“Miraculous” for Whom

by Abhik Pramanik, ETA ’15-’16

Despite Korea’s rapid ascension from economic basket case post Korean War to a global heavyweight referred to as the “Miracle on the Han River,” the Asian Financial Crisis and the years hence have revealed a dark underside to Seoul’s economic might. 

Indisputably, South Korea is among the richest nations in the global economy. Currently, it is considered the 13th wealthiest country by the World Bank, sandwiched between Australia and Spain with a GDP of approximately $1.4 trillion. However, despite Seoul’s “miraculous” rise to global economic prominence, it is still the most parsimonious public spender among the so-called developed nations. According toOECD Stat, public expenditure in the Republic of Korea only matched 10.4% of GDP in 2014 – comfortably the lowest among all Organization for Economic Cooperation and Development (OECD) countries. The second stingiest nation is Iceland, whose public expenditure comes in at 16.5% of GDP. However, Iceland’s GDP per capita in 2014 – $52,005 USD – is nearly double South Korea’s measure of $27,970 USD from the same year.

This low level of public expenditure also coincides with a decadal increase in inequality in South Korea that was precipitated by the Asian Financial Crisis. From 1990-1995, South Korea’s average Gini coefficient was .258. In 1999, in the dead center of the crisis, Seoul’s coefficient had risen to .298. Eleven years later, in 2010, the ROK’s Gini coefficient had risen even further to .315. This rise in the coefficient reflects changes in the share of income held by the top 10% of Korean income holders from 1990 to 2010. In 1990, the top 10% held 3.30 times more wealth than the bottom 10%; but in 2010, that figure had increased by roughly 50% to 4.90. [1. Koo, Hagen. “Inequality in South Korea,” East Asia Forum, July 1st 2014.]

In spite of miraculous growth which has seen high rises become a ubiquitous part of Korean life, urban slums are equally commonplace. Pictured: Guryong Village, a shanty town on the outskirts of Seoul’s luxurious Gangnam District. Source: Reuters/Kim Hong-Ji.

In spite of miraculous growth which has seen high rises become a ubiquitous part of Korean life, urban slums are equally commonplace. Pictured: Guryong Village, a shanty town on the outskirts of Seoul’s luxurious Gangnam District. Source: Reuters/Kim Hong-Ji.

Despite the ROK’s immense GDP, the growing level of inequality throughout Korean society raises the question of societal equity and social responsibility. In an economically prosperous nation, is it the role of government to ensure that no citizen is left materially and/or socially behind? In the event of widespread poverty and economic inequality, is it the government’s responsibility to alleviate said inequality? In the immediate onset of the Asian Financial Crisis, it would appear that Korea’s answer to these questions was a resounding “yes.” In January 1998, then President-elect Kim Dae Jung promised “workers a ‘U.S. style’ social welfare,” in response to the gigantic labor crisis that some scholars argue Dae Jung’s policies “were bound to create”.[2. Crotty, James & Lee, Kang-Kook. “Korea’s Neoliberal Restructuring: Miracle or Disaster?,” Political Economy Research Institute (PERI), University of Massachusetts Amherst, 2001, p. 3.]

To understand the current state of the Korea welfare system, it is first necessary to trace the origins of the Asian Financial Crisis and the IMF restructuring of the Korean economy that concurrently took place. It is through this period of deep economic insecurity for Korean workers combined with a growing shift in attitude among younger Koreans about their obligations to the family that the Korean welfare system was first born.

The Asian Financial Crisis & Neoliberal Restructuring

The Asian Financial Crisis had a drastic impact on the Korean economy. Especially vulnerable to the crisis was the Korean financial sector, which had employed incredibly reckless lending practices upon its opening to foreign markets in the early 90s. In November 1997, Korean banks held $52 billion in non-performing loans it had doled out to cash-hungry chaebols, which constituted roughly 17% of the financial industry’s total debt. As a result, international traders attacked the Korean currency, driving the exchange rate from 844 won to the dollar in January 1997, to a high of 2000 won per dollar in December. That same December, 123 Korean companies failed each day on average. Moreover, the high trade deficit the Korean government had been running the previous three years meant that Seoul lacked the foreign currency to bail its conglomerates out of the growing crisis.[3. Lee, S. Keun. “Financial Crisis in Korea and IMF: Analysis and Perspectives,” Presentation at Hofstra University, 1998.]

As a result, the Korean government accepted an IMF bailout of 57 billion USD on the condition of several neoliberal reforms. These included the floating of the Korean currency on the international market, the opening up of Korean companies to foreign ownership, wider allowable daily fluctuations of the Korean stock market, and a massive increase in interest rates to 30%. Unlike most other developing nations, Korea wholeheartedly embraced the IMF’s proposed reforms. For example, though the IMF demanded that Korean listed companies be allowed to have up to 55% foreign ownership, the Dae Jung regime made 100% foreign ownership of Korean firms permissible by the end of 1998. [4. Ibid]

The IMF reforms took a heavy toll on Korean workers. Source: Associated Press.

