Korea s Experience with Rising Inequality and Inclusive Growth. Wonhyuk Lim Director of Global Economy Research

Transcription

1 Korea s Experience with Rising Inequality and Inclusive Growth Wonhyuk Lim Director of Global Economy Research

2 Rising Inequality and Inclusive Growth Conceptual Issues Initial Distribution of Endowments: Power, Wealth, and Merits Trade: Factor Price Equalization, Stolper-Samuelson, and Learning (Skill-Biased) Technical Change Political Economy and Endogeneity of Institutions cf. Krugman vs. Krugman Debate Policy Issues Horizontal vs. Vertical Approach: Broad-Based Growth vs. Pro-Poor Targeting Ex Ante vs. Ex Post Approach: Empowerment vs. Redistribution Sectoral Strategy: Agriculture, Manufacturing, or Services? Financing and Investment

3 Per capita GDP growth (%) Rapid, Shared Growth in East Asia Income of the top 20 % / Income of the bottom 20% Note: Average over Source: World Bank (1993).

4 Social Cohesion: Income Distribution Source: ADB(2011), Asia 2050: Realizing the Asian Century, p.50

5 Social Cohesion: Urban Gini Coefficient Source: ADB(2011), Asia 2050: Realizing the Asian Century, p.66

6 % Sectoral Composition of Korea s GDP Agriculture & Mining Manufacturing Services Source: Bank of Korea, National Account (

7 Korea s Exports, Imports, and Investment Relative to GDP Exports/GDP Imports/GDP Investment/GDP Source: IMF, International Financial Statistics. Bank of Korea, National Account (

8 Inflation, Unemployment, and Growth Inflation(%) Unemployment Rate (%) GDP(Real Growth Rate)(%) Source: Bank of Korea, ECOS ( Statistics Korea, KOSIS (

9 Current Account and Fiscal Balance 15% 10% 5% 0% % -10% -15% Balance of Payments/GDP Fiscal Balance/GDP Source: Bank of Korea, ECOS ( Statistics Korea, KOSIS (

10 Million students Thousand won Human Resource Development: School Enrollment and Per Capita Income Elementary School Kindergarten Middle School High School Higher Education Real GDP/GNI per capita Year Source: Center for Education Statistic Information ( Korea invested in its people even when it was quite poor. Prior land reform and flattening of the traditional hierarchy created expectations for social mobility conducive to human resource development. Universal primary education greatly increased the number of enrolled students at all levels, but did not raise per capita income until complementary developments in industrial and trade policy took place. 100

11 Foreign Capital Inflow for Korea, : Exit from Aid Dependency Public Loans Commercial Loans (0.1) 62 (7.1) 71 (8.0) FDI 13 (1.5) Bank Loans Bonds (Fin. Inst.) Bonds (Firms) US & UN Grants Reparation Grants 3,117 (99.9) 739 (83.4) 1,130 (26.4) 1,950 (45.6) 227 (5.3) 205 (4.8) 552 (13.0) 211 (4.8) (unit: current million dollars, percent) 3,431 (30.6) 5,858 (52.2) 704 (6.3) 1,007 (9.0) 219 (1.9) 10,105 (28.9) 7,937 (22.7) 1,157 (3.3) 11,892 (34.1) 2,989 (8.6) (2.4) 4,688 (15.4) 5,206 (17.1) 5,684 (18.7) 4,318 (14.2) 5,978 (19.7) 4,515 (14.9) Total 3, ,275 11,219 34,914 30,289 Source: Ministry of Finance and Korea Development Bank (1993), Foreign Capital and the Korean Economic Development: A Thirty- Year History (in Korean), pp.616, 618, 621. Note: This source does not provide data on grant aid after the period. Public loans include concessional loans, but this source does not provide a detailed breakdown. Nor does it separate the grant element in concessional loans that meet the definition of ODA (i.e., loans with a grant element of 25 percent or more).

