Globalization and Welfare Reform in South Korea

Chapter 12

I. INTRODUCTION

The Kim Dae Jung government took office in early 1998, when Korea was bogged down in the worst economic and social turmoil caused by the 1997 financial crisis. One of the salient features of the governance style of the Kim Dae Jung government was to combine neo-liberal economic structural reforms with compensatory welfare reforms (Yang Jae-jin, 2000). This dual approach can be interpreted as an effort to prevent socioeconomic polarization, which otherwise could undermine the social cohesion necessary for the success of the massive neoliberal economic reforms adopted to overcome the legacies of the Korean developmental state and enhance international competitiveness. It was critical for the Kim Dae Jung government to maintain political support from the general public including labor, not only for a successful launch of neo-liberal economic reforms but also for their successful completion. Without their support or at least reluctant consent, the economic adjustment programs were bound to fail, as was seen in many Latin American countries. Therefore, the Kim Dae Jung government proceeded with the dual approach, commanding political support from civic movement groups, labor, progressive intellectuals, and college students.

The Kim government’s dual approach was very interesting, since it challenged the conventional wisdom that globalization will weaken a nation-state’s policy autonomy and bring about a retrenchment of the welfare state. Therefore, this paper seeks to understand under what politico-economic conditions the Kim Dae Jung government’s social policy initiatives were espoused and carried out, and assess their implementation performance and limitations.

In this paper, I will argue that the Kim Dae Jung government’s welfare reforms were a remarkable historical step towards reshaping and enhancing social policies in the process of developing the Korean welfare system. The Korean case strongly suggests that welfare politics is still a domestic game largely conditioned by the way production has been structured as well as by other institutional legacies. I will also point out the inherent limitations of the social reform initiatives of the Kim Dae Jung government. First, although the recent development of Korean welfare reforms reflects a certain ideological propensity towards the popular sector, the Kim administration’s social policies were not systematically designed with long-term goals in mind. Rather, they were by and large made on an ad hoc basis colored often by ideological excessiveness. Second, the Kim government’s social welfare initiative was trapped in the legacies of the developmental state with low administrative capacities which preceded it so that the middle class and labor that had once supported Kim's government began to withdraw their support, resulting in far reaching consequences for social cohesion.

This paper is composed of five parts. Section two is a theoretical overview of the relationship between globalization and the welfare state. Two contending hypotheses – the “efficiency” hypothesis vs. the “compensation” hypothesis – and perspectives on the production and labor market regimes will be presented. The third section provides background information on the history of the Korean welfare state. The fourth section presents the Kim Dae Jung government’s productive welfare initiative and major social policy changes, including social insurance coverage expansion, implementation of a new public assistance program, introduction of a mechanism for reaching a broad consensus, and labor market reform. The fifth section will assess the productive welfare initiative and underline constraints on it. The sixth and last section concludes by presenting a summary of the outlook for the productive welfare initiative. 

 

II. THEORETICAL CONTEXT

 

1. Globalization and the Welfare State

Debates on the effect of economic globalization on the welfare state or social policy have not been yet conclusively resolved. Recently, as Garrett (1998) and Rudra(2002) have noted, there are two quite contradictory sets of arguments: the “efficiency” and “compensation” hypotheses (Kaufman and Segura-Ubiergo, 2001). Each offers quite different propositions about the interests and resources of labor and capital, and about the economic and political options which governments face.

The “efficiency” hypothesis rests on the assumptions that high levels of social spending and the protected labor market of the modern welfare state reduce competitiveness in global markets. Therefore, as business groups become increasingly exposed to international competition and state elites become aware of the national imperative to survive amid global economic competition, they press governments to reduce social expenditures, privatize overburdened public sectors, and increase labor market flexibility. Liberalization of capital markets would presumably compound this pressure, since capitalists have greater exit options than workers, which in turn increase asset holders’ bargaining power vis-à-vis labor. In short, as their economies become more exposed to international competition, the incentives for governments to curb social welfare provisions become stronger, while the political costs of doing so decline. Consequently, this efficiency hypothesis claims that the modern extensive welfare states will come to resemble the more market-conforming form of the welfare state that the neo-liberals espouse.

The “compensation hypothesis” posits just the reverse effect. It focuses on the role of the welfare state as a mechanism for offsetting the social costs of economic globalization and contributing to the development of human capital. This hypothesis is supported by studies that show a very strong empirical association between economic openness, large public sectors, and a generous welfare state (Cameron, 1978; Katzenstein, 1985; Garrett, 1998; Rodrick, 1997).

The main tenets of the compensation thesis are as follows: first of all, increasing exposure to trade is likely to create a potential for political instability and a backlash against market-oriented economic policies. For state elites, there is thus an incentive to ward off such threats by providing welfare transfers to social sectors or geographic regions that have fallen behind in the process of neoliberal change. Second, increasing social spending might enhance the skill level and productivity of the labor force. The active labor market policy of Scandinavian welfare states is a good case in point. An active labor market policy provides unemployed workers with job training and job placement, as well as income support, which enhances their skill level and facilitates industrial restructuring. Moreover, as Huber and Stephens (2002) point out, countries with a comparatively equal income distribution and low poverty get a higher return on their investment in education since children from poor backgrounds are more likely to have the same supportive environment at home as those from middle class backgrounds and above. This higher educational achievement level ends up with a labor force with higher literacy skill levels and thus a greater capacity to meet the requirements of a knowledge-based economy. Accordingly, the compensation perspective argues that globalization does not necessarily lead to the shrinking of the welfare system, and that the effectiveness of the institutional structure of welfare systems of existing welfare state will lead to a growing the divergence between welfare regimes and capitalist economies.

