Poverty and Income Inequality in South Korea Essay

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Poverty and Income Inequality in South Korea

South Korea is counted among the world’s leading economies alongside giants such as United States and Germany (Wiseman & Nishiwaki, 2006). Before the financial crisis hit Asia in 1997, South Korea was among the fastest growing economies of the world with a Gross Domestic Product (GDP) growth rate exceeding 5 percent (Kakwani, Khandker, & Son). Kwack & Lee (2007) report that income inequality had been reduced across the country before the financial crisis. Moreover, between the years 1965 and 2005, income inequality had not significantly increased.

All the same, between the years 1998 and 2005, South Korea experienced a rise in income inequality seeing that the Asian financial crisis was massive in its scope (Kwack & Lee, p. 20). Also, between the years 1990 and 1997, the percentage of South Korean people classified as poor had steadily decreased from 39. 6 percent to 8. 6 percent (Kakwani, Khandker, & Son). South Korea was coming to be known as an “economy with relatively equal distribution of income and with full employment” (Kakwani, Khandker, & Son). But, the Asian financial crisis naturally increased the number of poor people in the country.

In fact, the percentage of poor increased to 19 percent in 1998; it was 13. 4 percent a year later (Kakwani, Khandker, & Son). According to a study conducted by Kakwani, Khandker, & Son, the poor of South Korea were disproportionately affected by the Asian financial crisis of 1997. Even though the South Korean economy started to grow again immediately after the crisis, the benefits of growth did not reach the poor as they did the rich. Then again, the government of South Korea introduced new welfare programs for the very poor during that time.

The poor people of the country did not benefit from these programs, however. It was only the very poor that were positively impacted (Kakwani, Khandker, & Son). What is more, contrary to the interpretation of income inequality statistics as presented by Kwack & Lee, the International Monetary Fund has expressed great concern over this problem in South Korea during the present era of globalization (“Widening Inequality: IMF Acknowledges Downsides of Globalization,” 2007). A report published in Korea Times in October 2007 reads:

…Many South Koreans believe the nation has no other choice but to pursue the international trend in a bid to survive fiercer competition with other countries. Policymakers are trying to open the local market wider to foreign products, while promoting sales of Korea, Inc. , under the spirit of freer trade. They go all-out to attract foreign investment by setting up free economic zones and international business towns. Businesses are also expanding their overseas networks for production, sales and investment under the motto of globalization.

…In this regard, a recent IMF report caught the attention of economic policymakers, company executives, citizens and anti-globalization activists. Last week, the international body published its semiannual economic review, the World Economic Outlook, before the IMF and the World Bank meeting scheduled for Oct. 20-21. The IMF said in the report that technology and foreign investment are making income inequality worse around the world. The review tries to figure out why income inequality has widened in both rich and poor countries in the past two decades.

It is the first time that the IMF has come up with such a report admitting to the negative effects of globalization. “Over the past two decades, income inequality has risen in most regions and countries,’’ the report said. We can learn much from the report. We have to admit that South Korea has experienced widening income inequality, especially following the Asian financial woes. The income brackets have already been divided into 20 percent rich and 80 percent poor. That is the nation’s middle class has crumbled because the gap between the rich and poor widened.

The 20-80 ratio is on the verge of moving to a 10-90 ratio, further worsening the income gap. In addition, businesses have exploited non-regular workers and migrant laborers from foreign countries who suffer from low wages, poor working conditions and other discrimination. A law protecting non-regular workers took effect in July, but little progress has been made to guarantee their equal rights. Policymakers will have to take bolder measures to narrow income inequality and tackle other negative effects of globalization. (“Widening Inequality: IMF Acknowledges Downsides of Globalization”)

It is oft stated that globalization is accompanied by a widening gap between the haves and have-nots of the world. When a Korean farmer suddenly appeared during a meeting of World Trade Organization and committed suicide, the problems facing the global political economy were highlighted – that, in fact, the interests of the poor must be heeded, better than before. The farmer was wearing a shirt that read, “WTO KILLS FARMERS” (Cho, 2008, pp. x). After all, it is not uncommon for experts and non-experts alike to claim that the World Trade Organization does not represent the interests of the rich and the poor equally.

