Estimates of Import Demand Elasticities for Agricultural Products in Korea : Policy Implications of Agricultural Trade Liberalization

This paper estimates the import demand elasticities for agricultural products in Korea. Agriculture in Korea is heavily protected by tariffs and quotas. Thus the future trade liberalization might be expected to have a destructive effect on agriculture and agricultural producers in Korea. By searching for import demand elasticities for agricultural products in both aggregated and disaggregated levels, we can predict the plausible effects of trade liberalization on agriculture. By estimating import demand elasticities for agricultural products in Korea, the following two hypotheses can be probed. First, Korea is a small country in the world agricultural market. This hypothesis will be true if import prices are exogenously given and import demands are highly elastic to import prices. Second, the more is disaggregated, the higher the import demand elasticity is. Import unit-value indexes are used as proxies for import prices in this paper. Import demand elasticities for 32 agricultural sectors in Korea are estimated. Two estimation methods are employed, which are the least squares with autoregressive correction and two-stage least squares with autoregressive correction. Endogeneity of import prices are tested using Durbin-Wu-Hausman statistic. Estimation results find that all five aggregated sectors have inelastic import demand while among 27 disaggregated sectors, 16 sectors have highly elastic import demand. These econometric estimates support the second hypothesis.