The Introduction and Effect of Public-Purpose Direct Payment Program in Korea

The Introduction and Effect of Public-Purpose Direct Payment Program in Korea

Published: 2021.04.22
Accepted: 2021.04.20
8
Department of Agricultural Outlook, Korea Rural Economic Institute, Korea

ABSTRACT

It has been pointed out that the direct payment system of rice caused an oversupply of rice. In addition, polarization of direct payments according to the size of farms was also raised as a problem. Accordingly, in 2020, the Korean government reorganized the former direct payment system (reorganization also include Fixed Direct Payment in the Dry Field and Unconditional Direct Payment) to the public-purpose payment program and greatly expanded the budget. The Public-Purpose Direct Payment program is designed to be paid regardless of whether rice was produced. The requirements of farmers to receive direct payments has been reinforced to promote public interest functions. As a result, the reorganization significantly improved the difference in payment between farms according to the scale.

Keywords: Agricultural Policy, Public-Purpose Direct Payment, South Korea

INTRODUCTION

Although the direct payment system for rice had the effect of stabilizing the income of rice farmers, it induces rice production to steadily rise. In addition, problems such as the deterioration of equity among rice farmers and the system of compliance requirements that do not meet the public's demands for the public interest in agriculture were likewise raised.

Accordingly, in 2020, the Korean government reorganized the existing direct payment system (reorganization also include Fixed Direct Payment in the Dry Field and Unconditional Direct Payment) to the public-purpose payment program and greatly expanded the budget. Through the reorganization, many problems of the existing direct payment system have been improved. However, it is also clear that the reorganization of the existing direct payment system in 2020 was limited to the reorganization centered on basic direct payments. Therefore, in order to further expand the functions of public interest, policy efforts to further develop optional direct payments and increase budgets are considered necessary. 

POLICY BACKGROUND

In 2005, the income compensation program for the rice farmers was introduced to alleviate the income anxiety of rice farmers. This system sets a target price and provides financial support for 85% of the difference from the market price. Even if the price of rice falls, the perceived price by farmer, including direct payment, is similar to the target price, so the income of rice farmers can be stabilized. The amount by direct payment program is divided into fixed payment and variable payment, and fixed direct payment is classified as green box policy because a fixed amount is paid regardless of the market price. Variable payment is regarded as amber box policy because it is paid in connection with the market price. Due to the characteristics of the variable payment system, it has been pointed out that the variable payment promotes rice production.

In fact, rice prices fell sharply in 2016 due to excessive production of rice, so the variable direct payment was close to the payment limit, and the total amount of the rice income preservation direct payment expanded to KRW2,328 billion (US$23.3 billion), recording the highest level. So, the proportion of direct payments related to rice in the total direct payment budget has risen to almost 80%. In addition, due to the payment unit price proportional to the area, the difference in the amount of direct payment received between rice farmers was large, and the issue of equity was continuously raised. When looking at the amount of rice-related direct payments received by size in 2016, the number of small farmers with less than 0.5 ha was accounted for 44.7% of total farmers, but the total amount of direct payments received by them accounted for only 8% of the total amount. On the contrary, the number of large-scale farming households with 6 ha or more accounted for only 1.9% of the total, but the amount received by direct payment accounted for 23.1%. In addition, it was pointed out that there is a limit to the promotion of the public function of agriculture, since the cross-compliance of the existing direct payment program is not strict in a situation where the demand for the public interest function of agriculture is gradually increasing.

INTRODUCTION OF PUBLIC-PURPOSE PAYMENT PROGRAM

The public-purpose payment program was introduced in 2020 with the aim of improving the problems of the existing rice direct payment program. The public-purpose direct payment program is composed of basic and optional direct payments. Basic direct payment is a combination of three existing direct payment systems (Income Compensation Program for Rice, Fixed Direct Payment in the Dry Field, and Unconditional Direct Payment), and optional direct payment is the existing four direct payments (eco-friendly agricultural direct payment, eco-friendly safe livestock product direct payment, landscape preservation direct payment, paddy field use direct payment) continues as it is. More than 95% of the budget for the public-purpose direct payment program is allocated to basic direct payments.

In order to improve the criticism that the existing direct payment program stimulates rice production, basic direct payment was paid regardless of whether or not rice was produced, and the direct payment unit price between paddy fields and dry fields was set similarly to alleviate the issue of equity support between crops. The problem of polarization according to the scale was to be mitigated by introducing a direct payment for small farms targeting small-scale farmers.

The direct payment for small farmers means that KRW1.2 million (US$1,200) is paid in a fixed amount to farmers who meet the payment requirements among farms with 0.5 ha or less. However, even if it is less than 0.5 ha, if the payment requirements[1] are not met, direct payment in proportion to the area is paid.

Area direct payment is based on a direct payment in proportion to the area, but the goal is to improve income equity between large and small farmers through a retroactive unit price system in which the payment unit price decreases as the area increases. The area section is divided into 3 stages (0.1~2 ha, 2~6 ha, and more than 6 ha), and the payment unit price for each stage is designed to decrease as the area increases. The target farmland was divided into an agricultural promotion area (paddy fields and dry fields), a paddy field outside the promotion area, and a dry field outside the promotion area to minimize the difference in unit price between the paddy fields and the dry fields.

