Liberal Migration and Population policy Responses
to Demographic trends in Korea

Presentation by Amb. CHUNG Eui-yong at CALD-ALDE-LI Meeting at senate of the Philippines in Manila on Thursday, June 22, 2006

Introduction

It is a great honor and privilege for me to be invited to this meeting to speak on a very important topic. In fact, I accepted the invitation, not because I am an expert on the issue, but I thought that the challenges Korea is facing in dealing with the current demographic pressures in the country may present some insights to many countries, especially to developing countries in Asia.

In a recent report, Goldman Sachs forecast that Korea will rank third in the world next to The U.S. and Japan in terms in per capita income by 2025 and second only in U.S. by 2050. But, it also cautioned that “Korea’s working-age demographics, which will show a sharp fall after 2010 pose a significant challenge to future growth.” (“How Solid Are the BRICS’s?” in Global Economics Paper, No. 134, December 2005).

Indeed, Korea is facing three major challenges in coping with its demographic changes: i.e. the rapidly aging population, the socioeconomic bipolarization and the increase influx of foreign migrants. These challenges are critical for Korea to manage a sustainable development for the future.

Today, I will try to discuss each of the three challenges and how the Korean government and the ruling party Uri Party are responding to them.

Demographic Trends and Population Policies  

According to the latest projections by the government, the population of Korea will increase to its peak of about 50 million in 2020 from the current 48 million, and will start declining steadily afterwards. The population growth rate rapidly decreased from 1.6 % in 1980 to 1.0 % in 1990, 0.8 % in 2000 and 0.4 % in 2005. It is expected to further decline to -1.2 % by 2050. The decrease in the population is due to the gradual decrease in the birth rate.

There are several explanations for this phenomenon. First, unstable employment condition resulted in late marriages which contributed to the decline in the fertility rate. The average ages at first marriage has jumped from 26 years for male and 23 years for female in 1981 to 30 and 27 respectively in 2003. Second, the newly found sense of self-fulfillment among women and their participation in economic activities outgrew child raising infrastructure and child care system in the society.

Thanks to the medical treatment and increased investment in health care, the average life span also increased from 66 years in 1981 to 78 in 2005 and is expected to reach over 83 years by 2050.

The increase in birth rate and extension of the average life expectancy has changed the structure of population from a pyramid shape to a diamond shape. The working age population, between 15 to 64 years of age, was 72 % of the total population in 2005, but is projected to decrease to 54 % in 2050. the median age of the population was 35 years, slightly less than the OECD average of 39 in 2005, but is projected to increase to 56 years by 2050 which will be higher than the projected OECD average of 46 years. This would mean that, while eight working-age people supported one elderly person in 2005, one and a half people would have to support one elderly person in 2050. Korea is now an aging society with 7 % of the population over 65 years of age. It will turn into an aging society by 2018 with more than 14 % of the population over 65.

In response to the ongoing decline in population and the rapidly aging society, the Korean government enacted the Basic Law on Low Birthrate and Aging Society in September 2005 and recently (on 7 June 2006) announced the “First Basic Plan” to implement the law (“Saeromaji Plan 2010”). According to the plan, the government will invest 32.7 trillion won, or roughly US $35 billion, over the next five years to boost the nation’s birth rate back to the OECD average of 1.6 percent by 2020.

To achieve this goal, the budget will be used first to improve the child raising environment in the society, by building more childcare facilities, especially for low and double- income families, and to provide financial assistance for mainstreaming women in the society. Measures will also be taken to lower childcare costs. 

Special emphasis is given on education for children in low- income brackets and neglected communities. Programs to reduce education costs are being introduced, including such measures as expanding after-school program. Neglected communities include about 40,000 teenagers who discontinued their education, over 6 million adults who hold no diploma or middle school graduation as their final degree and children of North Korean refugees, foreign workers and their children.

