The Impacts of Reforming Rice Direct Payment Policy of Korea: A Combined Topdown and Bottom-up Approach

Transcription

1 The Impacts of Reforming Rice Direct Payment Policy of Korea: A Combined Topdown and Bottom-up Approach Oh Sang KWON (Seoul National University) Seoungho LEE (Seoul National University) Sung Won KANG (Korea Environment Institute) EcoMod 2018 Conference Venice, Italy, July 4-6, 2018 This research was funded by the Korea Ministry of Environment (MOE) as Climate Change Correspondence Program ( )

2 Introduction Rice production in Korea Rice is the most important crop in Korea Rice paddy occupies 54% of total farmlands (in 2015) 88% of farmlands in the Agricultural Promotion Zone is rice paddy Between 1990 and 2015, rice production declined by 22.8%, but per capita rice consumption declined by 47.4% due to the westernization of food consumption pattern Rice share in total farm agricultural income is declining: 48.2% in 1990 vs. 19.0% in 2015 Farm income barely reaches 70% of the urban employee s income and thus there have been several programs introduced to support farm income 2

3 Introduction Food crop direct payment system in Korea Applied to food crops: paddy rice and other non-rice field crops Rice direct payment is composed of two payments: a fixed payment and a variable payment Only a fixed payment is given to non-rice fields The rice fixed payment is given to the registered paddy fields: 889 USDs per ha The rice variable payment is paid if rice market price does not meet the predetermined target price: 85% of the gap is paid (amber box) The field fixed payment is given to the registered non-paddy fields: 445 USDs per ha The fixed payments are paid regardless of whether the crops are produced or not (green box) 3

4 Introduction Suggested concerns about the system Total payment amount of the system is occupying a large part of the government s agricultural subsidy budget It may provide distorted signals to agricultural producers and result in too much production of rice while rice consumption keeps declining The system would drop rice market price and subsequently increase government s budget deficit Large-scale producers and land owners would be the main beneficiaries and hence, the system could deteriorate rural income distribution Proposals of reforming the policy has been suggested several times Mostly reducing the rice payments and increasing the non-rice field payments instead 4

5 Introduction Our purpose Simulating the general equilibrium impacts of restructuring the current agricultural direct payment system in Korea using a combined top-down and bottom-up model A general equilibrium analysis has advantages in analyzing the policy Scale of the policy is large (1 billion to 2 billion USDs per year) Most of reform proposals aim to convert rice production to field crop production Limitations of the usual top-down CGE model Difficulty in incorporating the fixed payments due to the zeroprofit conditions Cannot incorporate detailed region-specific technology and resource endowment constraints 5

6 Introduction Potential gains from combining the top-down model with a bottom-up model A top-down model All prices, production and consumption quantities, incomes, export, imports and etc. are endogenously derived A bottom-up model: An agricultural sector model Incorporates detailed technology and resource constraints Micro-level decision making is allowed At least some of the price variables are exogenously given 6

7 Introduction A combined or linked model A bottom-up model A multi-region multi-output optimization model Determines crop production quantities (at local) Incorporates region-specific resource and technology constraints Prices of outputs and inputs are given from the top-down model A top-down model Accepts production quantities of the bottom-up model Determines quantities of the other commodities Determines all prices including those of crops Does not have zero-profit conditions for crops Incorporates the direct payment system into the price functions The iterative linking process ends when all endogenous variables converge 7

8 Structure of the Model Linked Model Top-down model: A standard single country static CGE model 19 sectors: 8 crop sectors, 11 non-crop sectors Bottom-up model: 8 crops models produced in 9 provinces Two models are linked based on the Böhringer and Rutherford (2009) algorithm Crops Rice (rough), Coase Grains, Beans, Potatoes, Vegetables, Fruits, Flowers, Other Crops Non-crops Energy, Heavy & Chemical Manufacturing, Mining, Other Manufacturing, Food Processing, Construction, Transportation, Services, Forest and Fishery, Livestock and Meat, Milled Rice 8

