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Income-Led Growth in Korea: Evaluation and Prospects
1. Income-Led Growth in Korea:
Evaluation and Prospects
University of Greenwich
November 22, 2018
Kang-Kook Lee
Ritsumeikan University
University of Cambridge
2. Income-Led Growth Strategy
by the Moon Government in Korea
• New Income-led growth by the new Korean government
• Raising wage and household income to promote aggregate
demand and growth, by raising minimum wage and expanding
social safety nets
• Based on wage-led growth by Post-Keynesians, and considering
Korean situation
• Examining the income-led growth strategy by the Korean
government, and presenting evaluation and prospects
• Direction is correct but real implementation is problematic, with
de facto austerity and not much redistribution
• Organizing political support necessary against strong criticism
3. Post-Keynesian Wage-Led Growth
and Its Evaluation
• Post-Kaleckian growth theory presents wage-led vs. profit-led,
integrating Keynes and Marx
• Demand side theory, contributing to integration of demand and supply
• Mainstream recognizes the importance of AD on long-run growth,
through hysteresis with long-run unemployment and endogenous
technology adoption (Ball, 2014; Anzoategui et al., 2017)
• Distribution between capital and labor affects AD and growth, compared
with mainstream ‘inclusive growth’ focusing on supply side
• Static, non-stochastic, partial equilibrium analyzing products market only
with no optimization
• If the wage share is endogenous and policy changes influence the
coefficients? Short/long term and AD/growth are a bit confusing
6. Empirical Studies of Wage-Led Growth
• Empirical studies of Post-Keynesian wage-led growth developed
• Structural, or single equation approach: studying the effect of wage
share on each components of GDP but endogeneity issue, wage-led
in major OECD countries, different for small-open economies
• Aggregative, or system equation approach: assuming endogenous
wage share and using VAR, reporting more profit-led results
• Single equation is more about longer-run results because
consumption effects take time while VAR result is shorter-run
(Blecker, 2016)
• Other methodologies including panel regressions or 2SLS
• Robustness of causality, omitted variables, short/long run results etc.
7. Empirical Studies of
Wage-Led Growth in Korea
• Empirical studies find that Korea is wage-led, after the 1997 financial crisis
• Sing equation approach finds that an increase in the wage share leads to a
large increase in consumption while no effects on investment and net
exports
• Using annual data, Hong (2009) and Onaran and Galanis (2014) report wage-
led but Kim (2013) finds profit-led with the negative effects on net export
• Using the better measure of the adjusted wage share and quarterly data,
Hong (2014a; 2014b), Jeon and Joo (2016) and Lee and Neoghi (2019a) with
the same model of Kim (2013) find the wage-led result
• Other methods also employed, Onara and Stockhammer (2005) using SVAR
report the wage-led regime, Jeong (2017) using SVAR also report the same,
while Lee and Neoghi (2019b) reports opposite
• Hwang (2009) using FM-GMM and Jeon and Jeong (2016) using ARDL
• Need to consider structural changes, income inequality and productivity
8.
9. Backgrounds of Income-Led Growth
• Falling wage share and rising income inequality after the 1997 financial crisis
due to neoliberal restructuring, labor market flexibilization, globalization and
aging
• Rising profit and corporate income highest in OECD while falling household
income and consumption, also investment and growth slowdown
• Real wage growth and domestic demand stagnation, leading to falling
productivity growth and economic growth
• Failure of deregulation and debt-led growth by conservative governments,
and the vicious circle of rising inequality and stagnating growth
• Thus, improving income distribution and raising wage to promote AD and
growth: income-led growth
• Wage-led growth from ILO introduced to Democratic Party from 2013, with
the rising criticism against conservative economics and spillover effects
17. Gini Coefficient in Korea compared with OECD,
Rather High Using New Statistics
Source: OECD, Statistics Korea
18. Income-Led Growth in Korea
and Policy Measures
• The Korean government growth strategy: Income-led growth, innovation-led
growth and fair growth
• Income-led growth: raising wage and household income to promote AD and
growth, with the low welfare and the high share of self-employed in Korea
• 1) Raising household income:
• raising minimum wage (16.4% in 2018, 10.9% in 2019), introducing job
stabilization fund (3 trillion won in 2018), reducing rent for self-employed,
reducing living cost such as medical cost, providing public housing
• 2) Expanding social safety net and welfare:
• expanding unemployment insurance (from mid- 2018), raising EITC (from 1.2
trillion to 2.6 trillion in 2019), introducing new child benefit (1.9 trillion won
and more in 2019), raising elderly pension (2.4 trillion more budget in 2019),
12% growth of welfare budget in 2019
•
21. Debates on Income-Led Growth:
Criticisms and Anti-Criticisms
• Income-led growth is not good for export-led Korea: but the effect on net
export is limited since main exports are capital and tech intensive, and
