Growth, Inequality, and Poverty in Korea

Korea has experienced growing inequality and decreasing GDP growth rate since mid-1990s through the global financial crisis of 2008.  There seems to be a vicious circle of inequality and low economic growth. Trickle-down effects of economic growth seem to be weakened, and negative demand effects of inequality seem to be strengthened in Korea.

In this paper, we are going to test two hypotheses. The first one is that the effect of economic growth on poverty reduction has been decreased in Korea during the last two decades. The other one is that growing inequality has reduced aggregate demand of Korean economy for the same period.

First, we estimate the growth elasticity to explore whether or not economic growth has been translating to the reduction in poverty gap. We use the generalized means of income satisfying most of the relevant axioms of a good income standard as a preferred way to measure the elasticity of growth(Foster and Szekely, 2008). This work shows that most of the growth in Korea would be driven by the richer segment and so called ‘the effect of trickle down’ would diminish over time although the ‘better’ poor would have some benefits from growth. Even though growth could reduce poverty to some degree, there would be no strong evidence indicating that growth has reduced deep or extreme poverty in Korea especially since the 1997 financial crisis.

We also estimate the effects of household income inequality on aggregate demand. As previous researchers(Onaran, 2012, Hong 2014) found that the average demand regime of Korea is wage-led, we estimates the demand effects of personal inequality and asset price for Korea. Our tentative finding is that growing inequality’s effects on aggregate demand has become negative since the 1997 financial crisis.