The Achievements and Limitations of the Public-purpose Direct Payment Program in Korea

The Achievements and Limitations of the Public-purpose Direct Payment Program in Korea

Published: 2023.02.24
Accepted: 2023.02.23
33
Department of Agricultural Outlook, Korea Rural Economic Institute, Korea

ABSTRACT

In the past, the direct payment program in the agricultural sector was concentrated on rice, and problems such as fairness with other crops, overproduction of rice, and limitations in terms of improving public function have been raised. So the Korean government promoted the reorganization of the direct payment program for improving the problem. As a result of implementing the new direct payment program, not only the total amount of direct payment increased significantly, but also the equity among farm households improved with the introduction of direct payments to small farmers, etc. Although the reform of the direct payment for public interest is evaluated as being generally successful, optional direct payment program should be expanded rather than basic direct payment in order to achieve the improvement of the public interest value, which was the main purpose of the reform.

Keywords: Agricultural Policy, Public-purpose Direct Payment Program, Inequality

INTRODUCTION

The Korean government promoted the reorganization of the direct payment system for public interest in order to overcome the limitations of the existing direct payment system and to enhance the sustainability of agricultural policy. Most of the budget for the existing direct payment system was concentrated on rice, raising the issue of fairness with other crops. At the same time, criticism was raised on the structure in which direct payments were concentrated on rice intensified the trend of oversupply of rice. The issue of fairness among farm households was raised due to direct payments based on the proportional method of paying direct payments according to the cultivation area. Equity issues were caused not only by the difference in the size of the cultivated area, but also on the difference in the proportion of paddy fields and fields. This is because the unit price paid for rice fields was very high compared to the unit price for fields. On the other hand, although the overall demand for public interest value in the agricultural sector is increasing, the limit of insufficient means to improve public interest value under the existing direct payment system has also been continuously raised.

Relevant laws were amended to overcome the limitations of the existing direct payment system and to enhance the sustainability of agriculture and rural communities. The newly enacted law is the "Act on Operation of Direct Payment Program for Promoting Public Functions of Agriculture and Rural Communities" (hereinafter referred to as the Public-purpose Direct Payment Program, 2019.12.31.). The passage of this law laid the legal foundation for the continued implementation of the Public-purpose direct payment program.

According to Kim (2021), The public-purpose direct payment program can be divided into two  categories: basic direct payment and optional direct payment. Basic direct payment is again divided into ‘small farmer direct payment’ and ‘area direct payment’. In principle, basic direct payment is paid to all farmhouses when farmhouses engaged in farming or maintaining the shape of farmland comply with basic requirements. On the other hand, optional direct payment is paid to achieve a specific purpose, such as eco-friendly agricultural payment, and additional requirements must be observed.

ACHIEVEMENTS AND LIMITATIONS

As a result of implementing the new direct payment program, not only the total amount of direct payment increased significantly, but also the equity among farm households improved with the introduction of direct payments to small farmers, the amount of payments to small farm households was expanded. In 2021, the total amount of direct payments paid to small farms of 0.5 ha or less was KRW539.1 billion (US$414.7 million), an increase of 6% compared to the previous year’s payment (KRW508.4 billion, US$391.1 million). As the total amount of direct payments received by farms with an area of 0.5 ha or less increased, the share of the total amount of direct payments received by farms with an area of 0.5 ha or less also rose to 24.2% in 2021, which is a 1.9% increase from the 22.3% rate in 2020.

Comparing the average amount of direct payments between paddy fields and fields per ha before and after 2020, when the public-purpose direct payment program was reformed, 'direct payments to fields' were 91.8% in 2021. This figure is a slight increase from the 2020 figure of 89.2%. For reference, the ratio in 2019 before the reorganization was 43.1%, and direct payments to paddy fields were very high compared to fields.

When analyzing (based on basic direct payment) based on the p90/p10 rate[1] and Gini coefficient, which are widely used to measure income and other inequality, it can be confirmed that income inequality has actually been significantly reduced through the reorganization of the public-purpose direct program. Specifically, the p90/p10 value, which was close to 23 in 2019, has fallen to the 8 level since 2020, and the Gini coefficient was in the 0.6 range before 2019, but has decreased to the mid 0.4 level since 2020, improving overall equity.

On the other hand, as a result of a survey targeting farmers who received public-purpose direct payment program, they showed very high satisfaction with the implementation of the program. As a result of the survey conducted by the KREI (Korea Rural Economic Institute, 2020.12.16-22, 600 valid respondents), 87.3% of the total respondents responded that they were “satisfied” with the introduction of the public-purpose direct payment program.

However, various requests for improvement were simultaneously raised in the process of implementing the public-purpose direct payment program. The main content was related to the conditions of farmlands to be paid with basic payment. In order to receive basic direct payment, it was necessary to meet the condition that the farmland had a track record of receiving direct payment at least once during the three years from 2017 to 2019. In fact, there were a significant number of farms that did not receive direct payments from 2017 to 2019 despite cultivating activities, and they strongly argued that these farms needed to be rescued.

At the same time, it was pointed out that the reorganization of the optional direct payment, which is the key to achieving the goal of improving the public value of agriculture, is insufficient. Since the basic direct payment program focuses on reducing negative externalities of the agricultural sector, the goal of promoting the public interest can be achieved only when the optional direct payment that additionally increases the positive externalities is actively implemented.

CONCLUSION

The reorganization of the direct payment system for public interest has significantly improved the issue of fairness among farm households in the past program. This can be attributed to the introduction of direct payment to small farmers and the basic direct payment unit price system in which the unit price of direct payment is lowered as the scale of cultivation increases. In addition, by changing the unit price between rice paddies and fields as much as possible, the issue of fairness between rice paddies and fields was mostly resolved. It can be interpreted that the total amount of direct payment also increased, resulting in an increase in farm household income. Farmers, who are the targets of the policy, also showed a very high rate of satisfaction with the institutional reform, confirming that the institutional reform was successful as a whole. Farmers' main dissatisfaction with the program reform was the condition of receiving direct payments between 2017 and 2019 as a condition for receiving direct payments. To improve this, the Korean government conducted a fact-finding survey in 2022 and secured a budget to help farmers who are disadvantaged due to this condition from 2023.

Although the reform of the direct payment for public interest is evaluated as being generally successful, everyone will agree that optional direct payment program should be expanded rather than basic direct payment in order to achieve the improvement of the public interest value, which was the main purpose of the reform. Currently, the type of optional direct payment and the related budget are very weak, so the key to the success of the public-purpose direct payment program will be how to expand optional direct payment program in the future.

REFERENCES

Act On Operation Of Direct Payment Program For Promoting Public Functions Of Agriculture And Rural Communities, 16858 Act No. § 2019.

Industrial Budget Analysis Division. 2022. Analysis by Committee on Settlement for Fiscal Year 2021. NABO(national assembly budget office)

Kim, J.I., 2021. The introduction and effect of Public-purpose direct payment program in Korea(FFTC Agricultural Policy Platform), .


[1] p90/p10 is the ratio of the upper bound value of the ninth decile. As one of the income distribution indicators mainly used by the OECD, the increase in this ratio indicates that the income gap between the poor and the high-income has widened.

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