The IMF reforms took a heavy toll on Korean workers. Source: Associated Press.

Such reforms came at a high cost. From an incredibly low unemployment rate of 2.1% in October 1997, unemployment skyrocketed to 8.6% in February 1999. As others have argued, however, the Dae Jung government foresaw this spike in unemployment from the outset. Kim Dae Jung was an incredibly pro-market politician, who stated in his 1985 book, Mass-Participatory Economy: a Democratic Alternative for Korea, that “maximum reliance on the market is the operating principle of my program” and that “world integration is our historic mission”.[5. Crotty, James & Lee, Kang-Kook. “A Political-Economic Analysis of the Failure of Neoliberal Restructuring in Post-Crisis Korea,” February 2002, p. 4.] Additionally, in the midst of the deep recession, Kim announced that he “believe[d] that the crisis will be remembered as a blessing…because it is forcing essential economic changes”.[6. NYT, February 8th 1999, Online.]

Despite the ominous predictions of several prominent economists such as Paul Krugman and Jeffrey Sachs at the time, the IMF and Kim Dae Jung undertook the neoliberalization of the Korean economy at breakneck speed.[7. Crotty, James & Lee, Kang-Kook. “A Political-Economic Analysis of the Failure of Neoliberal Restructuring in Post-Crisis Korea,” February 2002, p. 5.] Many view Kim Dae Jung’s failure to heed such admonitions as explicitly political, as the extent of the free-market reforms he demanded would have been met with fierce resistance in a “non-crisis environment.” With labor weakened by the unprecedented rates of unemployment, the IMF and the Blue House took the opportunity to repeal traditional labor laws that guaranteed job security. As a result, firms were allowed to fire as many workers as “needed” for anything deemed to be of “urgent managerial need,” while temporary help agencies were rapidly legalized. Chaebols took advantage of this change by firing many of their permanent, full-time employees, and hiring cheaper temporary workers in the following years. Such a shift had a drastic effect on the financial stability of the Korean populace. From 1992-1996, 58% of Korean workers had permanent job status. In 2000, that figure fell below 48%. Especially disconcerting was the sharp increase in temporary job status among women, which increased from 57% in 1995, to 70% in 2000.[8. Ibid, p. 10-11]

The Inception of Social Welfare

To appease the growing transient workforce and criticized for high rates of unemployment, President Kim augmented the nation’s social welfare system. Nevertheless, Dae Jung’s government did not make such a decision on its own, and was influenced by a host of external factors. One such factor was pressure from grassroots movements and civil society writ large for social safety net reform. Civil society leaders were able to position themselves as expert-activists, and were invited to be involved in the policy making process – despite opposition from vested conservative and business interests. Moreover, many labor unions, which saw their influence among businesses erode as a result of the IMF reforms, turned their attention to altering government policy to provide some respite for their beleaguered (ex)members. In the end, this grassroots pressure was able to build momentum for reform because of Korea’s increasing democratization throughout the 90s, as the government was forced to listen to the demands of its constituents.[9. Peng, Ito & Wong, Joseph. “Growing Out of the Developmental State: East Asian Welfare Reform in the 1990s,” 2004, p. 16]

South Korean labor vigorously protested the IMF’s impositions on the Korean economy. Source: Associated Press.

South Korean labor vigorously protested the IMF’s impositions on the Korean economy. Source: Associated Press.

As a consequence of civil society and union lobbying, the National Basic Livelihood Security System (NBLSS) was formed. The NBLSS entirely reframed the concept of the Korean safety net. Prior to the crisis, the national government provided very little aid to the Korean population as it subjugated equity-based concerns to its aims for economic growth. Moreover, with a phenomenal rate of growth throughout the 80s, and with a population which valued utilizing the family as a safety net, the Korean government felt very little need to provide any welfare assistance prior to the Asian Financial Crisis. Under the NBLSS, Yeon-Myung Kim – a Professor of Social Welfare at Chung-ang University – argues, the government “made it clear that enjoying a basic standard of living is a basic civil right; thus, the government has the responsibility of guaranteeing a minimum living standard, even for those who cannot afford it.” Prior to the NBLSS, aid was only provided to those under 18 or over 60 who did not have family who could care for them. Both of these conditions were scrapped (though not entirely) by this new system. Moreover, the NBLSS was means-tested at or below the national poverty line, a measure that had not existed before.[10. Kim, Yeon-Myung. “Towards a Comprehensive Welfare State in South Korea,”Asia Research Centre, Working Paper 14, January 2006, p. 10-11.]