 

2. Production Regime Theory and Labor Market 

Another interesting theoretical perspective regarding the diverse responses of the advanced welfare regimes to globalization is that different production and labor market regimes lead to different outcomes (Esping-Andersen, 1996 and 1999; Soskice, 1999; Pierson, 2000; Iversen, Pontusson, and Soskice, 2000). That is because the institutional basis of welfare regimes is closely related to the institutional features of the individual nation's productive systems and labor markets. They are like both sides of the same coin.

Esping-Andersen's three types of welfare regimes (liberal, conservative, and social democratic regimes) are based on the interweaving effect of different productive strategies, labor markets, and political coalitions. Recently, Soskice's distinction between coordinated market economies(CME) and liberal market economies(LME) has been widely used to explain the different strategies of western industrialized countries to globalization and neo-liberal pressures. According to this perspective, a coordinated wage bargaining system between the business community and labor organizations carefully managed by the state tends to maintain institutional consistency and economic effectiveness in spite of the pressures of globalization, while liberal market economies heavily relying on free market mechanism tend to adopt more intensive neoliberal strategies.

 

3. Domestic Politics and Diverse Courses of Welfare State Restructuring

The above theoretical perspectives imply that there are divergent routes that modern capitalist states should take in response to economic globalization, not only in terms of welfare policy, but also of productive and labor market policy. Indeed, whether each state should adopt “efficiency” or “compensation” strategies in general depends on domestic political economic institutions as intervening variables that condition the impact of globalization on the welfare state (Yang Jae-jin, 2000; Kay 1999; Niles 1999; Kaufman and Segura-Ubiergo, 2001).

What we need to bear in mind here are the modes of political governance, coalitional dynamics, and state capacity. The democratic mode of governance expands space for political maneuvers through which civil society can redress its concerns for social equality and welfare. Furthermore, political coalitional dynamics allow civil society to build its political power base to translate its interests more directly into viable social policies. But the provision of social welfare ultimately rests on state capacity. Leadership commitment, technocratic competence, and resource availability determine the nature, direction, and performance of social policy. Therefore, the impact of globalization is neither uniform nor unidirectional across countries over time. Welfare consequences of globalization are very much contextual, being dictated by the dynamic interplay of domestic politics, institutional configuration and state capacity.

Indeed, the paths of welfare state restructuring have never been uniform since the early 1980s when the neo-conservative attack on the welfare state came into being with the advent of Thatcher and Regan governments. While Anglo-Saxon countries such as the US, the UK, Australia, New Zealand, and Canada have retrenched their welfare states, many Nordic and Continental European countries like Sweden, Norway, Finland, Germany, and Austria retained the core of their social welfare arrangements. The latter group also differs from the former in dealing with labor market reform. They distanced themselves from strict neo-liberal approach which tries to increase labor market flexibility even at the expense of social equality.

Moreover, Southern European countries such as Spain, Portugal, and Greece expanded their welfare states, going against the international trend of downsizing the welfare state. Not only were the forces of globalization offset by the wave of democratization in the region, but also democratic governance was a catalysis for the rise of welfare states (Song Ho Keun, 2001). Post-Pinochet Chile also witnessed the revival of some of its social democratic tradition in the social welfare and labor policy area (Haggard and Kaufman, 1995; Suh Byung Hoon, 1994).     

In short, different countries have responded differently to the universal pressure of economic globalization. Then, what strategy did South Korea adopt to cope with the pressure generated by globalization? And what was the result? Before we get into the answer based on recent experience under the Kim Dae Jung government, a short overview of the development of Korean social welfare systems will be presented for a better understanding of the current process of social policy change.

 

III. THE SOUTH KOREAN CASE

 

1. Pre-crisis welfare system in Korea^[1][1]

The Korean developmental state (Park Jung Hee to Chun Doo Hwan governments, 1961-1987) constructed a "minimalist welfare system", a product of the developmental ideology of ‘growth first, distribution later.’ The dominant social paradigm was ‘welfare through work.’ Thus, the combination of economic growth, high employment, and individual self-reliance served as the hegemonic social ideology during the period of the developmental state. Such ideology was shaped and sustained by the developmentalist coalition, composed of authoritarian politicians, technocrats, and chaebols (Ahn Byung Young, 1991; Lee He-kyung, 1993). Labor and other popular sectors were heavily repressed and controlled by the developmentalist coalition so that “politics against the market” was invisible. Thus, while the labor market was left unprotected except in some important export sectors, the state actively controlled industrial strategies in close coordination with big businesses.