Nevertheless, there is a limit to how much the World Trade Organization can do for the poorest people of the world. It is, in fact, for the government of South Korea to bear greater responsibility for poor Koreans. According to another news report published in South Korea in the year 2007, The wage disparity of the lower 10 percent of earners versus upper 10 percent rose to a factor of 5. 4 in 2006 from 4. 8 in 2001, meaning that wages for the top decile of earners were nearly five-and-a-half times greater than those of the lowest decile of earners… (“A Look at South Korean Society, 20 Years after Democracy,” 2007)

It is for the South Korean government not only to improve income distribution in the country but also to implement policies to end abuse as well as discrimination of the poorest workers. Individual income in South Korea rose fivefold between the years 1987 and 2007. But, South Korea has not made progress to end income inequality. The Gini coefficient is typically the statistical measure of choice to assess income distribution. A Gini coefficient of zero indicates perfectly equal income distribution, while a coefficient of 1 indicates perfectly inequality.

In 1987, the year that South Korea became a democratic country, its Gini coefficient was 0. 31. By the year 1997, South Korea’s Gini coefficient had been reduced to 0. 28 as the country had made strides in reducing the gap between the haves and the have-nots. But then the Asian financial crisis ensued. By 2006, South Korea’s Gini coefficient was back to 0. 31. Although the size of the economy had grown from $500 billion to $800 billion, income distribution had been reduced between 1997 and 2006. Unsurprisingly, the poorest people of South Korea are confronting discrimination and abuse.

After all, the rich are getting richer at the expense of the poor. As a matter of fact, exploitation of labor is reality in South Korea (“A Look at South Korean Society, 20 Years after Democracy”). Robert J. Barro, a professor of economics at Harvard University, explains that living standards across South Korea were raised with its dramatic rise in GDP. As examples, the infant mortality rate fell from 8 percent to 0. 8 percent and life expectancy rose from 54 years to 73 years. Additionally, income distribution in South Korea has been more equitable as compared to the United States and Japan.

When individual income rose in South Korea, low-income groups were beneficiaries, too, and poverty was reduced (Barro, 2003). Then again, as we have already discussed, the Gini coefficient of South Korea in 2006 was the same as in 1987. This reveals that although the poor people of South Korea have higher wages now than before, the gap between the haves and the have-nots has not been narrowed. So, Professor Barro suggests that South Korea must work on improving its education system. If the poor people of South Korea have access to good quality education, it would be easier to improve income distribution.

Moreover, the country needs to enhance corporate governance (Barro). These changes are sure to enhance working conditions and living standards of poor workers. Then again, South Korea may not be able to support half of its “elderly households” living “in a state of ‘relative poverty’” with these improvements (“Korea Highest in Elderly Poverty,” 2008). In fact, the income of these households is lower than 50 percent of average household income in the country. Although South Korea has a pension scheme for the elderly, the percentage of the poor that may benefit from the scheme is small.

Because the traditions of South Korea demanded of children to take care of their parents upon reaching adulthood, the country does not have a developed social insurance system for the elderly. What is more, South Korea is aging fast. At least 7 percent of its poor are over 65 today (“Korea Highest in Elderly Poverty,” 2008). At the same time as social welfare programs remained underdeveloped, South Korea generated 3100 more people owning at least U. S. $1 million worth liquid assets between the years 2000 and 2001 (“Asian Millionaires: A Tough Bunch,” 2002).

According to Australian Banking & Finance, among the reasons for this rapid production of millionaires is increasing income inequality (“Asian Millionaires: A Tough Bunch,” 2002). To put it another way, corporate leaders are raising their organizational revenues, thanks in part to globalization, even as the poorest workers of their organizations continue to be paid low wages. In the year 2007, South Korea experienced the widest gap between the haves and the have-nots since the Asian financial crisis.

