Policy Ideas and Proposals to Reconcile Economic Growth and Welfare Development in South Korea

November 19th, 2016

KIM, Yeon Myung (金淵明)

Department of Social Welfare, Chung-Ang University(中央大學校 社會福祉學科)

Doshisha-ChunnAngWorkshop November 19th, 2016, DoshishaUniversity, Kyoto, Japan

Summary

§ The period of high economic growth in South Korea ended after the financial crisis in 1997. Since then, the Korean economy entered a long-term low growth phase. In addition, Korea has been facing demographic challenges with low birth rates, ageing population and severe labor markets dualization.

§ Around 2010, Korea has entered an early stage of the welfare state, spending only about 10% of GDP on social expenditures. Because of this extremely unfavorable socio-economic and demographic changes, the Korean welfare state is facing with fundamental challenges in moving toward a more comprehensive welfare state.

§ The ‘mainstream’ in the Korean society continues to believe that an export-led growth path is still a viable option in a slow growth phase. Most importantly, they are still dominated by the perspective emphasizing the negative relationship between welfare and the economic growth.

§ Recently, in Korea, there has been a number of claims saying that the conventional relationship between economic growth and the welfare development must be redefined. This new emerging paradigm shift, yet not dominantly strong enough in Korea at this stage, pays more attentions to the positive economic effects of welfare expenditures in boosting domestic demands under the low economic growth scenario.

§ In the line with this new emerging paradigm, several ideas and policy proposals have been suggested by pro-welfare social forces and are currently being debated. They include ‘income-led growth’ strategy, social investment policies enhancing employability among youths and women, boosting domestic demand by expanding cash allowances, investing public pension fund in providing more public housing and welfare facilities, and creating more stable public jobs in social service sectors.

Background : Ending of high-economic growth and entering into a low-growth phase

Source : KOSIS(2016)

5.9%

11.5% 9.7%

8.4% 9% 10.4%

7.9% 5.4% 4.7% 4.1%

3.0

02468101214

<Figure1>Korea'shistoricaleconomicgrowthrate:1961-2015(5yearsaverages)

§ High economic growth from the 1960s to the mid 1990s due to export-led growth strategy.

§ Economic growth led to income growth for escaping from absolute poverty (trickle-down effects).

§ Gradual reduction of economic growth rate after the financial crisis in 1997.

3.6%

2.6% 1.9%

1.4% 1.1%

00.51

1.52

2.53

3.54

2016-2019 2020-2029 2030-2039 2040-2049 2050-2060

<Figure2>Economicgrowthrateforecastedfor2060(10yearsaverages)

Source: Ministry of Strategy and Finance(2016)

§ Entering into a long-term low economic growth phase, growth averaging just over 1-2% per annum in the long run.

3

Financialcrisisin1997

Background : No more trickle-down effects

Source : Bank of Korea (2015)

§ Companies have taken much more of the fruits of Korea’s economic growth than have households.

§ Trend toward polarization between ‘rich companies’ and ‘poor households’.

§ Waning trickle-down effects of export industries.

83.5

68.45.4

17.7

0.0

5.0

10.0

15.0

20.0

60.0

65.0

70.0

75.0

80.0

85.0

<Figure3>ShareofnationalincomebetweenhouseholdsandBusinesses:1975-2012

Householdincome Businessincome

Marketincome Gini

(A)

Disposable income Gini

(B)

Poverty reduction effect

((A-B)/A*100)Korea 0.329 0.300 8.81

Sweden 0.43 0.23 46.51France 0.48 0.28 41.67

Germany 0.51 0.3 41.18Japan 0.44 0.32 27.27

US 0.48 0.38 20.83OECD average 0.45 0.31 31.11

<Table1>Inequality-reductioneffectoftaxesandpublictransfersinselectedOECDcountries(2012)

Source: OECD (http://stats.oecd.org/index.aspx)

§ Widening income gaps between the rich and the poor.

§ Weak inequality and poverty reduction effects of taxes and public transfers.

4

Financialcrisisin1997

Welfare State Building under the unfavorable socio-economic conditions

0

5

10

15

20

25

30

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 12 2014

Mexico Japan Korea United States EU-21 OECD

10%ofGDP

10%ofGDP

<Figure4>PublicsocialexpenditureasapercentofGDPin1960-2014

Source: OECD (2014a)

§ Belated takeoff of the Korean welfare state in 1990s.§ Korea has entered into an early stage of the welfare state, spending 10% of GDP on

social expenditures around 2010.§ However, along with low economic growth rate, Korea has faced with fundamental

negative changes in demographics and labor markets in developing its welfare state.