The plan also includes measures to secure stable income for the elderly, including beefing up nursing infrastructures and enhancing housing and transportation conveniences for the ages population. In a longer term plan, laws and regulations will be revised to foster to lay firm foundation for an aged society and to increase the quality of life of elderly people.

A new health insurance program for senior citizens, titled “Elderly Care Insurance” will kick-off in 2008 to help relieve the financial burdens of the elderly and their families. Senior citizens over 65, who are suffering from age-related diseases, such as Alzhiemer’s, will be eligible to subscribe to the new scheme, separately from the current national health insurance. Beginning in 2010, the program will be further expanded to provide in-house care and free- care at government-designated recuperation centers for elderly people who are seriously ill. The program will also help families who are struggling to support their elderly members. Around 12 % of the people over 65, or 530,000 citizens are believed to be suffering from various age-related diseases and in need of public health support. The number is expected to surpass 650,000 by 2010.

The government also aims to provide 80,000 public jobs to senior citizens this year to cope with Korea’s rapidly-aging society. In addition, the government has decided to provide tax breaks and other incentives to promote “reverse mortgages” for elderly homeowners. This is a program for asset-rich but cash-poor senior citizens. From next year, people over 65 owning homes worth 300 million won, roughly US $ 320,000, will be able to receive a monthly payment of 930,000 won, or about US $ 1,000 for the rest of their lives after providing their homes as collateral to financial institutions. In addition, the government is building homes for the elderly in all 234 municipal districts across the country.

Socioeconomic Bipolarization and Social and Welfare Policies

The second challenge is socioeconomic bipolarization. In fact, this has been the most controversial issue since the nation recovered from the 1997 financial crisis. Even though the Korean economy successfully recovered from the highly volatile crisis within a relatively short period of time , thanks largely to an export boom in IT-related industries, the bipolarization and worsening of income disparity still disparity still disrupt Korea’s economic growth. The bipolarization of the economy is manifested in the changes of Korea’s income distribution.

The Gini coefficient, which is the measure of the inequality of income distribution, ranging between a maximum 1 for absolute inequality and a minimum of 0 for absolute equality, had been in a downward trend since the early 1980s reaching 0.280 point before the 1997 financial crisis. But it jumped to 0.320 point in 1998 and still remains at around 0.310 point. The total income of the top 10 % of the households is still 20 times larger than that of the low 10 %.

The causes of the worsening of income distribution are believed to be two-fold. First, there are simply not enough jobs. Looking only at the unemployment rate of 3.7 % in 2005, we need not worry about the situation. The problem is, however, that there is not enough employment growth to satisfy the population’s job needs. The average net job increase until the financial crisis had been 400,000 per year. However, it has remained a mere 205,000 from 1998 to 2005. The particular concern is the increasing unemployment rate among the youth, aged between 15 to 29 years. It was 7.9 % in 2005, and further increased to 8.5 % last May. Many jobs vanished due to a domestic worsened. The so-called decent jobs have become relatively scarce while irregular employment with low payment and few benefits has increased.

The trend of sectoral and industrial bipolarization has also deepened since the financial crisis. The Korean economy has indeed experienced rapid and remarkable changes in industrial structures. It started its industrialization with labor-intensive light industries in the 1960s, expanded to he capital-intensive heavy industries in the 1970s and 1980s, and to IT and high-tech industries in the 1980s and 1990s. Since the early 1990s, the labor-intensive manufacturing sector was in decline, while high-value-added, high-tech and capital-intensive industries could not generate enough employment opportunities. Thus, the economy has slowly transformed into a service-based economy as we see in other advanced economies. However, the service sector is not yet as competitive as Korea’s other industries, like IT. As the economy underwent rapid restructuring, workers in the declining sector also experienced degenerating employment conditions. Moreover, since employment multiplied rapidly in the service sector, it could not provide satisfactory salaries and benefits and further exacerbate the bipolarization of income distribution.

The government has been mapping out a series of measures to resolve widening socioeconomic divides, stressing the importance of job creation, support for SMEs and expansion of social safety nets.