The democratic opening in 1987, however, ushered in a new stage of social policy development in Korea. People’s welfare demands erupted, forcing the government to accommodate such social pressures. The Roh Tae Woo government (1988-1992) enacted a minimum wage law and implemented a national pension program for private sector workers. The Kim Young Sam government (1993-1997) which followed introduced an unemployment social insurance scheme and expanded the national pension program to farmers and fishermen.

Nonetheless, elected governments could not transcend the developmentalist social welfare paradigm and showed a high degree of policy and political continuity with their authoritarian predecessors. They were significantly constrained by the conservative ruling party, the state apparatus, and the private sector (i.e. chaebols). There were no significant changes in their different stance toward labor and minimalist approach to social welfare (Haggard and Kang, 1999).

Overall, the Korean state was eager to invest available resources in economic development. The state was willing to divert resources from the economy into social welfare only when it was conducive to economic growth and political legitimization. <Table1> presents comparative data on selected governments’ social welfare commitments.

 

********** Table 1 about here *************

 
In 1993, South Korea’s per capita income reached $7,660, but budgetary share for the health, housing, social security, and welfare sectors out of total government spending was 8.7 percent. That figure is far below Chile (50.8 percent) and Brazil (35.2 percent) whose per capita income was $3,170 and $2,930 respectively. The Korean government’s low commitment to social welfare could be explained partly by the high defense burden (20.1 percent). However, given that Israel’s high defense burden (20.3 percent) did not lead to a low social welfare commitment, the trade-off between social welfare and economic services deserves attention. South Korea showed the highest ratio in economic services among the 12 countries under comparison by accounting for 18.8 percent of total government spending.^[2][2]

This low social welfare commitment is also reflected in the belated introduction of major social insurance programs. Table 2 underscores the underdeveloped nature of South Korea’s social welfare system in comparative perspective. Work injury insurance and pension schemes for state and military personnel, which are the most mature in South Korea, were introduced in the early 1960s, almost fifty years later than Brazil and Chile. Introduction of health insurance, a national pension scheme for private sectors, and unemployment insurance lags far behind not only advanced industrial countries such as the United States, Japan, Germany, and Sweden, but also developing countries such as Brazil and Chile.^[3][3]

 

********** Table 2 about Here **************

In short, the Korean welfare system was far behind even in relation to her economic achievement. The government accepted limited responsibility for health, industrial injuries and pensions, and provided only minimum protection to those unable to participate in the labor market or to those having no family to rely on. Consequently, there has been a salient mismatch between the miracle economy and the social welfare system.

Moreover, the Korean social welfare system is run according to administrative expediency and political calculation from the top rather than relying on direction from the popular sectors. Social insurance programs, for instance, were introduced to cover military, government employees, and big business workers to solicit loyalty to the state, while the neediest such as urban marginals, informal sector workers, and peasants were excluded from the social safety net.

Nonetheless, this does not mean that welfare needs were not satisfied. The developmental state had deliberately developed quite a unique social welfare arrangement, which could be regarded as a ‘social contract’ between the developmental state and the citizen for the past forty years.  In this implicit setting, social welfare demands involving health, housing, unemployment, old-age, and education were satisfied primarily through a fast growing real income in the market, which was buttressed by stable employment, strong family ties and corporate welfare embedded in the Confucian cultural tradition (refer to Yang Jae-jin, 2001: Chapter 4).

 

2. The Kim Dae Jung government’s productive welfare initiative^[4][4]

 

1) The 1997-8 Economic Crisis and Productive Welfare Initiative

The economic restructuring which followed the economic crisis in 1997 produced serious negative effects on social equality and welfare for the majority of the population of Korea. The most immediate outcome was high unemployment due to the economic restructuring. The unemployment rate rose sharply from 2.2 percent in July 1994 to 8.7 percent in February 1999, reaching 2 million, the highest since the Korean state had accelerated economic development strategies in the 1960s. The economic crisis also brought about a significant change in the labor market structure in Korea. The ratio of full-time workers (i.e. regular worker group) decreased from 56.6 percent in 1996 to 47.1 percent in the fourth quarter of 1999, the ratio of part time/temporary workers (i.e. ‘non-standard’ worker group) increased from 43.4 percent in 1996 to 49.1 percent in 1998 and to over 50 percent in 1999. In short, the time is gone when a job was secure and stable; now, the “casualization of labor” prevails in South Korea (Gazier and Herrera, 2000; 332). Real wages also significantly dropped. In the third quarter of 1998, for instance, nominal wages dropped by 8.1 percent and real wages by 14.2 percent.  The reduction in nominal wages in 1998 was the first in Korean economic history since wage data began to be collected. Soaring unemployment, casualization of employment, and falling wages all aggravated poverty and inequality.

Although the new Kim Dae Jung government immediately implemented expanded coverage of the employment insurance program to include workplaces with more than five employees, along with some temporary public assistance measures such as public work programs, it was clear that the old social welfare arrangements built on the assumption of high economic growth and full stable employment were incapable of coping with the consequences for the welfare system of the worst economic crisis in modern Korean history.

