The Cost of Food Self-Sufficiency and Agricultural Protection in South Korea

Transcription

1 The Cost of Food Self-Suffcency and Agrcultural Protecton n South Korea John C. Beghn (Iowa State Unversty) beghn@astate.edu Jean-Chrstophe Bureau (INA P-G and Iowa State Unversty) Sung Joon Park* (Bank of Korea) Ths draft: January 17, 00 Abstract: As part of ts food securty polcy, South Korea has been pursung food self-suffcency usng hgh tarffs and hgh admnstratve prces n key agrcultural and food markets. Usng a dual approach to trade and trade restrctveness ndces, we analyze the mpact of these market dstortons on welfare and trade volume. Then, we compute optmum dstortons, whch mnmze the welfare cost of observed self-suffcency and producton objectves. We ratonalze these optmum dstortons to what could be clamed as legtmate protecton under a food securty (FS) box n World Trade Organzaton negotatons. FS-box protecton s senstve to changes n the defnton and the extent of the FS objectves. We show that FS va producton targets and relance on mports would be more palatable to consumers and trade partners, whle preservng rents to the farm sector. Key words: agrcultural dstortons, food securty, Korea, protecton, targetng, WTO negotatons. The vews presented n ths paper do not represent the vews of the authors afflated nsttutons. Wthout mplcatng them, the authors thank H. Lee, C. Moreddu, and D. Sumner for useful dscussons and ther help wth the data.

2 The Cost of Food Securty and Agrcultural Protecton n South Korea Abstract: As part of ts food securty polcy, South Korea has been pursung food self-suffcency usng hgh tarffs and hgh admnstratve prces n key agrcultural and food markets. Usng a dual approach to trade and trade restrctveness ndces, we analyze the mpact of these market dstortons on welfare and trade volume. Then, we compute optmum dstortons, whch mnmze the welfare cost of observed self-suffcency and producton objectves. We ratonalze these optmum dstortons to what could be clamed as legtmate protecton under a food securty (FS) box n World Trade Organzaton negotatons. FS-box protecton s senstve to changes n the defnton and the extent of the FS objectves. We show that FS va producton targets and relance on mports would be more palatable to consumers and trade partners, whle preservng rents to the farm sector. Key words: agrcultural dstortons, food securty, Korea, protecton, targetng, WTO negotatons. Introducton The Republc of Korea has supported ts agrcultural sector at a relatvely hgh level compared to that of other member countres of the Organzaton for Economc Cooperaton and Development (OECD). Publc nterventon manly conssts of hgh producton prces supported by government purchases, together wth hgh tarffs that protect domestc producers from foregn competton and, mplctly, from tax consumers. Trade lberalzaton recently took place n certan sectors, and Korea s now a major mporter of olseeds and coarse grans. However, Korea only reluctantly exposed ts agrcultural sector to the provsons of the Uruguay Round Agreement on Agrculture (URAA) (IATRC 1997). It has kept very hgh tarffs n the rce, meat, and dary sectors; hgh producton subsdes n most other sectors; and sgnfcant non-tarff trade barrers on many commodtes, ncludng admnstratve barrers (mport monopoles) and santary restrctons (IATRC 1994; Thornsbury et al.). Exportng countres have stressed that Korean farm polcy mposes hgh food costs on consumers and ncreases the cost of labor for ts manufacturng sector. By artfcally mantanng resources n agrculture, Korean agrcultural polcy allegedly slows the growth rate of the entre domestc economy. Other World Trade Organzaton (WTO) member countres complan that Korea, whle beneftng from global manufacturng export opportuntes, mposes consderable obstacles to other countres exports of food products (Dao et al.). In current WTO negotatons, the Korean government promotes non-trade concerns n agrculture, such as food securty (FS) objectves (WTO 000a), and emphaszes the need for ensurng an adequate supply of food n all market condtons. Korea makes a strong case that Net Food Importng Developng Countres (NFIDCs) should be able to support the domestc producton of staple crops and argues that such measures should be exempted from reducton commtments, on the grounds of FS (WTO 001b). Ths leadng stance echoes developng countres proposals for food securty and development boxes, whch would legtmze larger support to domestc producton and trade barrers. Recent debates under the auspces of the World Bank (001) show a large coalton of sympathzers wth Korea s poston on FS. Free trade, t s argued, s not a guarantee of relable access to cheap food under all condtons. Korea defnes FS as a perplexng jont relance on trade, domestc producton, and selfsuffcency (WTO 000a,b; 001b). Despte some trade concessons under the URAA, Korea has nevertheless openly pursued food self-suffcency as the desrable way to acheve FS. FS based on 1