9 Structure of the Model CGE model Households Cobb-Douglas utility function Income sources: capital, labor, government transfer Income= Consumption + Saving + Income Tax Savings: Households, Government, Foreign Savings = Inventory Changes + Capital Formation Firms CES valued-added production function, Leontief combination of intermediate goods Produces domestic goods, QD c Goods PD c QD c = PDD C QDD c + PE C QE c (CET) P C Q c = PDD c QDD c + PM c QM c (CES) Q c = Household & Gov. Consumption + Intermediate Use + Inventory Change & Capital Formation 9

10 Structure of the Model CGE model The government Tax revenue sources: household income tax, capital & labor tax, product tax, tariff Expenditures: government consumption, transfer, subsidy A 2010 SAM is constructed Elasticity estimates: Kwon (2015), Kwon et al. (2018) Numeraire = consumer price index 10

11 Structure of the Model Bottom-up model A multi-output multi-region model but a single national market for each crop Objective function = sum of the areas under each crop s linearly approximated demand curve sum of each crop s variable production costs The demand curve is approximated at the point where the quantity is the crop quantity supplied by the BU model and the price is the price that the TD model found 14 input prices are also provided by the CGE model Seeds, pesticides, fertilizers, energy, irrigation, small instruments, large instruments, facilities, other material, other services, capital, labor, taxes, residuals Region-specific water and land constraints are applied Monthly resource constraints are applied incorporating each region s cropping pattern and schedule 11

12 Structure of the Model Bottom-up model max q i r i PD i QD i 1 Q i 2QD i 2ε i QD i i C i (QD i ) s. t., QD i = r q i r, q i r 0, r = 1,, R, i = 1,, I C i QD i = r i c i r q i r, c i r = m α r ij q r i β r j, j = 1,, J P m θ i r, m = 1,, M 12

13 Linking Böhringer and Rutherford (BR, 2009) algorithm The bottom-up model determines crop production, but all the prices are determined by the top-down model The 384 sector I-O table is used to derive the BU input prices from the prices of the TD model Unlike BR, Howitt (1995) s PMP(positive mathematical programming) step is applied to the bottom-up model A constant region-specific marginal cost results in corner solutions and an over-specialization of production We generate region-specific increasing marginal cost curves that path through each region s BAU production level: C i QD i = r (d i r + 13

14 Linking The BR algorithm 14

15 Linking A PMP bottom-up model q 01,q 02 : data q M1, q 12 : Q. P. BAU solution q 01,q 02 : data = Q. P. BAU solution 15

16 Incorporating Direct Payments The BAU economy The SAM is based on the 2010 I-O table, the latest measured table Various agricultural statistics on crop acreage, production costs, farm income, and resource constraints are used A hybrid SAM using the method of Sue Wing (2008) is constructed to make two different sources of data be consistent with each other Three types of direct payments are incorporated as subsidies to agricultural producers Crop sector s profit is transferred to the household and becomes a part of household income 16

17 Incorporating Direct Payments Direct payments paid since 2005 Paddy Fixed (1,000ha) Paddy Fixed (B. USD) Rice Variable (B. USD) Field Fixed (1,000 ha) Field Fixed (B. USD) , , , ,

18 Incorporating Direct Payments The BAU economy All three types of direct payments including the rice variable payment is assumed to be paid The historical records of payments are applied Rice Variable (B. USD) Paddy Fixed (B. USD) Field Fixed (B. USD)

19 Incorporating Direct Payments The rice variable payment PDS = PD + max 0, svxz PCINDEX TP PD PCINDEX sfx PDS = producer price of domestic rough rice PD = market price of domestic rough rice TP = rough rice target price svxz = support rate (=0.85) PCINDEX= consumer price index sfx = return of fixed payment converted to per quantity value TP=1.244PD at BAU sfx is also consistent with the BAU data PDS is transferred to the bottom-up model Constitutes a DNLP (discontinuous nonlinear programming problem) 19

