Equity of Income Equity of Income and Economic and Economic

LifeLifeChapter 10Chapter 10

The U-Shaped Hypothesis The U-Shaped Hypothesis of Income Inequalityof Income Inequality

Pattern of income inequality in the course of development follows a Pattern of income inequality in the course of development follows a U-shaped curve (Simon Kuznets)U-shaped curve (Simon Kuznets)

Degree of equality high at early stages (everyone equally poor)Degree of equality high at early stages (everyone equally poor)

Degree of equality is high at later stages as well (e.g. middle class in WeDegree of equality is high at later stages as well (e.g. middle class in Western Europe)stern Europe)

Inequality is higher in between these two stagesInequality is higher in between these two stages

Korea generally followed the U-shaped pattern of developmentKorea generally followed the U-shaped pattern of development

Difficulties in Measuring Difficulties in Measuring EquityEquity

Value of assets changes rapidly (e.g. land) so distribution of income may chValue of assets changes rapidly (e.g. land) so distribution of income may change a lot within a year’s timeange a lot within a year’s time

Owners hide assets to avoid taxes and problematic publicityOwners hide assets to avoid taxes and problematic publicity

Population is highly mobile so creating a “representative sample” and tracing Population is highly mobile so creating a “representative sample” and tracing it is difficultit is difficult

Statisticians measure inequality by analyzing income distribution within a represeStatisticians measure inequality by analyzing income distribution within a representative samplentative sample

A representative sample is a small group of people, whose structure is very close A representative sample is a small group of people, whose structure is very close to the structure of the whole countryto the structure of the whole country

People tend to underreport their incomesPeople tend to underreport their incomes

Misunderstanding between surveyors and surveyeesMisunderstanding between surveyors and surveyees

Korean Development—a Re-Korean Development—a Re-CapCap

Incomes were very equal in 1950s because of the destruction during Korean WarIncomes were very equal in 1950s because of the destruction during Korean War

Chief objective is to surviveChief objective is to survive

Agriculture not mechanized Agriculture not mechanized

Economic base destroyedEconomic base destroyed

Foreign aid essential for survivalForeign aid essential for survival

1950s main goal of economic policy was rehabilitation1950s main goal of economic policy was rehabilitation

Inward-orientedInward-oriented

Agriculture-basedAgriculture-based

1963: shift of policy1963: shift of policy

Outward-orientedOutward-oriented

Export-orientedExport-oriented

Manufacturing-orientedManufacturing-oriented

Inequality becomes an issueInequality becomes an issue

Disparity Emerges between Disparity Emerges between Rural and Urban Rural and Urban

HouseholdsHouseholds Rural and urban household incomes were about Rural and urban household incomes were about

equal as of 1965equal as of 1965

By 1970 rural household income fell down to 67% By 1970 rural household income fell down to 67% of urban incomeof urban income

Incentives created to move to big cities Incentives created to move to big cities contributing in over-urbanizationcontributing in over-urbanization

Urban concentration emerges as a major social Urban concentration emerges as a major social issueissue

새마을운동새마을운동The New Village MovementThe New Village Movement

In 1971 the government started the New Village In 1971 the government started the New Village Movement to eliminate the disparities between Movement to eliminate the disparities between rural and urban incomesrural and urban incomes

Policies of the Policies of the 새마을 새마을 movementmovement In mid-1970s 10% of total national investment allocated In mid-1970s 10% of total national investment allocated

to rural areasto rural areas Government investment in agricultural infrastructure Government investment in agricultural infrastructure

(e.g. irrigation and flood control)(e.g. irrigation and flood control) Price-support system for ricePrice-support system for rice

By 1975, rural household incomes raised to By 1975, rural household incomes raised to almost equal level with urban householdsalmost equal level with urban households

Rural and Urban Rural and Urban HouseholdsHouseholds

　 　 　 　 Household income ('000 Won)　

　Share of

Agriculture in GNP

Farm Population

(million)

Share of Farm Population in Total Population, %

Rural UrbanRural/Urban

1955 43,9 13,3 61,9 　 　 　1960 36,5 14,6 58,3 　 　 　1965 37,6 15,8 55,8 112,3 112,6 99,7

