Title: Inequality and Economic Growth in Emerging Market Economies: A Comparative Analysis of Indonesia and Korea
Abstract: For the last four decades, inequality has been increasing in both industrialized and emerging market countries. Inequality is a concern in development due to its social-ethical and economic rationale. Inequality can impair social well-being which leads to political unrest. Also it can trigger economic instability and hamper economic growth. Indeed, inequality is not a recent debate in development economics. Previous studies have focused on many factors such as economic policy, labor, education, health, culture, technology, political economy, etc. This research aims to examine the relationship between economic growth and inequality, then analyze its influencing factors in the context of emerging market economies. Thus, it proposes to look into the inequality-growth relationship anew and go beyond most of the earlier studies in the case countries (Indonesia and Korea) by two approaches. First, it employs Theil’s T statistics method to assess how the changes in the economic structure have driven inequality and economic growth as presumed by Simon Kuznets. Kuznets supposes the existence of an inverted U-shape curve between inequality and economic level in which inequality first rises along the growing economy then followed by a decline inequality despite the economy keeps growing. This pattern is driven by the structural economic transition. Second, it examines the influencing factors of changing inequality with a special attention to economic policy then puts it into institutional and historical context of Indonesian and Korean economies. A regression model is developed to identify the correlation between these factors and inequality. The motivation of this comparative analysis is based on the fact that Indonesia and Korea experienced rapid economic growth and structural transition. They have managed to leap from low income countries in 1960s to high income (middle income for Indonesia) countries nowadays, with massive structural transition from agriculture to industry and services. Moreover, they also experienced some profound changes in their institution which have influenced the orientation of their economic policy, especially in the mid-1990s when both countries fell into the economic crises and most of the new economic policies were suggested by the donor institution. Theil’s T method shows, despite the declining trend of economic inequality in terms of sectoral and regional GDP, income inequality is increasing since 1990s in Indonesia and Korea. Theil’s T index calculated from regional and sectoral wage data confirms the official Gini ratio measurement. It indicates service sector (in Indonesia) and financial sector (in Korea) as the main driver of this rising income inequality. Then, the regression model shows this trend is correlated with some economic policies which are, for Indonesia case, fiscal policy in terms of declining tax ratio and progressiveness, and economic openness in terms of declining tariff rate. For Korea, these are monetary policy in terms of higher real interest rate, and investment in real economy in terms of declining gross-fixed capital formation. Moreover, there are also correlation between income inequality and technological progress in terms of capital-to-labor ratio in both countries. Looking back to the 1960s-1990s period; Indonesia and Korea not only experienced rapid economic growth but also steady inequality within moderate levels. They have been successful to manage growth with equity. However, this was influenced by the transition from an authoritarian to a democratic regime, which has caused a profound change in their economic policies from a coordinated and planned economy to a more liberal economy. Revisiting the debate about Kuznets’ theory, it is concluded that the existence of Kuznets’ curve could be a common phenomenon unless there is a force (more active role of the government) governing income distribution and growth. Therefore, a free-market economy would be more likely to create an unequal economic growth.
Publication Year: 2014
Publication Date: 2014-11-28
Language: en
Type: article
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