3 self-suffcency s a recurrent theme among developng members of the WTO. For nstance, Inda has proposed an FS box (WTO 001a). However, self-suffcency objectves are detrmental to (poor) consumers, and alternatve polces, such as producton subsdes, are a more targeted way to acheve FS objectves. Korea and Inda s promoton of self-suffcency, whch penalzes consumers, looks nconsstent wth ther endorsement of FS as access to food for all, proposed durng the World Food Summt of the Food and Agrculture Organzaton (FAO). Our paper contrbutes to the agrcultural trade polcy debate by provdng a rgorous assessment of current agrcultural polces n South Korea and, more generally, of FS strateges promoted by many developng economes. A frst contrbuton of our paper s to estmate the welfare costs and trade mplcatons of Korean agrcultural polcy, usng a multmarket dual approach to trade based on Anderson and Neary We consder major polcy nstruments such as tarffs, prce support, nput subsdes, and consumpton taxes. A comparson of these costs snce 1979 makes t possble to assess how the polcy changes that took place n the 1990s translate nto welfare. Second, Korea s part of a multlateral tradng system that reles on the most-favored-naton clause, mplyng some mport volume expanson. We measure the degree of restrcton, expressed n volume of trade that s generated by Korean agrcultural polcy, usng the mercantlst ndcator of trade restrctveness (Anderson and Neary 000). Ths ndex provdes a metrc of foregone trade opportuntes by other WTO members. Fnally, we estmate how Korea could ratonalze ts polcy nstruments for several FS objectves. We begn wth self-suffcency n staple crops and meat, and present the structure of optmal consumpton taxes and producton subsdes, together wth ther welfare and trade mpacts. We then look at FS attaned under jont relance on mports and producton targets. We show the senstvty of the level and nature of protecton to the commodty coverage of the target through cross-prce effects n producton and consumpton. We conclude the targetng secton by drawng mplcatons on strategc consderatons for trade negotatons regardng support levels under the development or FS box. The polcy recommendaton punch lne of our paper s that developng members of the WTO who endorse FS should advocate defcency payments for ther agrcultural producton and open ther borders smultaneously. Ths would represent a tt-for-tat strategy wth major players such as the Unted States. Ths strategy s much less antagonzng than self-suffcency for trade partners and much more benefcal to consumers and small producers who are net buyers of food. Polcy rents to farmers would be lttle affected. The Analytcal Framework We use a multmarket model of Korean agrculture and food markets embedded n a dual approach to trade to estmate the supply and demand response to government nterventon and the subsequent welfare effects. Followng Anderson and Neary (1996 and 000), these dstorted markets are treated as beng separable from the rest of the economy. The set of polcy nstruments that s consdered here affects the output prces, consumpton prces, and nput prces. Tarffs and government purchases translate nto producer and consumer prces hgher than the border prce. Input subsdes and drect payments are modeled by lower nput prces that are commodtyspecfc n the case of fertlzer taxes, rrgaton subsdes, and subsdzed nterest rates. Consumpton subsdes are modeled by lower consumer prces. We cover rce, wheat, barley, corn, soybean mlk, beef, pork, and poultry. Demand for food s represented by an ncomplete Lnquad demand system calbrated to exstng estmates of ncome and prce elastctes for agrcultural and food products (LaFrance;

4 Lafrance et al.). The sub-demand system for agrcultural and food products s constructed assumng that other consumpton goods are a composte sngle good. Homogenety n prces of the complete system s accounted for by expressng all prces relatve to the prce ndex of the composte non-agrcultural good. 1 Let x be an n-vector of agrcultural goods on demand, q be an n- vector of correspondng consumptons prces, and q z be the consumpton prce of non-agrcultural goods z. Varable y s an m-vector of agrcultural netputs, ncludng n (postve) agrcultural outputs and m n (negatve) nputs, and p s the correspondng prce m-vector. Varable M s total ncome or expendture; p * denotes the m-vector or world prces for agrcultural nputs and outputs. The Lnquad expresson of the vector of Marshallan demands for agrcultural and food goods s M 1 x = ε + Vq + χ( M ε' q q' Vq δ ( qz )), (1) correspondng to the expendture functon 1 e( q,qz,u ) = ε ' q q' Vq δ ( qz ) + θ( qz,u ) exp( χ' p ). () The elements of the n-vectors and n equaton (1), together wth the elements of the n x n matrx V, are calbrated usng the procedure descrbed n an appendx avalable upon request. The calbraton mposes homogenety of degree one n prces for e and symmetry of the Hessan of e. Concavty s verfed locally. The whole producton sector of the economy s represented by a gross domestc product (GDP) functon gdp( p, pz, φ ), wth p z denotng the prce of non-agrcultural netputs, and φ denotng a vector of fxed endowments and the technology. We assume that gdp s separable nto the agrcultural and non-agrcultural components, Π and g, so that gdp( p, pz, φ ) = Π( p, y f ) + g( p z, y f ) (3) where y f denotes the agrcultural endowments. Component Π s represented by a quadratc revenue functon Π( p,y f ) = η p + p' Wp + h( y f ) (4) leadng to supply functons beng lnear n relatve prces. As for the demand system, the prce responses of agrcultural supply and demand for nputs are calbrated usng pror nformaton on prce elastctes. Homogenety of degree zero n netput prce and symmetry are mposed at the sectoral level, and convexty s verfed locally. Ths multmarket model s then mbedded n a dual approach to trade, namely, the Balance of Trade (BoT) functon. The BoT functon, B, s defned as the sum of the value of a consumer s excess demand over ncome at external prces. It s bult up from the consumer s expendture functon and the revenue (GDP) functon, net of the government tax revenue functon, or B(p, p z,q,qz u, φ, y f, β ) = e(q,q z,u) - gdp(p, p z, φ ) - [(q - p*) x(q, u) - (p - p*) y(p, y f )] + β, (5) where β s the sum of the tarff revenue on non-agrcultural goods and the net fnancal transfers from abroad, both of whch are assumed constant n the rest of the paper. We assume perfect competton and exogenous world prces. Dervatve propertes appled to e and gdp yeld compensated consumpton and output quanttes and ther dfference yelds mported quanttes. The BoT functon B ncludes a general equlbrum concept. Expendture and revenue functons characterze the prvate sector structure of supply and demand of the dstorted sectors analyzed n the economy. However, because of the tax revenue rased by dstortons, both government and prvate behavor are summarzed by B(p,q,p*,u,), where represents the 1 In the followng notatons, p, q, and p z express nomnal prces deflated by the aggregate prce ndex of non-agrcultural goods. 3