12 Domestic Resource Mobilization and Policy Space < Government revenue, expenditure, and fiscal surplus (% of GDP)> 30.0% 25.0% 20.0% Expenditure 15.0% 10.0% 5.0% 0.0% Revenue -5.0% -10.0% -15.0%

13 Investing for Development: Industrial, Infrastructure, and Human Resource Development Project $ mil. % Agriculture Fishery Manufacturing Construction of POSCO Purchase of raw materials Promotion of SMEs Science and Technology Equipment for practical training for schools Equipment/facilities at KIST Infrastructure Soyang River Multi-Purpose Dam Gyeongbu (Seoul-Busan) Expressway Improvement of Railway System Yongdong Thermal Power Plant Expansion of Waterworks Namhae Bridge Rehabilitation of Han River Bridge Electric Power Transmission Lines Expansion of out-of-town Telephone Lines Total (Reparation funds for grants and public loans) Source: EPB (1976), White Book on Reparations pp Instead of simply subsidizing consumption, Korea allocated funds to facilitate selfsustaining growth, which in turn would support human development. Korea adopted a proactive science and technology policy from the mid- 1960s. Korea used reparation funds to develop projects that were opposed by international lenders (e.g., POSCO and Gyeongbu Expressway).

14 Priorities of the Second Five-Year Economic Development Plan ( ) (1) To achieve self-sufficiency of food, forestation, and maritime development (2) To lay the foundation of industrialization by promoting chemical, steel and machinery industries, and to double the industrial production (3) To achieve an export target of 700 million dollars and improve the balance of payments though import substitution (i.e., filling the missing links in the domestic value chain, up the quality ladder) (4) To increase employment, to suppress population growth through birth control (5) To achieve considerable increases in people s income, in particular farmers income through farming diversification (6) To enhance technical level and productivity by promoting science, technology and management and by cultivating human resources In the mid-1960a, Korea still sought to achieve basic food security. At the same time, as an industrializing economy, Korea had two sets of new concerns: a widening urban-rural income gap and a low level of local content in its exports. Korea faced a difficult investment climate and substantial capacity constraints, but made conscious and concerted efforts to move into higher value-added areas in the value chain by promoting export-oriented industrialization and human resource development.

15 Urban-Rural Income Gap In 1963, per capita income in rural and urban households was roughly equal. During : - Average income growth of Urban HH: 14.6% - Avg income growth of Rural HH: 3.5% Income Comparison between Urban and Rural Households (Unit, 1000 won) Year Avg income for Urban HH (A) Avg income for Rural HH (B) Rate (B/A) % % % % % % ,152 1, % ,405 1, % Source: Ministry of Internal Affairs, 1978 Saemaul Undong, p113

16 Saemaul Undong (New Community Movement) and Rural Development Background Widening Urban-Rural Income Gap Failure of Previous Rural Development Programs: Unless farmers develop a spirit of self-reliance, rural villages will be mired in poverty for another 5,000 years. Core Elements Community Empowerment under Diligence, Self-Help, and Cooperation : Local Decision-Making on Community Projects and Voluntary Contributions Peer Inspiration: Learning from Other Villages with Similar Endowments Through Study Tours and Training Sessions Performance-Based Support from the Government: Effective Scaling Up In 1970, the government provided each of 33,000 villages with 335 bags of cement and let each village decide their best use for the good of the community. In 1971, the government provided 500 bags of cement and 1 ton of reinforced steel to only those villages that had achieved good results in the first year. Linkage with Other Programs Green Revolution and White Revolution: New Varieties and Greenhouses Dual Grain Price System

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18 Total (billion won) sub total Government support Central gov t Local gov t Loan and Misc Financed by Villagers (66%) (89%) (78%) (77%) (44%) (48%) (47%) (47%) (44%) (50%) Total 3, , ,691.2 (49%)

19 In 1970, President Park remarked: Is there a hope in a village where villagers should walk carrying things on their back when they enter the village, because they do not have a village access road for a truck?

