No such thing as free lunch

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Opinion

Sat, April 21, 2018 | 12:35

Andrei Lankov

No such thing as free lunch

Posted : 2017-08-20 16:54

Updated : 2017-08-20 16:54

By Andrei Lankov

If one were asked to describe the Moon Jae-in administration's political and ideological leanings in a few words, perhaps the best description would be "left-leaning and modestly nationalist." Indeed, when it comes to social policy, Moon and his cadre might be compared to the "New Labour" of Tony Blair, and more broadly speaking, the moderate social democrats of modern Europe. They believe in free-market capitalism but want to manage it and reduce social inequities, commonly associated with the free market.

Moon promised just that on the campaign trail: A dramatic increase in social welfare spending. However, many have noted that his goals were much less ambitious when compared to commitments made during his previous presidential run in 2012, and on-the-record statements throughout his long political career.

His retreat from more radical action reflects a difficult reality-check. While social welfare in Korea is indeed underdeveloped and in dire need of reform and expansion, significant adjustments are politically difficult, and perhaps even impossible in the short term (certainly within the one non-renewable five-year term allotted to Korea's presidents).

Korea is a wealthy OECD member state with a (purchasing power adjusted) per capita income roughly similar to that of France. However, in 2016 Korea spent just 10.4 percent of its GDP on welfare and social programs ― half the OECD average of 21 percent.

It is debatable whether Korea suffers from serious income inequality. The most widely-cited inequality metric, the Gini Coefficient, pegs Korea at a respectable 0.30, commensurate with countries such as France and Australia, states that are not grappling with massive inequality. However, other indicators paint a bleaker picture. There is a significant distance between the bottom 10 percent of earners and top 10 percent in Korea. Embracing one particular indicator often reveals much about the political inclinations of the one making the argument, but does not necessarily reflect what inequality is like.

One indisputable reality both sides of the aisle must grapple with is that Korea is aging rapidly, and many senior citizens live in abject poverty. A low birthrate is exacerbating the demographic issue, and youth unemployment is in the double-digits. These and other problems ― such as a comprehensive but overstretched universal health care system and subsidized higher education ― may be ameliorated with a generous re-appropriation of taxpayers' money.

But the conundrum is whether it is possible to significantly expand welfare spending without seriously increasing taxes. Most politicians on the Korean left, predictably so, claim that it is doable. Unfortunately, they are almost certainly wrong. Korea may spend less than half that of their industrialized counterparts on a social safety net, but they also excise far fewer taxes. The total Korean tax rate is 25.3 percent of GDP (as of 2015), while the OECD average is 38.1 percent ― one-and-a-half times higher.

Many Koreans presume themselves to be exempt from a tax hike designed to further social welfare, believing that such funds can be squeezed out of big business who, accordingly, don't pay their fair share as it is. This is simply not true. The corporate tax in Korea is, in fact, already quite high by any standard. It is the income and individual tax rates which are conspicuously low by the standards of the developed world.

On the other hand, Korean high income earners, while under-taxed by European standards, are not numerous enough to make a difference.

In other words, while a generous pension, health subsidies, and scholarships are possible and, perhaps, necessary, it is not the conglomerates and their shareholders, or successful neurosurgeons who will end up paying these new welfare costs. The costs will have to be paid by the average hard-working middle-income Korean.

Will Mr. Kim and Ms. Park accept this burden? Are they going to part with a noticeable portion of their income for the betterment of those around them? In the long run, I am inclined to answer this question in the affirmative: they will. However, it will take time.

Korean voters are used to what is, essentially, a very low tax burden. If the ruling party moves too quickly and essentially shrinks paychecks overnight, they are likely to be voted out of office and their policies reversed. In the Korean political system even a small number of swing votes can sway elections, and this is a significant threat.

Instead, Moon would be wise to pursue a gradual advance of the welfare state toward average OECD levels. This may alienate some to his far left, but will ensure his party will be competitive in the next national election. One should expect a noticeable increase in welfare spending (and taxation) in the coming five years, but not a Scandinavian-style welfare state in the East. It will probably happen, but it will take a decade or two.

Andrei Lankov was born in St. Petersburg, Russia, and teaches at Kookmin University in Seoul. Reach him at anlankov@yahoo.com.

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