Political macroeconomy of agricultural policy: rice policy adjustments in Korea

Abstract

Agricultural policies are likely to respond to political economic interactions rather than to the necessity for correcting market failures. Political economic approaches have gone beyond the horizons of traditional market analyses to explore why and how agricultural policies have evolved to their present forms. Meanwhile, in the formal modeling for policy analysis, it has gradually been recognized that the political economic forces associated with macroeconomic changes are sources of primary influences of government actions in the agricultural sector. In this context, this study attempts to provide a political macroeconomic analytical framework to address how agricultural policies are functionally adjusted to the changes in the macroeconomy. Two working hypotheses guide the study: 1) agricultural policy decisions are endogenous responses to political influences of relevant interest groups rather than exogenous actions of government, and 2) macroeconomic changes affect the variation of political influences by interest groups which are transmitted to the agricultural policy making process. The Korean rice price policy from 1961 to 1985 is modeled to specify empirically testable hypotheses, and three major interest groups (consumers, producers, and government) are assumed to exert political influences on rice policy making. A political preference function is specified for testing the first hypothesis. The results successfully confirm the existence of differentiated political influences on rice policy making among the three interest groups. Korean policy maker in the rice sector, accommodating the aggressive pressure from the farmers, shows more favorable political preference toward the rice producers than to the other groups. In order to test the second hypothesis concerning the relationship between agricultural policy and the macroeconomy, an econometric model consisting of 12 simultaneous equations is constructed. The major empirical findings are summarized as follows: 1) Increasing deficits in both the Grain Management Fund and the general government budget represent a reduced political position of the government in rice policy making. 2) The parity price ratio and the rural-urban income ratio are positively related with the policy maker's rising political preference toward rice producers, while declining agricultural share to total output causes rice producers to exert political efforts to influence rice policy. 3) As per capita income increases, consumers are found to make less political efforts to influence the process of rice policy making. 4) Through a simulation of the macroeconomic impact experiments, rice policy in favor of farmers is expected to remain as long as the Korean economy continues to advance.