Starving the households

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Starving the households

A leader must put the country’s economy first. But when people are struggling to make ends meet, they cannot afford to think about the nation. Is the Korean economy in that much trouble? Data-wise, it is not doing terribly. Among the Organization for Economic Cooperation and Development members, South Korea remains among the top in terms of annual growth rate. Even when the world was shaken by the Wall Street-triggered financial meltdown in 2008, the Korean economy sustained the fourth-highest growth pace. But at the same time, our households have gotten poorer. The widening wealth gap is close to that of the United States with its historic disparities. If economic growth is not distributed in a fair enough way to improve individual lives, what good is a nation’s economy anyway?

Korea has become one of the most unequal societies in the world due to a dysfunctional distribution system. The fruits of growth should be divided among households, corporations and the government. Of the national income, the government’s share, which is earned through tax revenues, remained unchanged at 13 percent from 1990 to 2013. But the share that went to our households dropped to 61 percent in 2013 from 70 percent in 1990. During the same time, corporate income increased from 17 percent to 26 percent. The losses in household income were translated into corporate gains. Among household incomes, the share of the rich rose at the expense of the middle-class and poorer ranks. The rich have gotten richer and the working class poorer.

Because individuals have gotten poorer, they can hardly afford to save. Household savings, which accounted for 43 percent of total savings in financial institutions, plunged to 18 percent in 2013. Corporate savings during the same period ballooned to 60 percent from 35 percent. Again, the less individuals had to save, the more companies had. The benign capital flow of household savings spurring corporate investment broke down and companies are getting richer and saving more than households. Amid this dysfunctional income and capital distribution, households have become debtors rather than savers. The ratio of debt against disposable income by our households spiked to 152 percent in 2013 from 56 percent in 1990. Household debt is now pegged as the biggest danger to the national economy.

If corporate income and savings are translated into investment, they will flow back to households and their savings accounts. The economy will be working fine. But corporate investment has been declining instead of rising. Fixed capital investment, which took up 40 percent of the gross domestic product in 1990, sank to 29 percent in 2013. Korea has become a country with scant investment. It is not just companies that do not spend. Consumer spending has also been falling. Private consumption, which accounted for 59 percent of gross national income in 1990, fell to 47 percent in 2013. The data implies that the benign cycle of corporate investment leading to increased household incomes and spending has broken down. Since companies have not invested nor redistributed their profits to employees nor paid more taxes even as the economy grew, it is no wonder that companies have gotten rich and people poor.

The U.S. was once a land of opportunities and the American Dream. Anyone who worked hard could one day own a house and give their children a good education. It was a country of the middle class who were assured of fair ease in later life. This was possible through strong enforcement of distribution through taxation in the early 1940s that led to the “Great Compression,” an age when income inequality was the lowest ever. But the inequality worsened because of various tax deductions and benefits for the rich and the companies they owned or controlled. The distribution policy that built the American Dream ended up being wrecked. Unfortunately, Korea is going down the American path.

Money is earned to lead a better life. To live well in a capitalist society is to spend well. In economics, the economy should grow to spur consumption. Consumption is done by consumers not the suppliers. Companies manufacture and invest, not consume. There must be money to spend and income to consume. Income comes through distribution. If companies that should redistribute their earnings stockpile them in their own coffers, the economy is headed for doom. A country cannot exist without individuals. A national economy cannot run without individual consumption. People have long been disillusioned about the trickle-down theory that companies must get rich in order for people to become richer. Again what use is a nation’s economy when growth merely fattens companies - and starves households?

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, May 12, Page 35

*The author is a professor of business management at Korea University.

by Jang Ha-sung

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