1970 26,8 14,4 45,9 255,8 381,2 67,1

1975 24,7 13,2 38,2 872,9 859,3 101,6

1980 14,4 10,8 28,9 2693,1 2809 95,9

1985 13,5 8,5 21,1 5736,2 6046,4 94,9

1990 8,7 6,7 15,5 11025,8 11319,3 97,4

1995 6,6 4,9 10,8 20315,8 20415,6 99,5

2000 4,6 4,1 8,7 23072,1 28642,8 80,6

Inequality Inequality withinwithin Urban Urban SectorSector

Inequality of incomes within urban sector Inequality of incomes within urban sector emerges as a new equity issueemerges as a new equity issue

Rise in wages and accumulation of wealth including Rise in wages and accumulation of wealth including housinghousing

Green belt policies to restrict the expansion of Seoul Green belt policies to restrict the expansion of Seoul pushing up prices for housingpushing up prices for housing

Disparity emerges between wage earners and property Disparity emerges between wage earners and property owners since the latter get rich quickly and easilyowners since the latter get rich quickly and easily

Disparity between Large Disparity between Large and Small Firmsand Small Firms

Export-orientation growth policy Export-orientation growth policy adopted in the 1960s resulted in adopted in the 1960s resulted in preferential treatment for large preferential treatment for large firms, neglecting the small onesfirms, neglecting the small ones

Gap also widened due to the HIC Gap also widened due to the HIC (heavy industry and chemicals) (heavy industry and chemicals) policy adopted in early 1970spolicy adopted in early 1970s

A Glance at Inequality in A Glance at Inequality in KoreaKorea

Income of all Koreans in general increased rapidly since Income of all Koreans in general increased rapidly since 1960s1960s

Overall level and trend of income distribution in Korea since Overall level and trend of income distribution in Korea since 19651965

Disparity between rural and urban households improved from Disparity between rural and urban households improved from 1970 to 1975 due to 1970 to 1975 due to 새마을 새마을 movement and the farm price movement and the farm price support policysupport policy

From 1970-1980 income disparity increased reflecting the From 1970-1980 income disparity increased reflecting the increase of wealth of real estate owners as compared to wage increase of wealth of real estate owners as compared to wage earners and the gap between large and small firmsearners and the gap between large and small firms

Since 1980 income inequality improved somewhat thanks to Since 1980 income inequality improved somewhat thanks to more stable housing and real estate prices, also intensive more stable housing and real estate prices, also intensive promotion of small industriespromotion of small industries

Changes in Income Distribution and Poverty Level, 1965-2000Changes in Income Distribution and Poverty Level, 1965-2000

　 1965 1970 1975 1980 1985 1993 2000

Income Shares of Quintiles 　

Lowest 20% 5,7 7,4 5,7 5,1 61 7,5 7,6

20%-40% 13,6 12,3 11,1 11 11,6 13 12,7

40%-60% 15,5 16,3 15,5 16 16,2 17,3 17

60%-80% 23,3 22,4 22,4 22,6 22,4 22,9 22,7

80%-100% 41,9 41,6 45,3 45,3 43,7 39,3 40,1

90%-100% 25,8 25,4 27,5 29,5 28,3 24,3 25,4

Gini Coefficient 0,34 0,33 0,39 0,39 0,36 0,31 0,32

Average income and consumption per capita, monthly million won, 1999 prices

Average income 73,9 99,9 150,6 199,7 263,5 468,6 812,3

Average consumption 37,9 88 125,7 159,8 191,6 346 477

Poverty income (minimum acceptable standard)

per capita monthly ('000 won, 1999 prices)

71,3 108,4 123,4 149 180,9 233,1 246,9

percentage of households below poverty-income level

　 81,8 80,6 60,7 44,5 15,7 10,8

Poverty class designated by the government

　

Persons disabled ('000) 287 306 330 329 345 421 409

Persons supported by government ('000)

39147 2338 934 1500 1928 1580 1503

Korea’s International Korea’s International Standing in Terms of EquityStanding in Terms of Equity

High growth with high extent of equity possibleHigh growth with high extent of equity possible

