Not long ago I bumped into professor Zheng of the Korean National University (KNU). Four years ago when I taught at KNU, the professor of econometrics and I we were very close, and I was happy to have the opportunity to ask him about the economic problems facing Korea today.
Korea is on the brink of a presidential election, says Zheng, and many Koreans are hoping that the government will change hands as early as possible. The current government is besieged on all fronts, and due to left-leaning economic policy, Korea's economy has disappointed many. Rising unemployment rates and a spike in housing prices have caused the complaints of average citizens to crescendo.
What Professor Zheng calls left-leaning policy refers to an expansion of income distribution and re-distribution. When President Roh Moo-hyun's administration took the stage and started to honor income redistribution policy, it coincided with public opinion. Of course, if the relationship between income distribution and growth was simple and could be expressed clearly, policy would be as well. But for economists, the actual relationship between economic growth and income distribution is still unclear. If you search online for this, the number of results is staggering. Why is that? It's because the mutual causality is extremely complex, and with different economies, this relationship is manifested differently. Rarely do we see a large degree of economic growth that can fully protect fairness in income distribution.
The earliest theory exploring the relationship between income inequality and growth is perhaps the most famous-- the Kuznets Curve, which looks like an upside-down U. Researchers have found it difficult to find the actualization of the Kuznets Curve, though oftentimes have discovered instead, and indeed some economies seem to only exhibit, one-half of the U. For many years, economists, at least statistically, have been unable to find one economy that completely exhibited a Kuznets Curve. Of course, for the overwhelming majority of developing countries, the ambiguity of "income" as well as how to more precisely measure income distribution gaps and trends, are exceedingly difficult questions being reserved for future discussion.
How income distribution and redistribution relate to growth is seemingly simple but actually extremely complicated, and economists will not create direct relationships between them. A simple contrast of how economists view income distribution research and industry organization research is perhaps useful here. These two fields became popular at the same time, and the goals were both very clear. Both were spurred by policy and aimed at improving it. But we've discovered that there is now a greater consensus in the field industry organization research, regardless of whether it is based on developed or developing countries.
For example, government capture theory, government relaxation towards monopolized industries and price-fixing, have all become influential concepts that have crept into many national agendas. These past few years, industry organization theory specific to intellectual property rights, auctions, bank cards, IT, and internet economies has made rapid progress. With this in mind, we must admit that very rarely do economists encounter a problem that receives so much attention but simultaneously so little consensus, and despite tireless research, has had such a negligible effect on policy, as the issue of income distribution's relationship to growth has.
With so much research going into the field, why has public policy been largely unaffected? As I see it, there is one striking difference between the two fields; governments leverage industry organization research because they want to find fair and effective ways to develop industries and market structures-- things that can be readily provided by economists. But income distribution is much different. In one aspect, this is because the causality between income distribution and growth is so complicated, because income and wealth are not as easy to measure as profit and prices, and even more importantly, because the measuring of income distribution equality, to a large degree, is subjective, and indeed a question of "feeling". And the evaluation of public opinion oftentimes plays an even more important role. Put more extremely, perhaps income distribution policy is always more influenced by public opinion than by mainstream academia. This is actually not that strange, as public opinion affecting policy is ubiquitous in modern society. Foreign policy, especially regarding war, is greatly swayed by the tides of public opinion.
These past few years, through shifts in public opinion, it is common to hear on the internet and in open venues that China's growth has not lifted all boats, but instead, led to the further exacerbation of income inequality. This is a significant trend and a valuable evaluation. Four or five years ago, I believed that the majority of people were still approving and praising China's economic growth and the resulting reduction of poverty and unemployment. How big have the changes been these past few years? Actually, encouragement of labor-intensive, small and mid-sized businesses has been constantly increasing for ten years, including the small-scale service industry which has grown exceptionally fast (the 2005 Economic Survey can attest to this).
Thus, it's hard to believe that China's growth hasn't produced a tide that lifts all boats. China's regional disparities, rural problems, and the lack of government-provided public products have been salient all along, but if during the past several years these problems had not seen some improvement, it's hard to imagine that China could have maintained social stability.
So why is public opinion so different than that of economists? The main reason is that public opinion pins problems on government, and simplifying it as governmental inaction regarding income distribution. Meanwhile, economists, from a market perspective, believe that the government's usefulness is limited. For example, for economists, the creation of employment is an important factor in improving income distribution; the public, on the other hand, looks to re-distribution instead. The great majority of economists believe that to solve rural poverty, we still should rely on growth and the augmentation of market and economic mechanisms, job creation, and the shifting of surplus rural labor forces. These, I'm afraid, were our main past methods of reducing poverty and spurring development, and are all still important today. If the government must to be brought into play, then it needs to spur job creation and a transfer of the labor force (for example, financial deepening, or the reduction of government-supported monopolies). If we can look at the problem through the lens of job creation, then perhaps the differences in opinion can be bridged after all.
