Doshisha-ChunnAngWorkshop
November 19th, 2016, Doshisha University, Kyoto, Japan

Policy Ideas and Proposals to Reconcile Economic
Growth and Welfare Development in South Korea

November 19th, 2016
KIM, Yeon Myung(金淵明)

Department of Social Welfare, Chung-Ang University(中央大學校 社會福祉學科)

Summary§ The period of high economic growth in South Korea ended after the financial crisis in 1997.
Since then, the Korean economy entered a long-term low growth phase. In addition, Korea has
been facing demographic challenges with low birth rates, ageing population and severe labormarkets dualization.
§ Around 2010, Korea has entered an early stage of the welfare state, spending only about 10%of GDP on social expenditures. Because of this extremely unfavorable socio-economic anddemographic changes, the Korean welfare state is facing with fundamental challenges inmoving toward a more comprehensive welfare state.
§ The ‘mainstream’ in the Korean society continues to believe that an export-led growth path isstill a viable option in a slow growth phase. Most importantly, they are still dominated by theperspective emphasizing the negative relationship between welfare and the economic growth.
§ Recently, in Korea, there has been a number of claims saying that the conventional relationshipbetween economic growth and the welfare development must be redefined. This new emerging
paradigm shift, yet not dominantly strong enough in Korea at this stage, pays more attentions to
the positive economic effects of welfare expenditures in boosting domestic demands under the
low economic growth scenario.
§ In the line with this new emerging paradigm, several ideas and policy proposals have beensuggested by pro-welfare social forces and are currently being debated. They include ‘incomeled growth’ strategy, social investment policies enhancing employability among youths andwomen, boosting domestic demand by expanding cash allowances, investing public pension
fund in providing more public housing and welfare facilities, and creating more stable public
jobs in social service sectors.

Background : Ending of high-economic growth and entering into a low-growth phase<Figure 1> Korea's historical economic growth rate :1961-2015 (5 years averages)
14121086420

11.5%

9.7%

5.9%

8.4% 9%

10.4%

Financial crisis
in 1997

7.9%

5.4% 4.7%

4.1%

3.0

§ High economic growth from the1960s to the mid 1990s due toexport-led growth strategy.
§ Economic growth led to income
growth for escaping from absolute
poverty (trickle-down effects).
§ Gradual reduction of economic
growth rate after the financial
crisis in 1997.

Source : KOSIS(2016)< Figure 2> Economic growth rate forecasted for2060 ( 10 years averages )

43.5
3
2.5
2
1.5
1
0.5
03.6%

2.6%

2016-20192020-2029

1.9%

2030-2039

Source: Ministry of Strategy and Finance(2016)

1.4%

2040-2049§ Entering into a long-term low
economic growth phase, growth
averaging just over 1-2% perannum in the long run.

1.1%

2050-2060

3

Background : No more trickle-down effects

85.0

83.5

<Figure 3> Share of national income between
households and Businesses: 1975-2012

80.0

15.0

75.0
70.0
65.0
60.0

17.7 20.0

5.4

68.4 10.0

Financial crisis
in 1997
Household income

5.00.0Business income§ Companies have taken muchmore of the fruits of Korea’s
economic growth than havehouseholds.
§ Trend toward polarization
between ‘rich companies’ and‘poor households’.
§ Waning trickle-down effects ofexport industries.

Source : Bank of Korea (2015)<Table 1> Inequality-reduction effect of taxes and public
transfers in selected OECD countries (2012)
MarketDisposable
Poverty reducti
income Gini
income Gini
on effect(A)(B)((A-B)/A*100)
Korea
0.329
0.300
8.81
Sweden
0.43
0.23
46.51
France
0.48
0.28
41.67
Germany
0.51
0.3
41.18
Japan
0.44
0.32
27.27US
0.48
0.38
20.83
OECD average
0.45
0.31
31.11
Source: OECD (http://stats.oecd.org/index.aspx)§ Widening income gaps
between the rich and the poor.
§ Weak inequality and poverty
reduction effects of taxes andpublic transfers.

4

Welfare State Building under the unfavorable socio-economic conditions§ Belated takeoff of the Korean welfare state in 1990s.
§ Korea has entered into an early stage of the welfare state, spending 10% of GDP onsocial expenditures around 2010.
§ However, along with low economic growth rate, Korea has faced with fundamental
negative changes in demographics and labor markets in developing its welfare state.

<Figure 4> Public social expenditure as a percent of GDP in 1960-2014
30

MexicoJapanKorea

United States

EU-21

OECD

25

10% of GDP

2015

10% of GDP

10
50
1960

1965

1970

Source: OECD (2014a)

1975

1980

1985

1990

1995

2000

2005

2010

122014

Demographic context : Low birth rate and aging population§ Lowest fertility rate in theworld.

<Figure 4> Total fertility rate in selected countries(Numbers of children born to women aged 15 to 49)
2.50
2.00

1.871.98
1.381.41

1.501.361.43

1.47
1.19

1.89
1.55

2.06
1.86

1.671.67

1.67
1.51

1.00
0.50
0.00

FranceGermany

Japan

Korea
2000

SwedenUSAOECD

China§ Rapid speed of population
ageing.
§ Less tax payers and more
welfare recipients in thefuture.
§ Fiscal strains in financing
welfare programs.