Korea ranks very high compared to equality of its Korea ranks very high compared to equality of its income distribution compared to other countriesincome distribution compared to other countries

President Roh Tae-Woo’s policy of ‘Economy for OPresident Roh Tae-Woo’s policy of ‘Economy for Ordinary People’rdinary People’

International Comparison of International Comparison of Income DistributionIncome Distribution

　 0%-20% 20%-40% 40%-60% 60%-80% 80%-100% Gini Index

Korea 7,7 13,5 17,8 23 38 29,5

Russia 4,4 8,6 13,3 20,1 53,7 48,7

Thailand 6,4 9,8 14,2 21,2 48,4 41,4

Taiwan 7,2 12,9 17,5 23,2 39,1 　

Japan 10,6 14,2 17,6 22 35,7 24,9

US 5,2 10,5 15,6 22,4 46,4 40,8

Germany 8,2 13,2 17,5 22,7 38,5 30

India 8,1 11,6 15 19,3 46,1 37,8

Mexico 3,6 7,2 11,8 19,2 46,6 40,3

China 5,9 10,2 15,1 22,2 46,6 40,3

UK 6,6 11,5 16,3 22,7 43 36,1

Brazil 2,5 5,5 10 18,3 63,8 60

Housing and EquityHousing and Equity

1950s: arable land most important asset, also usually the only asset most 1950s: arable land most important asset, also usually the only asset most Koreans ownedKoreans owned

Land reform conducted in late 1940s resulted in fairly equal distribution of landLand reform conducted in late 1940s resulted in fairly equal distribution of land

Value of non-land assets owned by Korean households in 1977 still only Value of non-land assets owned by Korean households in 1977 still only 15.8% of total physical capital15.8% of total physical capital

Non-land assetsNon-land assets Ownership of stocks low, Korean stock market slow to develop (10% of all Ownership of stocks low, Korean stock market slow to develop (10% of all non-non-

landland assets in 1968) assets in 1968) Speculative nature of stock market investment contradicts traditional valuesSpeculative nature of stock market investment contradicts traditional values Wider public ownership of stocks being promoted now by the governmentWider public ownership of stocks being promoted now by the government

Relative importance of non-land assets is still smallRelative importance of non-land assets is still small Ratio of housing units to households around 70% in 2001Ratio of housing units to households around 70% in 2001 Some households own more than one houseSome households own more than one house Proportion of households that do not own housing unit exceeds 40%Proportion of households that do not own housing unit exceeds 40% Not owning a house increases the perception of poverty and inequalityNot owning a house increases the perception of poverty and inequality

Factors Influencing Equality Factors Influencing Equality in Koreain Korea

Land reformLand reform

Korean WarKorean War

HomogeneityHomogeneity

Equal educational opportunitiesEqual educational opportunities

Growth strategyGrowth strategy

Equality-oriented policiesEquality-oriented policies

Extended family systemExtended family system

Land ReformLand Reform

Before land reform of end of 1940s only 14% of farmers Before land reform of end of 1940s only 14% of farmers were owners-cultivators, 39% of land rented, 4% of rural were owners-cultivators, 39% of land rented, 4% of rural population were landlords collecting half the main crop frpopulation were landlords collecting half the main crop from their tenantsom their tenants

Land distributed in small pieces to farmers making them Land distributed in small pieces to farmers making them land owners (3 chongbo limit on land ownership, now lifteland owners (3 chongbo limit on land ownership, now lifted, but then resulted in extremely equal distribution of land, but then resulted in extremely equal distribution of land)d)

Landlordism still prohibited in Korea by lawLandlordism still prohibited in Korea by law

The Korean WarThe Korean War

Korean War destroyed virtually all physical Korean War destroyed virtually all physical infrastructure and production facilitiesinfrastructure and production facilities

Value of capital stock in 1953 estimated to Value of capital stock in 1953 estimated to be zero due to wartime destructionbe zero due to wartime destruction

High extent of equality right after the War High extent of equality right after the War because everyone was made equally poorbecause everyone was made equally poor

HomogeneityHomogeneity

Same cultural, climatic and geographical factorsSame cultural, climatic and geographical factors

