Posted : 2014-12-11 17:39
Updated : 2014-12-11 17:39

Inequality and growth

Arguments that income inequality has an impact on economic growth have been accepted only vaguely because of a lack of rich empirical studies. But the Organization for Economic Cooperation and Development (OECD) recently concluded through research that "when income inequality rises, economic growth falls," providing reasonable evidence for the Korean government to seek new policies.

The research suggests that income inequality has a negative and statistically significant impact on medium-term growth. In OECD countries, the Gini coefficient, a broader measure of inequality ― which ranges from 0, where everybody has identical incomes, to 1, where all income goes to only one person ― stood at 0.29 in the mid-1980s, but the figure increased to 0.32 by 2011-12. Rising inequality by three Gini points would drag down economic growth by 0.35 percentage points per year for 25 years ― a cumulated 8.5 percent GDP loss.

The OECD said the gap between rich and poor was at its highest in 30 years in most OECD countries. Now the richest 10 percent of the population in the OECD area earn 9.5 times more than the poorest 10 percent. In the 1980s, they earned seven times as much.

All this shows that the worse income inequality is, the less economic growth there is, and raises the possibility that the theory that the income trickles down from rich to poor as a result of economic growth no longer holds true.

The OECD urged policymakers to do more than just implement anti-poverty programs.

"It is not just poverty or the incomes of the lowest 10 percent of the population that inhibits growth," the report said. "Instead, policymakers need to be concerned about how the bottom 40 percent fares more generally.'' It added that there should be more access to high-quality education, training and healthcare.

No doubt Korea can ill afford to overlook these policy suggestions, given the severity of its income inequality. In November, the national statistics office computed Korea's Gini coefficient at 0.348, the sixth-highest among the 34 OECD members.

So it is imperative that the government should not leave the dire state of our income inequality and widening polarization unattended. But this is not going to be easy, considering that the conservative Park Geun-hye administration is fundamentally in favor of economic growth through stimulus and structural reform.

Earlier this year, the administration's economic team presented a trio of policy measures aimed at increasing household income as part of its measures to lift the sagging economy, but the initiative has yet to achieve much.

Now it is time for our administration to listen to the OECD's recommendation: tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.

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