5 constant elements (p z,qz, φ, y f, β ). The BoT functon represents the external budget constrant and s equal to the net transfer requred to reach a gven level of aggregate domestc welfare, u, for a gven set of domestc prces. Net government revenue from agrcultural and food dstortons s equal to [(q p*) x(q,u) (p p*) y(p)], where the fxed endowments are gnored to smplfy notaton. Consumpton subsdes are captured by (q p) negatve, the cost of tarffs and taxes to consumers by (q p*), and the producer prces, ncludng support and subsdes, by (p p*). Subtractng the partal dervatves of the BoT functon wth respect to domestc prces (p, q) yelds p B and q B, the vectors of margnal welfare costs of domestc prce dstortons n producton and n consumpton, respectvely. As dp and dq represent the producer and consumer prce dstortons, the total deadweght loss from these dstortons s equal to mnus the change n the foregn exchange to support u, or mnus ( p Bdp + q Bdq). Ths s the addtonal foregn exchange requred to compensate for a change n dstorted prces (dp, dq) n order to mantan the ntal welfare level. Varables p B and q B can be derved from totally dfferentatng B, and they can be parameterzed and estmated usng the calbrated food demand and supply responses. Welfare Costs of Korean Agrcultural Polcy The producer support estmate (PSE), measured by the OECD and expressed as a percentage of the value of producton, reaches 74 percent n Korea compared to an OECD average of 40 percent n The Korean government provdes a few drect payments and some nput subsdes (fertlzers and nterest subsdes). The man polcy nstruments are transfers from consumers, whch account for 95 percent of the support to farmers (OECD 001). Many consder such forms of publc nterventon most dstortonary and beleve that they mpose welfare costs on the socety as a whole. TABLE 1. Support n Korean agrculture Perod GDP Share of % PSE %CSE Consumpton at Producton at (3-Year 10 9 Wons Agrcultu (OECD) (OECD) Domestc Domestc Average) at re n Prce/Consumpton Prce/Producton 1995 Prces GDP a at World Prces b at World Prces b , % 56% 56% , % 77% 7% ,779 4.% 65% 63% a Commodtes covered by OECD s PSEs only. b Laspeyres ndex, fxed producton and consumpton weghts. The welfare effect of the varous polcy nstruments can be derved from the BoT functon by constructng the Trade Restrctveness Index (TRI), whch s a welfare-based sngle tarff equvalent of the varous polcy nstruments (Anderson and Neary 1996). The TRI s the unform scalng factor (or unform prce deflator ) that, when appled to perod 1 prces, permts the representatve consumer to attan hs or her ntal level of utlty u 0 whle holdng the BoT constant at ts orgnal (perod 0) level b o : ( p,q,u0,z) [ : B( p /,q /,u0,z) = b0 ]. (6) The scalar s the unform deflator, whch, f appled to all mported goods prces, would ensure a constant balance of payments at the ntal level of utlty. Consder the case where the * comparson s between a protected stuaton 0 and free trade (.e., p 1 = q 1 = p, or τ 1 = 0, wth the 4

6 * equalty p = ( 1 + τ )p defnng the ad valorem unform tarff τ, = 0, 1). Then we have the equvalence between deflator (1/ ) and unform tarff factor (1+τ 0 ): * 0 * B ( p /, u0, z) = b0 = B( (1 +τ ) p, u0, z). (7) 0 The unform tarff equvalent, τ = (1/ 1), leads to perod 0 welfare when appled to the set of world prces. In our case, specfc producton and consumpton prce dstortons exst, and the TRI methodology apples to any subset of prce dstortons n any sector of the economy. In the rest of 0 the paper, s referred to as the unform deflator and τ = ( 1/ 1), as the unform unt prce dstorton. In the general case, wthout a general equlbrum model, the changes n have to be locally approxmated. Total dfferentaton of B n equaton (6) yelds the percentage change n as a local approxmaton of the change n welfare p Bdp + q Bdq normalzed by the factor Bp + Bq, or p q p Bdp + q Bdq & =, (8) p Bp + q Bq 1 1 where the dervatves of B are evaluated by ( p /,q /,u0 ). That s, the change n the TRI deflator s a weghted average of the proportonal changes n domestc prces. The weghts are the shares of margnal deadweght loss due to each polcy-nduced prce varaton. The numerator of equaton (3) measures the deadweght loss of the dstorton changes and corresponds to the change n compensaton measures (EV or CV) nduced by dp and dq, or the change n the money metrc utlty for the same dp, dq up to normalzaton by the shadow prce of foregn exchange (Anderson and Martn). Table provdes the deadweght loss of the agrcultural polcy based on estmates of the components of and B. When comparng the observed (dstorted) stuaton 0 and the B p q stuaton 1 wthout publc nterventon (at the vector p * of free trade prces wthout nput and consumpton subsdes), t s possble to calculate the dfferent components of the numerator of equaton (8). The fgures shown n Table are n bllon won at 1995 prces. Table. Transfers and welfare losses nduced by Korean agrcultural polces (all fgures n bllon 1995 wons) Perod Increase n Tarff and Deadweght Deadweght Deadweght (3-Year Agrcultural Tax Loss Loss Loss Total Average) Revenue Revenues Consumpton Producton ,640 1,76 1,557 1,553 3, ,98 1,53 3,015 3,650 6, ,571 1,8,430 3,7 6,15 Cumulatve 18,595 6,58 49,976 69,77 119,54 The results provded n Table show how costly the socal transfers nduced by Korean agrcultural polcy are n terms of welfare. The deadweght loss assocated to the transfer of 10 wons to farmers amounts to roughly 5.8 wons. Ths s manly caused by the partcular polcy nstruments fully coupled to producton and taxng consumers. Hgh tarffs and admnstratve prces reflect the Korean preference for self-suffcency objectves, regardless of the cost for consumers n sectors such as rce, pork, or poultry. Table 3 provdes a measure of the TRI unform dstorton equvalent relatve to free trade. Equaton (8) leads to the proportonal change n the unform tarff. When comparng the observed 5

