In “Hell Joseon”, government income redistribution efforts fall short

Posted on : 2016-09-22 17:42 KST Modified on : 2019-10-19 20:29 KST
Inequality was reduced by an average of 34.5% for all OECD member countries, but only 9.2% for South Korea
Gini coefficient differences in major OECD member countries
Gini coefficient differences in major OECD member countries

Two new coinages, “Hell Joseon” and “dirt spoon,” have become symbols of the reality in South Korea today. They reflect a very real sense of despair that extreme polarization in income and assets have resulted in the South Korean economy finally reaching the point of hereditary capitalism. The government has attempted income redistribution measures to rein in polarization, but it has far to go to meet international trends. South Korea’s Gini coefficient numbers show that improvements once redistribution effects are taken into account are markedly lower than in other member countries.

The Hankyoreh conducted an analysis on Sept. 21 of 2012 Gini coefficients reported for different countries by the OECD. South Korea’s market income Gini coefficient stood at 0.338, while its coefficient for disposable income following redistribution effects came out to 0.307 - a difference of only 0.031. A large difference means a large Gini coefficient improvement effect from redistribution; South Korea had the third-lowest improvement among OECD member countries, after Mexico (0.015) and Turkey (0.022).

The Gini coefficient represents inequality in income distribution on a scale from zero to one, with numbers closer to one indicating more severe inequality. The OECD calculated Gini coefficients for both market income and disposable income. Disposable income represents market income once the redistribution efforts of tax, fiscal, and social insurance policies are factored in; by examining the difference in the coefficients for the two income types, the strength of a given country‘s income redistribution can be estimated. Essentially, a larger difference means a stronger redistribution effect.

The average difference in Gini coefficients for the 30 OECD member countries that reported them came out to 0.162. - meaning South Korea’s difference of 0.031 was less than one-fifth the average. Examination of improvements in the Gini coefficient reflecting redistribution effects showed a similar situation: inequality was reduced by an average of 34.5% for all member countries, but only 9.2% for South Korea.

Changes in South Korea’s Gini coefficient difference
Changes in South Korea’s Gini coefficient difference

The difference between South Korea’s coefficients has been improving as the government introduces additional welfare policies. But each administration has shown a different rate of improvement. The Lee Myung-bak administration (2008-13), which emphasized tax cuts on the wealthy, was characterized by marked stagnation. The pace has picked up slightly since Park Geun-hye became president in 2013. But difference levels for European welfare states like Ireland, Finland, and France range from 0.278 to 0.212, or seven to nine times higher than South Korea’s level of 0.031 - showing it still earns failing marks at the global level.

In response, the Korea Labor Institute (KLI) published a report in late 2015 on economic inequality conditions and policy responses, in which it analyzed Gini coefficient improvement effects between 1996 and 2013 and suggested alternative policy approaches. Its findings showed the improvement contribution from public transfer income such as pensions rising substantially from 0.9% in 1996 to 4.2% in 2013. In contrast, the contribution for direct taxation rose only slightly from 0.6% to 2.6%. The findings suggest tax policies are not playing as strong a role in improving the Gini coefficient as public pension policies.

“As income inequality rises, the domestic demand base weakens, which can be a cause of low growth,” said KLI senior research fellow Lee Byung-hee.

“We need to make the income tax more progressive by reducing non-taxable reductions on the highest-ranking income groups, while boosting the effective tax rate on asset income, including interest, dividend, and rental earnings,” Lee suggested.

By Noh Hyun-woong, staff reporter

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