After three temporary welfare measures in 1999, President Kim Dae Jung announced a "productive welfare initiative" and his long-term plan for building a "Korean Productive Welfare State". This new initiative differs in several ways from the policies of the previous governments. First, it recognizes social welfare as a basic human right, and emphasizes that the state is obliged to guarantee and protect that right. Second, the productive welfare initiative is predicated on the principle of welfare through work and assumes a role of the private sector. It declares that “work is not only a means of earning a living, but an essential means of attaining a sense of satisfaction and value, i.e., attaining dignity.” (Office of the President 2000:9). Finally, the productive welfare initiative wields social welfare policy as an instrument for enhancing social integration and achieving harmonious development between sustained economic growth and participatory democracy (Office of the President 2000: 7-17). In a sense, this new social welfare policy was a contradictory mixture of an emphasis on state protection and solidarity, on the one hand, and the role of the private sector and workfare in the provision of social welfares, on the other hand.

As will be discussed later in this paper, the actual social policies did not fully meet the ideals of productive welfarism. Nonetheless, it signified a departure from the previous social welfare paradigm in Korea.

 

2) Social Policy Change in the Kim Dae Jung Government

The Kim Dae Jung government made some visible progress despite the inherent limitations placed on it by institutional legacies and the pressure of globalization.

 

Coverage Expansion of Four Major Social Insurance Programs: first of all, one of the important features of the productive welfare initiative is that the new government achieved comprehensiveness in the coverage of statutory social insurance programs such as unemployment insurance, national pension, and industrial injury insurance by expanding their coverage to the marginal sector of the population, which is usually considered as being very difficult to bring under the protection of social insurance programs.^[5][5] The coverage of the Employment Insurance System was initially limited to workers in companies with more than 30 employees. It was rapidly expanded in four steps: in January 1998, to firms with 10 or more employees; in March 1998, to companies with more than 5 workers; in October 1998, to enterprises with fewer than 5 workers, that is to say, to all companies; finally in July 1999, temporary workers (employed at least one month per year), part-time workers (working more than 18 hours a week), and day workers (who work less than 30.8 hours a week) were covered (Gazier and Herrera, 2000: 344).

The state-administered national pension and work injury schemes also expanded. The National Pension System expanded to include about 10 million self-employed persons and workers in companies with fewer than five employees (or, a half of the economically active population) from the previous 4.9 million company employees, and 2.1 million farmers and fishermen. Industrial Injury Insurance, which had covered 7.5 million workers in industrial firms with five or more employees, was extended to include additional 1.6 million workers in small business with four or less in July 2000. Employers of small business also became eligible for work injury insurance scheme.

Since Medical Insurance had already begun to cover the entire population in 1989, four major statutory social insurance programs now cover all workers both in the formal and informal sectors.^[6][6] This universal coverage is quite unique among developing countries, and the speed at which the statutory social insurance programs expanded since they first were implemented is extraordinary among countries with universal coverage (Kim Yeon-myung, 1999).^[7][7]

Another significant feature of the Kim Dae Jung government's welfare reform is the way it weaves the nation’s social safety nets: it attempted to unify fragmented welfare systems, aiming at social integration and solidarity. Aggressive reform of the Medical Insurance is the case in point. The Kim Dae Jung government unified various Medical Insurance plans, which were previously run by 142 insurance associations serving company employees and 227 regional insurance societies for general citizens including the self-employed, not to mention separate administrations for public employees and private teachers. Under the integrated health insurance scheme, the same standard of contribution and benefit is applied nationwide. The Kim Dae Jung government also expanded the National Pension in an integrated monopillar system, nullifying the previous Kim Young Sam government’s plan to split the National Pension System into an earning-related scheme and a basic pension scheme and to place them under different financing and payment arrangements.

However, the new welfare initiatives are being tarnished by low effective coverage rates and low levels of benefits (Chung Moo-Kwon, 2002; Cho Young Hoon, 2001). As discussed above, coverage of the four major statutory social insurance schemes was extended to all working places. Therefore, the coverage should be universal. But the effective coverage rates fell well short of expectations due to a huge shortfall in contribution and a lack of effective monitoring capacity. As Table 3 reveals, effective coverage rates are still modest and especially so for ‘non-standard’ workers. In many cases, small businesses and low-income irregular workers could not afford to contribute to the various insurance schemes, resulting in their exclusion from its benefits. Moreover, the high-income self-employed attempt either to hide their real incomes in order to take advantage of the free-rider problem built into the social insurance program, or intentionally avoid making contributions because they are suspicious of the long-term viability of the social insurance programs.

 

********** Table 3 about Here **********

Although we hope coverage rates will increase as the newly expanded systems mature, we cannot be too optimistic, since the Korean government has no appropriate administrative capacity to carry out massive social welfare schemes. Just as state social welfare systems were underdeveloped during the past developmental state era, so were state social bureaucracies. They lack essential administrative resources such as experienced personnel and organizational expertise. What is worse, the Korean government has no appropriate monitoring capacity to prevent evasion, especially among small companies and the self-employed. The Korean government may be eventually able to build effective administrative capacity and to enforce contribution collection. But given the casualization of the labor force after the economic crisis in Korea, it will take a longer time than it otherwise would; and in the meantime, a huge loophole will remain the same.