7 (dstorted) stuaton 0 and the stuaton wthout publc nterventon, equaton (9) provdes an 0 0 approxmaton of τ /( 1 + τ ): 0 0 τ τ & d d = = =. (9) τ 1 + τ Scalar τ 0 would lead to the present welfare f the reference prces were ncreased by ths amount (.e., f all the components of p*, the vector of netput prces n the free trade stuaton 0 * ' 0 * 0 ' 0 0 wthout nterventon, were ncreased by a factor τ p ). Expresson q B ( p q ) / q B q s the weghted sum of the unt dstorton of consumpton prces; the weghts are the deadweght loss assocated wth the unt dstorton on a partcular good. The comparson of ths ndcator (column 4 n Table 3) wth the sum of each consumpton dstorton weghted by the consumpton of each good n (column 5) shows that the use of the margnal deadweght loss on consumpton as a weght results n a larger overall ndex. In a smlar way, the deadweght loss weghted average of the ' 0 * 0 ' 0 0 producton dstortons pb ( p p )/ pb p (column 6 of Table 3) s sgnfcantly larger than the average dstorton weghted by the share n producton (column 7). Table 3. TRI and related ndcators Perod (3-Year Average) d / Unform Unt Dstorton Margnal Welfare Weghted Percentage τ 0 Dstorton on Consumpton Consumpton Weghted Dstorton on Consumer Prces (% Actual Margnal Welfare Weghted Percentage Dstorton on Output Prces Prces Value) Producton Weghted Dstorton on Output Prces The Effect of Korean Agrcultural Polcy on Each Agrcultural Sector The relatve mpact of the varous polces can be seen by smulatng the effect of the whole set of taxes and subsdes on a partcular commodty. Ths requres takng nto account the specfc measures for each nput, such as rrgaton subsdes, captal grants, subsdes for fertlzer use, etc. These nputs were allocated to each producton usng annual nput/output coeffcents, and a reference prce was constructed for each commodty-specfc nput by allocatng a detaled set of subsdes to the varous agrcultural productons based on the allocaton used by the OECD for the calculaton of the PSEs. The deadweght loss n consumpton correspondng to the commodty s estmated by the ' 0 * 0 expresson qb ( p q ), where the elements of p * are the reference prce n the case of the commodty and the commodty specfc nput and are the observed prces q o n other cases. A smlar computaton s made for estmatng the deadweght loss on the producton sde. The sum of the two components provde the total welfare effect assocated wth the government nterventon on commodty, whch ncludes the market prce support, the output enhancng subsdes, and the subsdes to the nput used n the producton of (Table 4, row 5). The contrbuton of the commodty-specfc polcy to the overall welfare s expressed as a percentage (Table 4, row 6). The effect of the polcy on the revenue of agrcultural producers can be derved from the sectoral GDP functon. The dervatves of relatve to dstorted prces p Π gve the amount of 6

8 ncome resultng from an ncrease n output (decrease n nput) prces. Because of Hotellng s lemma, these are the elements of the producton vector. That s, the ncome effect of the ' agrcultural polcy s approxmated by pπ( p p*). A smlar approach s used for estmatng the revenue effect of the agrcultural polcy on a commodty-specfc bass. The effcency of the agrcultural polcy, defned as the overall cost to the socety of transferrng ncome to producers, can be estmated by the deadweght loss (on both the consumpton and producton sdes) assocated wth one unt of the extra producer ncome resultng ' from the polcy. It therefore s defned as one plus the rato of the revenue effect pπdp to the welfare effect p Bdp + q Bdq and s provded n Table 4, row 6. Rce growers get the largest transfer, followed by beef, pork, and mlk producers. Rce polcy has the hghest contrbuton to foregone welfare, followed by beef, dary, and pork. Beef has the lowest effcency of transfer, at around 47 percent. The effect of government nterventon on a partcular product has mplcatons n terms of substtuton on both the producton and consumpton of other products when prces are nfluenced. The deadweght loss generated by a commodty-specfc polcy can be decomposed n terms of an own-prce effect, a cross-prce effect, and an nput effect that measure the mpact of the publc polcy (both on output and nput through prces subsdes) on nput use. Input dstortons have the largest amounts of welfare losses n the rce and pork sectors, where they account for one-fourth and one-thrd of the deadweght losses n these respectve sectors. However, deadweght loss levels nduced by nput subsdes are neglgble n other sectors, except for beef, dary, and poultry. Table 4. Commodty-specfc effect of Korean agrcultural polcy (fgures n bllon 1995 wons; all fgures are average ) Rce Wheat Barley Corn Soya Mlk Beef Pork Poultry Overall Value of Output at Domestc Prce Value of Output at Reference Prces Consumpton at Domestc Prces Consumpton at 1, , ,197 1, ,11 Reference Prces Product-Related 3, , Deadweght Loss (948) (-0.3) (57) (0) (6) (35) (97) (144) (3) (,430) (Consumpton; (,680) (-) (-) (-) (55) (401) (516) (3) (144) (3,7) Producton) Contrbuton to Total 55% 0% 1% 0% 1% 11% % 7% % - Welfare Costs Income Transfers to 7, , ,571 Producers a Transfer Effcency b 67% - 73% - 74% 5% 47% 63% 54% 63% Drect welfare effect, , Cross-Commodty Welfare Effect Input Welfare Effect a Includes nput subsdes. b Defned as (transfers/transfers+deadweght loss). 7