20 Policy Simulation Directions of policy reform Most of the policy reforms suggested aim to either reducing rice support or increasing support for other crops It might not be easy introducing variable payments for non-rice crops as well So many crops with heterogeneity, difficulty in selecting TPs WTO regulations on the Amber Box Changing the non-paddy field fixed payments does not affect producer behavior Reducing paddy fixed payment does affect production because it is linked with the variable payment, and is a component of the variable payment received Reducing payments for rice, in general, is very unacceptable because of the rice producer s resistance 20

21 Policy Simulation 2018 Reform The reform that the government is introducing in 2018 is supporting converting paddy into non-rice fields When a producer, whose rice paddy is registered for the rice fixed payment, converts the land into a non-rice field he or she is paid a subsidy in addition to the already paid paddy fixed payment The land actually has to be used for field crop production, and thus the additional payment, Non-rice Crop Production Subsidy is coupled with production The government will review the applications of producers, and subsidize for 50,000 hectares which is almost 6% of the rice paddy registered for the paddy fixed payment Total target acreage of the new subsidy is scheduled to be 100,000 hectares in

22 Policy Simulation The impacts of the 2018 Reform are simulated The new subsidy will be given when rice production is converted to production of coarse grains, beans, potatoes, vegetables, or other crops but not to production of fruits and flowers Coarse Grains Beans Potatoes Vegetables Fruits Flowers Other Crops Target Conversion (ha) Subsidy per ha (USD) 5,000 15,000 5,000 5, ,000 3,022 2,489 3,022 3, ,422 Each crop s target conversion acreage is applied to the bottom-up model as a constraint In the model, he change in the government s total subsidy amount is incorporated into the transfer to household, and thus a fiscal neutrality is imposed 22

23 Policy Simulation Target acreage: 50,000 hectares A substantial decrease in rice production (-5.64%), and an increase in rice price (12.23%) The variable rice payment is not paid because of the price increase Total direct payment including the conversion payment deceases by more than 30% Productions of coarse grains, beans, potatoes, vegetables, and other crops increase substantially and their prices drop Total profit of crop sectors declines by 0.57 billion USDs Positive effects: Increase in rice price, 0.15 billion USDs of conversion subsidy, change in crop input prices Negative effects: Large scale drops in non-rice field crop prices, change in crop input prices 23

24 Policy Simulation Target acreage: 50,000 hectares Despite the decrease in total crop profit, conversion to non-rice crops is actually chosen in the micro production decision of the bottom-up model owing to the large amount of conversion subsidy Productions of fruits and flowers which are not subject to the conversion subsidy show relatively minor changes Import of milled rice increases by 14.2% but imports of non-rice crops decrease Production of food processing increases slightly owing to the increases in non-rice crop production Production of non-agricultural sectors such as energy and manufacturing decline but only slightly There is almost no change in GDP 24

25 Policy Simulation Target acreage: 50,000 hectares Rice Production(%) Flowers Production(%) 0.19 Market price(%) Market price(%) Subsidy rate 0 Other crops Production(%) Producer price(%) 1.45 Market price(%) Coarse grains Production(%) 7.83 Food Processing Production(%) 0.51 Market price(%) Market price(%) Beans Production(%) Livestock & Meat Production(%) 0.02 Market price(%) Market price(%) 0.06 Potatoes Production(%) 9.04 Milled rice Production(%) Market price(%) Market price(%) 9.91 Vegetables Production(%) 2.52 All crop sectors Profit (B. UDS) Market price(%) Total payment(%) Fruits Production(%) GDP At market prices(%) Market price(%)

26 Policy Simulation Target acreage: 100,000 hectares Rice production decreases by 11.2% and its market price increases by 26.65% Productions of non-rice field crops except fruits and flowers increase very much Coarse grains 9.88%: Beans 53.45: Potatoes 18.04: Vegetables 5.21: Other crops But the decrease in total profit of crop sectors is smaller compared to the case of 50,000 hectares conversion due to a larger increase in rice price 26

