Experts say widening gap threatens social stability, sustained economic growth


A 51-year-old man was found hanging in his rented room in a Seoul multi-family house last week, leaving a note in which he said, “(I’m) too lonely and tired.”

The man, surnamed Shin, had lived from hand to mouth as a day worker for the past two decades. He left his son in the care of his elder brother since his wife ran away because of their poverty.

The heavy rain this summer had stopped him from working at construction sites. His landlady told police Shin had failed to pay his monthly rent of slightly more than 200,000 won ($180) for the past several months.

On the day Shin was discovered dead, President Lee Myung-bak pledged to create a warm-hearted society, where people take care of each other, in his speech marking Liberation Day. Lee’s message must have sounded more urgent ― or hollow ― to Shin’s neighbors and other day workers whose number now exceeds 1.17 million.

Two days later, the media highlighted figures proving the increasing grip of large enterprises on the national economy, ringing alarm bells against the consequences of economic concentration.

The data from Chaebol.com, a business website, showed the combined sales by 539 manufacturing affiliates of the country’s top 10 conglomerates amounted to 756 trillion won, or 41.1 percent of the total in the manufacturing sector, last year. It marks the first time that the ratio has exceeded the 40 percent level. The turnover by the manufacturing arms of the 10 largest chaebol, or family-run conglomerates, increased by 83.5 percent over the five years from 2005, while sales by all other manufacturers rose by 38.3 percent over the same period.

The top business groups have also increased their share in the local stock market. The aggregate value of listed stocks of their affiliates reached 698.7 trillion won as of Aug. 1, accounting for more than 52 percent of the total value of shares listed on the stock exchange. The ratio was up from 44.5 percent in 2008 and 46.3 percent in 2009.

According to statistics from the Citizens’ Coalition for Economic Justice, a leading civic group, the number of companies affiliated with the 15 biggest conglomerates rose from 472 in April 2007 to 778 last April.

No trickle-down effect

Experts note that the overexpansion of large business groups, accompanied by few new jobs and forays into the territories of small- and medium-sized enterprises, has exacerbated economic polarization to breaking point. They point out that the trickle-down effect, in which growing profits for big companies are supposed to lead to more benefits for the SME sector, the self-employed and working-class families, has been lost in Korea’s economic structure.

The 10 largest companies, which accounted for about 30 percent of the total corporate profits last year, employ a mere 2 percent of the workforce, according to figures from the Bank of Korea and Statistics Korea.

“President Lee Myung-bak’s business-friendly policy has resulted in feeding only big enterprises, marginalizing small companies,” said Ko Kye-hyun, secretary general of the CCEJ. He indicated the withering of the SME sector, which employs nearly 90 percent of waged workers, has left many households financially vulnerable, weakening domestic consumption.

In a recent survey of 300 SMEs and self-employed people, 94.3 percent of respondents said the economic divide between large and small businesses is serious. More than 91 percent replied the economic rift would exacerbate the polarization of society, with 88.7 percent worrying that sustainable growth of the national economy will be impossible if the polarization goes unchecked, according to the survey by the Korea Federation of Small and Medium Business.

Former Prime Minister Chung Un-chan, who heads a commission on shared growth, told an event organized by a private bank last month that polarization of Korean society is at a “very grave” level and if it continues at the current pace, there is even a “possibility of our society collapsing.”

“Polarization in our country is a more serious matter than the relations with North Korea,” he said.

The strategy of stimulating economic growth through extensive support for large businesses, including a weak currency, low interest rates and tax reductions, has led Korea to exit the 2008 economic crisis faster than other countries. In 2010, the country became the world’s seventh-largest exporter with a total export volume of $460 billion and the seventh nation with a population of more than 50 million to achieve the per-capita gross domestic product of $20,000 after the U.S., Japan, Germany, the U.K., France and Italy. Industrial giants have powered this growth but their roles have been overshadowed by the mounting criticism that their hefty profits have not seen them making more investments and creating more jobs.

Widening gap

According to the National Tax Service, per capita earnings for the highest 20 percent of people liable for general income tax increased by 55 percent from 58 million won in 1999 to 90 million won in 2009. On the contrary, the corresponding figure for the lowest 20 percent decreased by 35 percent from 3.06 million won to 1.99 million won over the cited period. The highest-paid 20 percent of salaried workers earned an annual average of 76.8 million won in 2009, compared to 14.8 million won for the lowest-paid 20 percent.

In 2009, a total of 288,503 people were subject to inheritance tax and a mere 1.5 percent of them, or 4,340, actually paid the tax with deductions leaving no taxable inheritance for others. The assets inherited by the 1.5 percent group amounted to 10.1 trillion won, or 51 percent of the whole inherited fortunes.

