Gap between rich and poor widens during pandemic - Korea Times
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Gap between rich and poor widens during pandemic

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Overflowing liquidity exacerbates asset inequality, worsening social divide

By Anna J. Park

The gap between the rich and poor has widened precipitously during the COVID-19 pandemic. While the poor are being pushed closer to the edge, the value of assets owned by the rich has soared during the same period.

In the U.S., the collective wealth held by the country's billionaires has grown by over 70 percent from March last year to October this year, according to Americans for Tax Fairness and the Institute for Policy Studies Program on Inequality (IPS). During the past 19 months, their fortunes have expanded to over $5 trillion, from slightly less than $3 trillion at the beginning of the pandemic.

The wealthiest 10 percent of American households now owns nearly 90 percent of all U.S. stocks, a record high, according to the latest data from the U.S. Federal Reserve. The U.S. stock market has been enjoying a bull run after bottoming out in March 2020 and has nearly doubled since then with the biggest gains concentrated in the richest households.

Asset inequality has also worsened in Korea. Against the backdrop of abundant liquidity following the pandemic, a sharp increase in the value of assets such as shares and real estate, rather than income, has been the main driving force behind the widening gap.

Soaring real estate prices

The average price of an apartment in Seoul doubled over the past four years and real estate property prices are expected to have surged in 2021 at the fastest rate in 15 years.

A recent report by the National Assembly Futures Institute pointed out that the main cause of deepening asset inequality in Korea is the surging value of real estate. The proportion of real estate in asset inequality decreased slightly in the early 2010s, only to rise again to 74 percent in 2019. And the surge in real estate prices since 2020 has only caused the gap between the rich and poor to widen further.

Offering concrete proof of this worsening asset inequality, the report urged policymakers to focus on addressing the divide in both income and assets. It also warned that the deepening asset gap could exacerbate social and political conflict in the future and damage the quality of life in Korea.

Increasing poverty rate

While asset values continue to rise, the country's relative poverty rate ― the percentage of people living with less than 50 percent of the median disposable income ― has also increased. According to the latest data from the OECD, one out of every six people ― or 16.7 percent ― in Korea were found to be living in relative poverty. This is the fourth-highest number among OECD member countries after Costa Rica which has the highest relative poverty rate of 20.5 percent, the U.S. at 17.8 percent and Israel at 16.9 percent.

Poverty among senior citizens is also a major factor behind Korea's high rate. A whopping 43.4 percent of Koreans aged over 65 are living in poverty, the highest percentage among OECD member countries.

A report by the Bank of Korea also pointed out that inequality in household income has also widened during the pandemic. The central bank report showed that households in the lowest income bracket were found to have suffered the brunt of the economic shock caused by COVID-19.

Addressing inequality

The worsening inequality in assets owned by households is now considered as a major threat to Korea's economic development. The government took drastic steps to curtail mortgages in order to tame soaring apartment prices by deterring people from borrowing money to buy homes. But the measure is more likely to increase the interest burden on already-indebted households. As a result, a more surgical approach by the government and lawmakers is being called for to address the gap.

A recent report by the Korea Insurance Research Institute (KIRI) also highlighted that the country's asset prices have skyrocketed to a record-high level, warning that if the situation is not addressed properly, it could negatively influence the country's mid- to long-term financial stability.

"The value of all assets has escalated to an all-time high, ranging from stocks, real estate and virtual assets, which is pretty unprecedented," Cho Young-hyun, a research fellow at KIRI, said. "Rising household debt is also worrisome, not only from the perspective of its size, but also from the speed of the debt increase rate, which is one of the fastest among OECD countries. As it could later impact mid- to long-term financial stability, it is necessary to alleviate such an imbalance," Cho explained.

While some experts lambasted the government's politicized approach in dealing with economic problems by boosting taxes on the wealthy, the move is also being blamed for worsening asset inequality here. Some argue that now is the time to prioritize redistribution of wealth, rather than solely focusing on growth.

Some stress the need to increase taxes on the super-rich, although any serious discussion on the issue is unlikely any time soon due to the country's presidential election slated for next year.

With divergent views and approaches being raised to address the issue, a more prudent, holistic and long-term policy approach is required to narrow the gap between the rich and poor, in addition to an increased public awareness of the seriousness of the problem.

However, such a sophisticated policy development is easier said than done. Measures aimed at raising key interest rates and curtailing liquidity alone cannot address the issue properly.

"There's a limit to changing the current tide of liquidity flow by resorting to the usual policy medium, such as a Bank of Korea interest rate hike. More microscopic and surgical policy measures will be required to alter the overflowing money's path to go into its use for balanced growth," Cho Young-moo, a research fellow at LG Economic Research Institute, said.

Park Ji-won

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