By Park Jae-ha
Nearly five years have passed since the onset of the global financial crisis. However, the global economy remains mired in gloomy uncertainty. After a brief rebound from the September 2008 Lehman shock, the global economy was hit hard by the sovereign debt crisis in Europe. Despite great efforts by eurozone countries and international financial organizations, it is uncertain if the solvency crisis of several southern European countries will be resolved and if the eurozone’s single currency, the euro, will survive.
The two recent major economic crises had significant negative effects not only on the advanced countries from which the crises started, but also on many emerging economies via trade and financial channels. In addition to the global economic slowdown and recession, many countries have experienced social and political turmoil. Violent protests have occurred in many countries with demands for jobs, a better quality of life and more equitable distribution of income.
Rising income inequality has become a serious economic, political, and social issue. In retrospect, uneven economic growth and rising income inequality have long been critical policy issues even before the recent crises. Although many Asian economies enjoyed much faster growth than other countries in the past two decades and overcame the crises relatively unscathed, they too face the challenge of rising income inequality.
Gini coefficients, which measure inequality of income distribution, and the ratio of average incomes of the top 20 percent and the bottom 20 percent, show that income inequality has grown in most countries since the 1990s. In many developed countries, including France, Japan, Sweden, the United Kingdom and the United States, the Gini coefficients at the end of 2005 were between 0.44 and 0.49, indicating high levels of inequality, and they have risen over time in most countries. In Asia, the most recent Gini coefficients of the People’s Republic of China and Singapore stand at 0.47 and 0.48, respectively and have surged in recent years.
The Republic of Korea is not an exception. At the end of 2010, its Gini coefficient stood at 0.32, which is lower than in other major developed countries. However, it has been increasing, from 0.27 in 1990 and 0.28 in 2000. In addition, some scholars argue that Korea’s true income distribution may be worse than that implied by Gini coefficient since it is calculated based on the survey data. It may be possible the surveyed people did not show their true income level.
What has caused this worldwide uneven economic growth and increase in income inequality? Factors include a sharp rise in unemployment after the financial crises, the collapse of small- and medium-sized enterprises (SMEs) in the course of fierce competition after the acceleration of globalization and market opening, the development of labor-saving technology, polarization in the labor market between full-time and part-time workers and inadequate domestic fiscal policies. In the Korea’s case, massive layoffs and worsening employment conditions following the 1997 Asian financial crisis contributed to rising income inequality.
Policymakers recognize that reducing income gap is vital and that persistent economic growth as well as social and political stability cannot be attained unless this issue is addressed. What policy prescriptions are needed to address this problem? The actual unemployment ratio should be reduced and working conditions improved, among others. Income levels between large corporations and SMEs, and fulltime and part-time workers need to be narrowed. At the same time, social investments in human capital need to be increased.
Fiscal policies need to be restructured to strengthen income redistribution and support people living on low incomes. However, taking into account the lessons of the eurozone countries, we should not introduce populist policies that boost government debt while failing to help people living on low incomes.