"The Limitations of Income-led Growth Policy and Search for Alternative Policies"

The income-led growth policy aims at promoting economic growth by increasing household income, thereby boosting demand and consequently supply. This policy was started in the 1980s when the Cold War was coming to an end, promoting global economic growth, especially in North American and North, West, East European countries. Then it  spread to emerging economies in South Europe, South America and East Asia. Politicians also use this policy to earn the trust of their voters, especially those of the middle class.

However, this policy has also caused inequality worldwide. According to OCED's statistics, in the 1980s, the ratio of top 10% income class’ average income to the lowest 10% income class’ average income  x 19 was 11. In 2013 this ratio reached 19 and that in South Korea was 10,1. In addition, this policy caused the decline of labor productivity. If during the period of 1999-2006, the world average labor productivity increased by 2.6%, in 2014 it decreased by - 2.1%.

Prof.. Hak K. Pyo talks about the implications of income-led growth policy

According to Prof. Hak K. Pyo, the above phenomena were due to the fact that income-led growth policy only focuses on increasing wage and generating profit without taking into account labor productivity and the impact of income distribution. He referred to Greek, an economy focusing excessively on tourism to boost growth. When the financial crisis 2008 broke out, American and Western tourists restricted their spending, decreasing the number of tourists to Greek. This took away its economic competitiveness and it fell into public debts. This also happened to Spain, Portugal and Italy.

In Asia, he warned the same could happen to other open, export-led economies such as China's, because excessive income generation would likely increase export costs, reduce competitiveness and induce lower growth rates. As for Vietnam's economy, Prof. Hak K. Pyo expressed more optimism for the income-led growth model because in the short-term, Vietnam still needs to attract capital and increase the wage of workers. This contributed to its impressive GDP growth of 6,8% in 2017. However, signs of inequality in Vietnam have shown up, especially between urban and rural areas. The decrease of cheap labor is also making it hard for Vietnam to attract foreign direct investment.

To replace the income-led growth model, Prof. Hak K. Pyo suggested an investment-led model with an emphasis on investments in human capital and technological advancement. Economies have to maintain a positive effective labor input growth and a positive growth in Total Factor Productivity. For example, the emerging East Asian economies need to avoid focusing too much on export and the service sector without considering labor productivity. That's the only to avoid what Marx called the “infinite accumulation of capital and doomsday of a capitalist society”. To the professor, Vietnam will inevitably face with this challenge within 10-20 years as it embarks on the process of industrialization and modernization. 

After the presentation, Prof. Hak K. Pyo received some questions from the audience about issues such the South Korean government's measures to protect low-income workers, the methods of improving labor productivity, and the relevance of income-led growth model to consumption and service-driven economies.

Hak K. Pyo is Professor Emeritus, the Faculty of Economics, Seoul National University. He has served as Professor of International Economics and Econometrics at Seoul National University since 1981 until February 2013. He was born in Milyang, Korea on February 16, 1948. He earned BA from Seoul National University (1970) and Ph. D from Clark University (1977). He also served as Visiting Professor at International Monetary Fund (1989-1990), Paul Nitze School of Advanced International Studies, Johns Hopkins University (1997-1998), and the Faculty of Economics, University of Tokyo (1998-1999; 2005 June-August). He served as consultant to Asian Development Bank (1996), World Bank (1997), Institute of Developing Economies in Tokyo (1992-1999) and APO-SMEDEC for training in Vietnam Ho Chi Minh City September 11-15, 2017.