The second area of concern is the low benefit level. The unemployment benefit, for instance, is half of the worker’s salary during the month prior to the dismissal. This modest target benefit level aside, the effective income replacement is bound to be lower because the unemployment benefit is based on regular earnings only.^[8][8]

 

Enactment of the National Basic Livelihood Security Act: A visible change is also seen in the field of public assistance, a breakthrough to guarantee a national minimum standard of living as a social right. The four major social insurance plans generally base eligibility for pensions and other periodic payments on the length of employment or self-employment. Although a redistributive function is built-in in the case of health insurance and national pension, the amount of pensions (long-term payments) and other periodic payments (short-term) in the event of unemployment, sickness, or work injury is usually tied to the level of earnings. Thus, they are insufficient and inefficient social safety nets for urban and rural marginals and those without work capacity. In order to deal with that gap, the Kim Dae Jung government renovated public assistance programs through the enactment of the National Basic Livelihood Security Act in August 1999. 

The old plan did not provide allowances to people capable of working, even if their incomes were less than the minimum cost of living. Now the needy, even though capable of working, receive a monthly benefit from the government equivalent to the difference between their real income and the minimum cost of living under any circumstances. Although the new law requires recipients to continue to seek or train for jobs, it marks a radical departure from the previous Elizabethan-Poor-Law style public assistance program, which distinguished the deserving from the non-deserving poor and protects only the former. The number of people receiving government allowances for livelihood assistance tripled to 1.52 million from the previous level of 0.54 million.

However, despite the legal rights guarantee of a minimum income, a strict means test still excludes many deserving poor from receiving benefits; for example, the poor who have family members -- broadly defined -- who are able-bodied and able to work do not receive benefits. Household incomes and other government allowances such as unemployment benefits and medical expense subsidy are subtracted from the modest allowance,^[9][9] (Minister of Health and Welfare, 1999). As a result, the actual cash transfer is much more modest than desired. Moreover, paid sick leaves and family allowances, which are now common in mature welfare states, are not yet provided.

Introduction of Social Concertation: Unlike the past, when civic movement groups and labor were ignored and denied a voice by authoritarian regimes, the Kim Dae Jung government attempted to establish institutionalized consensus-making by including them among core members of its inner circle and empowering them with new participatory roles in social and labor-market policymaking as well as in the improvement of the business-labor relations. The Tripartite Commission is an exemplar.

Upon his election, president-elect Kim Dae Jung proposed forming a tripartite national council comprising the representatives of government, business, and labor. After a month of negotiations, the Tripartite Commission reached a total of 90 historic agreements on structural adjustments and burden sharing, in which labor organizations agreed to more permissive rules on layoffs and the employment of temporary workers in return for government pledges to improve labor rights, fight unemployment (through public works programs and subsidies to unemployed workers), and weave an extensive social safety net (Moon Hyungpyo, Hyehoon Lee, and Yoo Gyeongjoon 1999, 82-96). This achievement might surprise those who favor the efficiency hypothesis and is in sharp contrast to the weakening of societal corporatist arrangement seen in advanced western welfare states. However, as we know, the corporatist institutional arrangement was still effective and maintained in most European welfare states in the process of restructuring their labor markets and welfare programs.

However, the Korean case reveals the unstable and ad hoc nature of the Tripartite Commission. This consensus-making organization was quite effective right after the economic crisis as a means of crisis management. In fact, Korea did not have many of the elements essential to institutionalize consensus-building among government, business, and labor such as a strong labor organization, a high rate of unionization, strong left-wing parties, a willingness by business to compromise with labor, and so on. Nonetheless, given the centralized organizations of business and labor developed as a result of the state-led industrialization, the economic crisis along with the enhancement of democratization provided an historical juncture for institutionalizing a consensus-making organization.

However, this consensus-building mechanism began to weaken when the Korean economy quickly recovered and the pressure to compromise caused by the economic crisis ceased. Labor came to doubt the effectiveness of the tripartite committee, as the many promises, especially commitment by the government and business to employment security, were not met. Businesses had no incentive to actively participate in it, once they acquired labor market flexibility from the initial agreement. Above all, the government's inconsistent policy and the lack of a commitment to the institutionalizing of the tripartite committee contributed to its instability.

Labor Market Reform: The Kim Dae Jung government improved labor market flexibility through more permissive rules on layoffs anddispatch work. This policy is consistent with the government's neo-liberal economic restructuring and the need to respond to the pressure of economic globalization. As mentioned above, ‘non-standard’ labor began to rapidly increase after economic structural adjustment began, while labor market flexibility for the ‘regular’ workers in the strongly unionized sector was less serious. This implies a further stratification within labor as well as broader social inequality, resulting in a serious barrier to social cohesion and integration in the future.

To offset this trend, however, the government strengthened labor rights: 1) civil servants were allowed to form workplace associations, 2) teachers’ unions were permitted, 3) the KCTU (Korean Confederation of Trade Unions, the then outlawed leading organization of democratic unions) was legalized, and 4) political activities of labor unions were permitted, just to name a few (OECD, 1999; 158-159). However, the effects of these measures are not immediate and require a long-term time to have much effect.

A more serious problem is that the ambitious expansion of coverage as a compensatory measure was made more difficult by the rapid expansion of the ranks of the irregular employees, since one of the major policy goals of the expansion of coverage was to protect hitherto excluded irregular workers. The new public assistance program does not yet guarantee minimum incomes as a social right because of still excluding many of those who deserve and need assistance.