9 Trade Impacts of Korean Agrcultural Polcy and Mercantlsm As a member of the WTO, Korea had to convert quanttatve restrctons on mports nto bound tarffs, reduce these tarffs over an mplementaton perod, open ts market to mports under the mnmum access provsons, and reduce the most trade-dstortng forms of domestc support n However, Korea appled the Uruguay Round provsons so that t could protect ts producers from foregn competton n key sectors (IATRC 1997). For example, Korea postponed the tarffcaton of rce for 10 years and negotated an oblgaton to mport only 4 percent of ts consumpton by 004. In most of the staple foods, Korea has also kept mport restrctons under domestc specal rules. Prohbtve tarffs and admnstratve barrers stll restrct mports of many agrcultural goods to Korea (IATRC 1994). Self-suffcency remans a polcy objectve (see Table 5), partcularly n the rce sector, because of the cultural content of ths good and because of the possble reunfcaton wth North Korea, whch has been experencng dramatc shortages of rce, makng ths ssue partcularly senstve. Table 5. Self-suffcency n Korean agrculture Rce Wheat Barley Corn Soybean Mlk Beef Pork Poultry Producton (10 3 tons) , , Consumpton (10 3 tons) ,148 3, ,438 1,667, Net Imports n % Consumpton 19% 97% 1% 100% 66% -0.1% 19% 14% -0% Net Imports n % Consumpton 0% 99% 15% 100% 85% 6% 53% -0% 9% Net Imports n % Consumpton -1% 99% 4% 100% 9% 16% 40% 5% 14% From the pont of vew of the other countres nvolved n the trade negotatons, the varable of nterest s the volume of mports and exports of the gven country, rather than ts welfare. Ths motvates an evaluaton of the restrctveness of trade polcy usng trade volume as the reference standard rather than the utlty of the representatve consumer (Salvatc, Carter, and Sumner). Anderson and Neary (000) have proposed the mercantlstc trade restrctveness ndex (MTRI), whch reles on the dea of fndng a unform tarff that yelds the same trade volume as the orgnal tarff structure. The defnton of the MTRI shares the basc BoT framework of the TRI. It provdes a metrc of foregone tradng opportuntes nduced by a set of dstortons, whle holdng constant the balance of trade functon but not utlty. Defne m c as a vector of Hcksan mport demand functons. Ths s the vector derved from the expendture and revenue functon: c m ( p,q,u ) = qe( q,u ) pπ( p ), (10) where the set of varables s nnocuously omtted. The general-equlbrum Marshallan mport demand functon depends on domestc and world prces and on exogenous ncome b for the entre economy, m(p,p*,b). Anderson and Neary (000) relate the Hcksan mport demand functon to the GE Marshallan one, as both concde when the balance-of-payments equlbrum holds, n other words, when the BoT equates the lump sum transfer from abroad b,.e., B(p,q,p*,u)=b. Ths makes t possble to defne the equvalent of a Slutsky dentty for the mport demand functon and to relate both mport demand functons,.e., * c c du c ' π m( p,q, p,b ) = π m + u m = π m bm π B, (11) dπ 8

10 where s used as a synthetc notaton for ether p or q vectors. The scalar mport volume functon, M, correspondng to the Marshallan mport demand M(p,q,p*,b) n equaton (1) gves the volume of mports at world prces when domestc prces equal (p,q) and the trade balance equals b: * * M ( p,q, p,b ) = p.m( p,q, p*,b ). (1) * M * M We use equaton (11) and bm = p bm = [ 1 ( q p*) I x ( q,i )] p I x ( q,i ), where x M denotes the Marshallan consumer demand, to retreve the prce dervatves of the Marshallan mport demand functon π M as shown n equaton (13): * c * π M = p π m p bm π B. (13) Note that b M s the margnal propensty to consume tarff-constraned mports; M [ 1 ( q p*) x ( q,i )] 1 M I s the shadow prce of foregn exchange and I x s the margnal ncome response vector for the n consumpton goods (Anderson and Neary 000). The Marshallan MTRI s the most relevant ndex for measurng the overall trade mpact of dstortons. The MTRI gves the unform prce deflator whch, when appled to the prces n the new equlbrum stuaton 1 yelds the same volume (at world prces) of tarff-restrcted mports as n the ntal stuaton 0: µ ( p 1,q 1,M 0 ) µ : M p 1 / µ,q 1 /µ, p*,b = M 0 = M 0 0 p,q,p*,b. (14) 0 0 As was the case wth the TRI, f p 1 equals ts free trade values p*, the scalar (1/ µ -1) s the unform tarff, whch s equvalent n mport volume to the ntal tarff-dstorted trade structure. The effect of tarff changes n the MTRI can be approxmated by usng prce dervatves of the Marshallan mport demand functon, evaluated at (p1/ p1/ ' ' M π dµ p M. dp + q M. dq µ& =. (15) µ p M. p + q M. q Usng the vector of prces n the absence of dstorton as the reference stuaton 1, and the observed prces as stuaton 0, the MTRI change s estmated usng the expresson of the demand system () and the sectoral GDP functon (3) to retreve the dervatves of the mport demand functons (13). Table 6 provdes the results. The change n the MTRI n equaton (15) s a weghted sum of the proportonal changes n consumpton and producton prces between the observed stuaton and the stuaton n the absence of publc nterventon. The weghts are the margnal volumetrc shares of each prce change. The unform tarff equvalent has decreased dramatcally durng the 1990s. Recall that ths s the tarff that should be appled to all goods under consderaton (.e., the lst of the agrcultural goods covered by the OECD PSEs) as ths would gve the actual level of mports n these goods. The declne by one-thrd of ths ndcator between and s manly a result of the surge n mports of corn, wheat, and soybeans at relatvely low tarffs, and an ncrease n the mports of beef (see Table 5). 1 Table 6. Trade volume restrctveness of Korean agrcultural polcy Perod Volume of dµ/µ Unform Trade Margnal Trade Trade (3-Year Trade Tarff τ Weghted Weghted Weghted Average) Restrcton Percentage Dstorton on Percentage Margnal Trade Weghted Dstorton on 9