In fact, the annual income of 20 percent of South Koreans earning the highest incomes was 5. 44 times greater than the annual income of the 20 percent that earned the lowest incomes. In 2006, the rich were earning 5. 38 times more than those that earn the least (“Income Gap at its Widest Point since 1999 Financial Crisis,” 2008). Analyzing the statistics, The Hankyoreh reports that income and wage gaps between 20 percent of the highest earners and 20 percent of the lowest earners had actually widened by 7. 9 percent and 11. 7 percent respectively between the years 2002 and 2007.

What is more, statistics on income distribution in South Korea reveal that the richest people of the nation are earning more than the people of developed countries, while the poorest South Korean households have incomes that are equivalent to those of households in less developed countries. Even the World Bank has confirmed that poor South Koreans have the same living standards as those of the citizens of El Salvador or Gabon. Rich South Koreans, on the contrary, have the same living standards as New Zealanders and Australians (“Income Gap at its Widest Point since 1999 Financial Crisis”).

Professor Barro’s analysis of income disparity in South Korea must be considered incomplete for the reason that there is no “decline in the burden of consumption on low-income households” (“Income Gap at its Widest Point since 1999 Financial Crisis”). These households pay their cellular phone and Internet bills with twice as much of their incomes as do rich households. Despite the fact that wages have increased – according to Barro – income disparity continues to widen. Son Tae-jeong, one of the researchers at the LG Economic Research Institute in South Korea, stated that salaries increased between the years 2006 and 2007 to boot.

However, the poorest workers do not seem to have availed the benefits of the rise in salaries across the country (“Income Gap at its Widest Point since 1999 Financial Crisis”). South Korea has introduced necessary legislations to strengthen its social welfare programs. There are social security schemes which are insurance based and applicable only to certain occupational groups. These schemes cover pensions and healthcare among other things. The government of South Korea also offers subsidies for housing on a limited basis.

But, most social security programs in the country only offer benefits related to earnings. Furthermore, these social security schemes are structured in a way that limits income redistribution from high-income to low-income groups (“Social Welfare in East Asia: Low Public Spending but Low Income Inequality,” 2008). Even though there are organizations across the country that continue to retain their unproductive workers, there is no way for them to cure the plague of poverty afflicting the elderly poor of South Korea (“Social Welfare in East Asia: Low Public Spending but Low Income Inequality”).

The poor elderly South Koreans cannot be financially supported by their grown up kids because even though labor productivity and GDP have risen together, real wages have lagged behind (Chung, 2007, p. 228). Poor workers have low standards of living in any case, seeing that corporate leaders must focus on raising their own living standards even if they offer support to unproductive workers. Of course, as Barro has stated, education and corporate governance may work wonders in eradicating the problem of poverty facing the worker and his or her elderly parents in South Korea.

Uneducated people usually have low living standards (Savada & Shaw, 1990). Moreover, in the workplaces of South Korea, these people are “treated with open contempt by university graduate managers” (Savada & Shaw). Increasing numbers of South Korean workers have migrated from agricultural farms to industrial establishments in recent years. Nevertheless, poverty has not been eradicated (Savada & Shaw). Rather, the differences between the haves and the have-nots have remained. The Asian financial crisis had negatively impacted both the rich and the poor of South Korea. But, as mentioned before, the poor were disproportionately affected.

Poor South Koreans had to reduce their spending by 9. 8 percent in the year 1998. The rich only reduced their spending by 0. 6 percent. Additionally, as soon as the Korean economy was back on its growth track, the rich are known to have greatly increased their spending. In point of fact, the consumption of luxury goods rose to the extent that sales of golf equipment were increased by 357. 6 percent between 1998 and 1999 (Yim, p. 32). The poor South Koreans, on the other hand, were left to their living standards resembling those of people in underdeveloped countries.

Of a certainty, the government of South Korea must be formulating and implementing the kinds of policies required to resolve these structural economic issues once and for all. The country possesses the capacity to grow beyond expectations. But, at the same time, income inequality and poverty create such a burden that a South Korean farmer came to commit suicide at a meeting of the World Trade Organization. The rich capitalists of South Korea pay low wages to workers who go on increasing their productivity nevertheless. Furthermore, poor, uneducated workers are abused and exploited in the South Korean workplace.

