Comment on “Meeting the Social Policy Challenges Facing Korea”
Article first published online: 1 JUN 2012
© 2012 The Author. Asian Economic Policy Review © 2012 Japan Center for Economic Research
Asian Economic Policy Review
Volume 7, Issue 1, pages 111–112, June 2012
How to Cite
CHIA, S. Y. (2012), Comment on “Meeting the Social Policy Challenges Facing Korea”. Asian Economic Policy Review, 7: 111–112. doi: 10.1111/j.1748-3131.2012.01223.x
- Issue published online: 1 JUN 2012
- Article first published online: 1 JUN 2012
The paper by Jones (2012) is an excellent account of Korea's social challenges and social policies. The challenges arise from rapid population aging and inadequate social insurance schemes to provide pensions, health care, and long-term care, as well as income inequality and labor market dualism. The paper discusses the dilemma of financing increased social spending, taking into consideration economic growth, social cohesion, and fiscal sustainability.
Jones benchmarks Korea against other Organisation for Economic Cooperation and Development (OECD) countries, but it would be enlightening to make comparisons with East Asia also, notwithstanding the difficulty of finding comparable data sets. Korea's demographic transition, erosion of the traditional social support system, low formal social spending, stage of economic development, and impact of technological change on income inequality have closer parallels currently with many East Asian economies than with most OECD countries. In the coming years, many East Asian governments will have to increasingly grapple with the problems of population aging impacting on gross domestic product (GDP) growth and rising income inequality undermining social cohesion. Finding financial resources to fund social safety nets at the same time ensuring fiscal sustainability will be a serious challenge for these countries, and a study of best practices in the OECD and in East Asia would be helpful.
On population aging, Korea's total fertility rate (TFR) of 1.2 parallels the ongoing demographic transitions in several East Asian economies. Korea has earlier enjoyed the demographic bonus, with a dramatic increase in the share of the working-age population, declining child dependency, and rising female labor force participation rate (LFPR). The current demographic onus shows a shrinking support ratio, population aging, and eventually, population shrinkage. Rapid population aging and rising life expectancy means Korea has to reverse its declining TFR, make better use of female and older workers, or else relax its immigration policy. What lessons can the OECD countries offer on reversing birth trends and encouraging female LFPR? The latter would include promoting family-friendly policies in the workplace. Raising elderly LFPR requires the removal of labor market policies that discriminate against the elderly, including the mandatory retirement age. Many OECD countries and some East Asian countries, particularly Singapore, have liberalized immigration to enlarge their population and labor force. Could Korea do likewise or would it prefer to follow the Japanese model on immigration?
Population aging and rising life expectancy means paying more for pensions, health care, nursing homes, and other social services. Traditional protection of older employees is no longer affordable with globalized competition, aggravated by the breakdown of the traditional family support system. With the transition to the knowledge-based economy, the speed with which the skills of the workforce become obsolete is accelerating, rendering older workers unemployable even as they become more numerous. Assuming current benefit and pension programs remain unchanged, their share of GDP will rise unsustainably in the decades ahead. The central challenge is how to provide a decent level of support for the old without imposing a crushing burden on the young. If Korea is to escape the burden of the welfare state in many aging western economies, there is a strong case to introduce a fully funded retirement system (provident fund) introduced by the British into Singapore and Malaysia during colonial times. Preventive health-care measures would also reduce the health-care burden posed by the elderly. The fiscal system also needs an overhaul. High reliance on tax revenue from trade in goods, employment income, and corporate profits is increasingly challenged by globalization and international mobility of professionals and investors. More reliance will have to be based on indirect taxes such as on value added, consumption, real estate, and the environment.
On rising income inequality, it should be noted that Korea began the industrial catch-up period with remarkably equal income distribution and a sharp reduction in absolute poverty. It is only in the 1990s that Korea experienced a dramatic deterioration in income inequality under pressures from economic restructuring and globalization. Economic restructuring leads to labor market dualism, with premiums on skills, and a sizable portion of low-skilled working in precarious and lowly paid jobs without adequate social insurance. As technological progress puts an ever-growing premium on skills, poorly educated workers are falling behind, and one priority is to provide more training opportunities for them. Another is to liberalize employment protection for regular workers and let the labor market operate more freely, so that firms can achieve necessary flexibility without depending much on non-regular workers. A third priority is to equalize the social safety net coverage of regular and non-regular workers.
Jones notes that social welfare spending in Korea is not only low, but is also not well targeted on low-income households. The Korean government has continuously expanded the social safety net since the 1970s with the introduction of social insurance programs (health, pension, unemployment, etc.) and public assistance programs. However, these have played only a limited role in mitigating poverty for various reasons. In the meantime, welfare spending has increased rapidly. Ensuring sustainable growth is essential to create the jobs and generate the public revenues necessary to fund social welfare spending and insurance programs. At the same time, the government needs to give priority to the implementation of well-targeted tax and benefit programs.