The government is planning to create more than a half million (527,000) jobs for the socially disadvantaged this year. This program has a budget of 1.5 trillion won, about US $ 1.6 billion, up 10 % form last year. To alleviate the growing polarization, more focus will be made on creating stable jobs rather than those with short terms and lower wages as was the case in the past. Under the stable job category, 27,000 youths will get jobs, most as social service workers.

In addition, government’s support system for SMEs will be streamlined to offer more opportunities for viable entities and to weed out uncompetitive ones. Debt work-outs and other restructuring schemes will be applied to help SMEs get themselves out of financial difficulties as quickly as possible. The IMF recently also called for an approach to and more sustainable help. The SME sector accounts for about 87% of Korea’s total hiring and 50 % of factory output, but investment by the sector shrank 20 % from a year earlier. In contrast, large corporations, including “chaebol,” increased their investment in facilities and R&D by over 30% during the same period. 

Measures to expand social safety nets also include programs to prevent hereditary poverty through better education as discussed earlier. We believe that people equipped with better education can become high-income professionals later. The government plans to create “Edu-Safety Net” by investing 1.3 trillion won, or US $ 1.4 billion, this year and an additional 8 trillion won, or US $ 8.6 billion, over the next five years. Measures are also being taken to improve labor conditions and eliminate discrimination against the disadvantaged.

Migration Policies

Another challenge the Korean society faces is the ever-growing number of foreign residents. Korea had once been known as one of the most homogenous societies in the world. However, according to a recent survey the number of foreign residents was estimated at 817,000 as of last May, according for about 1.7 % of the total population. Chinese nationals are the largest foreigner group living in the country, accounting for over 46 % of the total. About 30 % of foreign residents are from Southeast Asia While 4.8 % are from the U.S and 3.6 % from Japan. Foreign migrant workers are estimated at about 424,000 or 52 % of total foreign residents. Among them, about 188,000 are undocumented workers.

One of the reasons for the increase in the number of foreign workers in Korea is that, despite the economic difficulties people may have, they are increasingly becoming reluctant to take on low-skilled jobs, thanks to the rapid pace of aging and the elevated levels of general income and education. The shortage of low-skilled labor is expected to worsen in the future. The only answer is to fill the vacancy with foreign migrant workers. In fact, foreign workers already occupy a significant portion of the Korean market force, and their share will continue to grow further still.

Foreign migrant workers first started to come to Korea in the early 1990s. The Korean government introduced the Industrial Trainee System (ITS) to legalize such migration in 1993. But the ITS had fundamental flaws, including illegal use of foreign labor, human rights violations, and other systemic problems. Unskilled foreign workers simply left their “trainee” positions after arriving in Korea, preferring to word “illegally” because it allowed them to receive much higher wages.

In order to overcome such problems, the Foreign Employment Permit System (EPS) was implemented since August 2004. And the government is going to abolish the ITS by the end of this year. For the first time, the EPS provided the framework for unskilled foreign workers to work legally in Korea, with all the rights and privileges the native workers enjoy. The intervention of private agencies in the process of employment is also prohibited. Only the governments of the dispatching countries or their designated agencies can conduct the selection and other procedures relating to the employment based on the MOUs signed with the Korean government.

Although the EPS is an improvement over the old system, some significant limits still remain. The EPS permits only the employers who have failed to hire native workers to import foreign labor. The system allows foreign workers to remain Korea only for a maximum of three consecutive years. Under the system, foreign workers are also allowed to work in the five sectors like manufacturing, construction, farming, fishing and service.

Other Asian countries which are experiencing similar labor shortages, like Taiwan, Singapore and Hong Kong, have also introduced similar foreign worker employment system. Most European countries such as France, Germany and Switzerland have introduced, however, Labor Permit System, which allows foreign workers to move freely from one workplace to another. Ultimately, this is a system which Korea should adopt.

