000 have
20 or more heads).

Some beef traders might have gained from an increased
amount of exchange by imports and sometimes they may have
gotten some extra profits by cheating on the quality.
Imported beef was treated as low quality beef because it
had been frozen for a long time, so the price was lower.
But it could be sold as high quality Korean native cattle
beef at higher prices because it could not easily be
distinguished by consumers. A system of meat quality
standards and sales of cut and packed meat has not yet been
generalized except in a few super-markets. Consumers have
to rely on the service of retailers, another possible cause
of sales deception.

Other gainers could be the government and NLCF who
through cumulated the sales margin of imported beef and
cattle established the 'Livestock Development Fund' to
finance various policy programs to encourage livestock
breeding, price support and marketing improvement, etc.

It was true until 1983 that the total amount of the

221
fund greatly expanded from 0.9 billion won in 1975 to 310
billion won in 1983. Since 1984, however, the amount has
decreased to 164 billion won by 1987, mainly because of the
losses from the cattle purchase and release programs.

Finally, the cattle feed industry and other input
businesses for cattle raising, as well as cattle processing
enterprises including slaughter-houses were benefited by the
increased herd size of cattle. Although it is not clear
whether low income consumers might be included in this
category of gainers or remained the cost bearers of extra
price above the world price, it is noteworthy that some low
income consumers could. have enjoyed. the low"price of
imported beef more than in the past.

On the other hand, the biggest losers are bankrupt or
heavily indebted farmers through the cattle raising
encouragement loans and price drops, although they
themselves must bear the ultimate responsibility for their
losses. Total number of cattle farms increased from
1,105,000 in 1970 to 1,366,000 in 1974, then decreased to
886,000 in 1981 due to farm mechanization, and increased
again to 1,092,000 in 1985 because of the cattle raising
boom and expanded special government encouragement loan
programs (511,000 heads in 1980-85, see‘Table 20), and.egain
decreased to 392,000 in 1937. The 200,000 farms which left
the business in 1986-87 are the most numerousiprimary losers

by this policy.

222

Other losers include the overall rural economy and
agri-businesses related to cattle raising at the moment of
price drops and bankruptcy of cattle farms, and the
government and NLCF for their actual losses (from purchase
and release program) as well as the loss of their
credibility and popular support from members of livestock
cooperatives and the rural people.

Besides, the gainers through the institutional reform
of beef marketing seem to be beef retailers, for their
increased margin, and some consumers, for improved quality
of meat and services. The farmers and consumers were
initially targeted as beneficiaries but were not actually
benefited as expected because of the incomplete reform of
marketing regulations.

The losers were the wholesalers who lost extra profits,
but actually their loss was not that great because the rate
of their margin did not decrease much, although they might
have lost an expected increased.margin at the time of cattle
price fall as usual. I

Finally, all costs ultimately have been paid for by
the consumers, fundamentally including the extra payment
above the world price level because of protection,
additional payment for the price support program and extra
payment for the price hike due to the policy's failure.
Among consumers low income consumers may have sacrificed

more than high income consumers as a result of high price

223
because of greater share of meat consumption expenditure
out of total disposable income.

The government.and.NLCF bore the actual costs of policy
programs with earnings from beef importation, the 'Livestock
Development Fund'. There has been no net loss or additional
budgetary costs during the last decade. However, the
national economy in general paid the costs of consequent
market distortions caused by this policy, and the general
public has borne the cost of unnecessary social and

political unrest caused by this policy failure.

C. Reed Grain Impert and Reed industry Poliey
1. Roliey Differenees fren Rood Grain nanegemenr

There are three major policy differences between food
grains (mainly rice and barley) and feed grains in Korea:
differences in production policy (extensive efforts to
increase rice and barley production for self-sufficiency of
staple food grains but virtually no policy for feed grains
' production); differences in import policy (government
monopolized import of rice and barley vs. not fully
liberalized but mostly privatized importation of feed
grains); and differences in domestic marketing regulation
(total government Control of ‘food grain markets by
government vs. highly competitive feed grain and compound
feed markets far less regulated by government).

These differences originate from two fundamentally

224
different policy orientations. The first is that food.grains
or rice and barley have been conceived by Korean policy
makers as top priority major staple foods for the people
which can not and should not be given up, while feed grains
are only minor commodities in the Korean people's daily
life.