Ultimately, the NBLSS became a necessary measure to deal with the increasing need for more universal social services as the traditional Korean safety net began to wither. As Kim demonstrates, throughout the 90s Korea experienced a “gradual decrease in the number of average household members, the weakening of the extended family support system, the increase in female participation in the labour force, the rapid aging of the population, and the lowest birth rate amongst OECD countries”. [11. Ibid, p. 12] However, despite the altruistic intentions of the NBLSS, at the programs inception in 2001, only 1.4 million South Korean citizens, approximately 3% of the total population, were covered by the initiative.[12. Ibid, p. 15] Despite this statistical nuisance, Kim – writing in 2006 – was positive about the Korean welfare’s system future trajectory, and argued that the huge projected annual increases in the state’s rate of social welfare expenditure of roughly 12.2% per annum, made it “possible to argue that Korea has moved to a more comprehensive welfare state following the financial crisis”.[13. Ibid, p. 17]

Evaluating Korea’s Social Safety Net

Nonetheless, examined in context, Korea’s massive increase in social expenditure appears less impressive. When viewed in a vacuum, the Korean government’s increase in social expenditure since the turn of the decade appears fantastical – however, it is fairly easy to post massive rates of growth when you’re starting near zero. Moreover, when likened with its OECD peers, Korea still resides near the bottom of the list when comparing public expenditure among economically advanced nations.[14. Lee, HyeKyung. “Emergence of the Post-Developmental Welfare Regime: A Case of South Korea,” 2009.]

Raw increases in expenditure aside, Soonman Kwon and Ian Holliday – Professors at Seoul National University and City University of Hong Kong respectively – argue that contemporary Korean welfare programs are not that qualitatively different from the programs that pre-dated the crisis.

As Kwon and Holliday are quick to disprove, many observers of Korea’s neoliberal restructuring have interpreted Korea’s implementation of a welfare system while undertaking IMF reforms as a shift in the government’s productivist welfare capitalist paradigm, which made economic growth its a-priori objective. Paradoxically, observers exclaimed, Korea was embracing a “third way” that recognized the importance of societal equality and the need for a free-market economy to operate in an extremely globalized world. Kwon and Holliday, however, deny such a shift ever happened: essentially concluding that the extensions in welfare that took place in the late 1990s and thereafter were in fact “rather modest” in scope.[15. Kwon, Soonman & Holliday, Ian. “The Korean welfare state: a paradox of expansion in an era of globalisation and economic crisis,” International Journal of Social Welfare(2007), Volume 16, p. 242.]

For example, though unemployment insurance was expanded for workers, eligibility was still restricted to those who had a history of employment for a minimum of six months, effectively denying recent graduates and part-time workers coverage. As a result, only 52% of salaried workers were provided with coverage, and of those with coverage, the replacement rate is set at 50% of the worker’s average earnings for a maximum of seven months. Rather than serving as a true safety net, Kwon and Holliday believe this unemployment assistance in fact strengthened the IMF’s targeted reforms by increasing labor market flexibility rather than actually improving job security.[16. Ibid, p. 246] Additionally, although the National Pension Program was expanded, since the program is contribution based, many of the low-income workers who would have benefitted most from a government-sponsored pension fund declined to participate. Likewise, though Korea has spent ever-increasing amounts on its pension funds, the fact that the program is contribution funded means that the pension is actually budget neutral. Finally, while the Minimum Living Standards Guarantee enshrined in the NBLSS sounds like a philosophical shift on the part of the Korean government – from growth-first to livelihoods-first – the NBLSS is still a conditional grant based on job-training and an active-search for employment known to many in the Western world as “workfare.” Thus, the NBLSS serves as a means towards enhancing economic productivity and still fits within the productivist welfare capitalist system, rather than signaling the emergence of a Nordic socialist-capitalist system built around a truly egalitarian ethos.[17. Ibid, p. 247]

Even when interviewing recipients of the NBLSS itself, the program appears a mixed bag. In a recent study by Joon Yong Jo, a Visiting Scholar at the Institute of East Asian Studies at UC Berkeley, the author found that though interviewees reported that the program “contributed to the alleviation of absolute poverty by providing a significant proportion of household income…they perceived the level of benefit was not sufficient enough to meet the developmental needs such as investment on child education, health care and housing improvement.”[18. Joon Yong Jo, “Welfare Policy for a Sustainable Development: Korea’s Productive Welfare and the National Basic Livelihood Security System,” 2014, p. 8.] Though many in the program were grateful for the work, most perceived the program as “cost-ineffective” as the majority of the trades they worked/were taught in the program – such as providing nursing or lunch-services – were un-marketable or un-profitable on the open economy. Thus, countless beneficiaries actually preferred to remain in the program for as long as possible, as it provided them with a consistent source of income.[19. Ibid, p. 8-9] Penultimately, when asked “if they would recommend the program to their friends in need,” a majority said yes as it helped them sustain their “minimum livelihoods.” However, when asked if they would recommend the program to a younger relative, respondents said no as the program did not provide participants with useful skills in a modern economy. [20. Ibid, p. 11]