“The income polarization has been going on since the 1998 foreign exchange crisis rather than being accelerated in the past few years,” said Kim Sun-bin, research fellow at the Samsung Economic Research Institute. He noted that more serious than the income gap may be the increasing difference between classes’ perception and consumer behavior.

“The richer group has shown a clear pattern of buying certain brands at certain shops,” he said.

With the gap between rich and poor widening, the country’s middle class has been shrinking. Defined as households earning 50-150 percent of the median income, the middle class declined from 60.4 percent of the population in 2003 to 56.4 percent in 2007 and 55.5 percent in 2009, according to figures from Statistics Korea.

The share of the middle class in national income also slid from 54 percent in 2003 to 49.4 percent in 2007 and 48.1 percent in 2009. Experts note the contraction of the middle class, which serves as a buffer zone against possible social and political disruptions, should be taken seriously as a signal of potential eruptions. They worry that social stability and sustainable economic growth cannot be guaranteed unless the problem is tackled effectively.

Many of the families clinging to the middle class are also on the verge of falling below the poverty line as they are struggling with high inflation, mounting education costs and a collapse in the value of their assets under the constant threat of unemployment. The average income of the middle class rose by 33.9 percent from 2003 to 2010 only to be offset by annual average price hikes of 3.1 percent over the last decade.

With the middle class squeezed, the poor class, which is defined by the Organization for Economic Cooperation and Development as households earning less than 50 percent of the median income, increased continuously to 3.52 million households, or 20.9 percent of the total, in 2009. The ratio is nearly double the OECD average of 10.6 percent. Many of the poor actively engage in economic activity but fail to earn the minimum monthly cost of living ― 1.44 million won for a four-member household.

Government figures show the country’s GDP increased by 6.2 percent in 2010, the highest rate in eight years, but the ratio of compensation for employees to national income decreased to a six-year low of 59.2 percent, showing Korean workers have taken an increasingly small share of the benefits from economic growth.

Insufficient jobs

Jobs have not increased at a fast enough pace to absorb a rising number of job seekers. Figures from the Bank of Korea showed that jobs paying more than a median wage climbed from 5.29 million in 1995 to 5.81 million last year, while graduates from colleges and other higher institutions of education rose from 4.74 million to 9.65 million over the cited period.

Aside from the need to create more jobs, Ko, the CCEJ secretary general, stressed efforts to improve treatment for irregular workers, whose number has continuously increased, making household economy vulnerable and pushing polarization of society further to the extreme.

Korea’s labor market has become polarized between well-paid regular workers and temporary laborers whose low wages make up for the gap between rising labor costs and lowering productivity.

According to government figures, more than half of salaried workers numbering 17 million were employed on the irregular basis as of March, with their average monthly wage remaining at 1.35 million won, just 57 percent of the 2.36 million won for regular workers. The proportion was down from 65 percent in 2004. The ratio of low-wage workers earning less than two-thirds of the median wage amounted to 25.6 percent of the total workforce in Korea for 2007-09 period, compared to 24.8 percent in the U.S., 15.0 percent in Japan, 12.0 percent in Denmark and 5.3 percent in Finland, according to a report from the International Labor Organization.

With household income remaining stagnant or even decreasing, household debt is ballooning at such an alarming pace that regulators have recently come up with a set of measures to curb it. Household debt totaled a record high of 876.3 trillion won in June, far above disposable income, holding back domestic expenditure.

The economic polarization has been also reflected in the widening gap between private tuition fees paid by high-income and low-income classes. According to figures from Statistics Korea, the lowest 20 percent income group spent a mere 33,593 won in private tuition costs for children in the first quarter of this year, compared to 301,453 won for the highest 20 percent. The expenditure on private tutoring increased by 67.6 percent over the past eight years among the high-income families, dwarfing the 10.2 percent rise among the low-income households.

Experts worry that the widening gap in private education costs will cement the polarization between rich and poor as children from poor families have less chance of being admitted to top universities and then gaining decent jobs.

The deepening economic polarization has sent policymakers and politicians scrambling for measures to bridge the rift and support the livelihoods of the less privileged. With parliamentary and presidential elections scheduled for next year, political parties are already in competition to win voters’ hearts by proposing a flood of welfare policies, some of which have been criticized for being populist.

In a national survey of voters, conducted by Korea Research in March, nearly half of respondents cited the building of a good welfare system as the nation’s top priority, compared to 28.1 percent who viewed the establishment of a full-fledged democracy as most important.

By Kim Kyung-ho (khkim@heraldcorp.com)