Secondly, rice and barley have been considered as
possible to achieve domestic self-sufficiency and at the
same time as traditionally major sources of farm household
income, while an adequate supply of feed grains can not be
produced domestically within very limited land. Feed grain
production appears to be not relevant to a small farm
agricultural framework such as Korea's. Therefore, feed
grains have been imported from the beginning while rice and
barley have been highly protected.

However, as in beef policy, before the second decade
of ‘maturing 'transition (1977-86), feed. policy' was not
included as a major policy concern, so the top policy makers
didn't care about it very much. This led to a lack.of policy
concerning feed grains which made it easier to remove
unnecessary restrictions on trade and domestic marketing of
feed grains. Thus, the importation of feed grains and
marketing and pricing of feed concentrates or compound feeds
were jprivatized. in 1980 and eventually liberalized 'in
practical sense.

Before then, feed grains, like other food grains, were

225

totally under the control of government, although actual
importation was allowed to NACF (NLCF was separated from
NACF in 1980) and Korea Feed Association (KFA), and to be
distributed to private or cooperative feed mills. Import
quotas were imposed annually by MAFF, but each import again
had to be approved by the government case by case. Since
-1980, import decisions have shifted from government to NLCF
and KFA and eventually to each private feed miller.
Restrictions on pricing and marketing of feed concentrates
or compound feeds have been removed step by step.

The government still reserves the power of emergency
order but the feed grain market is free with almost no
government control except the system of licensing feed mills
and indirect influence of the NLCF, which controls about 30%
of total market share of commercial feeds.

Sales promotion and quality improvement activities are
controlled by individual feed millers through free
competition, and occasional efforts by KFA and NLCF to form
a sort of cartel have failed because of over capacity of
feed supply to demand in total.

As a result, Korean feed industry has been modernized
in short period. large facilities for unloading, storage
and processing of feed grains have been newly established
or rapidly modernized mainly through private investments.
Some ' public loans have been granted to supplement the

shortage of private investment.

226

The feed grain market has grown very rapidly and
adjusted fairly well to free market competition with
relatively stabilized output prices and a lower cost of
production, especially through cost savings from applying
competitive inputs (mainly feed grain importation).

Furthermore, feed. millers have. done 'very"well in
providing related extension services for their customers as
a part of their own sales activity. Consequently, the
livestock industry, especially pig and poultry farming, has
also been modernized and relatively market-oriented, without
much additional government cost or political pressures with
regard to feed grain matters.

Until 1985, a sort of import price stabilization scheme
was maintained in which a standard import price was set up
by government. In case of lower price, difference was
collected by the 'Livestock Development Fund' and in case
of higher price the difference was paid for through
compensation from the fund. This system was removed by
pressures from feed grain exporting countries (mainly
U.S.A.) and end users of feed grains, the farmers, who felt
the system to increase the price of feed concentrates or
compound feeds by an unnecessarily excessive margin at a
time when import price continuously declined below the

standard price in 19805.

227
2. genperison of Policy Rerformances

As in the previous cases of rice and beef, policy
performances will be compared by the evaluation criteria of
intended policy goals, real beneficiaries and cost bearers,
and other factors including quality of products and related

services, and progressiveness.
Above all, common policy goal of the two subsectors of
food and feed grains has been price stabilization. Thus the
result of price fluctuations is the first criterion of

comparison in an evaluation of intended policy goals.

Figure 15. Rriee Trends of Rice ang Reee
non/k9 (Current Price)

 

 

 

 

 

I000
‘ n' ma)
weprioeesel
750
sun.
.3» nice I art Prie . .................... .«u
a ,,,,, a'm 3"?‘ .... .....m «3 o: M Cattle Flia33..........“f“.3
-—- 'b--‘_'_ __ ”-----
"CHI-n 'IiportTI-Te'r- "W—h—x __ -..—
0

1903 1904 1005 1000 - 1007

3 Rice Import Price; FAS Price, Corn Import Price; C&F
Price

** Data Source; MAFF, Qete Qolleetion on Grain Management,

Bureau of Grain Management, 1988 and KFA, HandpooR e:
Misfire. 1988.