Not divided by religious and racial differences (except for discriminatiNot divided by religious and racial differences (except for discrimination against Buddhism during Chosun dynasty)on against Buddhism during Chosun dynasty)

Weather and soil conditions largely the same everywhere (except JejWeather and soil conditions largely the same everywhere (except Jeju)u)

Interregional disparities in Korea are not large compared to most devInterregional disparities in Korea are not large compared to most developing countrieseloping countries

Regional disparities grew more pronounced since the start of industriRegional disparities grew more pronounced since the start of industrialization (remember the underdevelopment of south-west due to lack alization (remember the underdevelopment of south-west due to lack of natural ports there)of natural ports there)

Equal Educational Equal Educational OpportunitiesOpportunities

Educational system puts a premium on Educational system puts a premium on competitive selection, not family wealthcompetitive selection, not family wealth

Entrance examination uniform across Entrance examination uniform across the countrythe country

School system is standardizedSchool system is standardized

Growth StrategyGrowth Strategy

Growth-oriented strategy reduces Growth-oriented strategy reduces inequality by creating jobs thus decreasing inequality by creating jobs thus decreasing the proportion of poor unemployed peoplethe proportion of poor unemployed people

Koreas strategy of developing labor-Koreas strategy of developing labor-intensive industries at early stages of intensive industries at early stages of growth created job opportunities for growth created job opportunities for people with only primary educationpeople with only primary education

Equality-Oriented Equality-Oriented PoliciesPolicies

Farm price-support policyFarm price-support policy

Low tax rate on farm incomeLow tax rate on farm income

Price controls on daily necessities such as bus Price controls on daily necessities such as bus fares and coal briquettesfares and coal briquettes

Limits on agricultural land ownershipLimits on agricultural land ownership

Tax disincentives to own more than one houseTax disincentives to own more than one house

Extended Family SystemExtended Family System

Extended family system has been the basic Extended family system has been the basic unit for consumption and social welfareunit for consumption and social welfare

Welfare traditionally considered as private Welfare traditionally considered as private or family matteror family matter

Large proportion of multi-generational Large proportion of multi-generational households in Korea helping eliminate the households in Korea helping eliminate the extent of inequality (e.g. between older extent of inequality (e.g. between older unemployed and younger working people)unemployed and younger working people)

Equity ConsciousnessEquity Consciousness

Proportion of Koreans considering themselves poor Proportion of Koreans considering themselves poor (belonging to the low class) still high at 44% in 1999(belonging to the low class) still high at 44% in 1999 However, beware of subjective thinking!However, beware of subjective thinking!

80% of households below poverty line in 1970 falling down 80% of households below poverty line in 1970 falling down to only 10% in 2000to only 10% in 2000

Number of Koreans Number of Koreans subjectivelysubjectively claiming to belong to the claiming to belong to the middle class increased somewhat since 1980smiddle class increased somewhat since 1980s Increase is only 10 percentage pointsIncrease is only 10 percentage points Share of middle class households still low compared to Share of middle class households still low compared to

developed countries (especially Western Europe)developed countries (especially Western Europe)

1997 financial crisis decreased the size of middle class1997 financial crisis decreased the size of middle class

Subjective Class Subjective Class Consciousness of Koreans Consciousness of Koreans

(%)(%)

　 1980 1985 1991 1994 1999

Upper class 2,6 4,4 1,6 1,4 1,1

Middle class 41 53 61,3 60,4 54,9

Upper lower class

14 13,9

　37,1

　

　38,2

　

　44　

Middle lower class

23,9 16,4

Lower lower class

18,5 12,3

Measuring Quality of LifeMeasuring Quality of Life

What is quality of life and why is it important?What is quality of life and why is it important?