This discrepancy between the government's impressive welfare measures and their actual implementation is rooted in Korea's distinctive labor market structure: the large portion of ‘non- standard’ workers in the labor sector and the large number of self-employed in the economically active population (30.6% as of 2000/ National Statistics Office, 2001). It would be very difficult for welfare reforms to protect the marginal sector without a substantial improvement in the ability to monitor the incomes of the self-employed and in the ability to ensure that marginalized workers actually contribute to the various insurance programs.

All in all, despite remarkable formal institutional expansion, the faltering expansion of coverage is highly likely to end up cementing stratification, which would hamper social integration. And, the Kim Dae Jung government did not make much progress toward eliminating differences across income level due to low levels of effective coverage and benefit. Therefore, as Chung Moo-Kwon (2002) points out, the Korean social welfare regime has grown in the direction of conservative/corporatist welfare regime of Continental Europe in terms of formal institutional arrangement, while the performance of the Korean welfare regime is in effect closer to the liberal Anglo-American regime. In short, the productive welfare initiative has fallen short of bringing about a paradigm shift from the developmental state to a welfare state in South Korea.

 

3. Making Sense of the  Productive Welfare Initiatives: Enabling conditions and institutional barriers

In the name of productive welfarism, the Kim Dae Jung government strongly intervened in the reform of the welfare systems to bring marginal groups under the public social safety net. Formal social security programs now reach those previously excluded workers in small businesses with four or less employees and low-income marginal workers. These programs were erected on the principle of income redistribution, universalism, and solidarity in the name of social integration. Plus, public assistance programs and labor laws were overhauled to enhance social and labor rights. Social policymaking, including labor market policies, is also no longer the preserve of the government and business alone, as is seen in the activities of the Tripartite Commission. Progressive civic movement groups and labor participate actively in social policymaking. Indeed, the government’s social expenditures have been souring. Under the Kim Dae Jung government’s productive welfare initiatives, the government social welfare budget^[10][10] The social welfare budget is limited to core government commitments –i.e. expenditures on four major social insurance schemes, the National Basic Livelihood Program, and on social service institutions. Thus, it excludes spending on other welfare measures such as active labor market policies and public works.  almost tripled in just three years, from 3.1 trillion won in 1998 to 8.1 trillion won in 2001 (Chosun Ilbo, January 28, 2001 in Yang Jae-jin, 2001).

What made such remarkable change possible? Plus, why did such remarkable change fall short of realizing the ideals of productive welfarism? The answer could be found in the contingent dynamic interaction among the domestic political economy of the Kim Dae Jung government, the institutional legacies of the historically formed Korean developmental state, and the pressure of globalization. Here I will discuss the enabling conditions for extensive social welfare reform, and then add some discussion of institutional and structural barriers to reform.

First of all, a primary condition was the nature of the political coalition which formed the basis of the Kim Dae Jung government (Yang Jae-jin, 2000). A realignment of the power structure has entailed a fundamental change in the social policymaking process, critically contributing to the strengthening of the social safety nets. From the beginning, the Kim Dae Jung government faced the complex task of maintaining its main support base of the lower middle and working classes amid the sweeping liberalization of the Korean economy demanded by the IMF and the World Bank. In the economic policy area, neo-liberal adjustment policies were a continuing source of tension between the government and labor or, to a lesser degree, civic organizations. As far as social policy is concerned, however, there was no serious disagreement over to government’s plans to expand social welfare as a compensation for neoliberal structural adjustment, or more precisely as glue to hold together its support base, which could fall apart during the neoliberal economic reform period.

Unlike years past, when civic movement groups and labor were ignored and excluded from any significant role in policy making, the Kim Dae Jung government made them members of its inner circle and allowed them to participate in making social policy. Their degree of participation varied, but the most striking difference from the past was their regular participation as standing members of a variety of policy committees of the Ministry of Health and Welfare and social insurance administrative bodies. They evaluated, approved, or vetoed government proposals and even initiated new programs. For example, the controversial National Basic Livelihood Security Act enacted in August 1999 was espoused and proposed by the most outspoken liberal civic movement group, the People’s Solidarity for Participatory Democracy (PSPD), and its allied forces, including other prominent NGOs and the KCTU, the leading organization of democratic labor unions (Ahn Byung Young, 2000). In this sense, a pro-welfare social policy network was established by creating formal links between these groups on the one hand, and the ruling party and the Senior Secretary for Welfare and Labor (formerly Senior Secretary for Social Development) of the Blue House (i.e. Office of the President) on the other (Yang Jae-jin, 2000: Ch. 7; Shin Dong Myeon, 2000).

However, it should be noted that the ruling party consisted of people with a great variety of ideological coloring. Only some of the ruling elite were progressive and concerned with the welfare reform: The majority of them were conservative. Although the MOHW, a major state welfare bureaucracy, often became a coalition partner with the progressive social partners, they were still opportunistic and had different reasons based on their bureaucratic interests for forming such alliances. Furthermore, the economic bureaucrats, who occupy the commanding height of the state bureaucracy with their control of economic policy and the state budget, still retain considerable influence on social policy-making, especially the implementation process.

