ASEM 2000 People's Forum<br>Conference Page<br>People's Action and Solidarity Challenging Globalisation<br>Seoul, Korea, 17-21 October 2000

Transformation of Korean Poverty Situation and Governmental Role
Professor Cho Heung-Seek

The problems of poverty had not been seriously considered in Korea prior to 1997. At least prior to the IMF intervention period, poverty incidence has declined because of continuous endeavors both in economic and social development. The absolute poverty rate in Korea, which was 60-70% in the mid-1960s, dropped to almost 10% in the 1990s. After the IMF bailout, the Korean poverty situation entered a new phase. According to one study, the poverty rate among urban working households was more than doubled during the year following the crisis (Moon, Hyung Pyo and Yoo, Kyung Joon, 1999). The high unemployment rate of Korea affected household economy more seriously than in the West because most Korean families have depended solely on wage income. The economic crisis demolished the middle class and expanded the urban poor.

Having begun to overcome the financial difficulties since 1999, the Korean economy was positively evaluated for its improvement. However, the conditions of poverty and the distribution of wealth have not much changed. According to a recent National Statistical Office report on the status of household income and expenditure among urban working households in 1999, income distribution has dramatically deteriorated compared with a decade ago (National Statistical Office, 2000). Social equity has notably deteriorated since the crisis, and increased unemployment and reduced incomes were seen mostly in the low and middle income groups. Despite an apparent economic recovery, stagnant conditions among the poor and the unequal distribution of wealth are now deemed to be more problematic.

This paper will attempt to examine the trends and levels of poverty incidences and the government's anti-poverty policy, and to suggest government role for eliminating poverty in Korea.

I. The Trends and Levels of Poverty Incidences

The Korean economy, relatively speaking, was flourishing with high economic growth and stable economic conditions for thirty-five years before 1997. With a 5-8% annual GDP growth rate, private consumption and fixed investment tended to increase steadily. Industrial productivity also went up consistently and the annual industrial operating rate was around 80%, on average, while the dishonored bill ratio was kept below 0.2%. In the meantime, it succeeded in reducing absolute poverty within a short period of time. Moreover, the dramatic reduction in absolute poverty, with little expansion of the government anti-poverty policy, is considered unique to Korea.

The stable economic conditions, however, started to deteriorate in 1997 and Korea faced the foreign exchange crisis at the end of the year. The post-crisis poverty and distributional conditions in Korea were drastically aggravated. Contrary to the decreasing poverty rate and improving distributional conditions between 1996-1997, before the crisis, the poverty rate surged and the distributional conditions greatly deteriorated in 1998 in the wake of the crisis.

A poverty incidence is much differently estimated depending on the way and time of estimation. For the general public, the poor people are more or less identical with those receiving public assistance under the Livelihood Protection Act (LPA), estimated to constitute 4.1%(1.93 million persons) of the total Korean population (47 million persons) in 1999. Most of them have been the poorest of the poor from before the current economic crisis. But subsequent to it, a large group of the "new poor" have emerged. Most of the new poor are low-income daily labourers, temporary workers, part-time workers, the self-employed facing insolvency, unskilled workers, the unemployed too disappointed to look for a job any further, and the long-term unemployed. They occupy a marginal situation between employment and unemployment and are largely excluded from official unemployment statistics and social safety net (SSN) coverage. Since Korean SSN is primarily employment-related, they do not receive adequate attention as a target group of social policy and programme (KIHASA2, 1999).

The proportion of beneficiaries of public assistance in population announced by Ministry of Health and Welfare (MHW) shows steady reduction rates in low level, for instance 11.5% in 1966, 3.9% in 1995, 3.3% in 1996, to 3.1% in 1997 before IMF management started. The IMF economic crisis made a new group of the temporary welfare beneficiaries - 310,000 unemployed that increased public assistance beneficiaries by 26.4%. The ratio of public assistance recipients among population, selected and announced by MHW early this year could be revised to the ratios 3.3% by adding 0.7% in 1998 and to 4.1% by adding 1.6% in 1999, which includes temporary and special recipients who lost jobs.

With a little higher and different level of poverty lines, Park and Kim's estimation (1998) shows a little slow speed of reduction such as 20.04% in 1975 to 7.36% in 1995. According to a KDl/KIHASA/World Bank estimate, the poverty rate increased by almost 200% between 1997 and 1998(KIHASA1, 1999). But this rate presents a problem because there is a 12% or so difference between the one based on household income information and that based on household expenditure information.

