S. Korean state failing at redistribution

Posted on : 2014-07-18 17:55 KST Modified on : 2019-10-19 20:29 KST
Data analysis shows South Korean government’s transfer payments exceptionally low among developed countries

By Ryu yi-geun, staff reporter

In 2013, the average monthly income earned on the labor market by households of two persons or more was 3.83 million won (US$3,730). The majority of household income consisted of wages received in exchange for labor, or earnings from doing business for the self-employed.

The main way that households earn income, as seen above, is by working in the labor market or by running a business. However, there are those who cannot earn enough money: those who do not have the opportunity to work despite being able and willing to do so, and those who cannot work because of old age or sickness.

In modern democratic societies, it is the government that must provide such people the greatest amount of help. It provides this help through what are known as transfer payments: public pension, basic old-age pension, tax returns, and social benefits (retirement benefits, for example). In this way, the government uses its budget - that is, taxpayers’ money - to supplement the market income of low-wage earners.

But how much help are these people actually receiving? According to figures from Statistics Korea accessed by the Hankyoreh on July 17, the average monthly transfer payment for households with two or more persons in South Korea in 2013 was 195,427 won (US$190.15). This amounts to around 5.1% of the household market income (not including transfer payments and miscellaneous payments at work, including bonuses for weddings and funerals).

The government’s monthly per capita social insurance cost, which is the sum of public cash transfers and medical, housing, and education benefits, is 220,000 won (as of 2009). This is only one third of the average amount (650,000 won) paid by countries in the OECD, which is referred to as the club of developed countries.

As this indicates, the social insurance provided by South Korea is rather small. In 2012, the cost of social insurance in South Korea only accounted for 9.3% of gross domestic product (GDP). This is not even half of the OECD average of 21.8%. Of the 32 countries for which comparison was possible, only Mexico (7.4%) was lower than South Korea.

As this reveals, the South Korean government is not properly carrying out one of the most important fiscal policy goals of a modern democratic government: the redistribution of wealth. The low expenditure on social insurance results in little improvement in the redistribution of wealth in South Korea, which is at the lowest level in the OECD.

According to the Hankyoreh’s analysis of the Gini coefficient in 31 OECD member countries for which comparison was possible in 2010-2011, income equality (based on income made on the market) improved an average of 34% after government expenditure on social welfare. But in South Korea, improvement in income inequality was barely one quarter of this, or 9%, even lower than in Chile.

The Gini coefficient measures inequality. It ranges from 0-1; the larger the coefficient, the greater the inequality, with 1 representing absolute inequality - all resources being owned by one person.

Income subsidies, social services, and other aggressive budgetary policies also represent a way to increase the growth rate by stimulating the domestic economy. The marginal propensity to consume (that is, the percentage of income that is spent instead of saved) is high among low-wage earners, or those below middle class. As a result, when such people receive public cash transfers and other government subsidies, they are more likely to use that income on consumption.

In addition, as the stability of household income increases, the stability of the national economy as a whole increases as well.

“The government needs to use increased taxation and budgetary wealth redistribution. This will also help expand the basis of domestic consumption by increasing the income of low-wage earners,” said Kang Byung-goo, economics professor at Inha University.

 

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