Original sin of 'economic polarization' in Korea

By Shin Jang-sup

The most baffling tendency in the current controversy over Korea's ‘economic polarization' is the denial of facts. According to Statistics Korea, the Gini coefficient, a representative income distribution index, has improved slightly in the last few years. However, many politicians and media pundits are simply denying the statistics by saying, "How could income distribution be improved when we are hearing public outcries of ‘golden spoons versus mud spoons'?" The Korean government strangely succumbs to these accusations and only responds by saying they will examine whether the statistics really reflect the reality, although Statistics Korea (then called the National Ststistics Office) has been operating since the beginning of Korea's nationhood in 1948 and there have been numerous academic and policy research reports on Korea's income distribution financed with tax-payers' money.

It goes without saying that income distribution is an acute political and social concern in most countries. Korea's old saying, "People can endure hunger but they can't swallow jealousy" applies to any country. It is therefore inevitable that public sentiment intervenes in the discourse of income distribution. Nevertheless, it is necessary that policy discussions should be based on hard facts at minimum. If concerned parties do not agree on or deny the facts, it is impossible to agree on meaningful policy solutions or even make a compromise.

The most serious denial of facts in Korea's discourse on distribution is currently happening in regards to the situation in the 1990s. The Korean economy was at its height in almost all major indices before the foreign exchange (FX) crisis in 1997. It grew at a rate of 7.5% annually. Not only were exports up, Korea's traditional engine of growth, but also domestic consumption, currently a major drag on the economy, was vibrant. Private consumption grew at a rate of 7%, far higher than the average growth rate of 4.9% during 1999-2005 when the Korean government actively promoted consumption by allowing real estate mortgages to become broadly available.

Indices of income distribution were also the best ever. The Gini coefficient released by Statistics Korea averaged 0.287 during the period before the FX crisis. Even empirical research by Professor Kim Nak-nyeon, who developed new long-term statistics based on taxation data after criticizing statistics based on household surveys and is currently contributing his data to the so-called Piketty Database, also shows this similar trend. His indices on the top 1% income were stagnant or slightly decreased during the middle of the 1990s. It is not difficult to understand the booming economy with good distribution at the time. Korean corporations were vigorous in their "globalization investments" and increased employment, resulting in an increase in wages. The increase in wages fueled domestic consumption and improved income distribution.

Actually, it is a globally well-established fact that Korea and Taiwan were the only economies that achieved both high growth and equitable distribution among developing countries during the latter half of the 20th century. Singapore and Hong Kong were part of the four East Asian tigers thanks to their high-powered economic growth. But the Gini indices of the two city-states hovered around 0.45, a very unequal distribution. China is currently making another East Asian economic miracle with its high growth rate. But the country is still facing huge income disparities as well as huge regional disparities.

It is regrettable and worrisome that the current discourse on income distribution in Korea is progressing by denying these facts. Some unconfirmed reports arguing that Korea is the most unequal country in the world in its income distribution are frequently cited by the so-called "experts" and the media. It has also strangely become a dominant view among the public and politicians that the deterioration of income distribution is mainly due to the "unequal economic development model" that led the Korean economy before the 1997 FX crisis. The two major opposition parties whose combined seats reach 160 and easily surpass the absolute majority of the parliamentary votes of 300, have submitted various bills on "economic democracy" grounded in the currently dominant view. According to this view, the Korean economy in the 1990s is portrayed as a dark age when "structural problems" of the old development model accumulated and resulted in the 1997 FX crisis.

However, the real facts are quite different. Korea's income distribution deteriorated significantly in the process of restructuring after the 1997 FX crisis under the tutelage of the International Monetary Fund (IMF). A cursory look at the policy package during the period would tell us why the deterioration in income distribution suddenly happened. First, as part of restructuring, redundancies were legally allowed for the first time in Korea's history. This is the period when problems of temporary employment started in Korea. Second, compensations for executives of banks and corporations jumped in the name of introducing "global standards." Many companies introduced and expanded stock options for their executives during the period.

Third, foreign banks, consulting companies, accounting firms and law firms, which offered much higher salaries than domestic institutions, sharply increased their presence in Korea. That was the period when the most desired jobs for young and capable Koreans changed from big local companies to foreign banks and companies. Fourth, the newly-elected Korean government led by former opposition leader Kim Dae-jung, attempted to create a new engine of economic growth by promoting venture businesses following the Silicon Valley model. But venture businesses look for "jack pots" and inherently have high failure rates. Promotion of venture businesses tends to have negative effects on income distribution. In fact, one can say that the Silicon Valley model is the most representatively unequal economic development model.

It is undeniable that indices of income distribution in Korea began deteriorating sharply after 1997. Kim Nak-nyeon's research on the top 1% income saw its share also increase suddenly from 1997 (refer to the graph below). The original sin of "economic polarization" that currently weighs heavily on the political scene of Korea should be found from the "restructuring" after the FX crisis, not from the development model before the crisis.

One reason that these facts are denied and/or ignored in the current policy discourse has to do with the fact that previous economic policy-makers and academics who provided them with the rationale for restructuring have promoted it as "the most successful one even in IMF rescue programs". They have the tendency to maintain what they have been advocating even if its problems are increasingly surfacing, rather than trying to re-interpret the situation and change their policy frameworks. The other reason would have to do with the fact that political groups who had been criticizing the earlier development model of Korea do not want to change the situation that in their view has now become mainstream.

However, we can only draw effective policy solutions when they are securely based on facts. It is necessary to assess the facts in the Korean economy with a global and historical perspective. It is impossible to reach a meaningful resolution on the impasse as long as facts are denied or avoided.

Shin Jang-sup is an economics professor at the National University of Singapore and former adviser to Korea's finance minister.