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Structural Change in Income Distribution
The nation`s income distribution in 2011 deteriorated sequentially but was better than 2009, according to Statistics Korea. Korea`s Gini coefficient, an index that gauges income equality, was 0.311 in 2011, a tick worse than the 0.310 in 2010 but better than 0.314 in 2009. (Zero on the index means perfect equality and 1 is maximum inequality.) Quintiles, the ratio of the richest and poorest 20 percent of income earners, have been on the rise since 2007, indicating that the gap in income distribution has widened in the wake of the global financial crisis.
The problem lies in our economic and social structure. In our export-oriented economy, added value is mostly created by export companies with international competitive advantage. Across-the-board economic growth is possible only if wealth from exports trickles down to enterprises that serve domestic demand. But the link between the exporters and domestic suppliers is very weak, exacerbating the industrial polarization.
Industrial polarization eventually leads to employment bipolarization, which will increase regional divide. Under the current economic structure, income distribution will certainly continue to worsen. Government taxation and social safety nets can help shore up income distribution, but in Korea, disposal income inequality is lower than market income inequality and the gap is widening. Taxes and social insurance charges against gross domestic product (GDP) exceed 25 percent and the ratio of public social expenditures to GDP has spiked to around 10 percent.
Despite the government`s persistent efforts, it remains difficult to close the income gaps. One of the reasons is the nation`s aging population. As people get older, their income declines sharply. The income inequality is magnified if they did not save enough during their prime working years. Thus, the income gap between the elderly and younger workers and among the elderly themselves becomes more pronounced as the nation grows older.
The ongoing deterioration in our nation`s distribution structure is due mostly to population aging. A case in point is Japan`s Gini coefficient of market income, which is in excess of 0.50, far higher than Korea`s 0.34. The reason for the gap is not because industrial and employment bipolarization is more severe in Japan than in Korea, but because Japan has become the world`s most aged country with the percentage of its elderly population, aged 65 or older, exceeding 20 percent. In comparison, the percentage of elderly people in Korea has just topped 10 percent.
The problem is Korea is similar to Japan in that both nations have low birth rates and a rapidly aging society. It is no exaggeration to say that Korean society in 20 years will closely resemble today`s Japan. Accordingly, our most urgent priority in preventing a further worsening of distribution structure is to arrest population aging. Of course, even if our nation`s birth rate was to reverse now, the effects will not be tangible for 25 years. Nevertheless, the government has to devise a long-term strategy to fundamentally solve the low fertility problem. In this sense, state expenditures designed to tackle the low birth rate can be seen as an investment in the future.
At the same time, macroeconomic policy efforts should be made to ensure that export-produced added value trickles down to the domestic sector. A weak won helps the nation`s export growth but raises import costs and subsequently weighs on domestic consumption. Japan has striven to boost domestic spending even at the expense of export competitiveness by holding fast to a strong yen over the past several years. The sustained weakness in the value of the won will hinder efforts to tame consumer prices, particularly amid the recent surge in international oil prices. It is necessary to carefully readjust our macroeconomic policy stance.