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Economic Income Gap Effects Questioned

Posted April. 03, 2006 03:00,   


The Roh administration says that “distribution can bring about economic growth.”

But one economic research committee member, a Mr. Ko, says, “Since the 1990s, many studies that suggest economies with smaller income gaps have higher growth rates were released, but there are doubts about the quality of their statistical analyses.”

When the relationship between economic growth from 1960-90 and Gini’s coefficient was analyzed, many studies overlooked the fact that there are variables other than distribution that affect growth. A year 2000 analysis even showed that “the bigger the income gap, the higher the economic growth.”

“It is difficult to conclude that balanced distribution always has a positive effect on economic growth,” Ko says.

Ko introduced a paper written by U.S. economists David Dollar and Aart Kraay that contains a 40-year economic analysis of more than 80 countries. The conclusion of the paper was that economic growth brings about benefits to both higher and lower income levels.

This conclusion, according to Ko, shows that “unequal distribution is not always an inevitable byproduct of economic growth, and distribution and growth are two things that can be achieved at the same time.”

Does Korea have a “small government?”-

As of 2004, Korean government expenditures accounted for 27% of its GDP, which is smaller than France (54%), Germany (47%), UK (44%), the U.S. (37%), and Japan (37%). Using this as its basis, the current administration regards itself as “a small government.”

According to Ko, however, public spending excluding social welfare expenses and tax spending accounts for 24% of GDP, higher than the U.S. (21%) and Japan (24%), and not much lower than Germany (25%), UK (28%), and France (32%).

Ko points out that Korea, in terms of current per capita income (around $15,000), public spending (about 30% of GDP), and social welfare expenses (about 10% of GDP), is similar economically to developed countries from the 1960s. In other words, government spending cannot simply be compared to that of developed countries, whose incomes and levels of social welfare are about 30 years ahead of Korea’s.

Ko continued to argue that both effectiveness and efficiency might decrease when increasing welfare expenses to a certain level that is set without considering other economic circumstances.

Ko also introduced a recent example of the European Union, which last year, through a comprehensive guideline for economic policy, recommended its member countries to increase growth-oriented public spending.

Strict measures on social welfare spending required-

Given the rapid aging of Korean society, it is inevitable to increase government spending, but Ko indicates that rather than simply increasing the amount of welfare expenses, the overall welfare policy has to be reviewed and be reorganized.

First, Ko recommends an overall restructuring of the administration’s distribution policy, especially in regard to child care, education, housing, pension, and health insurance.

Currently, Ko says, these policies are beneficial to middle- and high-income classes, but not to the lower income classes, who actually need the benefits the most.

Ko also warns that over half of Korea’s senior citizens will not be able to benefit from the national pension system in the future, pointing out that senior citizen pensions for those 65 years and older who are subject to the Basic Livelihood Security Act should be expanded.

In addition, Ko recommended a change in the child care system, where government subsidies for public facilities should be spent for each individual in need.

Hyun-Jin Park witness@donga.com