The Korean government has greatly reinforced the requirements of farmers to receive basic direct payments in order to maintain sustainable agriculture and rural areas and to enhance the functions of the public interest in agriculture and rural areas compared to the existing direct payment system. Under the existing direct payment system, maintaining the shape of farmland as the obligation to comply with the receipt of the direct payment system, but after the reorganization of the direct payment program, 17 cross compliances in 5 areas (5 areas relate to the environment, ecology, community, food safety, and basic system for the direct payment program.) have been imposed.[2] The five areas are environment, ecology, community, food safety, and institutional basis. Penalties for failure to comply with the cross-compliance requirements have also been strengthened. In the event of non-compliance with the compliance requirements, 10% of the total amount of the direct payment will be reduced (20% of the total amount will be reduced if the two compliance requirements are violated), and the reduction ratio will be doubled for repeated violations of the following year to apply the same obligation.

THE EFFECT OF PUBLIC-PURPOSE PAYMENT PROGRAM

In 2020, a direct payment of KRW2.35 trillion (US$23.5 billion) was paid to about 1.21 million farmers. Compared to 2019, before the reorganization of the system, the total amount of direct payment increased by KWR1.4 trillion (US$14 billion). Looking at the payment details of the direct payment for the public-purpose, equity between paddy fields and dry fields improved due to measures such as minimizing the difference in payment unit price between paddy fields and dry fields. With the overall increase in the dry field payment unit price, the amount of direct payment to the dry field increased three times in 2020 compared to 2019, and accordingly, the proportion of the amount paid to the dry field out of the total amount of direct payment was 28.3%, compared to the previous year (16.2%). It rose 12.1%.

By introducing direct payment to small farms and applying a reverse unit price system for area direct payments, the concentration of direct payments according to the size of each farm was greatly improved. As the direct payment to small farmers was paid in the amount of KRW517.4 billion (431,000 farms, US$5.2 billion), the amount of direct payment to farmers with a scale of 0.5 ha or less increased to KRW 509 billion (US$5.1 billion), which is nearly four times of the previous year. And the share of the total payment rose from 10.6% in 2019 to 22.4% in 2020, due to the reorganization of the public direct payment system.

On the other hand, direct payments received by large-scale farms exceeding 6 ha amounted to KRW345.8 billion (US$3.5 billion), an increase of KRW104.4 billion (US$1 billion) from the previous year, but the share in the total basic direct payment amount decreased by 4.3% from 19.5% to 15.2%.

When comparing the unit price of direct payment between paddy fields and dry fields before and after 2020, before the direct payment system was reorganized, the average of dry field direct payment was only 43.1% of the average of paddy field direct payment, but in 2020 after the reorganization of the direct payment system, the increase was significantly higher than before, and the ratio to paddy field in payments rose to 89.2%.

CONCLUSION

Although the income compensation program for rice had the effect of stabilizing the income of rice farmers, it was steadily pointed out that rice production was attractive because there was a precondition that rice was produced in order to receive variable direct payments. In 2016, there was a situation where the total variable direct payment exceeded the limit of AMS (the total aggregate measurement of support) so that the existing direct payment system for rice was forced to be reorganized. In addition, problems such as deterioration of equity among rice farmers and a system of compliance requirements that do not meet the public's demands for the public interest in agriculture were raised as problems.

Accordingly, in 2020, the Korean government reorganized the existing direct payment system to a public-purpose direct payment program that was not linked to the production of specific agricultural products and expanded the budget significantly. As a result, the difference in direct payment unit price between rice paddy fields and dry fields has improved a lot. In addition, the introduction of direct payment to small farms significantly improved the difference in direct payment between farms according to the scale. Previously, there were only 3 cross compliances to be observed for receiving direct payment, but it has been expanded to 17, and the penalties for failure to comply with the requirements for direct payment have been greatly strengthened so that the direct payment system can realize more public interest functions.

However, it is also clear that the reorganization of the direct payment system in 2020 was limited to the reorganization focusing on basic direct payments. Therefore, in order to further expand the functions of the public interest, policy efforts need to be forced to further develop optional direct payments and increasing its budgets are deemed necessary.

REFERENCES

KREI (Korea Rural Economic Institute). 2020. Agriculture Outlook 2020, Korea

Jeong, H., M. Jeong, D. Kim. 2020. Basic Public-Purpose Direct Payment introduced this year, paid from November 5th. Retrieved from https://www.korea.kr/news/pressReleaseView.do?newsId=156419470 (30 March 2021) Ministry of Agriculture, Food and Rural Affairs. Sejong.


[1] ① The sum of the areas of farmlands, etc. to be paid by all persons eligible for basic direct payment in the farmhouse is 0.5 ha or less, ②The sum of the areas of farmlands, etc. owned by all members of the farmhouse is less than 1.55 ha, ③ All employees eligible for basic direct payment in the farmhouse continue to engage in farming for more than 3 years immediately before the registration application year, ④ The period of residence in the rural area of each of the people eligible for basic direct payment in the farmhouse is 3 years or more immediately before the registration application year, ⑤ Total non-farm income of each person eligible for basic direct payment in the farm is less than 20 million won, ⑥ Total non-farm gross income of all members of the farm is less than 45 million won, ⑦ Livestock income of each of the people eligible for basic direct payment in the farm is less than 56 million won, ⑧ Income from facility cultivation business of all direct payment recipients in farm households is less than 38 million won.

[2] Prior to the reorganization of the public benefit direct payment system, there were only three requirements to be observed.

Comment