2013

Source: OECD(2016:15)<Figure 5> Share of the elderly population (age 65+) in selected
countries (As a percentage of total population)
50.0
40.0
30.0
20.0

33.1

38.8

37.4

26.2
16.1

16.4

24.7
17.3

17.4
7.2

10.0

20.9

25.312.4

13.0

USAOECD

23.9
6.9

0.0

FranceGermany

Japan

Korea
2010

Source: OECD(2014b:19)

SwedenChina2050

6

Labor Markets Context : ‘Dualized’ Labor Markets<Figure 6> Composition of employees byemployment status (2016 survey)§ Highly fragmented labor markets
by employment status.

56.4%

55.7%

44.3%

§ Gradually decreasing size of nonregular workers, but still highly
dualized labor markets.

43.6%

2001
regular workers

2016
non-regular workers§ Large gaps in wages andsocial benefits between
regular and non-regularworkers<Figure 7> Wage and social benefits gap between regularand non-regular workers(2016 survey)
96.6%

99.1%

40.4%

32.4%

NationalPension

84.7%

39.7%

99.5%

35.5%

89.1%

48.7
25.9%

HealthUnempolyment Retirement
Paid Leave
Insurance
Insurance
Allowance
regular workers
non-regular workers

Source: Kim.Y.S(2016)100§ Great barrier in realizing
universal coverage insocial security and anuniversal welfare state

Average Wage

7

Mainstream’s strategy : Economic growth without welfare?
§ ‘Long-term Economic Outlook 2060’ report by the Ministry of Strategy and Finance.
§ Stronger fiscal discipline in the face of growing economic uncertainties and negative
demographic changes.
§ Keeping national debt to GDP ratio at 40% range in the foreseeable future.
§ Maintaining current levels of tax burden.
§ Tighter controls on welfare spending including even cutting social benefits.
<Figure 8> General government debt to GDP
ratio(projection)
100

88.8%

80

62.4%

60

40.1%

38.1%

4020
2010

2020
Scenario 1

2030

2040
Scenario 2

2050

2060

Scenario 3

Source: Ministry of Strategy and Finance(2016)
Note : Scenario 1: Cutting 10% of public expenditures from 2016
Scenario 2: No policy changes from 2016
Scenario 3 : Introducing new mandatory social programs in 2020

§ The mainstream is stillseeking an ‘economic growth‘without welfare’ which wasdominant under thedevelopmental era of Korea.
§ Is that an viable option under
the deepening socio-economicpressures?

8New ideas and policy proposals(1): ‘Income-led growth’ strategy§ ‘Income-led growth’ strategy as an alternative for ‘profits-led growth(‘export-led growth.’)§ Boosting domestic consumption by increasing social benefits as well as labor’s incomeshare.
- Debates over ‘universal basic income’ plan: promoting household consumptions.
- Expanding social benefits : proposals for creating universal child allowance, youth
allowance (for labor market outsiders or entrants), and increasing the amount of basic
pension for the elderly.
<Table 2> Trends of Final Demand Composition in Korea
Year

PrivateConsumption

Government
Consumption

Investment

Exports

1990

41.0

7.7

28.9

22.5

1995

40.3

7.5

29.6

22.6

2000

42.0

7.3

22.4

28.2

2005

39.3

10.1

21.6

29.0

2010

35.0

10.1

19.7

35.1

2014

33.6

10.8

19.3

36.2

Japan(2005)

50.1

16.2

20.5

13.2

Source: Bank of Korea(2015)

New ideas and policy proposals(2): Open economy and social protection system§ Korea is one of the most open economy countries in the world.
§ Open economy constantly confronts with industrial restructuring in order to survive in thehighly competitive global markets.
§ Industrial restructuring requires massive relocation of workers in the labor market.
Therefore, without well-established social protection and job training system, relocation ofworkers would not be practical.
§ Social protection system is one of the main bases supporting an open economy.
< Figure 9> International imports and exports ingoods and services(as percentage of GDP, 2014 or latest available year)

60.0
50.0
40.0
30.0

50.6

45.7

45.3

39.0

44.5
40.8

30.528.7

29.1
20.8

20.0

17.7

28.9
26.2
23.8

16.6 13.5

10.0

France Germany JapanOECD(2016)

Korea
Imports

Sweden USAExports

OECDChina

New ideas and policy proposals(3): Social investment policy§ Social investment policies: enhancing employability of labor market outsiders throughincreasing the quality of job skills and providing favorable social environment for labormarket participations.
§ ALMP and ECEC(Early Childhood Education and Care) policies are main areas of thesocial investment policy.
§ Great advancement in ALMP and ECEC polices in Korea over last decade, but there aresome controversies over their policy outcomes.

