Inclusive Growth in Korea

Transcription

1 Inclusive Growth in Korea OECD-WB Conference on Challenges and policies for promoting inclusive growth March 2011, Paris Kyung Wook HUR Korean Ambassador to the OECD

2 Why Inclusive Growth is Important in Korea? Snapshot of Income inequality Gini-coefficient Interdecile ratio (p90/p10) Interdecile ratio (p50/p10) OECD average KOREA 0.31 (17 th ) 4.73 (24 th ) 2.50 (27 th ) Poverty rate is higher with a wider poverty gap than OECD avg. Poverty rate Poverty gap OECD average % KOREA % Source: OECD Factbook 2010 database 2

3 And inequality is increasing rapidly Worsening Gini Coefficients Vanishing Middle Class Exacerbating Social Conflict

4 Recent policy initiatives for inclusive growth Fair Society Initiative ( ) Presidential initiative for a fairer society equal opportunity, fair competition, rule of law Commission on shared growth (2010.9) Non-governmental Organisation Win-win growth for large companies and SMEs Presidential Commission on Social Cohesion ( ) Fair and transparent policy recommendations for conflict settlement 4

5 The Essence of Inclusive Growth is Job Creation Combined with Social Safety Net Growth + Capacity to create jobs Jobs are the best welfare : Workfare Key vehicle for a virtuous circle of growth Social Safety Net Compatible with fiscal soundness Compatible with incentives to work 5

6 Growth Potential is decreasing Potential growth rate is decreasing fast in Korea since 1990s * Potential growth prospect (annual average, %) Source: Korea Development Institute

7 Growth does not create jobs as in the past Job creation is decreasing Jobs created for 1Bn. Korean Won s 80s Industry wide Manufacturing Ind. Jobs per 1bn.KRW: (90) 40.8, (08) 5.5 Service Industry 7

8 Service industry is creating more jobs (Ten Thousand) Service Agr. Forest. Fishery Manufacturing Construction Share of GDP (%) Share of Employment (%) Service Surplus (bn. USD) OECD average (05) KOREA (07)

9 SMEs are creating more jobs Share of Jobs 100 (%) * Large companies: Mfg, Mining, Construction(300+), Financial Service (200+) 9

10 What are the policy priorities for job creation? 1. Policies for labor market (1) Policy priority: Raising employment rate Korea OECD average Labor Force (15-64) Participation Rate 65.4% 72.3% Employment Rate 62.9% 66.6% Women 52.2% 60.1% Youth (15-24) 22.9% 42.2% Elderly: poverty rate 45.1% (OECD avg. 13.5%) Early exit from main job career 10

11 1. Policies for labor market (2) Better targeting Youth: Meister school", curriculum reform, apprenticeship, entrepreneurship education Women: childcare facility, childcare leave, flexible working hours, part-time work, family friendly workplace Elderly: salary peak, performance-based wage, life-long learning job placement service Maximizing job creation capacity job-friendly economic policies (tax, budget, procurement) job impact assessments social enterprises 11

12 2. Policies for SMEs (1) SMEs: Weak Status (2010 survey; 5,000 companies) 47% of the total transactions were reported as violation cases against Fair Subcontract Transactions Act SMEs are lacking resources to adequately protect their IPRs Full adjustment of subcontract unit prices: less than 31% Level Playing Field for SMEs Protection of SMEs technologies (i.e. punitive damages for theft) Coverage of Fair Subcontract Transactions Act expanded to secondary vendors Systematic adjustment of subcontract unit prices 12

13 2. Policies for SMEs (2) Government Support measures Credit guarantee by government owned financial institutions - In 2010, 14.5% of the total SMEs loan (441 Trillion Won) was credit guaranteed (64 Trillion Won) Loan for SMEs by banks (recommended ratio by Bank of Korea) - commercial banks (45%), only one out of seven is okay - local banks (60%), most of them are okay Promoting SME activities (targeted procurement, R&D financing, standardization, taxes, etc.) 13

14 3. Policies for service sector (1) Service sector compared with other OECD countries Share of GDP (%) Share of Employment (%) Service Surplus (bn. USD) OECD average (05) KOREA (07) Low productivity in the service industry 52% of manufacturing 40% of US, 52% of France, 54% of Japan 14

15 3. Policies for service sector (2) Focusing on highly productive services growth rate (01-09 average) Wholesale /retail Hotel & restaurant Medical service Financing % of employed Deregulation in professional services pharmacists, medical doctors, lawyers Upgrading the leisure and tourism industry More R&D investment in the service industry 15

16 Demand for social protection is increasing Social spending is relatively small, but increasing fast Tax burden (% of GDP) Public social spending (% of GDP, 07) Rate of increase in social spending (%, yearly average) OECD average 36.8 (07) KOREA 25.6 (09) Source: OECD Social Expenditure database, MOSF Public social spending prospect (% of GDP) OECD avg. level Japan level US level source: Korea Institute of Public Finance 16

17 Challenges ahead in social protection Aging Korea: fastest among OECD countries (10) 4 th youngest (50) 2 nd oldest * source: Korea Institute of Public Finance 17

18 Seeking sustainability with increasing social spending Low burden, low welfare Mid burden, mid welfare [Scenario 1] No Action Gov t debt explodes if tax burden remains at current level [Scenario 2] Tax increase To keep gov t debt at 60% in 2050, tax burden must increase substantially source: Korea Institute of Public Finance Gov t debt (% of GDP) Tax burden (% of GDP)

