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The Role of the Fiscal Policy in Poverty Reduction

The Role of the Fiscal Policy in Poverty Reduction. 2003. 10. 9 Youngsun Koh Korea Development Institute. Trends in income inequality. Korea has long been known as a country that achieved equitable income distribution together with rapid economic growth. Gini coefficients.

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The Role of the Fiscal Policy in Poverty Reduction

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  1. The Role of the Fiscal Policy in Poverty Reduction 2003. 10. 9 Youngsun Koh Korea Development Institute

  2. Trends in income inequality Korea has long been known as a country that achieved equitable income distribution together with rapid economic growth. Gini coefficients Source: Hyun (2003).

  3. Contributing factors : Economic growth Rapid economic growth itself contributed to the reduction in poverty by providing a wide range of job opportunities. Labor force participation and unemployment Source: National Statistical Office.

  4. Contributing factors : Stable macroeconomic environment Low and stable inflation since the early 1980s, helped in part by sound fiscal management, fostered private savings and the accumulation of wealth among the general public. Rate of Inflation (CPI) Savings rate Source: National Statistical Office. Source: Bank of Korea

  5. Contributing factors: Demands for education Strong desire for educational attainment led to a general improvement in the labor force quality, which in turn moderated wage differentials among workers. Enrollment rates Ratio of college-graduates (%) (%, by age group, ’01) Elementary Middle High College ’60 99.8 33.8 19.3 5.0 ’70 100.7 51.2 28.1 8.7 ’80 102.9 95.1 63.5 15.9 ’90 101.7 98.2 88.0 35.2 ’00 98.7 99.5 95.6 79.4 ’02 98.5 98.5 94.0 87.0 24-64 24-34 U.S 37 39 Japan 34 47 Germany 23 22 France 23 35 Italy 10 12 U.K 26 30 Korea 24 40 Source: Ministry of Education and Human Resources Development. Source: OECD, Education at a Glance, 2002.

  6. Contributing factors : Educational spending The Korean government has made great efforts to meet the rising demand for education by spending a large share of its resources on this area. Expenditure on education (% of GDP, ’99) (% of the central government spending) Public Private Total U.S 4.9 1.6 3.9 Japan 3.5 1.1 4.7 Germany 4.3 1.2 5.6 France 5.8 0.4 6.2 Italy 4.4 0.4 4.8 U.K 4.4 0.7 5.2 Korea 4.1 2.7 6.8 Education Defense Welfare Economic Affairs ’70 16.7 22.7 4.9 27.4 ’80 14.6 30.6 5.7 26.0 ’85 16.6 26.6 5.2 21.9 ’90 17.0 20.0 8.1 20.4 ’95 18.0 15.7 9.0 24.9 ’00 15.3 11.4 15.3 25.2 Source: OECD, Education at a Glance, 2002. Source: Ministry of Finance and Economy.

  7. Contributing factors : Social insurance programs All social insurance programs have now been fully extended to the target populations by law, but the actual participation is usually below the 100% level. Social insurance programs Starting year Full extension Insured (thousand) Workers’ Compensation 1964 2000 10,571 National Health Insurance 1977 1989 46,659 National Pension 1988 1999 16,499 Employment Insurance 1995 1998 7,171 Note: In addition to the National Pension, we also have separate occupational pension programs for civil servants (931,000), military personnel, and private school teachers (221,000).

  8. Contributing factors : Public assistance and welfare services The government offers public assistance to the very poor who cannot participate in social insurance programs. It also provides welfare services for the disabled, seniors, and other underprivileged groups. National Basic Livelihood Protection Program  Target population - Families with income below the specified minimum living costs - Monthly minimum for a 4-member family (’03): 850 USD - Around 3% of the total population is currently covered with NBLP.  Types of assistance - Income support, housing and educational allowance, medical aid, etc. - The amount of monthly income support corresponds to the difference between the beneficiary’s income and the minimum living costs.  Budget for ’03 : 2.9 billion USD - Income support 1.1 billion USD, medical aid 1.5 billion USD.

  9. The impact of the recent economic crisis The recent economic crisis substantially increased income inequality in Korea. International comparison of Gini coefficients Source: Yoo (2003).

  10. Inequality of market income But in terms of market income (before the intervention of the tax and transfer system), inequality is still low in Korea.  Disposable income = market income - taxes paid + transfers received Gini coefficients of market and disposable income Source: Yoo (2003).

  11. Limited role of the tax and transfer system The very small difference in Gini coefficients between market and disposable income indicates the rather limited role of the tax and transfer system in Korea in general and the immaturity of the pension system in particular. Welfare expenditure and tax revenue Note: The data for Korea refer to 1999 while others refer to 1995. The tax revenue includes social security contributions. Source: Moon (2000); OECD, OECD Revenue Statistics, (2002).

  12. Expected increase in welfare expenditure Even under the current schemes, however, the welfare expenditure is expected to grow rapidly in the future with the aging population. Projected welfare expenditure Aging population Source: Moon (2000). Note: The elderly refers to those aged 65 or more. Source: National Statistical Office.

  13. Increasing tax burden and rising inequality The increasing expenditure on welfare programs will be accompanied by an increasing tax burden, implying a bigger role of the tax and transfer system in reducing the income inequality. At the same time, the inequality of market income is set to rise due to the skill-biased technological progress, the globalization of the Korean economy, the growing number of the elderly living alone, and the increase in structural unemployment that usually follows the increase in tax burden.

  14. Less focus on inequality For these reasons, it appears inappropriate to seek at this moment a drastic measure to reduce the income inequality, which is likely to prove to be ineffective and/or accelerate the growth in welfare expenditure.

  15. And greater focus on poverty Instead, the efforts should be focused on reducing the poverty at the bottom of the income ladder. Relative poverty in population Note: Relative poverty is defined as those with income below 40% of the median income of the total population. Source: Yoo (2003).

  16. Two-pronged strategy to fight the poverty Expanding the job opportunities by promoting the vitality of the market economy and by increasing the labor market flexibility; and  Targeting welfare programs at the very poor. For example, rather than financing the enormous deficit in National Health Insurance with tax money, the government should raise the insurance premium more rapidly and use the saved tax money on medical aid for the poor. Rather than extending free education to all middle-school students, loan and subsidy programs should be expanded for college students. Housing policy should be similarly revamped and targeted at the poor.

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