JPRI Critique Vol. V No. 2: February 1998
Accessing the Japanese Agricultural Market: Still an International Issue?
by Aurelia George Mulgan

The Korean Economic Crisis: The Result of Under-regulation
by Ha-Joon Chang

Accessing the Japanese Agricultural Market: Still an International Issue?
by Aurelia George Mulgan

Japan's accession to the GATT Uruguay Round (UR) Agreement on Agriculture appeared to close the final chapter on Japanese agricultural protection as an international issue. With the benefit of hindsight, however, this assessment is now seen as somewhat premature. The UR Agreement did not mark the demise of the agricultural support and protection regime in Japan. Many of the supports and controls remain in place such as production subsidies, price support and stabilization schemes, state trading, relatively high import tariffs and last but not least, import quotas for rice in a trade controlled and administered by the Ministry of Agriculture, Forestry and Fisheries (MAFF).

Input subsidies, for example, still consume enormous budgetary sums in the form of agricultural public works allocations. Alongside these are substantial disbursements for upgrading rural infrastructure. In 1996, more than 50 per cent of the total central government's agricultural budget (or ¥1.6 trillion) was allocated to projects for agricultural productivity improvement and consolidation of the rural environment'. Such projects are attractive to the MAFF because they are very costly at the same time as they suit the political purposes of the ruling Liberal Democratic Party (LDP).

In the wake of the UR agreement, the MAFF and LDP worked out a comprehensive package of subsidies amounting to ¥6.01 trillion in order to facilitate the passage of legislation necessitated by Japan's obligations under the agreement. The package was scheduled for implementation over a six-year period beginning in 1995. Its main contents were ¥3.55 trillion for agricultural public works projects and ¥2.46 trillion for non-public works projects. Not only did the package boost government spending on agriculture and the MAFF's budgetary share, but it also enabled the LDP to position itself well in rural and semi-rural constituencies in the lead-up to the 1995 and 1996 general elections.

In addition to these very generous subsidies for agricultural and rural infrastructure, a check of the post-UR situation for the main agricultural products reveals that administrative pricing systems have remained substantially the same, in spite of some new arrangements for imports. The agreement has not had a dramatic impact on either Japan's agricultural price support and stabilisation schemes or the levels of these prices. Most prices were frozen between 1991 and 1996; incremental reductions have only begun in 1997. The newly amalgamated Agriculture and Livestock Industries Corporation (ALIC) retains some state trading rights for wheat and barley, designated dairy products and silk imports. For a commodity like beef, stabilization price intervention plus high tariffs continue to protect producers, while quantitative limits remain on rice imports in a state trade administered by the Food Agency of the MAFF.

Although the current minimum access arrangement for rice will expire in the year 2000, Japan has not agreed to liberalize rice beyond that date. It has merely agreed to negotiate the matter in 1999-2000 under the auspices of the World Trade Organization (WTO). Japan will have two options beyond 2000: accept tariffication at a rate which is 15 per cent lower than at the time the UR agreement was signed or insist on reviewing the exceptional arrangement for rice and possibly expanding the minimum quota for rice imports. In the meantime, the Food Agency's continuing controls on the marketing of both domestic and imported rice enables it to frustrate the sale of foreign rice.

If Japan's position on agriculture during recent APEC summit meetings is indicative of its stance, the future looks problematic for the rice liberalization option. In the preparatory negotiations leading up to the November 1995 APEC forum in Osaka, Japan insisted on the exclusion of agriculture from the ambitious goal of liberalization of trade in goods and services "without exception" by 2010 for developed economies in the APEC group. In the event, the outcome of the summit was less than unambiguous, with agriculture subsumed within terminology referring to "sectoral flexibility" in achieving APEC's free trade goals. At the 1996 APEC summit in Manila, Japan restricted its concessions on agriculture to pledging that all remaining non-conforming Japanese Agricultural Standards would be aligned "wherever possible" with international standards and to speed up its quarantine control procedures for animal and plant product imports. The recent Vancouver summit produced little of interest on the agricultural trade front. Japanese officials rejected the option of putting agricultural commodity sectors on the priority list for early sectoral liberalization, asserting that Japan would not accept tariff reductions beyond the commitments made at the UR and that the government was not ready to start negotiations on farm products before 2000 at the WTO. It is significant, however, that the MAFF's latest "Long-Range Outlook for the Demand and Supply of Agricultural Products" incorporates long-term supply and demand projections through to 2005 which are predicated on border and other measures stabilized at levels reached in the final year (i.e., 2000) of the UR agreement.

Agriculture remains one of the most politically powerful and institutionally entrenched interests in Japan. Complementing the power of organised farm voters and their dominant electoral connection with the LDP are the substantial bureaucratic, organizational and public interest stakes in a highly regulated and protected agricultural economy. An important part of the story of agricultural reform in the future will be tackling the regulatory and subsidy powers of the MAFF and its associated auxiliary organs. Agricultural trade liberalization and deregulation of controls on the domestic agricultural economy are two sides of the same coin.

AURELIA GEORGE MULGAN teaches in the School of Politics, University of New South Wales, Australian Defence Force Academy. She is the author of The Political Economy of Agricultural Protection (Allen & Unwin, 1986) and is presently working on a new book entitled Interest Politics in Japan: The Agricultural Sector in Transition.

