The Koreas

Piketty in Seoul: Rising Income Inequality in South Korea

Advocates of the bestselling French author are calling for major reforms in South Korea.

Piketty in Seoul: Rising Income Inequality in South Korea
Credit: Flickr/lmjleft

Driven by the imperatives of nation-building and the fight for legitimacy on a divided peninsula, South Korean leaders have long subordinated social policy to the goal of economic growth. While this strategy, part and parcel of a “productivist regime,” was traditionally sustained by family and household initiatives (e.g., high savings, youth caring for the elderly) and enterprise welfare, the restructuring of South Korea’s economy following the 1997-1998 Asian Financial Crisis (or the “IMF Crisis” as it is known locally) and a transition from a developing country to a post-developmental country have eroded the status quo. Labor market changes, demographic shifts, and other challenges have altered the institutions upon which society was built. One consequence (among many) is rising income inequality.

It is wholly appropriate then that Thomas Piketty’s best seller Capital in the Twenty-First Century would be translated into Korean and brought into the discursive fold on what ails South Korean society. Piketty’s nearly 700-page tome makes the case that income inequality is a natural consequence of the capitalist system. More specifically, he argues, “When the rate of return on capital exceeds the rate of growth of output and income… capitalism automatically generates arbitrary and unsustainable inequalities.” These inequalities, in turn “radically undermine the meritocratic values on which democratic societies are based” and cause social and economic instability.

An October 28 installment to the East Asia Foundation (EAF) Policy Debates by Professor Jongil Kim (Dongguk University), “Piketty Fever and Income Distribution in Korea: Reality and Prescription,” shows how Piketty’s bestseller is influencing the debate about why inequality is rising and what can/should be done about it.

Piketty did not specifically address the South Korean economy in his book (although he says he will in the next edition of the book), but Dr. Kim does. Using data from Statistics Korea’s “Household Survey,” supplemented with additional data from the National Tax Service and the “Survey of Household Finances and Living Conditions,” he finds that income inequality “has been rapidly increasing since the mid-1990s.” He adds, “At the end of 2012, the top 1 percent of earners over 20 years old earned 12.23 percent of total income and the top 10 percent earned 44.87 percent. Income in South Korea is more concentrated than in Japan, and the gross income inequality in South Korea is a much graver issue than [it was believed to be].”

A problem with the way statistics are reported in Korea, contends Dr. Kim, is that they don’t include data from the supplementary data sources, as he does. This results in an omission of “the highest earners and fails to grasp the financial incomes of households.” In other words, it paints a rosier picture than is warranted. In fact, Dr. Kim thinks things are bad enough that “mere taxation and welfare policy reforms” might only have a limited effect. The problem, he argues, is structural.

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First, he argues, there simply are not enough new jobs being generated. During Korea’s high growth period, “exports… led to [increased] investment and employment, and this led to [an increase in] income and consumption….” However, this is no longer the case. The culprit? Globalized production networks that encourage Korea’s export producing conglomerates (the vaunted chaebol) to move their productions overseas – indeed, during Saenuri Chairman Kim Moo-sung’s official visit to China he made sure to meet with representatives of Korean firms.

At home, rather than employing large swaths of the population, South Korea’s money-makers are focusing on “core competencies such as research and development and production development” – vocations that employ less people. Despite his reservations about their effectiveness, Dr. Kim’s solution is to strengthen the progressive tax, “or… [expand] welfare that enables inclusive growth.” This means “the economic structure should be such that it creates a cycle of growth-employment-distribution.”

Dr. Kim thinks several major structural adjustments should take place. Chief among them, a shift in economic growth strategy, away from “bias towards export in the manufacturing industry.” He also thinks the practice of hiring people through sub-contracting or irregular work ought to be scaled back and that a “strengthening of rational employment protection and a social security net are needed,” in addition to a strengthening of “employment-welfare connections,” among a few other things.

Dr. Kim’s list is long. However, while Dr. Kim and other Piketty advocates are calling for a stronger progressive tax, welfare expansion, and policies for restructuring the economy, South Korea’s Finance Minister is pushing for a new corporate tax plan.

According to The Economist, the plan, if implemented, will require “South Korean firms with over 50 billion won in capital [to] pay a 10% surcharge on their corporate tax rate unless they have spent a certain proportion [somewhere between 60-80%, according to the article] of their income on dividends, investment and wages,” or spend somewhere between 20-40% on divides and wages. The current corporate practice of paying out a low percent of net profits as dividends is, as the article notes, in part a consequence of the Asian Financial Crisis, “when many firms ran out of cash and were forced to sell assets.”

The problem with this plan, notes The Economist, is that “[f]orcing companies to spend their cash could lead to unproductive investments,” like property. Hyundai’s controversial $10 billion purchase of a plot of land in the extraordinarily expensive Gangnam district is a case-in-point; according to Bloomberg, the price was “triple the property’s assessed value.”

While Dr. Kim may be right in suggesting that Korea must turn away from its export-oriented growth strategy, the path dependent nature of economic institutions makes that highly unlikely, if not virtually impossible. However, less ambitious reforms, such as better welfare policies or, perhaps, a strong progressive tax, could help turn the tide in favor of everyday people. However, for now, there isn’t much to be optimistic about. While welfare reform is very much a part of everyday political discourse in the Korean media, politicians seem more concerned with constitutional revision than they do about advancing social welfare.