Equity of Income and Economic Life

1. Equity of Income and Economic Life Chapter 10

2. The U-Shaped Hypothesis of Income Inequality • Pattern of income inequality in the course of development follows a U-shaped curve (Simon Kuznets) • Degree of equality high at early stages (everyone equally poor) • Degree of equality is high at later stages as well (e.g. middle class in Western Europe) • Inequality is higher in between these two stages • Korea generally followed the U-shaped pattern of development

3. Difficulties in Measuring Equity • Value of assets changes rapidly (e.g. land) so distribution of income may change a lot within a year’s time • Owners hide assets to avoid taxes and problematic publicity • Population is highly mobile so creating a “representative sample” and tracing it is difficult • Statisticians measure inequality by analyzing income distribution within a representative sample • A representative sample is a small group of people, whose structure is very close to the structure of the whole country • People tend to underreport their incomes • Misunderstanding between surveyors and surveyees

4. Korean Development—a Re-Cap • Incomes were very equal in 1950s because of the destruction during Korean War • Chief objective is to survive • Agriculture not mechanized • Economic base destroyed • Foreign aid essential for survival • 1950s main goal of economic policy was rehabilitation • Inward-oriented • Agriculture-based • 1963: shift of policy • Outward-oriented • Export-oriented • Manufacturing-oriented • Inequality becomes an issue

5. Disparity Emerges between Rural and Urban Households • Rural and urban household incomes were about equal as of 1965 • By 1970 rural household income fell down to 67% of urban income • Incentives created to move to big cities contributing in over-urbanization • Urban concentration emerges as a major social issue

6. 새마을운동The New Village Movement • In 1971 the government started the New Village Movement to eliminate the disparities between rural and urban incomes • Policies of the 새마을 movement • In mid-1970s 10% of total national investment allocated to rural areas • Government investment in agricultural infrastructure (e.g. irrigation and flood control) • Price-support system for rice • By 1975, rural household incomes raised to almost equal level with urban households

7. Rural and Urban Households

8. Inequality within Urban Sector • Inequality of incomes within urban sector emerges as a new equity issue • Rise in wages and accumulation of wealth including housing • Green belt policies to restrict the expansion of Seoul pushing up prices for housing • Disparity emerges between wage earners and property owners since the latter get rich quickly and easily

9. Disparity between Large and Small Firms • Export-orientation growth policy adopted in the 1960s resulted in preferential treatment for large firms, neglecting the small ones • Gap also widened due to the HIC (heavy industry and chemicals) policy adopted in early 1970s

10. A Glance at Inequality in Korea • Income of all Koreans in general increased rapidly since 1960s • Overall level and trend of income distribution in Korea since 1965 • Disparity between rural and urban households improved from 1970 to 1975 due to 새마을 movement and the farm price support policy • From 1970-1980 income disparity increased reflecting the increase of wealth of real estate owners as compared to wage earners and the gap between large and small firms • Since 1980 income inequality improved somewhat thanks to more stable housing and real estate prices, also intensive promotion of small industries

11. Changes in Income Distribution and Poverty Level, 1965-2000

12. Korea’s International Standing in Terms of Equity • High growth with high extent of equity possible • Korea ranks very high compared to equality of its income distribution compared to other countries • President Roh Tae-Woo’s policy of ‘Economy for Ordinary People’

13. International Comparison of Income Distribution

14. Housing and Equity • 1950s: arable land most important asset, also usually the only asset most Koreans owned • Land reform conducted in late 1940s resulted in fairly equal distribution of land • Value of non-land assets owned by Korean households in 1977 still only 15.8% of total physical capital • Non-land assets • Ownership of stocks low, Korean stock market slow to develop (10% of all non-land assets in 1968) • Speculative nature of stock market investment contradicts traditional values • Wider public ownership of stocks being promoted now by the government • Relative importance of non-land assets is still small • Ratio of housing units to households around 70% in 2001 • Some households own more than one house • Proportion of households that do not own housing unit exceeds 40% • Not owning a house increases the perception of poverty and inequality

