Randall S. Jones

Income Inequality, Poverty and Social Spending in Japan

Income inequality and relative poverty among the working-age population in Japan have risen to levels above the OECD average. This trend is partially explained by labour market dualism, with an increasing proportion of non-regular workers who are paid significantly less than regular workers, as well as by other factors, including the ageing of the workforce. Social spending as a share of GDP has been expanding in the context of population ageing, although it remains below the OECD average and the proportion received by low-income households is small. Consequently, the impact of social spending on inequality and poverty is weak compared to other OECD countries and inadequate to offset the deterioration in market income. The scope for increasing social spending is constrained by the fiscal situation. Instead, reversing the upward trend in inequality and poverty requires reforms to reduce labour market dualism and better target social spending on low-income households, particularly single parents. This Working Paper relates to the 2006 OECD Economic Survey of Japan (www.oecd.org/eco/surveys/japan).

Enhancing the Productivity of the Service Sector in Japan

Labour productivity growth in the service sector, which accounts for 70% of Japan’s economic output and employment, has slowed markedly in recent years in contrast to manufacturing. The disappointing performance is associated with weak competition in the service sector resulting from strict product market regulation and the low level of import penetration and inflows of foreign direct investment (FDI). Reversing the deceleration in productivity growth in the service sector is essential to raise Japan’s growth potential. The key is to eliminate entry barriers, accelerate regulatory reform, upgrade competition policy and reduce barriers to trade and inflows of FDI. Special attention should be given to factors limiting productivity growth in services characterised by either low productivity or high growth potential, such as retail, transport, energy and business services. Finally, it is essential to increase competition in public services, such as health and education, where market forces have been weak. Ameliorer la productivite dans le secteur des services au Japon La croissance de la productivite du travail dans le secteur des services, qui represente 70 % de la production economique et de l’emploi au Japon, s’est sensiblement ralentie ces dernieres annees contrairement a l’evolution observee dans le secteur manufacturier. Ces resultats decevants sont associes a la faiblesse de la concurrence dans les services imputable a la rigueur de la reglementation des marches de produits, au faible niveau de penetration des importations et au manque de dynamisme des investissements directs de l’etranger (IDE). Le ralentissement de la croissance de la productivite dans le secteur des services doit absolument etre inverse pour accroitre le potentiel de croissance du Japon. Il est indispensable d’eliminer les obstacles a l’entree, d’accelerer la reforme de la reglementation, de renforcer la politique de concurrence et de reduire les obstacles au commerce et aux entrees d’IDE. Une attention particuliere devrait etre accordee aux facteurs limitant la croissance de la productivite dans les services caracterises soit par une faible productivite, soit par un potentiel de croissance eleve, comme le commerce de detail, les transports, l’energie et les services aux entreprises. Enfin, il est essentiel d’accroitre la concurrence dans les services publics, comme la sante et l’education, ou les forces du marche ont peu joue.

Meeting the Social Policy Challenges Facing Korea

Korea faces the fastest population aging among Organisation for Economic Cooperation and Development countries and increasing levels of income inequality and relative poverty. While economic growth will help address these challenges, growth alone is not sufficient, making it necessary to introduce policies to promote social cohesion. First, the National Pension Scheme and the National Health Insurance need to be improved. Second, Korea should develop well‐targeted social programs and expand the earned income tax credit. Third, it is important to reduce labor market dualism, a major cause of inequality due to the large wage gap between regular and non‐regular workers. Fourth, education reform is needed to lower the financial burden of tertiary education, reduce the heavy reliance on hagwon and increase spending on preprimary education. At the same time, it is essential to maintain a sound fiscal position by increasing tax revenues, primarily through indirect taxes and environmental taxes, to cover rising social spending.

