“The Limitations of Income-Based Growth Policy and the Search for Alternative Policies”

Income-led growth policy aims to promote economic growth by increasing workers' income, thereby stimulating consumer demand and boosting supply. This policy began to be implemented in the 1980s when the Cold War was coming to an end, helping to create momentum for global economic growth, especially in North America and Northern, Western and Central Europe. It then continued to spread to emerging economies in Southern Europe, South America and East Asia. In other countries, politicians also use this policy to win over voters, especially the middle class.

However, this policy has caused global inequality. According to data from the Organization for Economic Cooperation and Development (OECD), in the mid-1980s, the average income of the richest 10% of the population was 11 times that of the poorest 10%. By 2013, this figure had risen to 19; in South Korea, it was 10.1. On the other hand, this policy has caused a decline in labor productivity. If in the period 1999-2006, the average productivity growth worldwide increased by 2.6%, by 2014, it was -2.1%. Europe and Japan began to see labor productivity decline in the 1990s. In South Korea, the real annual growth rate based on labor productivity was 4.17% in the period 1991-2000; by 2001-2002 only 2.91%.

Prof. Hak K. Pyo analyzes the policy implications of the income-led growth model

According to Professor Hak K. Pyo, the reason for this situation is that the income-based growth model only focuses on the motivation to increase wages and create profits in the economy, but does not pay attention to labor productivity and the impact of income distribution. He gave the example of Greece, an economy that focuses heavily on tourism to stimulate growth. When the financial crisis broke out in 2008, American and Western tourists had to tighten their spending, leading to a decrease in tourism demand in countries like Greece. As a result, this country lost its economic competitiveness and fell into a serious public debt crisis. The same phenomenon also occurred in Spain, Portugal and Italy.

In Asia, he also warned of this trend in open, export-oriented economies like China, because income inflation will increase export costs, reduce competitiveness and economic growth. For the Vietnamese economy, Prof. Hak K. Pyo expressed more optimism about the income-based growth model. This is because in the short term, Vietnam still needs to attract investment capital and increase income to improve the lives of workers. This contributed to an impressive GDP growth of 6.8% in 2017. However, signs of inequality in our country have also appeared, especially between urban and rural areas. The decline in cheap labor will also cause Vietnam to gradually lose its ability to attract foreign direct investment.

To replace the income-based growth model, Prof. Hak K. Pyo proposed an investment-based model, which focuses on human capital and technological development. Economies need to improve the efficiency of labor input (focusing on quality rather than quantity) as well as total factor production. For example, emerging economies in East Asia need to avoid falling into economic growth through exports and services, but must also consider productivity in the industrial sector. Only then can we avoid what Mark calls “endless capital accumulation and the demise of capitalist society”. According to him, this is also inevitable for Vietnam in the next 10 to 20 years; when Vietnam carries out industrialization and modernization.

After the presentation, Prof. Hak K. Pyo received a number of questions from the audience on issues such as the Korean government's measures to protect low-income workers, methods to improve productivity in the economy, and the applicability of the income-based growth model to consumer and service economies.

Prof. Hak. Pyo is Professor Emeritus at the Department of Economics, Seoul National University. He received his BA from Seoul National University in 1970 and his PhD from Clark University in 1977. He taught Economics and Econometrics at Seoul National University from 1981 to 2013. He was also a Visiting Professor at the International Monetary Fund (1989-1990), Johns Hopkins University (1997-1998), and the University of Tokyo (1998-1999; June-August 2005). He was a consultant at the Asian Development Bank (1996), the World Bank (1997), the Institute of Developing Economies in Tokyo (1992-1999) and taught at a training course organized by the Asian Productivity Organization and the Directorate for Standards, Metrology and Quality, Ministry of Science and Technology in Ho Chi Minh City from September 11-15, 2017.