The Role of the Fiscal Policy in Poverty Reduction

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
beneficiarys 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.
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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).
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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.