The Korean Economic Crisis: The Result of Under-regulation
by Ha-Joon Chang

When the Korean crisis first broke out, many commentators argued that it was the result of an intrusive state forcing banks to lend to unprofitable firms. The medicine to cure the country's economic ills, it was argued, was to ditch the now-defunct state-directed economic system, which some people likened to those of the Soviet Union or East Germany, and to create in its place a "genuine" market economy through an extensive liberalization of finance, international trade, and the labor market. But is this a valid approach?

The current Korean crisis is essentially a financial problem, rather than a crisis of the "real economy." Most of the country's manufacturing firms make products that sell even in the most demanding markets, if the exchange rate is right. During the last couple of years the won was clearly overvalued by 10-20%; but even then, on the eve of the crisis, the current account deficit was just over 3% of gross domestic product and is now falling after the recent devaluation. Yet we saw current account deficits of 8% to 10% in Thailand and Mexico before their recent crises, and in previous downturns Korea itself had current account deficits approaching 9% of GDP. Furthermore most, if not all, foreign loans financed investments in export sectors, rather than real estate development or imports of consumer goods, as was the case in Mexico and Southeast Asia. The Korean budget is largely in balance and gross public debt amounts to only 3% of GDP. Finally, there has been little significant inflationary pressure in the economy. Then why did Korea crash?

The current crisis is largely the result of a policy failure by the outgoing government of Kim Young Sam. It is a failure of underregulation, rather than of overregulation as the popular view holds. Deregulation had been the proclaimed policy objective of Kim's government, and although no radical deregulation occurred, state control relaxed enough to make important differences. The government abandoned its traditional role of coordinating investments in large scale industries, thus allowing excess capacities to emerge in industries like automobiles, shipbuilding, steel, petrochemicals, and semiconductors, which eventually led to the fall in export prices and the accumulation of non-performing loans.

In the name of financial liberalization the government also failed to monitor properly foreign borrowing activities, especially by inexperienced merchant banks. This resulted in a rapid build-up of debts totaling $100 billion with a very poor maturity structure; 70% of these debts carry less than a year's maturity. Finally, Kim's advisers were sold on the monetarist idea that inflation control is the most important objective of government policy and that the exchange rate should be an "anchor" in inflation control. This caused a significant over-valuation of the currency, hurting export performance.

The Kim government was also confused and incompetent as the economic troubles began. It dithered over the fate of the third largest car manufacturer, Kia, unnecessarily undermining confidence in the economy. As the currency crisis grew, it wasted $10 billion (more than one-third of its dwindling foreign exchange reserve) trying to defend an indefensible exchange rate, thus exacerbating the foreign exchange shortage. External causes also came into play. Southeast Asia's doldrums reduced demand for Korean exports and dealt a blow to some Korean financial companies that had been speculating in Southeast Asian financial markets. The entrance of new Taiwanese semiconductor manufacturers drove down the prices of memory chips, which accounted for nearly 20% of Korean exports when their prices were high. Chip prices fell to a critical point, from nearly $50 to $4. But the main problem was precisely a failure of oversight by a government priding itself on deregulation.

Having met the crisis, is the IMF program the best medicine for Korea? The second bailout at the end of December underlines a number of important problems with the basic IMF package. First, its strong deflationary bias made the credit crunch that firms are facing even worse, leading to a chain of bankruptcies and possibly driving the economy toward depression. The IMF's 5% inflation target was already too deflationary, given that the economy has to deal with a big rise in import prices due to devaluation; with the excess liquidity released by financial sector bailouts and the further fall of the currency since the signing of the agreement, this target now seems indefensible.

More worrying than the deflationary bias of the IMF is its insistence on financial liberalization and opening-up the economy. Korea needs better, not less, financial regulation. Bad debts in the financial system need to be cleaned up before the banks can be granted more freedom. Moreover, more time is needed to determine which are the really viable financial institutions and which ones need to be closed down. All of this requires time, which the IMF program does not allow. Worse, the IMF wants a quick opening up of financial markets to foreign participation, which exposes the economy to high volatility in the future. What such volatility can do to an economy is clearly shown by Chile in the late 1970s and recent experiences in Mexico and Southeast Asia.

Finally, the IMF acted precipitately and without consulting the Korean people, leading to widespread talk of "national humiliation" and "foreign trusteeship." The likely result is that the IMF program, with its heavy deflationary bias, will result in a sharp rise in unemployment and will be met by massive political resistance. The IMF's way of meeting these dangers was to say that the country needs to strengthen its unemployment insurance system‹as if this can be achieved at a time of fiscal retrenchment. If the political backlash materializes, the entire IMF program will be jeopardized.

The new government of Kim Dae Jung, with its more consensual approach to politics and stronger ties to the small firms and trade unions that are going to be hurt most in the process, may be in a better position than most to pull the country through a period of deflation and job losses and put the economy back on the path toward robust growth. But it must also find new ways to reinvigorate the coordinating and regulatory mechanisms of previous Korean governments without the negative features of the old system such as corruption, nepotism, and excessive bureaucratic rigidity.

HA-JOON CHANG is a member of the Faculty of Economics and Politics in the University of Cambridge, England. His latest book is The Political Economy of Industrial Policy (St. Martin's Press, 1994). This article first appeared in The Los Angeles Times, December 31, 1997.

Downloaded from