228

Figure 15 showing recent 5-year price trends reveals
that the price of feed (beef cattle feed was the highest
selling feed in 1983-87) was more stabilized than the
wholesale rice price, a natural result since the feed sector
depended mostly on imports and the world price during that
period was relatively stable and less open to seasonal
fluctuations than rice, a grain mostly supplied by domestic
production with the inescapable seasonality. Actually, the
average rate of seasonal fluctuation of rice price in that
period was 12.1%, while that of feed price was 9.8%.1

Figure 15 also) shows that 'the difference Ibetween
domestic price and import price, the cost of protection,
was far greater in case of rice than feed. Corn was the most
used feed grain during that time and.that is why it was
taken as the item of reference for price comparison. Here
it should.be:noted that the immediate consumers of feeds are
livestock farmers, who overlap with the target group of rice
protection.

In this regard, this feed policy can be evaluated as
neither harmful to farmers nor to the ultimate consumers of
livestock.products, which means there have been less losers
in that feed policy. Domestic producers of feed grains or

substitutable feed stuffs might have become losers, but

 

1 The rate of seasonal fluctuation of price was
calculated as the difference between the highest and lowest
monthly prices divided by the average price of the year.
These numbers are 5-year average of them.

229
actually there has been almost no one in that category but
a small number of corn growers in mountainous areas where
no other crops can be cultivated.

However, domestic. Corn growers had been subsidized
through the 'Livestock Development Fund' for compensation
of their deficit in the case of selling their products to
feed millers or having been paid by feed millers who were
obligated to buy domestic corn along with a certain
proportion of imported corn.

So the real beneficiaries of this feed policy have
included feed millers as direct users of imported feed
grains, livestock farmers and ultimate consumers of
livestock products. There have been no serious losers from
this policy nor have their been heavy cost bearers, as in
other cases of rice and beef.

Actually, there has been virtually no governmental
costs required for this feed policy (In Japan, they still
allocate huge subsidies for domestic producers of feed
grains and.wheat). Recently, domestically produced corn has
decreased in quantity at the same time it has become popular
as a special food for direct consumption as sweet corn, so
that the compensation has become unnecessary.

On the other hand, because of less intervention and
regulation, there has been less chances of market
distortions and the subsequent inefficiency or welfare

losses. At the same time there has been less probability of

230
wastes and leakages of public expenditures, corruption and
power abuses as in other cases such as of rice and beef. In
other words, some bureaucrats and opportunistic traders may
have lost possible fringe benefits or extra profits through
a policy which reduces interruptions.

The quality of the products and related services has
been much better for the feed industry than for the rice
processing' and. marketing industries. The facilities of
storage, milling or mixing, transportation, packing and
retailing or delivery system have also been much better in
case of the feed industry. For example, feed grains are
stored in modernized silos, while rice is still mostly
stored in small and traditional warehouses of local
cooperatives._

Most feed.mills are operated by a computerized quality
control system (total number of feed mills was 80 in 1988),
but most rice mills are still remain in a part small,
traditional village level services (totally 17,579 mills)
or some bigger and partly modernized mills designated for
government rice programs (433 mills).

Feed is completely packed with maker's brand for
retailing by standardized packing units, while rice is still
mostly retailed.by traditionally packing methods or without
packing except government brand rice. In other words, makers
guarantee feed quality, while the quality of rice depends

only on the retailer's reputation, which is often not

231
reliable. Even government brand rice is usually retailed
after 'unpacking' because the. packages are too. big for
retailing (80 kgs per bag).

In terms of other related services, feed is usually
delivered to the customer by order, while rice is usually
retailed at the shop directly by the consumers, with some
exceptions of recently increasing delivery service for good
customers. And because the feed customers are usually
livestock farmers, some big feed millers and feed retailers
provide related technical extension and management
consulting services as a part of their sales promotion
activities. Often they grant short term credits to their
customers, which is not the case for rice marketing.

Finally, to compare progressiveness of the two
subsectors, let's examine the trends of development,
production capacity and cost structure of those industries.
The total amount of commercial feed production increased
from 1.4 million M/T in 1976 to 9 million M/T in 1987, 5
times in.11 years, and total import of feed.grains increased
from 656 thousand M/T to 5,677 thousand M/T, 8.7 times in
the same period (from 84 ndllion dollars to 493 ndllion
dollars, 6 times), an extraordinarily speedy growth. The
policy of deregulation and encouragement of competition must
have contributed significantly to rapid development of the
feed industry which will continue for some time in the

future.

