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Korea’s economic refugees

Dec 14,2018
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Kim Dong-won
The author is a guest professor of Korea University’s economic department.

South Korea’s per capita gross national income (GNI) will top $30,000 by the end of this month. It took 12 years for the country to reach that threshold in GNI since it passed $20,000 in 2006. The global financial crisis in 2008 played a part in the delay. But economic conditions hardly feel any better. If the economy grows by 2.7 percent next year as the Bank of Korea estimates, it would have performed at its worst level since the 2.3-percent growth of 2012. A slow-growing economy has become our new normal.

The livelihoods of the people feel worse than what the data shows. This country may be as rich as developed economies with individual incomes above $30,000, but businesses are closing down, joblessness is at its worst since the aftermath of the Asian economic crisis of the late 1990s, households have little income left after paying for housing, and many families have broken up, with members ending up in cheap lodgings. Daily or hourly workers cannot find work. Over 530,000 have given up looking for jobs and another million or so are registered as unemployed. What has brought this country to such a pitiful state?

Jobs data can provide some clues. Monthly new hires averaged 97,000 from January to October — just 30 percent of the 2017 average of 328,000. Under the government’s pressure to upgrade the status of contract workers to permanent payrolls, the number of full-timers increased by 21 percent on year over the first 10 months. But employment of the poor contracted by 80,000 as of October, compared with the average monthly increase of 47,000 last year. The number of self-employed who don’t have paid staff decreased by 88,000 this year, compared with an average monthly increase of 58,000 last year.

Polarization also showed in household income data. Of the income of the bottom 20 percent, so-called “transfer payments” — or government handouts for social security, welfare subsidies and unemployment insurance — increased by 106,000 won ($94.18) a month on average from January to October. Income from salaries and business decreased by 103,000 won and 51,000 won, respectively. The workers on the bottom rung earned less from labor because employers let people go after the drastic spike — a whopping 16.4 percent this year — in the minimum wage. On the other hand, business incomes fell for the self-employed and mom-and-pop shops largely due to a protracted economic slump.

Under a well-intended policy to generate growth through increases in incomes, the 20 percent in the bottom class received an extra 106,000 won a month from the state. But the same policy of bumping up the minimum wage by double digits has wreaked havoc on the market and reduced the poor class’ monthly salary by 154,000 won. Their individual losses were bigger than the government handouts.
The disposable income of the bottom 20 percent group averaged 1,024,000 won from January to September, more or less similar to the country’s minimum living expense of 1,003,000 won, the Ministry of Health and Welfare found. It is the first time ever for the monthly disposable household income in the bottom 20 percent category to fall by more than 10 percent against a year-ago period. That would mean that most of the households with disposable income below the median cannot even afford minimum living expenses. The 10-percent reduction in the bottom-income class has made them more or less economic refugees. The spike in the minimum wage cannot be entirely blamed for the losses in incomes of the poor, but the toll cannot be denied. The sharp rise in the minimum wage has generated terrible consequences despite its good intentions.

No public policy is malicious: but the results can certainly be bad. How does a well-intended policy go so wrong? Alan Blinder — a Princeton University economics professor who served as the vice chairman of the Board of Governors of the Federal Reserve System — claims that income redistribution policies often bring about opposite results because it helps deepen income disparities and hurt the efficiency of the market. He advised discretion in such policies for both liberals and conservatives. Nevertheless, governments are tempted to adopt such policies as a tool to combat poverty, he said.

The Moon administration is stubborn about its income-led growth policy. A counter policy is needed to reinforce social safety nets and improve wealth distribution. But without correcting the ills of a well-intended policy, such a policy could wreak more havoc in the market and produce more economic refugees. The new Deputy Prime minister for the Economy, Hong Nam-ki, must pay heed to this paradox.
Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Dec. 12, Page 33