27 Policy Simulation Target acreage: 100,000 hectares Rice Production(%) Flowers Production(%) 0.60 Market price(%) Market price(%) Subsidy rate 0 Other crops Production(%) Producer price(%) Market price(%) Coarse grains Production(%) 9.88 Food Processing Production(%) 0.83 Market price(%) Market price(%) Beans Production(%) Livestock & Meat Production(%) Market price(%) Market price(%) 0.20 Potatoes Production(%) Milled rice Production(%) Market price(%) Market price(%) Vegetables Production(%) 5.21 All crop sectors Profit (B. UDS) Market price(%) Total payment(%) Fruits Production(%) GDP At market prices(%) Market price(%)

28 Policy Simulation Regional Impacts The impacts of the policy reform are substantially variant across provinces Depending on the resource constraints, climate conditions, and geographic conditions, there are regional differences in unit production costs Unless the government allocates each crop s subsidy to provinces proportionally, producers in each region may choose different patterns of crop conversion In the future when the actual choice of producers are observed, the observed benefits and costs of conversion may be successfully incorporated into the model, making the model more reliable At present, our bottom-up model derives each region s responses to the policy change considering region-specific cost structure, conversion subsidy, and changes in output and input prices 28

29 Policy Simulation Regional Impacts Currently, rice production is preferred in the western part of the peninsula which is more flat and well-equipped with irrigation facilities Chung -buk Jeonbuk Gyeounggi Gangwon Chungnam Jeonnam Gyeoungbuk Gyeoun g-nam Jeju Paddy (%) Paddy Acreage (#) 55% 36% 40% 70% 66% 61% 46% 59% 0.03% The new subsidy may not reduce rice production in Gyeounggi and Chungnam at all Gyeounggi is well-known for its high quality rice while Chugnam currently has the highest proportion of paddy rice Because of the subsidy, rice production will disappear from Jeju and will decline very much in Gangwon and Gyeoungbuk 29

30 Policy Simulation Regional Impacts Direction of conversion would be also variant across provinces Coarse grains production will increase in many areas except Jeonnam but the increasing rate will be higher in Jeonbuk and Jeju Production of beans will in increase in all areas especially in the eastern part of the country Potatoes production will dramatically increase in Chungbuk and Jeonbuk Production of vegetables will increase in all provinces especially in Gangwon, Chungbuk, and Jeju Production of other crops will increases in all provinces, but the increasing rate will be very high in Gyeoungbuk Fruits and flowers are not subject to the subsidy and their production will change only slightly 30

31 Policy Simulation Regional Impacts: 50,000 hectares Rice Coarse grains Beans Potatoes Vegetables Fruits Flowers Other crops Gyeounggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeoungbuk Gyeoungnam Jeju

32 Summary and Conclusion Constructing and applying a combined TD-BU model to analyze the direct payment system A multi-output multi-regional BU model that incorporates detailed technology and resource constraints is combined with a standard CGE model containing the structure of the direct payment system The model worked successfully and derived region specific responses in production All simulations converged within 10 times of iterations and the model was quite stable 32

33 Summary and Conclusion The impacts of introducing the Non-rice Crop Production Subsidy into the current direct payment system The model shows that crop conversion would be effectively chosen by producers owing to the large amount of conversion payment of this coupled subsidy policy Non-rice production as well as rice production will be significantly affected by the subsidy There would be a substantial regional variation in adopting crop conversion The reform may make the current rice variable payment nonoperational by reducing rice production and increasing its market price In that case, the government may be able to save substantial amount of rice subsidy budget 33

34 Summary and Conclusion The impacts of introducing the Non-rice Crop Production Subsidy into the current direct payment system Despite the newly introduced conversion subsidy there is no guarantee that crop producer s income will increase It is likely that the new subsidy will induce substantial declines in non-rice crop prices by increasing production of those crops, and thereby reduce income from crop production Therefore, whether the new system will be accepted by producers persistently may depend on the successful stabilization of nonrice crop prices The current record of the government shows that the total acreage of conversion applied is likely to reach the target level, 50,000 hectares 34