232

Production capacity of compound feed in 1988 was 21,700
M/T a day by the standard of 8 hours operation, 270 M/T per
each factory on average compared with 14,900 M/T (average
34 M/T per each) for government rice processing capacity of
designated rice mills. It was more cost effective in the
feed industry than in the rice processing industry because
of differences of transportation and storage (cost saving
methods of bulk handling are usual in the feed industry but
not for rice), and processing (computerized least cost
method is generalized in feed industry but not for rice
processing). All these are reflected in the opinions of
grain management.people in Korea that the feeding system for
animals is the best (compound feed), and the feeding system

for humans is the worst (rice).

CHAPTER VI

CONCLUSION AND RECOMMENDATIONS

A. §ummary of Policy Performance Evaluations
1. Environmental Changes in Transirional Periods

The results of this examination of the Korean economic
development process in the last two decades, following the
'Dynamic Dual-Sector Economic Development Model of Open
Economy' by Fei and Ranis, confirms that there were the two
important turning points in Korea's recent economic
development. First was 'Shortage Point' at which increase
in real wages of industry began in 1966-67 in accordance
with 'Reversal Point' of absolute decline of agricultural
population. Second was 'Commercialization Point' at which
the rate of labor’ productivity' of industry increased,
combined with the beginning of an increase in real wages in
agriculture in 1976-77. 'Commercialization Point' was
accompanied by another reversal in the share of industry
upsetting that of agriculture, and creating a significant
change in demand patterns for food.

Thus, the last two decades of Korean economic growth
and development ,can be divided into two transitional
periods, namely 'Take-Off Transition' for the first decade
1967-76 (Period 1) and 'Maturing Transition' for second
<decade 1977-86 (Period 2).

Prior to evaluating the performance of recent Korean

233

234
agricultural policy and institutions, it was necessary to
examine some significant transitional characteristics or
changes the environment and behavior of Korean agricultural
sector during those two periods.

The identified significant changes were: the rapid
decline of the agricultural sector both in terms of
population share and contribution to GNP; the drastic shift
of demand for rice and other commodities such as beef and
feed grains; changes toward more commercialized and
specialized farming patterns with changes in supply shifts
(e.g., rice supply in period 1 shifted a lot but not in
period 2); the widened gap of labor productivity between
agriculture and industry with limited resources for farm
size expansion and a subsequent widening gap in income
between the farm and non-farm sectors; increased risk and
'uncertainty in agricultural markets due to fluctuating
domestic supply responses which lead to more fluctuating
prices and vulnerability and instability of farm household
income and rural economy; and much relaxed tension
concerning food. security, mainly due to an increased

capacity of food imports by export earnings.

2. a ' of 'c er o a s
As representatives of recent Korean agricultural policy
and institutions, three policy areas .were selected for

analysis; rice, beef and feed grains. In the case of rice

235
policy, the different impacts of virtually the same policy
under different environments in period 1 and 2 were
compared. In the case of beef, the impacts of policy changes
were evaluated. And differences in performance of feed grain
subsector from that of rice were compared to evaluate the
impacts of different policies for similar commodities.

First, rice policy was relatively successful in
increasing farmer's income, and cost relatively little in
period 1- of supply expansion and still increasing demand
for rice. But in period 2 of no supply shift and decreasing
demand for low quality rice, it was not successful at all
in contributing to increased farmer's income or to stabilize
consumer price. Instead, it cost the government huge amounts
due to rapidly increased amounts of purchase and carry-over
in addition to increased consumer sacrifice and many other
social costs.

Second, the changes of beef import policy, repeated
allowance ,and sanction of beef importation, did not
contribute to reduce the rate of price fluctuations or to
prevent drastic price hikes or falls, but rather made the
situation worse because of ambiguous policy goals and the
existence of another contradictory policy of encouraging
cattle raising, as well as rigid and inappropriate
implementation of policy with significant time lags.
However, a change in domestic beef marketing regulation in

1985 brOught about more market competition, improving the

236
quality of meat and marketing service and demonstrating one
means of improving beef marketing in the future.

Third, in contrast to rice policy, the more liberalized
import policy and removal of domestic marketing regulations
for feed grains and feed industry encouraged and generalized
free competition in the entire industry, contributing to the
rapid growth of industry with stabilized price of outputs,
less cost of production and improved.quality of products and
related services without any notable social and governmental

costs or sacrifices to consumers.

