Targeted assistance for low-income earners to bolster inclusive, sustainable growth: economist

Gazi Salah Uddin of Linköping University / Courtesy of Linköping University

Education, health care and social protection spending should be bolstered for low-income groups, a critical step toward promoting inclusive growth, an economist from Sweden said Wednesday.

According to Gazi Salah Uddin of Linköping University, increasing government spending in those areas will help slow down worsening global income inequality.

“It is important to increase spending to make sure low-income groups are the primary beneficiaries,” Uddin said during a conference hosted by Bank of Korea (BOK).

It was jointly held by the Asia Development Bank and the Journal of International Money and Finance.

The economist said increased government spending in those areas leads to a lower Gini coefficient the following year.

The Gini coefficient is a statistical measure of income or wealth inequality within a population, ranging from 0 to 1. The figure 0 indicates perfect equality and 1 represents perfect inequality.

Bank of Korea Gov. Rhee Chang-yong delivers a keynote speech during a conference at the bank headquarters in Seoul, Wednesday. Yonhap

“Both high- and low-income groups benefit from the government benefit — the former mostly from a rise in wages or asset values. However, resources over time are redistributed in line with intended policy objectives,” Uddin said.

The income redistribution effects, the economist noted, tend to be weaker in emerging or developing economies, characterized by widespread public sector corruption and weaker fiscal balances.

“These countries mostly allocate public resources toward short-term responses, leading to reduced benefits for low-income groups."

Meanwhile, BOK Gov. Rhee Chang-yong stressed the importance of policy cooperation between the central bank and the government, and the flexibility of policy mix application.

Where policy instruments are dispersed across multiple institutions, close cooperation is essential, he said during the keynote speech.

“In Korea, four agencies — the Ministry of Economy and Finance, the BOK, the Financial Services Commission and the Financial Supervisory Service — convene weekly to share updates on the economic and financial landscape. This regular communication provides a foundation that enables each institution to pursue its own policy mandates independently, while ensuring timely and effective coordination when needed.”

However, unlike other advanced economies, the BOK does not have its own macroprudential policy tools or micro-level supervisory authority.

As a result, when there are differences in views concerning the strength or direction of policy, there is a risk that the speed and effectiveness of the response may be compromised.

“In the longer run, it is important to enhance the legal and institutional framework to strengthen the central bank’s role in macroprudential policymaking," Rhee said.

Today, Korea is able to respond more flexibly to the depreciation of the Korean currency than in the past, thanks to foreign exchange (FX) reserves exceeding $400 billion and to structural improvements in the FX market.

“Since the global financial crisis, cross-border capital flows are explained by a greater number of Koreans increasing their overseas stock portfolio rather than offshore investors expanding their equity holding in the country. Korea once was a net debtor but now is a net creditor with $1.1 trillion of net external assets," he said.