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Chapter 1: Introduction



Chapter 2: Orthodox Economic theory







Chapter 3: Political economic theory



  3. Moderating (reducing) the size distribution at the upper levels through progressive taxation of personal income and wealth. Such taxation increases government revenues and converts a market-and asset- determined level of personal income into a fiscally corrected 'disposal' personal income. An individual or family's disposable income is the actual amount available for expenditure on goods and services and for saving.

A contribution which agriculture makes to economic development is known as factor contribution which is related to functional distribution. This can be divided into a further two contributions' labour contribution and capital contribution. Labour contribution is defined as the phenomenon when agricultural productivity improves and surplus labour form the agricultural sector is released in to the industrial sector. Yao (2006) noted that in pre-reform China this was not so as labour could not be immediately transferred from one sector to another. In China's case this resulted in depressed agricultural labour productivity and large underutilised human capital. In terms of capital contribution Thirlwall (2006) explains that capital contribution can be via voluntary investment in machinery or via involuntary contributions in the form of taxes.






Some economists, such as Hirschman, have argued that there are in fact higher linkage effects in the industrial, rather than the agricultural sector and in particular, that in many less developed countries, linkages are to be found within manufacturing industries, but not between industry and agriculture. According to Hirschman' idea of Unbalanced Growth, the key to economic development is investment in a 'leading' sector, an industrial sector with high linkages, rather than in agriculture. A problem with this however, is the previously-mentioned inflation, due to lack of coordination between supply and demand. Propagating a single industry might indeed lead to the similar problems with lack of trade diversification that occur when primary commodities are the sole export.


Nevertheless, Alice Amsden argues that the reputation of Korea as a country with low income inequality might be due to false information for three reasons: (1) The value of real estate and other assets, which lends to appreciate with inflation, rose more rapidly in the 1970s than wages. Because this value is excluded from income and these assets tend to be owned by higher income earners, the treatment of such assets is likely to result in the understatement of inequality. (2) The equivalent of the United States' Internal Revenue Service in Korea sometimes includes and sometimes excludes from the calculation of personal income, capital gains, rent, and interest payments. Such income is also taxed differently from wage income. (3) It was possible until 1988 to open bank accounts in Korea under an assumed name. Nevertheless, land reform did respond to the ancient cry for egalitarianism. When Korea was an overwhelmingly agrarian country, land reform undoubtedly contributed to greater equity in size distribution of income. In the late 1930s, 3% of all farm households had owned over two thirds of all land, whereas ten years later. Fewer than 7% of all households were landless (Ben et al, 1980). (Asia's Next Giant, Amsden, 38) In addition, Korea has unusually high levels of aggregate economic concentration and of wage inequality by international standards. The process of measuring equality in Korea is vexed by institutional factors.