3. genrirmatien of initial Research Hypotheses
The hypotheses to be tested were:

(1) actual effects of government subsidies or
interventions such as the price support program for rice
became much cost-ineffective and inequitable in the sense
of total welfare of the society, particularly in the recent
transitional period;

(2) deregulation toward market functionalization,
decentralization, privatization and trade liberalization
such as deregulation of domestic beef marketing and feed
grain importation actually did not hurt farmer's welfare,
but instead significantly increased consumer's welfare and
also reduced possible unfairness and inefficiency in the
regulations.

The first hypothesis, cost-ineffectiveness of price

237

support program, was proved to be true in period 2 as
mentioned in previous section. In terms of equity, recent
rice policy seems to be very inequitable because low or mid
income consumers are sacrificing the most because of high
rice price. Tax payers (mostly mid income wage and salary
earners) ultimately bear all costs of government program,
and low or mid income laborers are also the most hurt by the
possible inflation.caused.by the program. On the other'hand,
a few big rice farmers and rice traders and processors
(likely to be richer) are actual benefited by the policy,
which allows many opportunities to use unfair privileges and
related corruption.

The second hypothesis that privatization of feed grain
importation and deregulation of domestic marketing of the
beef and feed industries did not hurt farmers, but rather
benefited many livestock farmers as well as ultimate
consumers of livestock products and a few domestic corn
growers who did not lose income was also proved to be true.
It is undoubtedly true that those deregulations brought some
significant increases in consumer welfare at the same time
it reduced unfair privileges and unnecessary social costs.
However, deregulation of beef marketing in 1985 also did not
bring about a satisfactory welfare increase for consumers
or producers, seemingly because of the incomplete reform of

related institutions.

 

238

B. Possible guidelines of Desirable Policy Directions
1. Mejer Rrepositions Supperred

As mentioned in the introductory chapter, as the socio-
economic development processes such as those of period 2 of
Korea are going on, food security may no longer be top
priority of national agricultural poliCy. It will be better
to move the focus of agricultural policy from encouragement
of domestic production for food security to encouragement
of each economic unit's capability to adjust to market
demand and supply. I

Also, as the size of national economy and the private
sector grows, it will be better not to maintain the a system
of central planning and control, but to reduce unreasonable
or unnecessary government intervention and market
regulations in order to eliminate possible chances of market
distortion or corruption and to remove the actual
constraints on free competition and the causes of unfair

privileges for a selected few.

2. ' ' s o es' e ' te atives
e 55 C. n es o r' ul ura ol' Goals
First of all, the goals of agricultural policy must
change from the still existing priorities of self-
sufficiency of staple food grains, increasing farm income
mainly by production encouragement and price support, and

price stabilization with minimum importation, to more

239
reasonable goals which match a significantly changed
environment and behavior grounded on the factual reality.

The first goal of self-sufficiency must be replaced by
vitalization of Korean agriculture as a self-sustaining
industry with sufficient competitiveness and increased
linkage to other sectors of national economy to reach its
maximum potential within minimum requirements for
conservation of 'greens' and for national defense.

The second goal of increasing farm income should be to
increase total income of farm households with a larger
portion of off-farm income from wage and salary earnings
and to expand the overall infrastructure of rural area
including education, health care and recreation to improve
quality of life with reduced cost for rural people.

The third (goal of price stabilization should be to
increase the capacity of agricultural markets for self-
control and coordination of supply and demand on the basis
of balanced bargaining power of each participant in the
private sector through the improvement of market conditions,
eventually adjusting to the world markets and gradual but
inevitable trade liberalization.

From now on, the interests of consumers should be
treated seriously with the same importance as those of
producers. Short-term or sectoral policy goals must not be
contradictory to the long-term or national policy goals.

Agricultural policy should not be. for farmers only, or

240
simply for protecting domestic production without reasonable
consideration of the total welfare of the whole society.
Instead, agricultural policy should provide an equitable
share of benefits and costs for the members of society. In
this regard, the target.of price supports should be replaced
by that of price stabilization in order to balance
government among various conflicts of interests between

producers and consumers.

