Changing comparative advantage in Korean agriculture : a domestic resource cost study

Abstract

The role of agriculture in saving or earning foreign exchange is usually very important for a developing open economy. How important it is for any particular country depends on the extent of agricultural comparative advantage enjoyed by that country, which changes as its economy develops. The main purpose of this study is to trace the locus of comparative advantage of rice and barley production in Korea through the Domestic Resource Cost (DRC) analysis. Secondary data from the Ministry of Agriculture and Fisheries of the Republic of Korea are used for this purpose. The data on foodgrain production and trade and the protection and DRC estimates for the period 1964 to 1980 reveal that Korea's rice and barley industries have become both increasingly less competitive and increasingly inefficient in saving foreign exchange. The production and trade data show that self-sufficiency in foodgrains has declined from close to 100 per cent in the mid 1960s to less than 70 per cent in the late 1970s, despite the fact that prices received by Korean cereal producers have risen from about equal to world prices in the mid 1960s to more than three times world prices in the late 1970s. Over this period the domestic resource cost ratios for rice and barley have increased from slightly less than unity to three or more, indicating that on average for each unit of foreign exchange saved by producing rice and barley domestically rather than importing it, the Korean economy foregoes about three units of foreign exchange by not being able to use those resources in more productive activities. The thesis concludes that policies aimed at facilitating structural adjustment would be far more appropriate for Korea, given its rapid decline in agricultural comparative advantage, than policies aimed at ever increasing protection from import competition.