<Figure 10> Family and ALMP Expenditures toGDP Ratio
1.9%

2.2%

1.2%
0.6%

OECD
average(2000)

0.5%

OECD
average(2011)
FamilyOECD(2016) Social Expenditure Database

0.5%

Korea(2013)
ALMP

0.1%0.2%
Korea(2000)

New ideas and policy proposals(4): Investing pension reserves in public
rental housing and public welfare facilities<Table 3> 5 Largest Public Pension Reserves Fund
USD bn.

% of GDP(Rank)

Korea(NPS)

404.5

32.4(1)

Sweden(Aps)164.7

29.0(2)

Japan(GPIF)

1223.926.9(3)

USA(Trust Fund)

2764.416.5(4)

Canada(CPP)

189.3

10.7(5)§ Korea’s NPS reserves is the largest one
in terms of its GDP ratio.
§ Most reserves are invested in domestic
and overseas bonds and equities.
§ Most portion in domestic equities
investment are concentrated on big
companies(conglomerates).

OECD(2014c)< Figure 11 > Portfolio breakdown of Nation
Pension Fund (2015)
10.2%
13.1%
18.6%

Alternatives
Overseas equities

4.3%

Domestic equities

53.1%

Overseas fixed income
Domestic fixed income

National Pension Service(2015)§ Investing 20% of newly accumulated
reserves per year (total 100 trillion Wonfor 10 years) in building public rental
housing, public healthcare and carefacilities for child and the elderly.
§ Goals of the proposal : removing thebarriers of marriage and childrearing by
reducing rent costs and care fees;reconciling work and home life forwomen; raising low birth rate; boosting
construction industries. etc.

New ideas and policy proposals(5): Increasing public welfare facilities andpublic sector jobs by establishing ‘social service corporation’<Figure 12> Numbers of employment
in health and social service sectors(2011-2015)§ Sizable numbers of new jobs are created inhealth and social care sectors under the joblessgrowth of Korea.

Numbers ofincreased jobs:
279,930§ Care workers mostly employed in small andprivate care facilities suffering from low wageand inferior working conditions.

1,566,361
person1,286,431
person2011

2015

Source: Ministry of Health and Welfare(2015)§ Proposal to establish ‘social servicecorporation(社会service公團)’ that not only
directly operates care facilities, but hires care
workers directly.
§ Aiming to increase publicly funded and operated
care facilities and quality jobs in the publicsectors.
§ Plan to launch a social service corporation inSeoul City in 2017.

Conclusions§ Because of the dramatic economic growth experience in Korea, the main stream
policy ideas tend to think that expanding welfare provision hampers achieving
economic growth.
§ A growing body of literatures(OECD,2015; Dabla-Norris et.al,2015), however,suggests that higher inequality in income and wealth may give negative impacts
on sustainable economic growth.
§ Korea is in a very challenging transition period. Under the very negative
economic, demographic, and labor market conditions, the country has to movetowards a more universal welfare state§ Some groups are proposing new ideas and policy proposals which support that
expanding welfare provision does not contrast with any economic growth.
§ Although these ideas are still ongoing and have not become main stream policy
ideas, there are great potentials in those ideas and it will appear as significant
values when existing economic growth strategy reveals their limitations.

References§ Bank of Korea(2015), “The Korean Economy Based on the Input-Output Statistics”§ Dabla-Norris, Era., Kalpana Kochhar et. Al(2015), Causes and Consequences of Income Inequality: A
Global Perspective, IMF Staff Discussion Note.
§ Elekdag, Selim(2012), Social Spending in Korea: Can it foster Sustainable and Inclusive Growth, IMF
Working Paper§ Katzenstein, Peter J(1985), Small States in World Markets, Cornell University Press§ Kim, Y.M(2008), Beyond East Asian Welfare Productivism in South Korea, Policy and Politics,
36(1):109-125§ Kim, Y.M(2015), South Korea’s Welfare State may be Heading for the Worst, EAP Policy Debates, No.
31, East Asian Foundation.
§ Kim,Y.S(2016), The Size and Working Conditions of Non-Regular Workers, KLSI Issue paper No.4 (InKorean)§ KOSIS (Korean Statistical Information Service) (2016)§ Lavoie, Marc., Engelbert Stockhammer(2012) Wage-led growth: Concept, theories and policies, ILO§ Lee, Sangheon(2013), Income-led Growth: Theoretical Potentials and Policy Implications, The Reviewof Social & Economics Studies, 43:67-99§ Ministry of Strategy and Finance(2016), Long-term Fiscal Outlook 2060 (In Korean)§ Ministry of Health and Welfare(2015), Report on Job Statistics in Health and Welfare related Industry.
§ National Pension Service(2016), 2015 National Pension Fund Annual Report.
§ OECD(2014a), "Social Expenditure Update: Social spending is falling in some countries, but in manyothers it remains at historically high levels”.
§ OECD(2015), In It Together: Why Less Inequality Benefits All§ OECD(2014b), Factbook 2014: Economic, Environmental and Social Statistics§ OECD(2014c), Annual Survey of Large Pension Funds and Public Pension Reserve Funds 2014.
§ OECD(2016), OECD Factbook 2015-2016