Reforming the Tax System in Japan to Promote Fiscal Sustainability and Economic Growth

Tax reform is an urgent priority, as Japan needs as much as 5% to 6% of GDP of additional government revenue just to stabilise public debt, which has risen to 180% of GDP. In addition to raising revenue, tax reform should promote economic growth, address the deterioration in income distribution and improve the local tax system. Additional revenue should be obtained primarily by increasing the consumption tax rate, currently the lowest in the OECD area, while broadening the personal and corporate income tax bases. The corporate tax rate, now the highest in the OECD area, should be cut to promote growth, while eliminating aspects of the tax system which discourage labour supply and distort the allocation of capital. Japan should also consider introducing an Earned Income Tax Credit to promote equity. The local tax system should be simplified, increasing reliance on existing taxes on property, income and consumption. Reformer la fiscalite au Japon pour promouvoir la viabilite budgetaire et la croissance economique La reforme fiscale est une priorite urgente : l’Etat japonais doit se procurer des recettes supplementaires a hauteur de 5 a 6 % du PIB pour simplement stabiliser la dette du pays, qui atteint desormais 180 % du PIB. Au-dela de cette progression des ressources, la reforme fiscale devrait promouvoir la croissance economique, faire face a la dispersion croissante de la distribution des revenus et ameliorer la fiscalite locale. Les recettes supplementaires devraient provenir pour l’essentiel d’une augmentation du taux de la taxe sur la consommation, qui est actuellement le plus faible de toute la zone OCDE, et de l’elargissement des bases d’imposition des revenus des personnes physiques et morales. Les autorites devraient abaisser le taux de l’impot sur les societes, aujourd’hui le plus eleve des pays membres de l’OCDE, afin de promouvoir la croissance, et supprimer les mecanismes fiscaux qui sont prejudiciables a l’offre de main-d’oeuvre et perturbent les affectations de capital. Le Japon devrait aussi envisager, pour favoriser l’equite, l’instauration d’un credit d’impot sur le revenu d’activites professionnelles. La fiscalite locale devrait beneficier de mesures de simplification et s’appuyer davantage sur les impots et taxes deja en vigueur en matiere fonciere et immobiliere, ainsi que sur les revenus et sur la consommation.

Reforming Housing and Regional Policies in Korea

The government has introduced five policy packages since August 2005 to stabilise house prices, mainly due to concerns about possible spill-overs from the capital region to other parts of the country, even though the increase on a nation-wide basis has been modest compared to other OECD countries. The planned expansion in housing construction in the capital region will reduce upward pressure on house prices. However, other policies aimed at reducing “speculative” demand and lowering house prices, such as the price ceiling on new houses, are likely to constrain supply and result in stronger price pressures in the longer term. The government should shift its focus from short-term price fluctuations in house prices to creating an efficient housing market, relying more on private-sector supply. Concern about increasing concentration in the capital region should be dealt with through economic instruments to address externalities, such as pollution and congestion, while phasing out the restrictions on construction in the capital region. Reformer la politique du logement et la politique regionale en Coree Le gouvernement a mis en place depuis aout 2005 cinq series de mesures destinees a stabiliser les prix des logements, meme si la hausse de l’immobilier a ete modeste en Coree par rapport a d’autres pays de l’OCDE. Le developpement prevu de la construction de logements dans la region de la capitale attenuera les pressions a la hausse sur les prix immobiliers. Mais d’autres mesures visant a reduire la demande « speculative » et a faire baisser les prix des logements, notamment le plafonnement des prix des logements neufs, sont de nature a limiter l’offre et a accentuer les pressions sur les prix a long terme. Au lieu d’essayer avant tout de remedier aux fluctuations a court terme des prix immobiliers, le gouvernement devrait s’efforcer de creer un marche du logement qui soit efficient, tout en s’appuyant davantage sur l’offre privee. Face au probleme de la concentration de plus en plus forte dans la region de la capitale, il faudrait utiliser des instruments economiques pour remedier aux externalites, en particulier la pollution et les encombrements, tout en mettant fin progressivement aux restrictions a la construction dans la region de la capitale.