It is considered quite problematic that the poverty and distributional conditions dramatically aggravated after the crisis showed no sign of improvement even in the first quarter of 1999, when Korea's economy began to improve. Even more, the distributional conditions had deteriorated further by the first quarter of 1999. The income GINI Index in 1998 was 0.3123 while the household expenditures GINI Index was 0.3162. However, they both increased to 0.3198 and 0.3198, respectively, in the first quarter of 1999. The increase in the income and expenditures GINI Index in 1999 is attributed to the increase in the income and expenditures gap between the upper 20% and the remaining income groups. From the aspect of income, despite the fact that the nominal income of the upper 20% increased in 1999, that of the rest income groups decreased and the decrease seemed greater further down the income spectrum. In the aspect of expenditures, by 1999, the expenditures of all income groups began to rise, though not to the 1997 level, and all other income groups, except the upper 40%, are short of meeting the level prior to the crisis (UNDP?PSPD, 1999). Such a phenomenon, therefore, became the background of the debate on the "Collapse of the Middle Class" in Korea and the emergence of a "20:80 Society."

Recently UNDP report (1999) shows the size of the most vulnerable groups varied, depending on who did the estimate, from 3.61 million (KIHASA2, 1999), 6.75 million (KIHASA1, 1999), 9.36 million (KIHASA·World Bank, 1999), to 11.93 million (KLIPT, 1999) persons. And UNDP?PSPD report (1999) shows "poverty population prior to the crisis was 5.36 million persons in 1997. After the crisis, however, it jumped to 9.47 million persons in 1998, which were 4.11 million persons higher. In 1999, it dropped by 1.37 million persons, registering about 8.10 million persons. Despite the decrease in the size of the poverty population as the economy started to recover, it is still much higher than that before the crisis."

In summary, because the estimation of poverty rate is closely related to the size of the most vulnerable groups, we can estimate that the size of poor people in Korea varies 3.61 million to 11.93 million persons. The number of beneficiaries of public assistance announced by MHW in 1999 was about 1.93 million persons.

II. The Government's Anti-Poverty Policy

Anti-poverty policy taken by the Korean government before 1997, prior to the foreign exchange crisis, was carried out through the Livelihood Protection system as a public relief system, which was launched in 1961. The Livelihood Protection system is a system that provides a monthly low-level living stipend to the extremely poor who are incapable of working, while providing services such as job training, business loans and job searches to the extremely poor who are capable of working (Kim, Sang Kyun, 1998).

Since the economic crisis, the increase in unemployment and the growing number of poor people proved the ineffectiveness of such governmental poverty countermeasures in dealing with the poverty problem. The government, launched in the midst of the economic hardship under the IMF bailout program, has set forth a neo-liberal economic policy direction, which it calls "democratic market economy." And it has put forward the "productive welfare" as a part of social policy.

The Presidential Committee for Quality-of-Life of Office of the President (OOP) in 2000 introduced "Productive welfare is an ideology, as well as a policy, that seeks to secure minimum living standards for all people, while expanding opportunities for self-support in socio-economic activities for the purpose of maintaining human dignity. - Thus, the theory of productive welfare is composed of primary distribution through an equitable market system, a fair redistribution of wealth by the Government for meeting basic human needs, social investment for self-support, and expansion of investment to enhance the quality of life for everyone is society."

The Korean government developed and implemented new poverty and unemployment countermeasures with new paradigm for "productive welfare". Structural changes in the poverty countermeasures after economic crisis were carried out in two different ways (UNDP·PSPD, 1999). One was carried out in complementing and reinforcing the existing poverty policy through the establishment of temporary new policy as an initial reaction to the crisis. The new public assistance systems were introduced by the government in 1998, such as the Temporary Livelihood Protection System (TLPS), Public Work for low-income households and General Public Work programs. The TLPS which has used 180 billion Won (about 160 million US $) of the revised secondary budget to protect low-income households was a part of the Livelihood Protection System (LPS) in Korea. The TLPS is a program that assists low-income households whose livelihood has become difficult because of unemployment resulting from the economic crisis. This system has a higher property level for eligibility than the LPS but the income level is the same. The contents of the Care programs are also similar in that they include livelihood aid, education aid, medical aid and so on. Compared to 1997, there was an increase of almost 5.02% in 1998 in the number of Livelihood Protection recipients as a result of the TLPS. This was 3.3% of all population in Korea. (Table 1) shows the 1999 practice of the LPS and TLPS.

The other was carried out in establishing comprehensive poverty countermeasures by means of enacting the National Minimum Living Standards Security Act (NMLSSA). After the foreign exchange crisis, the most remarkable change in government poverty countermeasures was the enactment of the NMLSSA in August 1999. This act provides a living stipend for all households whose income is below the minimum living costs, regardless of age or the capability to work. The act guarantees minimum living standards to all citizens taking effect in October 2000.