11 (Bllon Dstorton on Consumpton Dstorton on Producton 1995 Consumpton Prces Producton Prces Wons) Prces 1 Prces a , , , a The unt dstorton s measured as (q n *-q n )/q n. for consumpton prces and as (p n *-p n )/p n for producton prces. Table 6 shows that weghtng ndvdual tarffs (or, more exactly, ther mpact on both producton and consumpton prces) by the margnal trade mpacts, as expressed by the MTRI, leads to slghtly hgher measures of trade restrctveness than those found usng standard mportweghted average dstorton. Agrcultural Polcy n a Second-Best Framework The specal sesson of the WTO Commttee on Agrculture was establshed for the purpose of trade negotatons on agrculture durng the years 000 and 001. Proposals made durng the sesson show that many developng and food-mportng countres share Korea s concerns about food dependency and possble prces hkes, leadng to dffcultes n fnancng normal levels of commercal mports. Most of them are also unsatsfed by the practcal effect of the 1994 Decson on Measures Concernng the Possble Negatve Effects of the Reform Programme on Least-Developed Countres and NFIDCs that accompaned the URAA. The Decson was supposed to address ther concerns about FS. We saw n two prevous sectons that Korean food polcy has costly welfare effects and frustrates mercantlst aspratons of trade partners by restrctng agrcultural trade. In ths secton, we take FS as a premse and nvestgate optmum dstorton structures for several defntons of FS, ncludng self-suffcency. Tax Structure for Self-Suffcency Targets Frst, consder Korea s negotatng clam that WTO commtments should allow t to pursue desred FS and rural development polces, by settng an objectve of a gven degree of selfsuffcency n the gran sector, n the meat sector, and for a set of commodtes that Korea actually produces (meat, grans, dary). Wthn a second-best framework, t s possble to provde optmzaton of the tax structure for achevng a gven level of self-suffcency =( 1,,.., n ) for α n x n =y n, wth the subscrpt referrng to commodty n and wth 0 α n 1 for all n. From the targetng prncple n a small economy (Bhagwat, Panagarya, and Srnvasan; Vousden), the optmum dstorton structure calls for a producton subsdy and a consumpton tax that s equal to α, the producton subsdy. In addton, nput subsdes are nferor to output subsdes and should not be used; that s, margnal rates of techncal substtuton should be left undstorted (Bhagwat, Panagarya, and Srnvasan). Formally, consder the (specfc) tax on consumpton τ c n = q n p* n and the tax on p * producton τ n = pn pn for good n. Effcency costs should be mnmzed under the constrant of the dstorton structure satsfyng the self-suffcency target. Imports represent a predefned proporton of demand at the dstorted prces: c p α n x( p* + τ n,u ) yn ( p* + τ n ) = 0. (16) Dfferentatng equaton (16) and the BoT functon leads to the followng system of equatons: 10

12 M x n c e g e p c = + ( 1 τ n du τ n dpn τ n dq n I u pn qn. (17) e e g α n du + α n dqn = dp n qn u qnqn pn Rearrangng leads to the expresson of du, n terms of dq and the frst-order condton: du c p = 0 τ n τ n α n = 0. (18) dq n That s, a necessary condton for the second-best tax structure s that the relatve consumpton and c p producton taxes verfy τ n = αnτ n for all n. To solve for the optmum level of τ, defne the excess demand for mport relatve to the self-suffcency target at non-dstorted prces, based on equaton (16): A ( p,u ) = α x ( p*,u ) y ( p*) α dx dy = A. Ths excess demand s response H x A y to optmum dstortons s = α p α j, for targeted self-suffcency levels and j for τ j p j p j and j. The optmum dstorton reduces the excess demand (over the target) and mnmzes welfare losses relatve to a free trade stuaton, as expressed by the followng equatons: K M p A x e τ j + α p du = A (19) j τ j I u for K self-suffcency targets at level j wth and j=1,,k, and K K A τ τ j e j τ j du =, (0) K M u x 1 α τ I to be mnmzed. The latter expresson comes from the dfferentaton of the BoT functon. Mnmzng welfare losses (19) subject to (0) yelds the optmum τ structure. In a frst set of smulatons, we defne the optmal tax structure under the constrant of achevng the hstorcal level of self-suffcency over the perod. Smulatons were conducted n two ways: mposng the observed levels of self-suffcency for the whole set of commodtes, and on a commodty per commodty bass. Table 7. Targetng hstorcal levels of self-suffcency (all fgures are averages) Actual Actual Rato Hstorcal Rate Second-Best Second-Best Producton Consumpton Producton/ of Self Tax on Tax on Support Tax Consumpton Suffcency Producton Consumpton (Ad Valorem Equvalent) Tax Rce 360% 35% a 34% 34% Wheat - 0% Barley 377% 15% % 14% Corn - 1% Soybean 688% 54% % 5% Dary % 15% % 00% Beef 17% 167% % 19% 11