President Kim Dae Jung could not command strong backing from his own party for his productive welfare initiative because the ruling party was not, by nature, a leftist party, although it was the most progressive major party in the conservative Korean political milieu. More importantly, the ruling party was not well prepared for embracing the ideals of productive welfarism since it lacked a coherent ideology. Therefore, ill-formed social policies were implemented, and that provoked an unnecessary backlash from the public.

The second important enabling and constraining factors are the poor quality of the previous welfare system and the pressure of international financial institutions such as IMF and the World Bank. International lending institutions are traditionally known to impose neo-liberal reforms without regard for negative social welfare consequences. In the case of South Korea, however, both institutions have been quite attentive to social welfare issues, because they worried about the underdeveloped social safety nets of Korea, which would hamper the smooth implementation of neoliberal structural adjustment. Therefore, the $2 billion structural adjustment loan by the Bank to South Korea, for instance, laid out conditions calling for strengthening of the social safety nets: the extension of unemployment insurance to employees in small-scale enterprises and the overhaul of the nation’s pension and health insurance systems (World Bank, 1998a, 1998b). However, it should be noted that the international financial institution’s backing for vigorous social welfare reforms was not for social development itself. It was a precondition for smooth neoliberal economic reform.

Third, although the underdeveloped social safety nets of the previous developmental state provided the reason for massive social welfare reform, the government had to fight against the legacies of the developmental state and the resistance of the conservative groups embedded in the previous institutional structure. The dominant social paradigm of “economy-first and distribution-later” is embedded in national elites in state bureaucracies, business, and the press. For example, conservative economic bureaucrats, who control the national budget, sought to minimize the financial burden of new social welfare programs by putting their conservative view into the implementation stage when detailed procedures were formulated. Moreover, the vested interest groups embedded in the previous welfare system such as the business, the middle class, and the workers of the former social insurance organizations strongly resisted the welfare reforms.

Fourth, the low performance of welfare reform was often aggravated by a mismatch between ideological excessiveness on the part of civic movement groups, which strongly supported the productive welfare initiative and espoused and designed many social policies, and the lack of sound bureaucratic and pragmatic principles to guide implementation of the reform measures. Ideological rigidity often undermined administrative rationality and policy feasibility, provoking public outrage from the middle class at the stage of implementation. Under the strong redistributive mechanism of Korean social insurance schemes, expansion of coverage to embrace the lower class entails a massive income transfer from the middle class to the lower strata. Therefore, it was inherently very hard to garner political support from the middle class for the productive welfare initiative. Under the circumstances, an ill-prepared expansion of coverage and the resulting large-scale evasion of required contribution coupled with false income reports, called into question the feasibility of income redistribution through social insurance programs, weakening political support for the productive welfare initiative.

Finally, a labor market structure with a high portion of irregular workers and the self-employed became an important structural barrier to the effective expansion of the social insurance programs to the marginal sector. Although social insurance programs were expanded to protect workers hit by neoliberal labor market reform, ever-increasing non-regular employment has made all the government’s effort less effective that it would have been otherwise.

In sum, the compensatory welfare reform was a historic turning point in the development of the Korean welfare state. Korea appears to be an anomaly in the global trend toward a retrenchment of the welfare state. Yet, South Korea’s nascent welfare state has been faltering due to developmental legacies, the absence of consolidated coalitional political support, often-excessive ideological input into social policymaking, low levels of administrative capacity, and casualization of the labor market.

 

IV. CONCLUSION

In the golden age of economic prosperity and political stability during the 1950s and 1960s, it was relativelyeasy for governments to pursue their Keynesian interventionist policies of the full-employment welfare state, without fear of undermining macroeconomic performance. These days, however, it is widely believed that globalization has shifted the post-war balance between capital and labor and has contributed to a weakening of the state’s autonomy in the formulation of its own social agenda.

However, the Korean case suggests that the rationale for social welfare has not eroded even in the era of globalization,and that nation states still retain a considerable level of policy autonomy, sufficient to construct distinctive social welfare systems(Yang Jae-jin, 2000: 205-208). Even at the heart of the economic crisis and its aftermath, the Kim Dae Jung government could deploy a variety of policy instruments to shelter victims from the competitive risks of the international economy. Behind this move lie President Kim Dae Jung’s political leadership and the active participation by civic movement groups and labor. In this regard, it is important to note that democratization by and large provide a nurturing ground for the development of a welfare state in Korea, offsetting the negative consequences of economic globalization. Realization of the underdevelopment of the Korean social safety nets and the sympathetic attitude atmosphere of the international lending institutions were also favorable for vigorous social welfare reform. 

Yet, realizing a mature welfare state in Korea is a very challenging task. As discussed above, the new welfare initiatives were tarnished by low levels of effective coverage and low benefit levels. Moreover, uneven income distribution andstratification remain almost the same, despite ambitious social reform. Neo-liberal labor market reform posed one of the biggest challenges to the materialization of a mature Korean welfare state. And more importantly, structural barriers such as developmentalist legacies may not be soon overcome. It seems, therefore, that the Kim government’s productive welfare initiative in response to the globalization could not easily accomplish its ideological goal of social integration and solidarity. It has now become a new mandate for the next governmentof President Roh Moo Hyun to improve administrative capacity and garner public support. Also, the Korean government should exert more efforts to protect ‘non-standard’workers in order to build a mature welfare state in South Korea.