The passage of the Act was influenced by the decisive role played by civil organisations. PSPD (Peoples' Solidarity for Participatory Democracy), one of the most influential civil organisations in Korea, had first demanded in 1995 that the government enact a law, called the "Livelihood Guarantee Act," which was similar to the NMLSSA. As the unemployment rate after the crisis surged, followed by the rise in the number of the poor, Korean labour groups, like the Democratic Labour Union General League, and other civil organisations demanded the enactment of NMLSSA as a welfare plan for the poor and unemployed with low-incomes (Moon, Jin Young, 1999). Also, there was widespread public support for such measures. Thus, the efforts initiated by civil organisations were an important contributing factor to the passage of the Act.

The Act that replaces the present livelihood support law stipulates that "This Act aims to create self-support and secure the Basic Life by providing payment for the poor"(Article 1 Goal), and the support level of this "shall maintain the healthy and cultural basic life"(Article 4).

In fact, the Act is significant in that it would cover more people as it aims to guarantee the basic livelihood for all of low-income people; extending public assistance to a larger segment of the poor and thus reduce the social security "blind zone" that exists under the present system; shifting public assistance away from the present provider-orientation toward beneficiary needs-orientation; abolishing the anthropological criteria of the existing LPS in determining the beneficiaries, but included all households whose household income is below the minimum living costs as beneficiaries; instituting new housing assistance, and emergency assistance for better support system.

Furthermore, it created a Self-Help promotion plan according to each household by taking labour capability, household circumstances, and the desire to participate in Self-Help under consideration. For people with labour capability, the plan is designed with a work-incentive mechanism, which encourages recipients to seek employment.

In fact, the Korean government has exerted much effort in fighting unemployment and poverty through budgetary expansion, revision of existing poverty relief programs, and the adoption of new anti-poverty policy. However, the government poverty countermeasures have a number of problems.

First of all, a substantial number of people in poverty and unemployment did not benefit from the government poverty and unemployment countermeasures. In 1998, the extreme poverty rate was 7.6% while the rate of livelihood protection beneficiaries was 3.2%, from which it can be concluded that 57.9% of the people in extreme poverty did not benefit from the LPS. Likewise, in 1999, 31.7% of the people in extreme poverty were without the benefit of the LPS (UNDP·PSPD, 1999). Next, the ratio of the unemployed who do not get any benefits from the government unemployment countermeasure program is estimated to be over 80% (Park, Neng Hoo, 1999).

Second, the support for beneficiaries has been carried out fragmentarily. The low-income families by and large are subjected to unfavourable conditions for employment, such as low levels of education, menial labour skills, and advanced age. Therefore, it is crucial to provide them either with a long-term, stable job because they cannot easily transfer to other job sectors if unemployed, or with some support for a stable livelihood.

Third, the support for beneficiaries in rural areas is not sufficient. International market system is putting our economy in a peril into long-term high unemployment and mass poverty; the Uruguay Round Agreement had already serious impacts on rural residents. The income of the rural poor is only about 80 % of that of the urban poor in 1995. Especially, the poor rural income is estimated to be less than 50% of the urban income level in large cities in 1995.

Fourth, the relatively low-income groups within the mid-ranged income groups lack government support since they are not eligible to benefit from the livelihood protection project. As a result, the living standard of livelihood protection project beneficiaries is likely to be higher than that of the mid-ranged income groups with low income.

Fifth, the communication and inter-management among government programs and among state departments are unsatisfactory. The reason why the levels of support for each project are different can be attributed to the facts that the project carriers are divided among the Ministry of Labour and the Ministry of Health and Welfare, and that the overall budget varies according to different regions.

Sixth, there is a lack of network connection between public and private organisations, and among civil organisations themselves. Due to the different network structure of each government program, the one-stop service to the groups under its care is difficult to provide. In order to mitigate this problem, the government resorts to the means that reinforce the Work-Net and induce the former job registration from the unemployed. Nonetheless, the comprehensive database (D/B) network structure has not been manifested even in the public sectors.

Seventh, qualified personnel in all aspects of the social security's implementation are insufficient. Especially local government officials without professional knowledge of social welfare are dominant in service delivery.

Finally, psychological counseling services are insufficient. The increase in the scope of unemployment and poverty does not simply denote a decrease in income; it must also take into account the social, as well as psychological damage, inflicted on each individual. Indeed, many of the unemployed low-income household members have experienced mental instability and depression while suffering from the loss of self-confidence and motivation.

III. Governmental Role for Eliminating Poverty

The government is responsible for guaranteeing its citizens a basic life by eliminating poverty, and for establishing a system that will turn the guarantee into a reality. To overcome the shortcoming of government's anti-poverty policy as it presently is and so render it responsive to the needs of the poor, the following anti-poverty policy adjustments and specific action are highly recommended (Kim, Mee Gon, 1999; UNDP, 1999).