Alternarive Policy for Rice ane orher Feed grains

In principle, the government intervention should be
minimized and unnecessary marketing regulations must be
removed to encourage competition in the private sector and
to reduce governmental costs. Unreasonable targets of 100%
self-sufficiency must be relaxed to allow some flexibility
of imports and exports within a certain level of percentage,
say 5-10% of total supply determined by minimum necessity
of food security and degree of comparative disadvantage.
This target would prevent unnecessary social cost increase
to achieve the target of self-sufficiency and prepare for
inescapable future import liberalization even of rice.

In the short term, it is ‘better to allow some
importation in order to receive revenue to pay the cost of
government programs to reduce the cause of budget deficits
or over-supply of money.

Above all, the program of government purchase and

241

release should be reduced step by step to a minimum required
level for public usage. For the purpose of supporting
farmer's income only, a sort of deficiency payment system
might be better or more effective than the present purchase
and release system, saving unnecessary handling costs of
that program without the risk of over-production (available
paddy field is naturally limited and the yield of rice is
already at the highest level in the world).

Even if the present purchase and release system were
to be maintained, the methods of purchase and release must
be reformed to reduce the area of intervention to a
necessary minimum. For instance, the way of release can be
changed from the present system of controlling the whole
process of rice marketing, cutting the part of processing,
transporting, packing and retailing.

Government may sell the purchased rice to the millers
or traders directly or via the wholesale market as a form
of paddy. Rice sold must be enough to stabilize consumer
price in the short season. Actually this change has begun
to occur since 1986 with good responses from competitive
millers and consumers, but it is not that easy because of
the strong resistance by government designated millers and
storage owners who may lose their secure jobs without
competition. 4

The means of purchase also can be changed. Present

system of direct buying from each farmer a designated amount

242
rigidly allocated through administrative networks should be
changed to a system in which whoever wants to sell to the
government during a certain period of time can sell at
designated places in local areas. This change will at least
save the farmer5' efforts to bring their rice to the buying
plaCe, a task which could be delegated to rice collectors,
and of course save the cost of purchase and avoid
unnecessary conflicts in the process of allocating the
purchase amount.

The system of flat price all year throughout the
country must be reformed to allow price flexibility
reflecting the difference of cost in different locations
and times of purchase and release. This may rationalize the
structure of government cost for the program itself as well
as keeping the private sector from becoming unreasonably
contracted, a situation which would put pressure on the
government to intervene and on and on.

On the other hand, all unnecessary regulations of
domestic rice marketing must be removed step by. step. A
registration system to secure and enlarge free competition
in the market, eliminate unfair privileges of selected few,
and improve the quality of marketing services through
competition should replace the license system of milling,
wholesaling and retailing.

Moreover, the government should focus on the

improvement of food grain market conditions, invest in the

243

establishment of wholesale markets, standardize units of
storage and transaction by diversifying sales and packing
units for various consumer preferences, encourage
modernization of the system of retail transaction so that
consumers can choose quality-guaranteed products by
preferences of price and quantity, and improve reliability
and accuracy market information system and to extend it
immediately to all producers, consumers and traders.

There had been no legalized food grain markets in the
country with the exception of several NACF wholesale
markets. The first official central wholesale market for
food grains in the nation opened in 1988 in Seoul area,
showing the degree of government's negligence in this area.
Most wholesale markets for good grains should be officially

legalized and modernized in the near future.

ol c ternative or ee

Above all, it is necessary to make the goal of beef
policy very clear whether or not it is to stabilize the
price both for producers and consumers. Price support for
the farmers on the one hand and stabilization of supply and
consumer price on the other hand may not be consistent with
each other and may be impossible to achieve.

If the policy goal is cleared to be stabilization of
beef and . cattle prices by reducing the rate of price

fluctuation, including both price rise and fall, the

244
government should not repeat the mistaken policy of
encouraging cattle raising by granting special loans for
farmers to buy calves at the moment when.prices are rising.

Policies encouraging any agricultural production are
good as long as prices of products can be supported without
fluctuations, but this seems to be impossible in actual
agricultural market situation. Those policies may add more
risk and uncertainty to markets by distorting demand and
supply of related commodities, making the price fluctuation
worse and consequently resulting in increased blame of the
government.

Loan programs should be changed to special loans for
structural adjustment so that farmers can be free to change
products or expand farm size according to their own
judgement outside government direction.