By instituting good corporate governance programs, the government of South Korea may very well correct this problem. After all, it is because of the poor workers’ motivation to increase productivity that has made South Korea one of the most important economies in the world today. The country would not be able to sustain its economic position if it fails to heed its workers’ needs. References A Look at South Korean Society, 20 Years after Democracy. (2007, Jun 8). The Hankyoreh. Retrieved Mar 20, 2009, from http://www. hani. co. kr/arti/english_edition/e_national/214664. html.

Asian Millionaires: A Tough Bunch. (2002, Oct 15). Australian Banking & Finance. Retrieved Mar 20, 2009, from http://findarticles. com/p/articles/mi_hb4849/is_18_11/ai_n28954879. Barrow, R. J. (2003, Jun 9). South Korea: How to Keep the Miracle Going. Business Week. Retrieved Mar 20, 2009, from http://www. businessweek. com/magazine/content/03_23/b3836031_mz007. htm. Cho, Y. (2008, Oct 10). Participatory Democracy in the Global Public Sphere: Scale, Media Events, and the Body. Paper presented at the annual meeting of the International Communication Association, Sheraton New York, New York City, NY Online.

Retrieved Mar 20, 2009, from http://www. allacademic. com/one/www/www/index. php? cmd=www_search&offset=0&limit=5&multi_search_search_mode=publication&multi_search_publication_fulltext_mod=fulltext&textfield_submit=true&search_module=multi_search&search=Search&search_field=title_idx&fulltext_search=Participatory+Democracy+in+the+Global+Public+Sphere%3A+Scale%2C+Media+Events%2C+and+the+Body. Chung, Y. (2007). South Korea in the Fast Lane: Economic Development and Capital Formation. New York: Oxford University Press. Income Gap at its Widest Point since 1999 Financial Crisis.

(2008, Feb 15). The Hankyoreh. Retrieved Mar 20, 2009, from http://english. hani. co. kr/arti/english_edition/e_national/269809. html. Kakwani, N. , Khandker, S. , & Son, H. H. Poverty Equivalent Growth Rate: With Applications to Korea and Thailand. Retrieved Mar 20, 2009, from http://siteresources. worldbank. org/INTPGI/Resources/13984_Hyun_Sons_paper_pro-poor-final. doc. Korea Highest in Elderly Poverty. (2008, Nov 8). The Korea Times. Retrieved Mar 20, 2009, from http://www. koreatimes. co. kr/www/news/nation/2008/11/113_34066. html. Kwack, S. Y. , & Lee, Y. S. (2007, Dec 31).

Income Distribution in Korea in Historical and International Prospects. Retrieved Mar 20, 2009, from http://www. kdi. re. kr/kdi/report/report_read05. jsp? 1=1&pub_no=10341. Savada, A. M. , & Shaw, W. , eds. (1990). Social Classes in Contemporary Society. In South Korea: A Country Study. Washington: GPO Library of Congress. Retrieved Mar 20, 2009, from http://countrystudies. us:80/south-korea/. Social Welfare in East Asia: Low Public Spending but Low Income Inequality. (2008, Jul). Center for Analysis of Social Exclusion. Retrieved Mar 20, 2009, from http://sticerd. lse. ac.uk/dps/case/cb/CASEbrief7. pdf.

Widening Inequality: IMF Acknowledges Downsides of Globalization. (2007, Oct 19). The Korea Times. Retrieved Mar 20, 2009, from http://www. bilaterals. org/article. php3? id_article=10033. Wiseman, P. , & Nishiwaki, N. (2006, Jul 23). Income Inequality Shrinks Japan’s Middle Class. USA Today. Retrieved Mar 20, 2009, from http://www. usatoday. com/money/world/2006-07-23-japan-usat_x. htm. Yim, S. Geographical Features of Social Polarization in Seoul, South Korea. Retrieved Mar 20, 2009, from http://www. lit. osaka-cu. ac. jp/geo/pdf/frombelow/0308_frombelow_yim. pdf.

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