(1) Institutionalising components of social safety net (SSN)

It is necessary to institutionalize as many SSN components as possible to ensure its viability and sustainability for the poor. In that connection, a closer linkage should be established between contributory social insurance schemes against the risks of old age, unemployment, industrial accidents, sickness and maternity, and death and public assistance programmes of either on-going or temporary nature and related social services. In other words, the cross-over from "welfare" to "workfare", and vice versa, should be facilitated and made more closely complementary:

(2) Operationalising the National Minimum Living Standards Security Law effectively

Operationalisation of the recently enacted National Minimum Living Standards Security Law should be based on concrete and accurate assessment of its possible efficacy with regards to the various population groups concerned, lest its implementation results in further aggravation of the disadvantage that the poor suffer under the existing one.

The operationalisation of the Law should therefore be preceded by, among others as follows (UNDP·PSPD, 1999):

First, all households below the minimum standard of living must be determined as beneficiaries. The substantial difference between the poverty rate and the protection rate is due to the irrational work capability criterion and income/assets criterion applied to those designated as family providers. Households in need of government support were often excluded as beneficiaries, mostly because they have someone who can take up the duty of familial support. Thus, it is more desirable to set a new standard (e.g. optimum level of welfare) by equipping to law with a legal device to include the dependents that have been abandoned by their familial duty-carrier.

Second, level of stipend must be at the level of securing a minimum living standard.

Third, self-help stipend must not be used in limiting the stipend to benefiting households, yet in helping to regain the ability to self-help and being independent. So a detailed plan according to the Self-Help promotion method must be laid out, that is, not only the methods, such as the creation of a safe Self-Help joint-group and social bonding (Kim, Soo Hyun, 1999), but also for the provision of technical education (job training), and job-hunting services, with which people can go back to work, such as day-care services, home-welfare services (Table 2).

Fourth, the determining criterion of work capability as "Labour Inducement" device should not be severe. In the case of a household with a person capable of working, the determining criteria of work capability is very crucial, because the living stipend is given conditional to the availability of labour. However, if the criteria were wrongly defined, many households in need of support would be excluded from being beneficiaries. Hence, succinct, detailed provisions concerning work capability and the self-help stipend system must be stipulated in the Act. Furthermore, familial caretakers for the ill and college students should be excluded from being subjected to the determination of a person with work capability.

Fifth, provision of partial stipends (funeral stipend, education stipend, medical stipend, etc.) to mid-range income groups is necessary.

Finally, incorporation and rearrangement among social welfare programs are necessary. The government programs of the state departments overlap one another. Thus, a coherent and systematized social safety-net system must be structured by unifying the different determining criteria and investigating methods of personal assets among public support programs (programs for investigating personal assets) of all kinds.

(3) Establishing infrastructure for poverty monitoring

The effects of anti-poverty policies should be carefully reviewed once they have been applied to the poor. The main purpose of Livelihood Protection policies in Korea is not only to support recipients in guaranteeing a minimum standard of living, but also to provide them with the infrastructure essential to becoming self-supporting. However, until we evaluate the effectiveness of these policies, it is difficult to ensure that they will reduce poverty and assist recipients in becoming self-sufficient.

It is therefore urgent to render the country's system of and infrastructure for poverty monitoring adequate and effective so as to overcome the existing problem of poverty assessment and to accurately depict the situation of those in poverty.

(4) Expanding the central government's social welfare budget

Until now the government has hesitated to invest in the human services domain, wary of spreading the "welfare disease". A comparison of the rates of social welfare budget among some OECD countries indicates that Korea's was considerably lower than others (Table 3). Thus, it is necessary to expand the budget before implementing the new system for eliminating poverty should be done immediately.

(5) Adjusting the tax structure

The tax structure should be further adjusted to lower the burden on salaried workers, through tax cuts or lower tax rates for small-size income on the one hand, and resurrection of the "global" taxation system on the other. These measures could help enhance the distributive function of the economy for the less advantaged.

There is a clear need, therefore, for finding an alternative modality for closing the income gap, such as through an extension of the progressive taxation system to below the tax exemption level, and indirect transfers that help prevent families and individuals from falling into poverty, such as tax exemptions, commodity pricing, subsidies for essential food items, subsidised health, education, day care services and public utilities, and other indirect transfers.

(6) Strengthening the delivery of social services at the grassroots level

It is urgent and necessary to strengthen the delivery of social services at the grassroots level in order for the existing social security measures to take better effect. For that purpose, a much larger number of professionals should be brought into the delivery process. Higher level social welfare expertise is called for on the part of the civil servants and other personnel deployed in social programme implementation.

(7) Expanding GO-NGO collaboration

The various welfare organisations and their activities need to be effectively coordinated to complement the public measures. To that end, it is necessary to expand the avenues for GO-NGO collaboration and to regularize the consultation practice between the two sectors through the establishment of a formal framework similar to the tri-partite Labour-Management-Government Commission.

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Professor Cho Heung-Seek, Seoul National University