Agricultural policy and economic growth: The case of the Republic of Korea

Sei-Kyun Choi, Purdue University

Abstract

This study focuses on the effects of agricultural policy liberalization on the gains from trade and the pattern of trade. The hypothesis is that freer trade policy in the agricultural sector will encourage a reallocation of agricultural investment toward more efficient uses, and thereby will generate higher economic growth. A general equilibrium model is applied to ensure that the effects of the changes in trade policy are reflected in the results throughout the whole economy. Korea is assumed as a small open economy. The economy is described by a Ricardo-Viner (fixed factor) model. The economy is divided into 15 sectors. The effects of policy changes are introduced into the model through changes in output prices. Trade liberalization in agriculture is assumed to decrease domestic market prices of liberalized products by 30 percent. This implies that Korea liberalizes its agricultural market from a quota system to tariffs and still maintains tariffs 52 percent on rice and 92 percent on beef after liberalization. In the case of beef market liberalization by cutting the domestic price 30 percent, imports of beef increase by 148.38 percent. In this case, imported beef provides 40 percent of domestic consumption of beef in the short run. But imports of other agricultural products decline as a result of the beef market liberalization. Imports of feed grain decrease by 1.58 percent. Exports of manufactured products increase by 0.79 percent. Exchange rates depreciate by 0.73 percent. Trade liberalization in the beef sector increases utility by 0.21 percent. The impacts of the liberalization strengthen in the dynamic outcome. The pattern of trade remains the same as the case of the static outcome. Utility increases by 0.31 percent and 0.49 percent at time t$\sb1$ and t$\sb3$, respectively. In the case of rice market liberalization by cutting the domestic price 30 percent, imports of rice increase 316.9 percent--imported rice provides 3 percent of domestic consumption of rice. We have a big change in imports of rice in percentage terms because of a small base. Imports of agricultural products except rice decrease. Imports of manufactured products decrease by 1.34 percent. Exports of manufactured goods increase by 0.74 percent. Trade liberalization in the rice sector increases utility by 1.25 percent. The pattern of trade remains the same as the case of the static outcome. Utility increases by 1.20 percent and 0.87 percent at time t$\sb1$ and t$\sb3$, respectively. Trade liberalization in agriculture increases social welfare. However, the government must consider conflicts among agents in the economy. About 15 percent of the total population reside rural areas. The gains from trade of 1.25 percent from the rice sector liberalization may not be significant compared to the losses of farmers' income of 10 percent.

Degree

Ph.D.

Advisors

Paarlberg, Purdue University.

Subject Area

Agricultural economics

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