In this regard, I would like to draw your attention to two other relevant developments in Korea. One is that the number of North Korean refugees who are resettling in the South, 85 % of them in the last five years. Unfortunately, however, many of the resettlers are having difficult time to adjust to the new environment, in particular, in a highly competitive society, despite the government’s efforts to help them.

The other is that we revised the election law to grant voting rights to foreign residents with permanent resident visas in local elections. Thanks to this revision, about 6,000 foreigners have participated in the elections. Although the voting right is granted to only those holding an F-5 visa of permanent residency status for more than three years and obtaining the visa itself is still very difficult, it is a very positive development for a society which has been most homogenous. Together with these developments, it is also noteworthy that there are now public debates about the possibility of allowing dual citizenship.

Nature of Liberalism as Guiding Principle for Governance

The Uri Party is firmly committed to preserving and advancing the values of liberal democracy, human rights and market economy.

We believe that growth of the economy is equally important as the distribution of wealth, and that both can be attained hand in hand. A harmonious link between economy and welfare should and can be established. This requires reforming socioeconomic policies in a way to expand the coverage of social safety nets and create a virtuous cycle of growth and distribution. We believe that social safety nets should be available to all citizens (universalism) from all possible social risks (comprehensiveness) to help them not to fall below poverty line (the national minimum).

We believe that everybody in the society, including the underprivileged and disadvantaged, deserves fair and equal opportunities to succeed in their efforts for better life. Without protecting socially vulnerable groups and helping them return to workplaces, there is no guarantee for sustainable growth. We also believe that our socioeconomic policies are centered on raising efficiency by abolishing unnecessary and burdensome regulations and increasing transparent in public and corporate governance.

Lastly, we believe that, in a world of increasingly global business networks, people need to be able to move around the world at short notice and for shorter periods. Economic integration process in the world, led by strong market forces, has passed the point of no return. Division of labor has already been established in production process beyond national boundaries.

In this rapidly globalizing world, national borders are becoming increasingly meaningless and less controllable for the flow of goods, services and manpower. The growing dynamism of global markets means a shorter reaction time to newly emerging opportunities. Advances in technology and cost reduction in transportation and communication have both spurred and enable greater mobility of people. These changes have also created new demands for skilled labor, which can be met by foreign migrant workers.

Recent Election Outcomes in Korea

Before concluding, I would like to say a few words about a big political setback the ruling Uri Party has experienced in the last local elections held three weeks ago (on May 31, 2006). Although the elections were to form local administrations and legislatures, they were viewed by many as mid-term referendum on the government and the party.

There are several explanations on the poor performances by the ruling party. We should admit that the election outcomes must reflect frustration of the voters with our policies. Many political analysts say that, ideologically, the Korean public may have shifted back to a more conservative stance after three years under a liberal government.

The result may constrain the ability of the government and the party to push forward our reform and welfare agenda, but won’t affect the basic framework of our socioeconomic policies. The party still maintains the largest number of seats in the National Assembly until the next general elections in early 2008. To win the public trust back, however, we may have to redefine our positions on the basis of voters’ demands and put more efforts on consensus-building in the society.

In this regard, it is with great pleasure to report that, just two days ago (on June 20, 2006), a social convention aimed at tackling the issues of low birthrate and aging population was signed by the Prime Minister representing the government, and the representatives of the private sector, including the Chairman of the Federation of Korean Industries (FKI), leaders of the two national trade unions and major civil societies. Although it is not legally binding, the signatories pledged to facilitate, and share the burden of, the government’s plan to expand support for childcare and welfare for elderly people. Among others, they agreed to increase the number of state-run childcare centers to accommodate 30 % of the infant population, aged 0 to 3, from the current level of 11 %. Unfortunately, political parties have been excluded from signing the convention due to the opposition of the Grand National Party, which is the main opposition party. This, however, well demonstrates the efforts on the part of the government and the ruling party to build consensus for future socioeconomic policies.

Thank you.