20 2 6 Rice Yields (Tons / Hectare) 5 4 Japan 3 2 Korea 1 0

21 Industrial Upgrading and Domestic Linkages: Outward Orientation Is Not Enough Outward-Oriented, Bottom-up, Integrated Engineering Approach In pursuing industrial upgrading, Korea systematically studied what had to be done to fill the missing links in the domestic value chain and move up the quality ladder, and made conscious and concerted efforts to aim for international competitiveness from the outset. After exploiting its latent comparative advantage to develop labor-intensive downstream industries in the early 1960s, Korea sought to indigenize intermediate inputs it imported from foreign upstream industries through technology acquisition, human resource development, and construction of optimal-scale plants (e.g., chemical-textile value chain). Instead of settling for a dual economy structure consisting of export enclaves and protected domestic markets, Korea consistently tried to increase domestic linkages so as to maximize positive spillovers. Inward-Oriented, Top-down, Ad Hoc Approach Many developing countries failed in their industrial policy because they either neglected to address innovation and coordination externalities or rushed to promote upstream industries without requisite skill accumulation and economies of scale.

22 Infrastructure Development Transportation and Water Pavement Ratio Road Extension Access to Potable Water Water Supply Per Person Per Day

23 Infrastructure Development Installed Capacity and Fuel Mix coal hydro natural gas nuclear oil Installed Capacity of Electric Power(MW)

24 Korea s R&D Expenditure Trends Gross R&D expenditure (% of GDP) (% of GDP) 3 Gross R&D expenditure 2 Private 1 Public Per capita GDP (constant 2000 US$) Source: World Bank (2007) Source: Ministry of Science and Technology, Bank of Korea Exposed to global competition, private-sector companies came to realize that innovation was key to their prosperity and dramatically increased their R&D expenditures.

25 Korea s per capita income continues to converge¹ 1. Based on 2009 purchasing power parity exchange rates. Source: OECD Economic Outlook database. 25

26 Gini Changing Income Inequality Alternative Measures of Income Inequality; Total Household Income, /10 ratio (right scale) Gini (left scale) Gini - size Source: Authors' estimates from the micro data files of the HIES. The Gini is computed using percentiles. The adjustment for family size is number of members raised to the 0.5 power. 26

27 ln(thousands of employed in the service sector) Changing Sectoral Employment Structure Level of employment in the manufacturing and the service sector, ln(thousands of employed in the manufacturing sector) Source: Statistics Korea

28 Changes of the share of employment, % point Changing Sectoral Employment Structure Changes in the share of the manufacturing sector, a, % points Norway -2 Canada* Finland Italy Switzerland Spain Austria Netherlands France* -6 New Zealand* United States Belgium Denmark United Kingdom* Japan -8 Germany Luxembourg -4 Sweden -10 Korea -12 Changes of the share of value added, % point a) 2008 for Canada, France New Zealand and UK Source: OECD STAN Database

29 International comparison of relative poverty rates in the mid-2000s¹ 1. Poverty rates are defined as the share of individuals with equivalised disposable income less than 50% of the median for the entire population. Countries are ranked, from left to right, in increasing order of poverty rates. The income concept used is that of household disposable income adjusted for household size. Source: OECD (2011), Income distribution questionnaire.

30 International comparison of income inequality in the mid-2000s 1. The P90/P10 inter-decile ratio is the ratio of the upper bound value of the ninth decile to that of the first. Source: OECD (2008), Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD, Paris. 30

31 Social expenditure in Korea is relatively low¹ As a per cent of GDP in After accounting for the impact of the tax system. Private spending includes mandatory and voluntary payments. Source: OECD Social Expenditure Database (SOCX), 31

32 Population aging in Korea is projected to be the fastest in the OECD area¹ 1. The over-65 population as a share of the working-age (15 to 64) population. Source: OECD, Society at a Glance Database. 32