Overview: Why is social cohesion an urgent issue in Korea?

This chapter examines the challenge of sustaining economic growth while encouraging social cohesion. A number of factors add to the challenge of fostering social cohesion; rapid population ageing; polarisation of the labour market between high-paid regular workers and lower-paid non-regular workers; low productivity and wages in the service sector and in small firms; and concern about the potential cost of economic rapprochement with North Korea. It is important, therefore, to advance gradually and cautiously in expanding social welfare programmes. In the face of such spending pressures, policies to sustain output growth, notably by boosting the labour force participation rate and increasing labour productivity, particularly in the service sector, are a top priority. In addition, rising public spending should be financed through tax increases designed to limit the negative impact on output growth. This suggests relying primarily on the value-added tax and environmental taxes.

Korea’s economic transformation has been one of the most rapid and successful in world history. Korea overcame extreme poverty and the destruction during the Korean War to become the world’s 12th largest economy in 2011 and the 6th largest exporter. Per capita income rose from 12% of the US level in 1970 to 65% in 2011 (Figure 1.1) and Korea now ranks 21st among OECD countries. The rapid economic development of Korea between the early 1960s and the 1997 Asian financial crisis was accompanied by a relatively low level of income inequality compared with other developing and emerging economies and shrinking wage dispersion. However, during the past 15 years, income inequality and relative poverty have increased significantly, as in most OECD countries, making social cohesion one of the most pressing issues in Korea today.

Figure 1.1. Korea’s per capita income is converging to the most advanced countries0

a) Using 2005 purchasing power parity exchange rates.

Source: OECD (2013), Economic Policy Reforms 2013: Goingfor Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/growth-2013-en.

This overview chapter first discusses Korea’s legacy of “egalitarian growth” and the factors that have pushed up inequality in recent years. It then outlines the main challenges to fostering social cohesion in Korea and concludes with three priorities to enable Korea to promote social cohesion.

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