Piketty discusses wealth disparity, Korea’s growth outlook

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Piketty discusses wealth disparity, Korea’s growth outlook

French economist and best-selling author Thomas Piketty says Korea faces a slowdown in its rate of economic growth within the next decade or two and must prepare policies to deal with wealth and income inequality.

“In emerging countries and fast-growing countries, such as Korea and China, you can have a very high inequality of wealth,” said Piketty on Sept. 20 at the JoongAng Ilbo headquarters in central Seoul. “And it is important to deal with this and to build democratic institutions and transparency about wealth dynamics so that we can better know what is happening to inequality, and we can, in advance, prepare the right policy to react.”

Piketty exchanged ideas with Song Ho-keun, a professor of sociology at Seoul National University, on wealth inequality, capitalism and democracy, and other overarching economic issues.

The 43-year-old Piketty, a professor at the Paris School of Economics, catapulted onto the global radar with his New York Times best-seller, “Capital in the Twenty-First Century.” Piketty’s book, published in French last year and in English in March, explains economic inequality through a database he complied that spans 300 years and includes more than 20 countries.

He has since been labeled by some as “a modern Marx.”

Piketty was in Seoul last month to attend the World Knowledge Forum, give a lecture at Yonsei University and meet with Korean economics and sociology scholars.

After earning his doctorate degree at the London School of Economics, Piketty became an assistant professor at Massachusetts Institute of Technology in 1993, at the age of 22, before returning to his home country in 1995.

His book was recently translated into Korean, and Korea is the first Asian country to publish the book.

Q. This happens to be your first visit to Korea. Do you have any impressions?

A. Korea is one of the big success stories of the world economy in the past decade, and I’m very happy to visit your country and discover your country. At the same time, I think it is a country when there is a growing concern about inequality, probably because of the huge growth performance. People feel that it can’t continue forever.

When did you become a professor at MIT?

I was a baby; I was only 22. This shows you can do a Ph.D. in economics by doing a lot of math and proving theorems. In fact, I didn’t know much about economics. And then I started learning more economics and economics history when I was teaching at MIT and after I returned to France. ... Proving theorems when you’re young doesn’t mean you understand economic issues.

Aren’t you pretty much a genius?

No, I don’t think so.

Many people would feel daunted, nonetheless.

What I’ve been doing in this book is very basic. It’s just putting together historical data. The reason why it was not done before is simply because it was, in a way, too historical for economics and too economic for historians.

You made a choice to return to France to study and pursue history and economics. Did you have a specific motivation?

I saw that by returning to France, it would be easier to work more closely with historians and sociologists. In France, the tradition in the social sciences is stronger around history. … To me, this was a more natural way to do economic research, more closely related to other social sciences.

Do you have any criticisms of mainstream economics in the United States?

I think the only problem is that sometimes they are too self-confident and they consider that other social sciences, historians, sociologists, journalists and rest of the world are not as scientific as they are, and I think this is very much an exaggeration. Economics should be more modest. I think we know very little about economic issues. We can make a little bit of progress by collecting data, but my main problem with the economics profession in the U.S. is that it is a bit self-centered.

Maybe it’s because I am a sociologist, but I think that recently economics is focusing on the micro and too much on a mathematical perspective. Do you think it is alienating the general public?

I think you are right. Economists spend too much time doing very complicated mathematical or sociological models and don’t spend enough time collecting data and trying to do empirical testing of their theories. I think theory and theoretical models and equations can be useful if you use very simple theory, very simple equations, with a lot historical evidence to explain. But to a fault, economists do the opposite, which is a lot of theory, a lot of equation and very little data, and sometimes no data at all, which is a problem.

Looking back on the recent financial crises, I’m skeptical whether we can accurately diagnose 21st-century capitalism. What do you think?

I think financial deregulation has gone too far and has contributed to making our economies in Asia, and also in Europe and North America, too fragile. Financial deregulation also has contributed to rising inequality, and this plays an important part in my book.

Do you have an assessment of why your book is becoming a worldwide phenomenon?