16.1 16.4 17.4

7.2

17.312.4 13.0

6.9

26.233.1

38.8 37.4

24.720.9

25.3 23.9

0.0

10.0

20.0

30.0

40.0

50.0

France Germany Japan Korea Sweden USA OECD China

<Figure5>Shareoftheelderlypopulation(age65+)inselectedcountries(Asapercentageoftotalpopulation)

2010 2050

Demographic context : Low birth rate and aging population

Source: OECD(2014b:19)

1.87

1.38 1.36 1.47 1.55

2.06

1.671.51

1.98

1.41 1.431.19

1.89 1.861.67 1.67

0.00

0.50

1.00

1.50

2.00

2.50

France Germany Japan Korea Sweden USA OECD China

<Figure4>Totalfertilityrateinselectedcountries(Numbersofchildrenborntowomenaged15to49)

2000 2013

Source: OECD(2016:15)

§ Lowest fertility rate in the world.

§ Rapid speed of population ageing.

§ Less tax payers and more welfare recipients in the future.

§ Fiscal strains in financing welfare programs.

6

Labor Markets Context : ‘Dualized’ Labor Markets

Source: Kim.Y.S(2016)

§ Highly fragmented labor markets by employment status.

§ Gradually decreasing size of non-regular workers, but still highly dualized labor markets.

44.3%

56.4% 55.7%

43.6%

2001 2016

<Figure6>Compositionofemployeesbyemploymentstatus(2016survey)

regularworkers non-regularworkers

96.6% 99.1% 84.7%

99.5% 89.1%

100

32.4% 40.4% 39.7% 35.5%

25.9%

48.7

NationalPension

HealthInsurance

UnempolymentInsurance

RetirementAllowance

PaidLeave AverageWage

<Figure7>Wageandsocialbenefitsgapbetweenregularandnon-regularworkers(2016survey)

regularworkers non-regularworkers

§ Large gaps in wages and social benefits between regular and non-regular workers

§ Great barrier in realizing universal coverage in social security and an universal welfare state

7

Mainstream’s strategy : Economic growth without welfare?

§ ‘Long-term Economic Outlook 2060’ report by the Ministry of Strategy and Finance. § Stronger fiscal discipline in the face of growing economic uncertainties and negative

demographic changes.§ Keeping national debt to GDP ratio at 40% range in the foreseeable future.§ Maintaining current levels of tax burden.§ Tighter controls on welfare spending including even cutting social benefits.

Source: Ministry of Strategy and Finance(2016)Note : Scenario 1: Cutting 10% of public expenditures from 2016

Scenario 2: No policy changes from 2016Scenario 3 : Introducing new mandatory social programs in 2020

38.1%

62.4%

40.1%

88.8%

20

40

60

80

100

2010 2020 2030 2040 2050 2060

<Figure8>GeneralgovernmentdebttoGDPratio(projection)

Scenario1 Scenario2 Scenario3

§ The mainstream is still seeking an ‘economic growth ‘without welfare’ which was dominant under the developmental era of Korea.

§ Is that an viable option under the deepening socio-economic pressures?

8

§ ‘Income-led growth’ strategy as an alternative for ‘profits-led growth(‘export-led growth.’)

§ Boosting domestic consumption by increasing social benefits as well as labor’s income share.

- Debates over ‘universal basic income’ plan: promoting household consumptions.

- Expanding social benefits : proposals for creating universal child allowance, youth allowance (for labor market outsiders or entrants), and increasing the amount of basic pension for the elderly.

New ideas and policy proposals(1): ‘Income-led growth’ strategy

Year Private Consumption

Government Consumption Investment Exports

1990 41.0 7.7 28.9 22.51995 40.3 7.5 29.6 22.62000 42.0 7.3 22.4 28.22005 39.3 10.1 21.6 29.02010 35.0 10.1 19.7 35.12014 33.6 10.8 19.3 36.2

Japan(2005) 50.1 16.2 20.5 13.2

<Table 2> Trends of Final Demand Composition in Korea

Source: Bank of Korea(2015)

New ideas and policy proposals(2): Open economy and social protection system

30.5

39.0

20.8

45.340.8

16.6

29.123.8

28.7

45.7

17.7

50.644.5

13.5

28.926.2

10.0

20.0

30.0

40.0

50.0

60.0

France Germany Japan Korea Sweden USA OECD ChinaImports Exports

<Figure9>Internationalimportsandexportsingoodsandservices

(aspercentageofGDP,2014orlatestavailableyear)

OECD(2016)

§ Korea is one of the most open economy countries in the world.

§ Open economy constantly confronts with industrial restructuring in order to survive in the highly competitive global markets.

§ Industrial restructuring requires massive relocation of workers in the labor market. Therefore, without well-established social protection and job training system, relocation of workers would not be practical.

§ Social protection system is one of the main bases supporting an open economy.

§ Social investment policies: enhancing employability of labor market outsiders through increasing the quality of job skills and providing favorable social environment for labor market participations.

§ ALMP and ECEC(Early Childhood Education and Care) policies are main areas of the social investment policy.

§ Great advancement in ALMP and ECEC polices in Korea over last decade, but there are some controversies over their policy outcomes.

