1. Ritsumeikan University
The End of Egalitarian Growth in Korea: Rising Inequality and Stagnant Growth after the 1997 Crisis
Asia Future Forum
Seoul, Korea
November 24, 2016
Kang-Kook Lee
College of Economics
Ritsumeikan University

2. Introduction
Korea in the past: a paragon of the East Asian miracle with rapid growth and relatively equal income distribution
Now: a vicious circle of rising inequality and stagnant growth after the 1997 financial crisis, leading to the highest suicide and the lowest birth rate
What happened? Structural changes with neoliberal economic restructuring and opening after 1997
Examining the former egalitarian growth model, the financial crisis and the end of egalitarian growth in Korea from the historical perspective
Arguing for the effort of the state to re-establish egalitarian growth with social welfare and democratic reforms

4. Egalitarian Growth in the Miracle Period in Korea
Higher than 6% economic growth for more than four decades after the 1960s in Korea (World Bank, 1993)
Effective state intervention including industrial policy, financial controls, trade protection and capital controls, based on the state with comparatively developed institutions (Amsden, 1989; Chang, 1993)
Low inequality contributed to social stability, the developmental state with strong autonomy and capacity, and human capital investment, resulting in egalitarian growth (Rodrik, 1997; Alesina and Rodrik, 1994)
Initial conditions: successful land reform and the Korean war
Active government policy: efforts for public education, sound and stable macroeconomic management, and managed openness with export promotion and effective government regulation (Singh, 1995)

9. Mismanaged Capital Account Liberalization and the 1997 Financial Crisis
Unraveling of the former development regime in the late 1980s, along the development of capital markets and growth of chaebols’ autonomy in finance (Cho and Kim, 1995; Lee et al., 2002; Singh, 2002)
Strengthening free market ideology and political democratization, and the retreat of the state
Rising demand for financial liberalization and opening from domestic businesses and external pressure in the early 1990s
Careless capital account liberalization adopted, with comprehensive deregulation of foreign short-term borrowings from 1993, financing investment boom of chaebols (Cho and McCauley, 2003)
Rising foreign debt from $44 billion in 1992 to $120 billion in 1997, due to skyrocketing foreign short-term debt, making the economy vulnerable and finally causing the financial crisis

10. Mismanaged Capital Account Liberalization and the 1997 Financail Crisis
Unravelling of the former developmental state, along with the development of capital markets financial autonomy of chaebol (Cho and Kim, 1995; Lee et al., 2002)
Strengthening free market ideology, political democratization, and the retreat of the state from the market
Rising demand for financial liberalization and opening from domestic businesses and external pressure in the early 1990s
Haphazard capital account liberalization introduced: comprehensive deregulation of foreign short-term borrowings from that financed investment boom of chaebols (Cho and McCauley, 2003)
Rising foreign debt from $44 billion in 1992 to $120 billion in 1997, due to skyrocketing foreign short term debt, making the economy vulnerable and finally causing the financial crisis

12. Neoliberal Economic Restructuring and Opening of the Economy
Neoliberal economic restructuring to establish the more open and liberalized economy, suggested by the IMF (Crotty and Lee, 2002; 2005)
Capital-friendly labor market reform and flexibilization, allowing layoffs and dispatching workers, increasing unemployment and inequality
Financial restructuring with shutdown of half of institutions and injection of public money as large as 30% of GDP
Corporate restructuring to reduce the debt ratio and to streamline the structure of chaebols, but limited efforts to reform corporate governance, causing a decline in investment
All-out financial opening of capital markets and more deregulation of foreign investment and foreign exchange transactions, resulting in increases in FDI and financial instability

13. Rising Inequality after the Crisis and Its Causes
Income inequality rising after the crisis and economic restructuring: Gini coefficient from in 1997 to in 2009, mainly owing to wage inequality (Choi, 2013)
The relative poverty rate skyrocketing from 8.7% in 97 to 15.4% in 2009, because of the poor becoming poorer
The top 1% and 10% income share rapidly rising after the crisis, following the Anglo-Saxon country pattern (Kim and Kim, 2015)
Asset inequality also rising, higher than income inequality, associated with the real estate market bubble in the early 2000s
Irregular workers earn less than half of wages of regular workers, and the gap between them increasing
Broad structural, rather than technological, changes and neoliberal labor market reform after 1997 are responsible for rising inequality

18. The Neoliberal Growth Model, Inequality and Growth
Economic growth and investment stagnant and unstable with bubbles and burst, after the 1997 crisis and neoliberal economic restructuring
Korean growth became dependent on exports much more and vulnerable to external shocks, with trade openness 59% in 97 to 110 % 2012 and 85% in 2015
The labor share and household income share falling while the profit and corporate income share rising in the 2000s (Kang and Lee, 2012)
Changes in the financial system and a decline in corporate lending while a significant rise in household loans and debt
The dualized growth pattern emerged, between exporting large firms and SMC in the domestic demand sector, along with with structural changes in the economy

27. Why Inequality is Bad to Economic Growth
Concerns about rising inequality is rising around the world after the global financial crisis, and its implication to growth
Inequality might be good to growth due to incentive effects and saving effects, however, more recently bad effects are highlighted
Inequality could depress consumption and domestic demand in short run, leading to lower investment
Inequality is harmful to human capital investment of the poor, and thus bad to productivity and economic growth (Aghion et al., 1999)
Inequality worsens social conflicts and instability, blocks development of inclusive institutional development for incentives and innovation, hindering long-run growth (Alesina and Perotti, 1996; Acemoglu and Robinson, 2012; World Bank, 2005)
Empirical studies report that inequality is bad to long-run growth across countries, and also bad to growth within countries, emphasizing redistribution for inclusive growth (Ostry et al., 2014)

29. The Role of the Government for Egalitarian Growth
The government role for social welfare still limited compared with other OECD countries (7% vs. 25% of reduction in inequality) (OECD, 2013)
Public social spending out of GDP is less than half of the OECD average, though rising from 3.2% in 95 to 10.4% in 2016
Serious income inequality with rising household debt depresses domestic demand: growth pattern changed to wage-led after 1997, so rising wage can increase aggregate demand (Hong, 2014)
Rising Inequality represses social mobility based on education, and is associated with increasing concentration of money and power
Korea needs to re-establish egalitarian growth, by expansionary fiscal policy with more welfare and progressive tax reform (IMF, 2016)
Democratic structural reforms for fairness, strengthening 90% workers’ bargaining power, raising minimum wage and managing financial openness are called on

32. Analysis of Demand System in Korea using Post-Keynesian Model
effect of wage on
aggregate demand:
1981~1997
1999~2012
Consumption
Wage elasticity of consumption (a)
0.35***
0.84***
Profit elasticity of consumption (b)
0.07*
0.32***
Difference (a-b)
0.28
0.52
Investment
Output elasticity of investment
1.96***
1.69 ***
Profit share elasticity of investment
-0.73
-0.48
Export
Unit labor cost elasticity of export
-1.22 **
0.50
Aggregate demand (=C+I+X-M)
-0.05
1.24
1% increase in labor share raise 1.24% of aggregate demand
Source: Hong, 2014

35. Conclusions
The old egalitarian growth model in Korea was associated with helpful initial conditions and successful government policies
It is over after the 1997 financial crisis along with the structural change of the economy toward the neoliberal growth model
But its result was rising inequality and poverty, stagnant economic growth, and social problems
Koreans should set up a new development model, based on a democratic welfare state to break the vicious circle of rising inequality and stagnant growth
Political mobilization for this purpose is essential