Finally, the efficacy of current Korean welfare policies should come under further scrutiny, as despite the fact social welfare spending “increased consistently” under both Kim Dae Jung and Roh Moo-hyun, its “effect on reduction of poverty was the smallest of all member countries” in the OECD. Specifically, the effect on poverty reduction of the welfare system in the ROK was 13.9% in 2009, less than one-tenth the OECD average (149%).[21. Kang, WooJin. “Inequality, the welfare system and satisfaction with democracy in South Korea,” International Political Science Review (2014), p. 7.]

Looking Forward

Thus, though Korea rolled out a substantial number of welfare initiatives in response to the Asian Financial Crisis, these programs have been insufficient at creating a broad and equitable social safety net on the whole. This has been proven by evaluating the substance of Korea’s current welfare policies as well as through obtaining fairly neutral feedback from the actual recipients of said policies. Additionally, we have yet to delve into broader societal perceptions about inequality and access to welfare throughout Korea.

South Koreans at an “Occupy” protest hold up signs reading “Tax the Rich 1%, Welfare for the 99%”. Source: Associated Press.

South Koreans at an “Occupy” protest hold up signs reading “Tax the Rich 1%, Welfare for the 99%”. Source: Associated Press.

In examining several surveys with a specific emphasis on citizen satisfaction with democracy (SWD), Woojin Kang, a Political Science Professor at Angelo State University, finds that though Korea has experienced deep democratic liberalization over the past two decades, Korean SWD has plummeted in response to increasing perceived and actual economic inequality.[22. Ibid, p. 1-2] In the 2009 International Social Survey Program, more than 90% of Korean respondents said, “income differences were too large” and believed “it was the government’s responsibility to reduce differences between high-income and low-income individuals.” Along those same lines, in the 2006 Asian Barometer Survey, 42.52% of Korean respondents expressed dissatisfaction with the welfare system and 64.41% desired an increase in social welfare spending “aimed at areas such as health, education, old-age pensions and unemployment – even though such spending could increase taxes”.[23. Ibid, p. 1-2] Interestingly, according to the Asian Barometer survey, many older Koreans still harbor a lingering nostalgia for authoritarian rule as they associate such governance with high rates of economic growth and lower income inequality.[24. Ibid, p. 12]

Consequently, broader societal demand for stronger welfare institutions, combined with the woeful inadequacy of the current welfare structure, begs the question: what are the long-term prospects for Korean social services? In their analysis of The Future Challenges of the Development Welfare State: The Case of Korea, Huck-Ju Kwon and his co-authors contend that future demographic shifts as well as ongoing changes in the Korean familial structure will force a restructuring of the current welfare system. Two compounding demographic changes in particular will pose an unsustainable burden on the Korean state. First, the increasing cost of paying for education coupled with poor support for workingwomen with children or women who are pregnant, has led to an exceedingly low national fertility rate. This low fertility rate means that by 2030, roughly 25% of the Korean population will be above working age, and in need of retirement assistance.[25. Kwon, Huck-ju; Dong, Grami & Moon, Hyun-gyung. “The Future Challenges of the Developmental Welfare State: The Case of Korea,” 2010, p. 16-17.] However, with a shrinking tax base and a contribution-based pension system, many of Korea’s future elderly are likely to live a meager existence unless policy planning for such a scenario begins in the present. This does not even address the fact that Korea’s elderly population (65+) already has the highest rate of poverty among OECD member nations with nearly 50% of the elderly living below the poverty line.

Ultimately, the Korean social safety net is in dire need of reform. The current welfare system is both inadequate to meet the needs of its current population, but also distressingly out of its depth in the long-term. Though some scholars have been optimistic about the emergence of the Korean welfare state as a result of the Asian Financial Crisis, I view the welfare system’s initial emergence as a cynical move by Korea’s neoliberal reformers to appease the very labor movements they sought to crush. By creating the appearance of a safety net that in actuality only benefitted a small sub-set of those in need, the current Korean social service network served to strengthen tacit public acceptance of the economy’s IMF-imposed and elite-favored neoliberal reconstruction. However, with increasing domestic dissatisfaction with growing inequality, and renewed public demand for increased welfare – especially in light of Korea’s extremely low levels of public spending when compared with its OECD counterparts – the Blue House should make plans to boost social spending sooner rather than later. If not, and if the government chooses to forestall increased welfare spending for as long as possible instead, the Korean economy and Korean society as a whole will be in for a rude awakening.