Quality of life of an average Korean person improved substantially since early 1960sQuality of life of an average Korean person improved substantially since early 1960s

To measure quality of life, Economic Planning Board compiled a social indicator covering 537 itemTo measure quality of life, Economic Planning Board compiled a social indicator covering 537 items measured every year since 1979s measured every year since 1979

General trends of improvement in quality of lifeGeneral trends of improvement in quality of life Koreans live much longer compared to 30 years agoKoreans live much longer compared to 30 years ago Life is more urbanizedLife is more urbanized Wider and better choice of consumer goodsWider and better choice of consumer goods Share of household budget spent on food down from 62% in 1965 to 23% in 2000Share of household budget spent on food down from 62% in 1965 to 23% in 2000 Eat more meat, fish, dairy products and fruitsEat more meat, fish, dairy products and fruits Studying for longer period of time at better schoolStudying for longer period of time at better school

Areas to improveAreas to improve Leisure hours increased slightly since 1965 (“dead workers”, gwa-ro-sa Leisure hours increased slightly since 1965 (“dead workers”, gwa-ro-sa 과로사과로사 )) Ratio of housing units to housing deteriorating until 1991Ratio of housing units to housing deteriorating until 1991

Income, Food and Income, Food and HousingHousing

　 1965 1970 1980 1991 2001

Income

GNI (USD billion) 3 7,8 56,5 281,7 421,3

Per capita GNI (USD) 105 248 1605 6518 8900

Food

Share in total consumption (%) 62,3 56,4 47,4 34 22,8

Daily calorie intake (calories) 2189 2370 2485 2858 2953

Daily protein intake (gm) 57,1 65,1 73,6 89,4 96,9

Daily rice consumption, urban household (gm)

359 404 343 298 244,4

Housing

Average space per person, square meters

　 6,3 10,1 13,8 20,2

Housing units, '000 3912 4360 5463 7853 11472

Households, '000 5057 5857 7968 10583 11928

Housing/Household ratio 　National average, % 81,3 77,8 71,2 74,2 96,2

Cities and towns, % 　 　 58,4 57,6 　

Education and HealthEducation and Health

　 1965 1970 1980 1991 2001

Education 　

Average education (years) 5 5,7 7,6 9,5 10,6

Total students ('000) 6694 7986 10568 10825 10819

Sudents/population (%) 22,1 25,4 27,7 24,5 22,9

High School graduates going to higher schools (%)

　 26,9 27,2 33,2 70,5

Health 　

Life expectancy (years) 55,2 57,6 66 70 75,6

Population per physician 2609 1773 1485 951 648

Medical insurance coverage 　 　 　 　 　

Number ('000) 　 19 9113 40529 47466

Coverage ratio (%) 　 0,1 23,9 94,3 101

Culture, Leisure and Public Culture, Leisure and Public SafetySafety

　 1965 1970 1980 1991 2001

Culture and Leisure

Households having a television (%) 　 6,4 86,7 97,2 99,9

Telephone subscribers ('000) 221 476 2705 14570 22725

Phones per 100 persons 0,8 2 8,9 33,7 48

Total automobiles ('000) 39,1 126,5 527,8 4248 12914

Passenger cars ('000) 　 60,7 249,1 2728 8889

Vehicles per 100 persons 0,06 0,19 0,65 9,8 27,3

Weekly non-working hours 　 116,4 116,7 116,1 120,5

Public Safety 　Numbers of crime ('000) 443 301 595 1230 1868

Crimes per 100000 population 1371 953 1561 2843 3974

Traffic accidents ('000) 14,9 37,2 120,2 266 291,7

Coverage of industrial accident insurance (%) 8,5 26,3 66,1 73,3 　

Deaths due to accidents 2276 3548 5460 13429 12174

Social EnvironmentSocial Environment　 1965 1970 1980 1991 2001

Share of urban population (%) 34,3 43,1 60,1 74,1 89,7

Population growth rate (%) 2,7 2,2 1,6 1,1 0,7

Labor force participation rate 　

Average (%) 55,6 57,6 59 60,6 60,8

Female (%) 36,5 38,5 41,6 47,3 48,3

Total divorces ('000) 21,7 39,5 120

Poverty population ('000) 3851 2423 1782 1826 　

Labor union participation ratio (%)

22,2 19,8 20 19,8 12

Economically disabled ('000) 355 346 282 338 409

Unemployment rate (%) 7,4 4,5 5,2 2,3 3,7

Government officials ('000) 333 417 596 854 872

Physical EnvironmentPhysical Environment

　 1965 1970 1980 1991 2001

Medical institutions ('000) 9,7 10,3 11,8 23,4 42,1

Piped-water supply per person

　

per day (litres) 106 158 256 376 380

supply ratio (%) 21,4 32,4 54,6 80,1 87,1

Road pavement ratio

All roads (%) 5,7 9,6 33,2 76,4 75,8

National highways (%) 17,7 28,5 71,6 93,1 98,4

International Comparison of International Comparison of

Life QualityLife Quality Korea still lags behind other countries in terms of welfare except educationKorea still lags behind other countries in terms of welfare except education