 

 

TABLES

Table 1. Governmental Welfare Commitment (% of central government budget,1993)

 

County	Per capita income	Defense	Education	Economic Servicesa	Health (A)	Housing,soc.sec & welfare (B)	A+B
US	$24,740	19.3	2.0	6.2	17.1	31.7	48.8
Germany	$23,560	6.4	0.8	9.7	16.8	45.9	62.7
Denmark	$26,730	5.0	9.8	7.2	1.1	41.3	42.4
Sweden	$24,740	5.3	7.3	16.2	0.4	53.3	53.7
Austria	$23,510	2.3	9.4	8.9	13.4	47.5	60.9
Netherlands	$20,950	4.2	10.2	5.6	13.7	41.5	55.2
Singapore	$19,850	24.5	22.3	11.5	6.1	9.0	15.1
Israel	$13,910	20.3	11.9	10.6	4.1	31.3	35.4
S. Korea	$7,660	20.1	16.8	18.8	1.5	7.2	8.7
Greece	$7,390	8.9	8.5	9.4	7.4	14.7	22.1
Chile	$3,170	9.1	13.4	14.6	11.5	39.3	50.8
Brazil	$2,930	2.6	3.6	7.5	5.2	30.0	35.2

Source: World Bank (1995, 180-181) in Yang Jae-jin (2000, 89)

Note: Economic services comprise expenditure associated with the regulation, support, and more efficient operation of business; economic development; redress of regional imbalance; research and trade promotion; and creation of employment opportunities.

 

 

 

 

 

Table 2. Timing of Social Insurance Introduction

 

Country	Work injury	Health	Pension	Unemployment
Germanya	1884	1880	1889	1927
Swedena	1901	1962	1913	1934
USa	1930	-	1935	1935
Japanb	1911	1927	1941	1947
Brazilb	1919	1923	1923	1965
Chileb	1916	1924	1924	1937
S. Koreac	1963	1977	1960/1988d	1995

Sources: ^a Flora and Heidenheimer (1981); ^b U.S. Social Security Administration (1999) ;^c Lee He-kyung. (1994) in Yang Jae-jin (2000, 91).

Note: ^d Year for the introduction of the Nation Pension Scheme for private sector workers.

 

 

Table 3. Effective Coverage Rate

	Pension	Healthcare	Unemployment	Severance Payment
Regular Workers	92.7%	94.8%	80.0%	94.3%
Non-standard Workers	19.3%	22.2%	20.7%	13.6%
Average	51.8%	54.3%	46.9%	49.0%

Source: Chung Moo-Kwon (2002).

 

 

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[1][1] This section draws heavily on Yang Jae-jin (2000).

[2][2] Korea also stood out for its commitment to public education. The Korean government poured into education twice the amount it spent on social welfare. Indeed, South Korea represents a classical example of the developmental state where the government channeled available resources preferentially into economic and human resource development. Singapore, another tiger economy, shows a similar pattern: a combination of a relatively low social welfare commitment and high investment in economic services and education.  

[3][3] Developmental strategy is critical (Kim Dong Sung, 1996; Haggard 1990). Unlike Latin American newly industrialized countries where inward-looking import substituting industrialization provided a safe haven for profit-making for local entrepreneurs, Korea’s outward-looking export-oriented industrialization necessitated price competitiveness in the world market. In Latin America, producers could pass social-welfare-related labor costs on to consumers, but in Korea, an increase in labor costs would directly hamper international competitiveness. Therefore, the economic imperative was that social insurance programs should be delayed as long as possible.

[4][4] This section draws mainly on Moon Chung-in and Yang Jae-jin (2001) and Chung(2002).

[5][5] National health insurance already covered the entire population from 1989.

[6][6] Besides, the Labor Standard Law has been into effect in the small-sized working places with less than five employees since 1999. Therefore, hitherto excluded marginal workers are now protected by the government. The minimum wage system, which took effect only in the firms with ten workers or more, was also extended to cover work-places with five workers and more in September 1999. Thus, about 85 percent of all workers are now protected by the minimum wage system (Shin Dong Myeon, 2000).

[7][7] In Korea, it took only 12 years from its introduction for Medical Insurance to reach the whole nation by 1989; 4 years for Employment Insurance by 1998; 11 years for the National Pension by 1999; 37 years for Industrial Injury Insurance by 1999.

[8][8] Employee compensation in Korea is composed of three components: regular earnings, bonus, and overtime payments. For blue color workers, the regular earning portion is anomalously small and bonus and overtime payments account for almost half of monthly earnings because employers and employees have the same interest in reducing tax payment and insurance contributions which are based on regular earnings (Han’guk Kyongje, November 6, 1999).

[9][9] As of 2000, the monthly allowance is 324,000 won or 270 US $ (1200 won = $1). 

[10][10] The social welfare budget is limited to core government commitments – i.e. expenditures on four major social insurance schemes, the National Basic Livelihood Program, and on social service institutions. Thus, it excludes spending on other welfare measures such as active labor market policies and public works.