It should not repeat allowance and ban of beef imports
according to domestic price conditions, which again may
worsen the fluctuation of beef and cattle prices. If import
is determined to be necessary to supply enough amount of
beef to meet continuously increasing demand in the future,
import policy must be consistent and continuous.

Moreover, present system of ‘beef imports completely
controlled by the government should be changed to a more'
privatized system as in the case of feed grain imports and
respond more quickly to market conditions without rigidity

and time lags caused by bureaucratic implementation. NLCF

245
seems to have the capability to handle that matter by itself
or through contracts with private businesses.

On the other hand, in case of price drops, a purchase
and release program of cattle like the rice program may be
ineffective and costly as seen in our earlier discussion.
However, it may be worthwhile to attempt to adopt special
loan programs to encourage private storage of beef or
subsidies to local livestock cooperatives to control cattle
supply temporarily at the moment of price fall.

Again, all unnecessary regulations of the domestic beef
and cattle market should be removed step by step for the
same reasons that rice market regulations should be removed.
More investment must also be required to improve marketing
conditions, including establishment of more modernized
slaughter-house facilities and wholesale markets for meat,
improvement of local cattle marketing, standardization of
meat quality, introduction and generalization of the system
of cut-meat sales by varying prices for different quality,

improvement of the marketing information system, etc.

u Dev 0 m e o 'c

The basic framework of feed grain import and feed
industry policies ' seems to be adequate. Further policy
development in this area might include more complete removal
of unnecessary regulations of trade and domestic marketing

such as the remaining license system for feed mills, clear

246

elimination of remaining constraints of free competition
such as attempts to form cartels, public support programs
for further’ research. and. development, encouragement. of
private attempts to participate in world futures markets,
etc.

If these developments are carried out in the near
future, the Korean feed industry may grow and develop
further to become industry able to process exports with

sufficient competitiveness in the world market.

3. es ed 0 s ' h ' ' ocess

As the long period of military backed authoritarian
regimes has ended in Korea since 1987, all policies and
institutions are being reviewed from the democratic policy
making perspective, an inevitable and very desirable reform
for further' development. of Korean. economy' as 'well as
improvement of policy and institutions.

Agricultural policy and institutions must not be an.
exception. Reforms in the policy making process are
necessary to prevent possible policy failures caused by
ineffectiveness and rigidity of the unchanged preference
articulation system, which fails to reflect fundamental
changes of society nor does it represent the preferences of

the majority of the people.

247

Wat—1911.

First, the process of goal identification should be
reformed. The process of problem definition and goal
identification is the starting point or basement in
establishing policy and institutions, a process which should
be open to all the members of the society as far as possible
and must be based on the maximum consensus of a majority of
the people.

Very often in Korea, this process of identification of
policy goals has been neglected and is sometimes even
missing. This becomes the basic reason for subsequent
failures in policy and institutions; unintended results,
cost-ineffectiveness or inefficiency, unfairness or
inequitable consequences, all of which lead to the
obsolescence of whole the political economy of the nation.

Prior to proceeding with the policy making process,
specific policy goals must be completely re-examined with
relation to the possible beneficiaries or target groups and
possible conflicts of interest among them. This process of
examination or review must be open to the general public for
necessary debates, discussions or negotiations to reach fair
compromises on the basis of maximum consensus. For example,
the real goals of rice or beef policy must be re-examined

to identify the actual beneficiaries and cost bearers.

248

Set-Up of Rerformance Evaluation Criteria

Next, it is necessary to establish performance
evaluation criteria on the basis of openness and maximum
consensus of the majority of the people. Until present, this
process has been virtually ignored in Korea. The President's
judgment had been the most powerful foundation of evaluation
criteria, and very often the interests of the nation were
confused.with.the interests of ruling power groups and their
followers. Now, these :criteria, including’ all possible
dimensions of efficiency, equity or fairness, suitability
and progressiveness, etc, must be involved in the policy-

marking process.

§y§tem of Monitering ang Feed Baek

Finally, the system monitoring feed-back of policy
process must be reinstalled from goal identification to
implementation and evaluation. Regular monitoring of the
policy process is required in various forms and tools in
addition to specific auditing or investigations. And a feed-
back system which reflects the results of monitoring and
evaluations must be institutionalized for continuous reform

and further development of related policy and institutions.

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I
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