export markets are in monopolistic competition
• Raising wage hampers investment? But no evidence, investment is affected
by AD and stagnated after the 1997 crisis
• Just short-term boost for the economy? But AD matters to long-run growth
(Cerra and Saxena, 2018) and consumption effect takes time
• Productivity growth? But promoting AD could encourage it
• Regulatory reform or industrial policy for innovation is necessary, but
equality and income-led growth are conducive to innovation
• More effective policy measures should be developed with the strong role of
the government for equality-led growth with redistribution and public
investment
22. Minimum Wage Increase and
Income-Led Growth in Korea
• The most important policy to raise the wage share: plan to raise
minimum wage from 7350 won in 2017 to 10000 won in 2020 (16.4% in
2018, 10.9% in 2019)
• Politically easier policy tool compared with other measures
• Job stabilization fund given to employers hiring minimum wage workers,
supporting 9% of minimum wage (16.4% - former 5 years’ average 7.4%),
about 3 trillion won budget in 2018 and 2019, but temporary
• Concerns about its rapid raise to lead to conflicts between the weak and
negative effects on employment because of the high share of poor self-
employed and small companies
• Internationally high compared with other OECD countries, and the share
of affected workers and those with less than minimum wage rising fast
• Other efforts to reduce rent, raise prices and and establish fair trade
28. Employment in Labor Market in 2018
• Many report that mild minimum wage increase would not affect
employment (Allegretto et al., 2016; Card and Krueger, 2004)
• Conflicting results of the effect of minimum wage increase on
employment in Korea (Lee, 2018), but its raise is too rapid
• Significant slowdown in job creation recently, so heated debates
• Stagnation in the manufacturing industry (auto, shipbuilding),
demographic change, decrease of Chinese tourists mattered to
stagnating job creation
• Maybe the negative effect of minimum wage increase on food and
lodging industry, but trend and economic cycles should be considered
• Hard to raise minimum wage rapidly under the stagnating economy
in Korea, and need to think of ‘fallacy of division’ or reverse of
‘paradox of cost’ with the limitation of ‘aggregate approach’
33. Growth and Distribution in Korea
under Income-Led Growth
• Recent slowdown of economic growth: consumption ok but serious
fall of investment, and uncertain international environments
• Stagnant job creation, affected by weakening manufacturing sector,
demographic changes and partly raising minimum wage
• Income distributions worsened in 2018, with continuous increase in
income by top 10% while significant decrease in income by the poor,
especially self-employed (partly related with changes in survey
data?)
• Income-led growth not yet successful in terms of growth and
distribution, but the wage share is expected to rise in 2018
• Much more efforts for redistribution and social welfare are needed,
including raising tax for the wealthy and real estate
40. Problem of De Facto Austerity
in Fiscal Policy in Korea
• The government announced that they are ‘Keynesian’, introducing larger
budget for 2018 with about 7% increase from the 2017 budget, and
supplementary budget for 2017 and 2018
• However, not so expansionary in reality because of more tax revenue than
originally estimated, 14.9 trillion won more in 2017 compared with 2017
revised budget, and about 30 trillion won more in 2018 (1.7% of GDP)
• As a result, de facto austerity, with rising fiscal surplus, seen by cyclically
adjusted primary surplus and fiscal impact index
• The mistake of estimating tax revenue, maybe related with former
overestimation in 2013-14 or their intentional act due to fiscal soundness
• 9.7% increase of budget in 2019, but more is needed with balanced budget
in integrated fiscal balance (managed fiscal balance is with more deficit)
• Serious failure in fiscal expansion with income-led growth policies
42. No Fiscal Expansion in Korea after 2016
Source: International Monetary Fund, Fiscal Monitor
43. Upgrading Income-Led Growth is Called on
Based on Political Support
• Income-led growth 2.0 with more fiscal expansion, and social welfare
and redistribution called on
• More efforts for fair economy to reduce the gap between large and
small companies, and to reform dualized labor market structure
• The stronger industrial policy by the government also necessary
• How to organize political support (still more than half support) and
intellectuals’ backing matter, given the conservative criticism
• Conservatives argue for deregulation and innovation-led growth, but
equality and income-led growth are conducive to innovation and
long-run growth
• Korean Left should present vision and feasible policy measures
46. Concluding Remarks
• Income-led growth is a new economic paradigm in
Korea: good direction but problematic implementation
• De facto austerity and not much efforts for
redistribution and progressive structural reform
• Not so successful in terms of growth and distribution
• The president still seems to have a will but more
feasible and effective policy measures are necessary
• How to organize political support given the criticism and
the recent slowdown of the economy?