Certainly there is a growing concern about inequality in Korea, in America and in many countries, so my book certainly resonates. Part of the reason for the success of the book is that I really tried to write a readable and accessible book to show people that economic issues, income issues and financial issues are not technical economic problems. They are important to everyone. In this book, I really try to tell a readable story of money and the social groups that are behind the statistics, and to show that if you want to understand this economic evolution, you also need to understand the political, the social and the literary representation of inequality.

You refer to a lot of novels in your book. Are you a fervent novel reader?

Yes, I love to read novels. I think that literature and movies are very powerful ways to express the competition between social groups, to express our income and wealth and money.

In your book, your conclusion on the future of 21st-century capitalism seems rather pessimistic.

In fact, I am more optimistic than what a number of people seem to believe, and I am very sad if some people became pessimistic after reading my book, because this was not the purpose and the spirit with which I wrote this book. One of the findings of my book is that, indeed, gross economic growth cannot continue at 5 percent per year or 10 percent per year forever. It’s a very fast growth period you had in Korea until now, and that we have had in France or Germany or Japan in the 1950s, 1960s, 1970s, due to reconstruction and the fact that when countries are catching up to other countries, it’s possible to grow very fast. But in the very long run, when you catch up with the most productive economies in the world, growth is not 5 percent per year for everyone. And when growth goes down to 1 percent or 2 percent per year, then wealth accumulated in the past plays a bigger role than in the reconstruction period or the period of catching up. So this is why I say that in the long run, patrimonial capitalism, that is capitalism where wealth plays a very large role, is more like the norm, and the reconstruction period and very fast growth period are more the exceptions. There’s nothing bad about patrimonial capitalism, per se.

Can you elaborate on your reasoning?

The fact that we have a lot of capital relative to income, a lot of wealth relative to income, there is nothing bad about this. This raises new challenges in terms of distribution, in terms of institutions. We need to design the right policies so that we have wealth mobility, so that new groups of people manage to accumulate wealth and become owners of their apartments and manage to have financial assets.

Nevertheless, if we leave everything to the market, it may bring about negative results.

I agree that market forces alone can lead to excessive inequality. I think inequality is OK up to a point. Inequality can be useful for growth up to a certain level. But sometimes, market forces alone can lead to excess inequality, which actually can be bad for growth because it reduces social mobility and it leads to the perpetuation of inequality over time.

It can also be bad because extreme concentration of wealth can have negative consequences for our democratic institution.

So, my point is that we need a strong democratic institution and fiscal institution, we need more transparency about incoming wealth dynamics, so that we put the market and capitalism in the common interest and make sure all groups of society can benefit from powerful economic forces.

In the case of Korea, the economic growth rate has been bigger than the rate of the return of capital. Worldwide economic growth stayed at 1.5 percent, but Korea has seen 3.5 percent on average in the 21st century. What is your assessment?

My assessment is that Korea is one of the big success stories in the world economy, but I don’t think that a growth rate of 5 percent per year will continue forever. One simple reason is that Korea, because of its success, is already very rich. Korea now has a per capita GDP of roughly 75 percent of the level in Japan or Western Europe. ... The most likely outcome is that as you complete the convergence, the growth rate will slow. And then the problem of having a rate of return to capital bigger than the growth rate would become more crucial to Korea.

That is an important point, and in the case of Korea, the level of inequality has been escalating as corporate income has surpassed household income, while there is a 20 percent income tax for households compared to a 28 percent corporate tax.

Korea’s total tax revenue as a percentage of GDP is not very high compared to other developed countries - it’s less than 30 percent. There are countries like Sweden or Denmark, where 50 percent of GDP is tax revenue, and these are the countries in the world with the highest productivity. ... I’m not saying Korea should go directly to 50 percent, but it really depends on what you do with the money. ... Probably the best way for Korea to have growth in the long run is to invest more in education with very inclusive educational institutions. At this stage, Korea is one of the OECD countries where private households have to pay the most for the education of their children, which raises problems for the children from poor families to go to good universities.

By Song Ho-keun, Chun Su-jin [sarahkim@joongang.co.kr]

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