Reforming the Tax System in Korea to Promote Economic Growth and Cope with Rapid Population Ageing

Korea has one of the lowest tax burdens in the OECD area, reflecting its small public sector. However, rapid population ageing will put upward pressure on government spending. The challenge is to meet the long-run need for greater expenditures and tax revenue while sustaining strong economic growth. A pro-growth tax reform implies relying primarily on consumption taxes for additional revenue. There is also scope for raising personal income tax revenue from its current low level by broadening the base by reducing the exemptions for personal income. The planned cuts in the corporate tax rate should be financed at least in part by reductions in tax expenditures. The broadening of direct tax bases would also help finance an expansion of the earned income tax credit to address widening income inequality. In addition, the local tax system should be simplified and reformed to enhance the autonomy of local governments. Reformer le systeme fiscal en Coree afin de favoriser la croissance economique et de faire face au rapide vieillissement demographique La Coree est l’un des pays ou la charge fiscale est la plus faible dans la zone de l’OCDE, en raison de la petite taille du secteur public. Cependant, le rapide vieillissement demographique va exercer une pression grandissante sur les finances publiques. La difficulte consiste a repondre au besoin a long terme de depenses publiques et de recettes fiscales accrues tout en soutenant une vigoureuse expansion economique. Pour qu’une reforme fiscale aide a la croissance, elle doit privilegier les impots sur la consommation comme source de recettes supplementaires. Il est aussi possible d’augmenter le produit de l’impot sur le revenu des personnes physiques, actuellement peu eleve, en elargissant l’assiette grâce a une diminution des exonerations. Les reductions prevues du taux d’imposition des societes devraient etre financees, en partie du moins, par des compressions de depenses fiscales. L’elargissement des bases d’imposition directe aiderait aussi a financer une extension du credit d’impot sur les revenus d’activite afin de remedier aux inegalites croissantes de revenu. Par ailleurs, le systeme d’impots locaux devrait etre simplifie et reforme afin de renforcer l’autonomie des collectivites territoriales.

Boosting Productivity in Korea's Service Sector

Labour productivity growth in the service sector has been low relative to manufacturing. This is explained in part by weak competition in services resulting from strict product market regulation and the low level of import penetration and inflows of foreign direct investment (FDI). Increasing productivity growth in the service sector, which accounts for 67% of employment and 58% of value added in Korea, is essential to sustain high potential growth. The priority is to strengthen competition by eliminating domestic entry barriers, accelerating regulatory reform, upgrading competition policy and reducing barriers to trade and inflows of FDI. Another challenge is to enhance the performance and accelerate the restructuring of small and medium-sized enterprises, which account for over 90% of service-sector employment. Furthermore, it is essential to boost productivity in service industries with high growth potential, such as telecommunications and financial and business. Rehausser la productivite dans le secteur des services en Coree La croissance de la productivite du travail dans le secteur des services a ete lente par rapport a celle du secteur manufacturier. Cela s’explique en partie par la faiblesse de la concurrence dans les services, due a une reglementation stricte des marches de produits et a un niveau peu eleve de penetration des importations et d’entrees d’investissement direct etranger (IDE). Un renforcement des gains de productivite dans le secteur des services, qui represente 67 % de l’emploi et 58 % de la valeur ajoutee en Coree, est essentiel pour soutenir un taux eleve de croissance potentielle. Il faut en priorite intensifier la concurrence en supprimant les barrieres interieures a l’entree, en accelerant la reforme de la reglementation, en ameliorant la politique de la concurrence et en reduisant les obstacles au commerce et a l’afflux d’IDE. Une autre tâche difficile sera de rehausser les resultats et d’accelerer la restructuration des petites et moyennes entreprises, qui representent plus de 90 % de l’emploi dans le secteur des services. Il est par ailleurs indispensable de stimuler la productivite dans les domaines qui ont un fort potentiel de croissance, comme les telecommunications et les services financiers et aux entreprises.

Sustaining High Growth Through Innovation

With inputs of labour and capital slowing, sustaining high growth rates in Korea will increasingly depend on total factor productivity gains, which are in turn driven to a large extent by innovation. While a number of Korean firms are at the world technology frontier in areas such as ICT, the diffusion of technology to lagging sectors is a priority to sustain growth. This paper recommends policies to improve the science and technology system by upgrading the R&D framework, in part through closer linkages between firms, universities and the government, and enhanced intellectual property right protection. Strengthened competition, particularly in the service sector, is needed to promote the diffusion of new technologies. Innovation also requires policies to ensure the supply of high-quality human capital through reforms of tertiary education. This requires a restructuring of the university system through increased competition and deregulation, as well as additional financial resources to improve quality. This Working Paper relates to the 2005 OECD Economic Survey of Korea (www.oecd.org/eco/surveys/korea).