Equality, Korean style
South Korea achieved two economic miracles from the 1960s through the 1990s. One is the often-cited passage from rags-to-riches. Per capita income, which was less than half the size of Ghana’s in the early 1960s, grew at a 6 percent to 7 percent annualized rate to push the country into the group of the richest countries in just 30 years or so.
China has been expanding at a similarly staggering rate, but because it is yet to join the advanced group in terms of per capita income, there are just four countries - South Korea, Japan, Taiwan and Singapore - that have moved up to the advanced group within one generation.
The lesser known miracle is an avoidance of the income inequalities often seen in economies that expand in a short period of time. Russian-American economist Simon Kuznets received the Nobel Prize in economics in 1971 for his contribution to the formation of a quantitative economic theory through his lengthy studies of the relationship of income and economic growth in industrialized nations in the aftermath of the Second World War. He developed a theory that when countries experience economic growth, income disparity first increases and then decreases. The inverted U-shaped relation between income inequality and economic growth, called the Kuznets Curve, was a hypothesis but served as an economic norm until the 1970s.
Income disparities worsened in Hong Kong and Singapore as a result of fast growth. But other East Asian miracles - Japan, South Korea and Taiwan - debunked the theory by containing the spread of inequality. South Korea managed to keep the income gap in check not through state redistribution via the heavy tax levies and social welfare spending common in advanced economies, but rather through state interference in market forces via regulations and corporate practices. The state protected farmers through land and protectionist trade regulations. It protected merchants by prohibiting large companies from entering certain retail sectors. Wage gaps between employers and employees remained narrower than in most other free market economies.
Things changed after the Asian financial crisis in 1997. Sweeping corporate and financial restructuring and liberalization in the wake of an international bailout package accelerated market opening and deregulation. Corporate behaviors were reinvented. Protectionist policies had to be eased. Farmers left to their own devices began to suffer. Merchants had to close shops due to the easing of regulations in the retail sector. The proliferation of American business standards accompanied by the capital market opening pushed up wages of employers and corporate executives. The result was widening income disparities.
The wealth gap in South Korea remains relatively moderate compared to many other countries. According to the Organization for Economic Cooperation and Development (OECD), South Korea is the most income-balanced country before redistribution through taxation and welfare spending. South Korea recorded a 0.342 Gini coefficient, which measures a country’s income inequality. (A Gini index of zero means perfect equality while an index of one indicates maximal inequality). South Korea’s Gini coefficient is close to Switzerland’s 0.368. The next lowest is Iceland with 0.406 and the highest is Greece with 0.555.
However, due to its poor social security net, South Korea ranks 19th in its inequality level after redistribution among 34 OECD countries. In contrast, most other countries spend heavily on redistribution. Germany’s pre-tax and pre-payment transfer Gini index is 0.512, higher than the U.S.’s 0.508. But after redistribution, Germany’s Gini coefficient comes down to 0.293, compared with the U.S.’s 0.389 and South Korea’s 0.311. The gap in the U.S. data also suggests that the federal government spends heavily to balance income through redistribution policy.
Factors pushing fundamental inequalities are increasing while South Korea’s redistribution remains poor due to weak welfare policies. Economic barriers are crumbling due to free trade agreements. Internal barriers are also being broken through deregulation. American-style winner-takes-all business practices have become widespread. Without better redistribution, inequalities will deepen.
Widening disparities trigger conflict, making society insecure to live in. Studies show the mental and physical health of poor people is worsening due to stress. Disparities also stall class mobility, slowing overall economic growth. If the past model of containing inequalities through market regulations no longer works, we must have new mechanism through welfare expansion.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Nov. 20, Page 35
*The author is a professor of economics at the University of Cambridge.
by Chang Ha-joon