Income equality index insufficient - and delusionary

By Choi Sung-jin

Korea is now abuzz with “gold spoon” and “dirt spoon” -- words indicating the economic gap, largely predetermined at birth. One of the factors fanning the ire of people born with dirt spoons is the difference between economic indexes and real situations.

A case in point is the Gini coefficient. It is an index presenting the income distribution of a nation's people and is the most commonly used measure of inequality. A Gini coefficient of 0 expresses perfect equality and that of 1 expresses maximum inequality.

Korea’s Gini coefficient has improved every year, at least in statistics. Some economists claim, however, economic concentration in the high-income bracket has accelerated since the 2008 global financial crisis. Still others attribute the disparity between statistics and reality to incomplete ways to measure them.

According to Statistics Korea, Korean households’ Gini coefficient fell from 0.314 in 2008 to 0.295 last year, the lowest since the office started the survey of all households in 2006. As of 2012, Korea stood at a relatively high 19th place out of 31 OECD member countries that submitted their figures on income equality, higher than Australia and New Zealand.

Some economists counter that this is a complete illusion.

“The analysis of the statistics at the National Tax Service shows economic concentration in high-income people has heightened since 2008,” said Park Myung-ho, a senior fellow at the Korea Institute of Public Finance.

According to Park’s report, the 0.1 percent of people in the income hierarchy, who total 36,000 to 38,000 in number, took 3.93 percent of the total income in 2007, but the comparable ratio rose to 4.41 percent and 4.13 percent, respectively, in 2011 and 2012. The income concentration ratio of the top-1 percent people also climbed from 11.08 percent in 2007 to 12.2 percent in 2011 and to 11.66 percent in 2012.

“Korea’s income distribution has deteriorated since the global financial crisis,” the report said. “Chances are that the Gini coefficient is failing to reflect income distribution appropriately.”

The Gini coefficient faces challenges from two aspects. One is the technological side. Statistics Korea computes the index by surveying about 10,000 households as samples.

There have been criticisms, however, that some high-income people refuse to reply, sharply eroding the credibility of the state statistical office.

“We have made a separate calculation of income equality based on the data of tax authorities,” said Professor Kim Nak-nyon of Dongkuk University. “As a result, the Gini coefficient was 0.37 as of 2010, far higher than the 0.31 as released by Statistics Korea, pulling down the nation’s ranking in income equality to fifth place from bottom among OECD members.”

The second problem is difficulties in measuring inequality of assets, which many believe reflects real economic inequality. “A year’s income cannot show the gap between the rich and poor correctly,” a private economist said.