New ideas and policy proposals(3): Social investment policy

1.9% 2.2%

1.2%

0.1%

0.6% 0.5% 0.5% 0.2%

OECDaverage(2000)

OECDaverage(2011)

Korea(2013) Korea(2000)

<Figure 10> Family and ALMP Expenditures to GDP Ratio

Family ALMP

OECD(2016) Social Expenditure Database

New ideas and policy proposals(4): Investing pension reserves in publicrental housing and public welfare facilities

53.1%

4.3% 18.6% 13.1% 10.2%

<Figure11>PortfoliobreakdownofNationPensionFund (2015)

Alternatives

Overseasequities

Domesticequities

Overseasfixedincome

Domesticfixedincome

USD bn. % of GDP(Rank)

Korea(NPS) 404.5 32.4(1)

Sweden(Aps) 164.7 29.0(2)

Japan(GPIF) 1223.9 26.9(3)

USA(Trust Fund) 2764.4 16.5(4)

Canada(CPP) 189.3 10.7(5)

OECD(2014c)

National Pension Service(2015)

<Table 3> 5 Largest Public Pension Reserves Fund § Korea’s NPS reserves is the largest one

in terms of its GDP ratio.§ Most reserves are invested in domestic

and overseas bonds and equities.§ Most portion in domestic equities

investment are concentrated on big companies(conglomerates).

§ Investing 20% of newly accumulated reserves per year (total 100 trillion Won for 10 years) in building public rental housing, public healthcare and care facilities for child and the elderly.

§ Goals of the proposal : removing the barriers of marriage and childrearing by reducing rent costs and care fees; reconciling work and home life for women; raising low birth rate; boosting construction industries. etc.

New ideas and policy proposals(5): Increasing public welfare facilities and public sector jobs by establishing ‘social service corporation’

<Figure 12> Numbers of employment in health and social service sectors

(2011-2015)

2011 2015

1,566,361 person

1,286,431person

Numbers of increased jobs:

279,930

Source: Ministry of Health and Welfare(2015)

§ Sizable numbers of new jobs are created in health and social care sectors under the jobless growth of Korea.

§ Care workers mostly employed in small and private care facilities suffering from low wage and inferior working conditions.

§ Proposal to establish ‘social service corporation(社会service公團)’ that not only directly operates care facilities, but hires care workers directly.

§ Aiming to increase publicly funded and operated care facilities and quality jobs in the public sectors.

§ Plan to launch a social service corporation in Seoul City in 2017.

Conclusions

§ Because of the dramatic economic growth experience in Korea, the main stream policy ideas tend to think that expanding welfare provision hampers achieving economic growth.

§ A growing body of literatures(OECD,2015; Dabla-Norris et.al,2015), however, suggests that higher inequality in income and wealth may give negative impacts on sustainable economic growth.

§ Korea is in a very challenging transition period. Under the very negative economic, demographic, and labor market conditions, the country has to move towards a more universal welfare state

§ Some groups are proposing new ideas and policy proposals which support that expanding welfare provision does not contrast with any economic growth.

§ Although these ideas are still ongoing and have not become main stream policy ideas, there are great potentials in those ideas and it will appear as significant values when existing economic growth strategy reveals their limitations.

References

§ Bank of Korea(2015), “The Korean Economy Based on the Input-Output Statistics”§ Dabla-Norris, Era., Kalpana Kochhar et. Al(2015), Causes and Consequences of Income Inequality: A

Global Perspective, IMF Staff Discussion Note.§ Elekdag, Selim(2012), Social Spending in Korea: Can it foster Sustainable and Inclusive Growth, IMF

Working Paper§ Katzenstein, Peter J(1985), Small States in World Markets, Cornell University Press§ Kim, Y.M(2008), Beyond East Asian Welfare Productivism in South Korea, Policy and Politics,

36(1):109-125§ Kim, Y.M(2015), South Korea’s Welfare State may be Heading for the Worst, EAP Policy Debates, No.

31, East Asian Foundation.§ Kim,Y.S(2016), The Size and Working Conditions of Non-Regular Workers, KLSI Issue paper No.4 (In

Korean)§ KOSIS (Korean Statistical Information Service) (2016) § Lavoie, Marc., Engelbert Stockhammer(2012) Wage-led growth: Concept, theories and policies, ILO§ Lee, Sangheon(2013), Income-led Growth: Theoretical Potentials and Policy Implications, The Review

of Social & Economics Studies, 43:67-99§ Ministry of Strategy and Finance(2016), Long-term Fiscal Outlook 2060 (In Korean)§ Ministry of Health and Welfare(2015), Report on Job Statistics in Health and Welfare related Industry.§ National Pension Service(2016), 2015 National Pension Fund Annual Report. § OECD(2014a), "Social Expenditure Update: Social spending is falling in some countries, but in many

others it remains at historically high levels”. § OECD(2015), In It Together: Why Less Inequality Benefits All§ OECD(2014b), Factbook 2014: Economic, Environmental and Social Statistics§ OECD(2014c), Annual Survey of Large Pension Funds and Public Pension Reserve Funds 2014.§ OECD(2016), OECD Factbook 2015-2016