19 Workfare Policy for low-income households (1) Financial service for low-credit households (1) Sunshine Loan (July 2010) For low-credit households whose credit rating range from level 6 to 10 : average interest rate lowered from 30~40% to 10% One million households are expected to benefit over the next 5 years * Credit business providers in Korea : Interest rate ceiling (44%), Average interest rate (41.2%),Total loan (5.9 trillion KRW, 0.6% of total Bank Loan) (2) Expand Micro-credit for low income households (Dec. 2010) Plan to provide KRW 2 trillion over next 10 years, in excess of 13 times the last 10 years for the people whose credit rating range from level 7 to 10 Expect 200 to 250 thousand low income households will benefit 19

20 Workfare Policy for low-income households (2) EITC (Earned Income Tax Credit, 2009) Refundable income tax credit for low income working individuals to provide incentive to work 49%(566 thousand) among the targeted households(second lowest class, 1.2million) benefited in 2010 Strengthening Social Enterprises A sustainable economy and social integration through the fostering of social enterprises As of Aug 2010, 353 Social Enterprises, employing 11,177 persons including 6,000 disadvantaged Tax support, purchase of goods and services by public agencies 20

21 3. Equal Opportunity in Education (1) High Performance in PISA Year Participating Countries Reading Mathematics Science Korea PISA Results ~4 7~ ~4 (1~2) 3~6 (1~2) 4~7 (2~4) * ( ) : ranking among OECD countries Relatively Low Influence of Parental Economic Background on PISA Score 21

22 3. Equal Opportunity in Education (2) Widening gap in private tutoring gap in SAT scores Private tutoring expenditure: 2.1% of GDP (07) Public expenditure: Korea 4.2%, OECD avg. 5.2% (07) How to reduce the gap? Before entering colleges Diversifying the university entrance criteria / admission officer Supporting the disadvantaged students for after-school programme Expand Education Welfare Priority Zone ( 03 : 79 schools in 8 districts, 11 : 538 schools in 100 districts) After entering colleges Introduction of Income-Contingent Students Loan (2009) Amortize the principals when income reaches a certain level after graduation 3.7% (120 thousand) of college students benefited (2010) Expand grants for the students from low income families 22

23 Minimizing skill mismatch Current Situation 2/3 of vocational high school graduates enter higher education University education satisfaction : IMD (51 th in 58 countries, 10) Low Participation in Life-long Learning : Korea 30.5%( 10), OECD 40% ( 07) Low Participation of SMEs in vocational training : 22% vs. 99.1% (Larger Firms) Policy Measures Introduction of Meister School (vocational school) : 10 schools( 08) -> 28 ( 11) Increase Entrepreneurship education in University 15 leading colleges( 11) Assist the Learning Activities of Adults (15 billion Korean Won, 2008~2012) Supporting Apprentice in SMEs 23

24 Government support is essential to mitigate inequality Comparison of Gini coefficients before and after tax and transfer (Mid 2000s) OECD avg. Korea before after before after Total Working age population: Retirement age population: over Source: OECD database 24

25 Food for thought 1. Goal of economic policy? Job creation or Growth/Surplus: built-in resistance exchange rate? service or manufacturing domestic or export SMEs or large companies Economic Policy Decision Structure 25

26 2. Is supporting SMEs effective? Ensuring level playing fields Introducing Punitive Damages for stealing SMEs technology Promoting Technology Escrows for SMEs But, are SMEs supporting measures effective? Too complicated: more than 3,800 measures Credit guarantee for SMEs is increasing again (moral hazard?) * (95) 2.0%; (98) 4.3; (01) 7.5; (07) 4.6; (09) 7.1 * incumbent vs. newcomers How to encourage vibrant entrepreneurs? New Zealand s agricultural industry, being subsidized until 1983, and became competitive after phasing out the subsidy 26

27 3. Service sector: how to overcome rent-seeking? Strong political power of professional services entry barriers, self-regulations concentrated interests: political power Policy issues OTC (over-the-counter) drugs For-profit medical and educational institutions Legal market opening Breakthrough FTA Outside pressure 27

28 4. Service vs. Manufacturing Equal treatment for tax incentives? Mfg. Industry has enjoyed more generous support Tax benefits on investment for factory or equipment Does Mfg. industry contribute more than the Service industry in overcoming the crisis? Germany vs. UK in the 2008 global crisis (hollowing out effect?) Service Ind. /Total (08): Germany(69.5%), UK(75.5%), Barriers in the Service Industry? Korea(60.0%) 28

29 5. Labor market dualism Declining but still high share of non-regular work Share of non-regular work among paid work: 35% Little job security, low social security scheme coverage, informal employment Overprotected regular work in large companies Trade Union Density: 10.1% How to tackle labor market dualism? Reducing employment protection for regular work - layoff, dispatched work Enforcing non-discriminatory treatment - pay, training opportunity, social insurance 29

30 6. Populism and fiscal discipline 3 free & 1 half Free: School lunch, Medical services, Childcare Half: College tuition * budget estimation? 2~5% of GDP Fiscal Rules Multi-year plan: 5 years, rolling plan Ceiling on spending increase: 4.8% (yearly average, 10-14) Deficit target (consolidated): (10) -0.2 (14) +2.5 Debt target: (10) 36.1 (14)