13 Pork 5% 48% % 47% Poultry 6% 3% % 0% a We constran α=1 for rce. Table 7 shows that the present structure of taxes and subsdes s close to the one recommended for maxmzng welfare under the constrant of the exstng rate of self-suffcency. Columns 3 and 4 of Table 7 show that the rato of the actual tax on consumpton and subsdy of c c producton s close to satsfyng condton τ n = α nτ n. Ths s partcularly the case for soybeans, a commodty whose producton s supported at very hgh levels, but for whch consumers face relatvely few taxes. Ths suggests that, f one focuses on a self-suffcency objectve, relatvely lttle can be ganed from a reform of the tax structure under these constrants, except for the nput subsdes dstortng margnal rates of substtuton n producton. The gans from such a mnor tax reform would be lmted to 1,540 bllon wons at 1995 prces. Self-suffcency targets mean restrctng demand by mposng hgh prces to consumers, whch can lead to the absurd stuaton where a country nsulates tself from the vcsstudes of world markets by starvng ts consumers. Consder the hypothetcal case n whch Korea would decde to become self-suffcent n protens. In spte of a very hgh level of subsdes (equvalent to payng producers more than sx tmes the world prces), Korean producton of soybeans covers less than 10 percent of actual consumpton. Smulatons wth the above model show that any selfsuffcency target could be acheved only by a chokng contracton of demand, where very hgh consumpton taxes would restrct the use of soybeans to a level that would be close to actual producton. In Korea, self-suffcency n pork and poultry producton s acheved only by mportng large quanttes of soybeans and corn, whch s less absurd than producng the feed domestcally, but stll less effectve than mportng meat n a land-scarce country. These commodtes face a relatvely low tarff, whle tarffs on meat are prohbtve. On ths bass, selfsuffcency can hardly be defended on natonal securty grounds: corn s suppled manly by a sngle country, and the world market for soybeans has experenced some shortages n the past. Ths suggests that Korean self-suffcency objectves n these sectors merely reflect smple tarff escalaton and effectve protecton of meat products. Fnally, although we do not address ths pont formally, self-suffcency penalzes poor consumers the most because t mposes on them a large expendture share for food; ths polcy hardly qualfes under the objectve to provde food access to all. Tax Structure Supportng Producton Targets for Food Securty A reasonable alternatve would be to set producton levels as targets n staple foods and rely on mports for addtonal sourcng of food tems. Low or no tarffs on the consumer sde would result n a hgher demand, and the self-suffcency rato would decrease dramatcally. However, domestc producton would be mantaned and would represent some nsurance aganst world market uncertanty. The effect of ths polcy on domestc supply securty would be the same as that of self-suffcency polcy, wthout dstortng consumpton decsons. Settng the constrant of achevng hstorcal producton levels leads to set output subsdes but no consumpton tax (Bhagwat, Panagarya, and Srnvasan; Vousden). The correspondng level of output subsdy on a subset of targeted commodtes k=1, K can be found by solvng the p 1 p * program τ = [ y / p ] ( y ( p + τ ) y( p )), where y j (p * +τ) s the level of producton target for commodty j, and j and k descrbe the K commodtes that are targeted by the FS objectves. The elements of τ correspondng to non-targeted commodtes are equal to zero. Matrx y/ p s KxK. Smulatons show that ths objectve leads to producton subsdes comparable to the present 1

14 stuaton, whch s not surprsng, gven the lmted producton mpact of Korean nput subsdes. Table 8. Welfare and market access under self-suffcency and producton targets, average (all fgures n 10 6 won at 1995 prces, except those n percentages) Actual Full Self-Suffcency Target Hstorcal Self-Suffcency Producton Target, Hstorcal stuaton (Α=1) on Subsets of Goods Target on Subsets of Goods Levels Staple grans only Meat Only Grans, Meat Mlk Staple Grans Only Meat Only Grans, Meat, Mlk Staple Grans Only Meat Only Grans, Meat, Mlk Deadweght 6, ,001 9,730,540 1,444 4,614 1, ,506 Loss EV a Value of 3,75 4,843 3,70,70 4,84 4,357 3,381 5,044 5,065 4,431 Imports at World Prces Trade, ,835 3, ,164, ,13 Restrcton Impact Unform 66% 19% 56% 98% 19% 35% 63% 14% 14% 3% Equvalent Tarff a Relatve to absence of publc nterventon. Table 8 makes ths pont vvdly. It compares the deadweght loss (EV from free trade) n the actual stuaton (column 1). It also shows the trade mplcatons of the alternatve approaches to FS, whch are full self-suffcency (columns 3 to 5), hstorcal levels of self-suffcency as a target (columns 6 to 8), and hstorcal producton levels as a target, as resultng from a polcy based on defcency payments and no tarffs (columns 9 to 11). The thrd row of Table 8 gves the value of mports of all commodtes at world prces under four stuatons. The fourth row provdes an ndcator of the trade restrcton caused by the correspondng tax structure, as measured by the numerator of the MTRI. Fnally, row 5 provdes the unform MTRI tarff,.e., the tarff that should be mposed on all prces of tradable commodtes n order to lead to the volume of trade at a world prce that corresponds to a gven tax structure. Besdes the welfare aspects, settng producton targets rather than self-suffcency targets represents a more palatable stuaton for mercantlst partners wthn the WTO and should facltate the negotaton of large defcency payments. Ths polcy, whch has been used n the man U.S. programs for years, makes t possble to avod the present deadweght losses on the consumpton sde. Ths generates extra Korean mports and a loss of lmted tarff revenue that can no longer be redstrbuted to consumers. However, the decrease n food costs for consumers, as well as the ncrease n consumpton, results n sgnfcant welfare gans, suffcent to pay for the farm program and more. Targeted defcency payments n the staple grans sector (rce and barley) that acheve hstorcal producton levels, whle removng tarffs on mports, would result n a sgnfcant welfare mprovement (the deadweght loss would be reduced by 7 percent compared to the actual stuaton, to 1,716 bllon wons at 1995 prces). It would also result n a sgnfcant expanson of market opportuntes. A synthetc ndcator of these market opportuntes, the MTRI unform tarff equvalent would fall from 66 percent to 14 percent, and the volume of trade foregone would fall from,7 bllon wons to 515 bllon at 1995 prces. Conclusons 13

