Comment on “Meeting the Social Policy Challenges Facing Korea”


Muhammad Chatib Basri, LPEM-FEUI, Jl. Salemba Raya no. 4, Jakarta 10430, Indonesia. Email:

Jones (2012) has produced a paper that is very informative and stimulating. His paper details the challenges and the development of social policy in Korea. Jones nicely lays out Korea's social policy problems due to an aging population. I think this paper is very timely and important considering the aging population is one of the important issues in the current economic situation. Jones (2012) focuses on three issues: (i) the challenges of implementing effective social insurance schemes to provide pensions and health and long-term care to an aging population; (ii) inequality and poverty which focus on the limited role of social spending and the dualism in the labor market; and (iii) the education system which is related to the equity issues and financing social spending. In addition, Jones tries to answer the question of how to promote growth with social cohesion.

There are several important findings from this paper. First, Korea's strong growth performance was accompanied by a widening income inequality which suggests that economic growth is not sufficient to achieve social cohesion. Second, the social welfare program should be designed carefully and efficiently, and should be targeted for those most in need rather than provided universally. Third, it is very important to learn from the European experiences about how difficult it is to scale back social welfare programs. Fourth, Jones nicely reminds policymakers and readers of the importance of implementing a defined contribution scheme rather than defining the benefit to ensure that the social insurance program can be fully funded. Fifth, it is important to ensure an adequate capacity for the long term by emphasizing the role of private sector and allowing competition. Sixth, to raise tax revenue, Jones argues that the government should rely on indirect taxes, environmental and property taxes to meet the needs of increasing social welfare spending.

Now I will turn to some specific comments and questions. It would be useful if the author can provide readers with the bigger macroeconomic picture on the status of the Korean economy in relation to the issue of the current account, savings–investment gap and budget deficit gap. This will help readers to understand the impact of the aging population, in general, and about its fiscal sustainability. I think it is worthwhile if the author provides some explanation of how sustainable Korea's fiscal policies related to the aging population are. This is going to be the anchor of the analysis in social spending.

As argued by Jones, the benefits of sustained growth over the past decade have not effectively trickled down to the poor and vulnerable. Some portion of Korean households may be considered poor or near poor. How vulnerable is Korea's poor to an economic shock such as the global financial crisis? Is there any specific program which the government has prepared for an economic shock? Unfortunately, Jones is silent on this issue.

I think the importance of a flexible labor market is worthy of more exploration. The high degree of employment protection and the power of the trade unions may act as a hiring tax. Thus, companies tend to hire temporary workers (non-regular workers) whose social insurance coverage is less comprehensive than regular workers. This will make some workers less protected. The question is how feasible is this policy politically, considering that the trade unions are relatively strong? It would be useful if the author can say something on this particular issue.

Jones argues that raising tax revenue is very important to ensure fiscal sustainability in the face of the aging population problem. Specifically, he suggests focusing on raising revenues from indirect taxes, such as value-added tax (VAT), and environment and property taxes rather than direct taxes. This is a very interesting and important policy recommendation. How effective is the VAT in raising tax revenue, considering consumption may be relatively low in a society which is dominated by aging population compared to that with a young population (Modigliani & Brumberg, 1955)?

Jones also argues that keeping direct taxes low is very important to keeping economic growth sustainable. It is probably worthwhile to look at the impact of low tax rates in a country with an aging population. The spending behavior of this group is likely to be influenced more by their permanent income, instead of their current income (Modigliani & Brumberg, 1955). Thus, a low direct tax rate may not be effective in promoting growth, because people will tend to respond to this by increasing their savings.

One of the most important issues in discussing a social protection system is that of institutionalization. I wonder if Jones can say something on the issue of institutionalization.

In summary, Jones (2012) is worth reading and offers an important contribution to the study of the social policy in Korea. This excellent paper also draws some important implications for pension, health, and long-term care policy. In addition, various lessons can be drawn from this paper, particularly a comparative study with other countries with similar problems.