Higher per capita GNP resulted in higher welfare for an average KoreanHigher per capita GNP resulted in higher welfare for an average Korean

Although GNP per capita still lags behind developed countries, Koreans are Although GNP per capita still lags behind developed countries, Koreans are better off in terms of consumer durables such as TV sets and automobilesbetter off in terms of consumer durables such as TV sets and automobiles

Housing the most important determinant of welfare for KoreansHousing the most important determinant of welfare for Koreans Home ownership crucial to formation of middle classHome ownership crucial to formation of middle class Home ownership crucial to maintaining social stabilityHome ownership crucial to maintaining social stability

Neighborhood, or community-based infrastructure still needs to be Neighborhood, or community-based infrastructure still needs to be developeddeveloped

Transportation system (commuting to work)Transportation system (commuting to work) Separation of residential and business areasSeparation of residential and business areas

Int’l Comparisons: Income and Int’l Comparisons: Income and HealthHealth

　 Korea China Japan US Germany Russia

Income

Per capita GNI (2000, US$) 8910 840 24210 34260 25050 1660

GNI (2000, USD billion) 421 1064 4337 9646 2058 241

GNI share of agriculture (1999, %) 5 18 2 2 1 7

Health

Life expectancy at birth (1999) 73 70 81 77 77 66

Infant mortality per 1000 (1999) 9 37 4 8 5 20

Deaths per 1000 (1999) 5 　 8 9 10 9

Births per 1000 (1999) 13 　 9 14 10 14

Population growth rate (1995-9, %)

1 0,9 0,3 0,9 0,1 -0,2

Int’l Comparisons: Int’l Comparisons: Education, Culture and Education, Culture and

LeisureLeisure　 Korea China Japan US Germany Russia

Education 　

Percentage of age group enrolled in tertiary education (1997)

68 6 41 81 47 43

Education expenditure/GNP (%)3,7 (95)

2,3 (96)

3,6 (94)

5,4 (94)

4,8 (96)4,1 (93)

Culture and Leisure

Television sets per 1000 (1999) 361 292 719 854 580 421

Mobile phones per 1000 (2000) 567 67 526 400 586 9

Private automobiles per 1000 (1999) 273 　 394 486 516 　

Weekly hours worked, manufacturing workers (1999)

50 46,6 42,7 41,7 37,5 　

Personal computers per 1000 (1999) 182 12 287 510 297 37

Internet users (1999, million) 10,9 8,9 27,1 74,1 14,4 2,7

Int’l Comparisons: Public Int’l Comparisons: Public Safety, Social and Physical Safety, Social and Physical

EnvironmentEnvironment　 Korea China Japan US

Germany

Russia

Public safety

Crimes per 100000 3660 　 1671 5898 7869 1760

Share of defense expenditure in GDP (1999, %)

3 5,4 3,3 2,3 1,6 5,1

Social and physical environment 　 　 　 　 　 　

Unemployment rate (1996-8, %) 6,8 3,1 4,1 4,5 9,7 13,3

Family size (persons) 3,2 4 2,8 2,6 2,3 2,6

Divorce rate (1998,%) 1,6 　 1,9 4,3 2,3 3,4

Road pavement ratio (1999, %) 75 　 76 59 99 　

Int’l Comparisons: Int’l Comparisons: Information, Science and Information, Science and

TechnologyTechnology　 Korea China Japan US

Germany

Russia

Scientists and engineers per million (1997)

2193 454 4909 3676 2831 3587

R&D expenditure in GNI (1987-97, %)

2,8 0,7 2,8 2,6 2,4 0,9

Patent application filed (1998, thousands)

50,7 14 360,3 141,3 67,8 16,6

Energy consumption per head (1999, kg)

3882 599 3999 8044 4023 4122