15 Despte partal trade lberalzaton under the URAA, South Korea has been pursung a polcy of food self-suffcency usng trade restrctons and admnstratve prces n key agrcultural and food markets, whle followng producton targets wth partal trade openng n lesser markets. These measures are part of a declared polcy of food securty, or FS. Because Korea uses polcy nstruments that nvolve large producton dstortons and that mpose hgh prces to consumers, we fnd that the present polces result n consderable welfare losses. The effcency of transfers to producers s poor; each won transferred to farmers costs consumers and taxpayers roughly 1.6 trllon won, and the objectves of self-suffcency are obtaned through a sgnfcant contracton of demand and hgh prces that are unlkely to make food access easer for the less-favored consumers. Compared to optmal self-suffcency polces, the observed system of taxes and subsdes s nearly optmal to acheve self-suffcency. Nevertheless, smlar objectves of FS could be acheved through producton targets and open borders wthout the actual (consderable) welfare losses. Whle the admnstraton of programs such as defcency payments mght be dffcult n some developng countres, whch lack admnstraton capactes and a large taxpayer bass, t s unlkely to mpose more of an admnstratve burden than the actual agrcultural polcy, characterzed by a hgh degree of state nterventon. There s growng pressure for consderaton of an FS box n a future WTO agreement and a growng recognton from developed countres that some of the NFIDCs concerns n ths area are legtmate. However, genune concerns for FS should not be used as a justfcaton for what s actually effectve protecton. From ths pont of vew, the present Korean polcy n the meat sector appears nconsstent. Most of the local producton s acheved thanks to large amounts of mported feedstuffs, and the Korean polcy corresponds manly to tarff escalaton rather than to FS concerns. The settng of self-suffcency targets appears to be domnated by other strateges when pursung FS. Relance on free trade wth producton targets s more ratonal and could provde the same level of protecton to producers and reduce welfare cost to consumers. We found that the welfare gans to such a polcy are consderable, even when mantanng present levels of producton. Such a reorentaton of polcy nstruments also would ncrease demand and hence exports from mercantlst trade partners who fnd current Korean polcy of nearly prohbtve agrcultural tarffs unpalatable. To conclude, our polcy recommendaton s that developng members of the WTO who endorse FS should advocate defcency payments for ther agrcultural producton and open ther borders. Ths tt-for-tat strategy, whch mrrors U.S. polcy, s much less antagonzng than selfsuffcency for trade partners and much more benefcal to consumers and small producers who are net buyers of food. Polcy rents to farmers would be unaffected. References Anderson, J.E., and J.P. Neary A New Approach to Evaluatng Trade Polcy. Revew of Economc Studes 63: The Mercantlstc Index of Trade Polcy. Natonal Bureau of Economc Research, Workng Paper Seres Cambrdge, MA (revsed verson June 13). Anderson, J.E., and W. Martn The Welfare Analyss of Fscal Polcy: A Smplfed Unt Account. Mmeo., The World Bank, Washngton, D.C. Bhagwat, J.N., A. Panagarya, and T.N. Srnvasan Lectures on Internatonal Trade, nd ed., chap. 8. Cambrdge, MA: The MIT Press. Chul-Hyun, L Short-Term Forecast for the Supply and Demand of Mlk and Other 14

16 Products n Korea. Korea Rural Economc Revew Vol. 0, No. 4, December. Dao X., A. Somwaru, J. Dyck, D. Skully, and C. Lee South Korea s Agrcultural Polcy Choces and Ther Consequences. U.S. Department of Agrculture, Economc Research Servce, AER report, forthcomng. Internatonal Agrcultural Trade Research Consortum (IATRC) The Uruguay Round Agreement on Agrculture: An Evaluaton. Commssoned paper, Unversty of Mnnesota Implementaton of the Uruguay Round Agreement on Agrculture and Issues for the Next Round of Agrcultural Negotatons. Commssoned paper, Unversty of Mnnesota. LaFrance, J.T The LINQUAD Incomplete Demand Model. Workng paper, Department of Agrcultural and Resource Economcs, Unversty of Calforna, Berkeley. LaFrance, J.T., T.K.M. Beatty, R.D. Pope, and G.K. Agnew. In press. The U.S. Dstrbuton of Income and Gorman Engel Curves for Food. Journal of Econometrcs. Makk, S.S., L.G. Tweeten, and M.J. Mranda Storage-Trade Interacton Under Uncertanty: Implcatons for Food Securty. Journal of Polcy Modelng 3: Matthews, A The Poston of the Developng Countres n the WTO Negotatons on Agrcultural Trade Lberalsaton. Development Polcy Revew, n press. Namdoo, K Measurng the Costs of Vsble Protecton n Korea. Workng paper, Insttute for Internatonal Economcs, Seoul. Organsaton for Economc Cooperaton and Development (OECD) Agrcultural Polces n OECD Countres: Montorng and Evaluaton. Pars Revew of Agrcultural Polces n Korea. Pars. Salvatc, L., C.A. Carter, and D.A. Sumner The Trade Restrctveness Index: The Potental Contrbuton to Agrcultural Polcy Analyss. In Food Securty Dversfcaton and Resource Management: Refocusng the Role of Agrculture, Edted by G.H. Peters and J. Von Braun. Aldershot, UK: Ashgate. Thornsbury, S., D. Roberts, K. DeRemer, and D. Orden A Frst Step n Understandng Techncal Barrers to Agrcultural Trade. Paper presented at the 3rd Internatonal Conference of Agrcultural Economsts, Sacramento, CA, August. Vousden N The Economcs of Trade and Protecton. Cambrdge: Cambrdge Unversty Press. World Bank, The Agrcultural Trade and the WTO. Electronc Forum. World Trade Organzaton (WTO). 000a. Notes on Non-trade Concerns, Commttee on Agrculture. Specal Sesson. Document G/AG/NG/W/36/Rev.1, November.. 000b. Fourth Specal Sesson of the Commttee on Agrculture, November 000. Commttee on Agrculture. Specal Sesson. Document G/AG/NG/W/74, November.. 001a. Negotatons on WTO Agreement on Agrculture. Proposals by Inda n the areas of Food Securty, Market Access, Domestc Support and Export Competton. Commttee on Agrculture, Specal Sesson. Document G/AG/NG/W/10, 15 January, Geneva.. 001b. Proposal for WTO Negotatons on Agrculture. Commttee on Agrculture, Specal Sesson, Republc of Korea, documents G/AG/NG/W98/, 9 January. 15