15. Factors Influencing Equality in Korea • Land reform • Korean War • Homogeneity • Equal educational opportunities • Growth strategy • Equality-oriented policies • Extended family system

16. Land Reform • Before land reform of end of 1940s only 14% of farmers were owners-cultivators, 39% of land rented, 4% of rural population were landlords collecting half the main crop from their tenants • Land distributed in small pieces to farmers making them land owners (3 chongbo limit on land ownership, now lifted, but then resulted in extremely equal distribution of land) • Landlordism still prohibited in Korea by law

17. The Korean War • Korean War destroyed virtually all physical infrastructure and production facilities • Value of capital stock in 1953 estimated to be zero due to wartime destruction • High extent of equality right after the War because everyone was made equally poor

18. Homogeneity • Same cultural, climatic and geographical factors • Not divided by religious and racial differences (except for discrimination against Buddhism during Chosun dynasty) • Weather and soil conditions largely the same everywhere (except Jeju) • Interregional disparities in Korea are not large compared to most developing countries • Regional disparities grew more pronounced since the start of industrialization (remember the underdevelopment of south-west due to lack of natural ports there)

19. Equal Educational Opportunities • Educational system puts a premium on competitive selection, not family wealth • Entrance examination uniform across the country • School system is standardized

20. Growth Strategy • Growth-oriented strategy reduces inequality by creating jobs thus decreasing the proportion of poor unemployed people • Koreas strategy of developing labor-intensive industries at early stages of growth created job opportunities for people with only primary education

21. Equality-Oriented Policies • Farm price-support policy • Low tax rate on farm income • Price controls on daily necessities such as bus fares and coal briquettes • Limits on agricultural land ownership • Tax disincentives to own more than one house

22. Extended Family System • Extended family system has been the basic unit for consumption and social welfare • Welfare traditionally considered as private or family matter • Large proportion of multi-generational households in Korea helping eliminate the extent of inequality (e.g. between older unemployed and younger working people)

23. Equity Consciousness • Proportion of Koreans considering themselves poor (belonging to the low class) still high at 44% in 1999 • However, beware of subjective thinking! • 80% of households below poverty line in 1970 falling down to only 10% in 2000 • Number of Koreans subjectively claiming to belong to the middle class increased somewhat since 1980s • Increase is only 10 percentage points • Share of middle class households still low compared to developed countries (especially Western Europe) • 1997 financial crisis decreased the size of middle class

24. Subjective Class Consciousness of Koreans (%)

25. Measuring Quality of Life • What is quality of life and why is it important? • Quality of life of an average Korean person improved substantially since early 1960s • To measure quality of life, Economic Planning Board compiled a social indicator covering 537 items measured every year since 1979 • General trends of improvement in quality of life • Koreans live much longer compared to 30 years ago • Life is more urbanized • Wider and better choice of consumer goods • Share of household budget spent on food down from 62% in 1965 to 23% in 2000 • Eat more meat, fish, dairy products and fruits • Studying for longer period of time at better school • Areas to improve • Leisure hours increased slightly since 1965 (“dead workers”, gwa-ro-sa 과로사) • Ratio of housing units to housing deteriorating until 1991

26. Income, Food and Housing

27. Education and Health

28. Culture, Leisure and Public Safety

29. Social Environment

30. Physical Environment

31. International Comparison of Life Quality • Korea still lags behind other countries in terms of welfare except education • Higher per capita GNP resulted in higher welfare for an average Korean • Although GNP per capita still lags behind developed countries, Koreans are better off in terms of consumer durables such as TV sets and automobiles • Housing the most important determinant of welfare for Koreans • Home ownership crucial to formation of middle class • Home ownership crucial to maintaining social stability • Neighborhood, or community-based infrastructure still needs to be developed • Transportation system (commuting to work) • Separation of residential and business areas

32. Int’l Comparisons: Income and Health

33. Int’l Comparisons: Education, Culture and Leisure

34. Int’l Comparisons: Public Safety, Social and Physical Environment

35. Int’l Comparisons: Information, Science and Technology