It is undeniable that the Korean state played a central role in the country's economic development through its cunning use of state-created rents as an instrument for industrial development. Of course, such a result was only possible because the Korean state was a strong state which could discipline firms whenever necessary. It has often been suggested that the Korean state could become strong because the country's historical development left a social structure with no powerful social classes to contest state power. (Ha Joon Jang, the East Asian development experience, 95) Another example of a significant state role in maintaining low income inequality is an agricultural pricing control. The typical price support programme consists in offering guaranteed procurement prices at which the government stands ready to buy food grain. The idea, of course, is to increase the marketed surplus of grain. At the same time, governments often are unwilling to pass on these prices to urban consumers, partly because these consumers are typically incensed by higher prices and partly because of the effect on the industrial wage. Thus price support programmes are usually accompanied by a subsidy to urban consumers: the procured food is sold at or below market prices by the government. Of course, someone has to pay for this subsidy, and it usually comes out of the government budget. An alternative option is to maintain an overvalued exchange rate. The overvaluation is kept in place by tariff or quota-based restrictions on imports. The implication of overvaluation is that the prices of exports are kept artificially low in terms of the domestic currency. If the country is a food exporter, this policy has the effect of discouraging food exports and shifting food sales into the domestic market. The policy has sufficient opacity about it-farmers may not be aware that the exchange rate is overvalued and reduces their export earnings- and it has the desired impact of making food available to urban consumers without a price rise. 369 Singapore government's public housing policy played a major role in achieving rapid economic growth because public housing policy both directly and indirectly provided opportunities for foreign investments. Singapore government unlike Korean government focused on gathering funds from foreign investors because their belief was that the multinational companies are able to present an opportunity to open up world markets to Singapore; thus increasing Singapore's reputation in the international arena as well as providing the sufficient skilled and relatively well-paid jobs for the population; and hence, to upgrade the economy quickly through value-added activities (Reference...). The multinational companies were not only attracted by the business environment and incentives in Singapore but also an opportunity to make greater profit presented by the People's Action Party (PAP) policies. Two arguments are put forward by Castells, Goh and Kwok that public housing policy managed to keep the costs of operation for foreign investors. First, the public housing lowered the costs of living. The workers were able to rent house at relatively low prices, thus the wage rates in Singapore were not as high as other industrialising countries. With low wage rates, companies were not restricted to lowering quality of labour when employing workers to expand or set up businesses. The empirical example given by Castells et al illustrates this. Although real income increased during the early stage of industrialisation, public housing rentals set in 1960 (at as low as 15 Singapore dollar per month for one-room emergency flat) were not adjusted until 1979, and selling prices of public flats set in 1964 were not adjusted until 1974. In addition, the provision and development of package of relatively high standards of other human and social services, such as educational, health, recreational and other community facilities, in conjunction with public housing further subsidised the workers' costs of living. (Reference) Second, public housing helped develop a complete network of urban infrastructure. State investments and subsidies into creating and improving industrial sites and services and other infrastructures such as railway system and roads around industrial sites reduced overhead and operating costs of the investing companies. Ssc The state investment also assisted the expansion of other industrial and commercial activities. This is another prime example of usage of forward/backward linkage effect. Singapore government not only managed to facilitate environments for investors but also provided bigger markets for domestic businesses that were at the early stage of expansion. Castells et al supports the second argument with an example of the Jurong Town Cooperation and the Housing Development Board (HDB). The Jurong Town Cooperation was established in 1968 as a spin-off from the Economic Development Board specifically to develop industrial sites and services, factories and living quarters for workers. However, the scope of the Cooperation was limited to assisting particularly the heavier industries and all industries within the industrial town of Jurong. Meanwhile, as the major landlord and developer in the republic, the Housing Development Board (HDB) was, in effect, largely responsible for the orderly coordination and development of almost the entire network of urban infrastructure and services, including the provision of sites and factories for light and non-polluting industries in the new towns. (Reference) Therefore, all these public-housing-led developments and services created a sophisticated level of social and urban services that formed the very basis of industrialisation and human capital productivity. These infrastructural investments subsidised a relatively high standard of living for the labour force. Moreover, the infrastructure supported the rapid growth of industrial and commercial activities that further enhanced Singapore's image as a prospective investment locale, as well as an active business and financial centre, in the region. Public housing has also contributed to Singapore's economic development in the area of capital formation. Funding for all the public construction by the HDB and other public development agencies came from the tremendous savings accumulated through the Central Provident Fund (CPF). 305

Besides economic regulation and government intervention on the supply side of economic development, Singapore also has a significant 'sui generis' welfare state. There are no welfare payments, and no unemployment insurance, although there is low unemployment, and the high rate of labour force participation and persistence of strong family ties enable the family structure to provide for most of the victims of economic recessions. The real extent of the welfare state in Singapore includes housing, health, and education. Primary education is almost universal and costs a low nominal fee. Secondary education is free and expanding rapidly. However, its provision is restricted to those children able to pass an examination at the end of primary school, a procedure that epitomises Singapore's meritocratic system. University education remains the domain of meritocratic elite, clearly modelled after 'Oxbridge' pattern. Health care is of moderate to good quality and provided almost free for 'class C' people (low-income). Classes 'B' and 'A' have to pay higher fees, although since 1985 they have been able to use their CPF contributions to pay for hospital costs. However, people can decide that they are 'class C' and pay a normal fee, without account being taken of their income, provided that they accept the standard conditions of public health care, certainly lower than the technological level of Singapore. Yet the system clearly exceeds any other in the ASEAN region and in most of Asia in quality and affordability. In terms of housing, 85% of the population live in public housing at affordable prices. Although these high-density high –rise living quarters, they are well equipped with facilities, organised o the basis of self-sustaining new towns. Housing units are provided at a cost estimated to be as much as 40% lower than equivalent accommodation in the private sector. This is mainly because of the low cost of land purchased by the Housing Development Board, and the economies of scale achieved by a comprehensive programme that clears land, designs buildings, produces its own construction materials, contracts and supervises the builders, and manages and maintains the housing estates. The Housing and Development Board is actually the manager of Singapore's everyday life. Government provision of collective consumption goods and services also includes open-air activities, cultural and recreational facilities, and institutional support for social life through the community centres that exist in most neighbourhoods and particularly in the new towns. By decisively intervening in the process of social consumption, the government provides the material basis for raising the standard of living in spite of low direct wages for the majority of the population (about 70% of Singaporean workers till earn less than $400 per month). In so doing, the state also shapes the pattern of social life and exercises its control and guidance of people, a matter with considerable policy implications. 188

The most important factor that facilitated the creation of the massive and comprehensive public housing programme in Singapore was the effective implementation and enforcement of the compulsory land-acquisition policies, based on eminent domain. This stringent land policy of compulsory land acquisition has limited land speculation during a period of tremendous economic growth, kept public development of sizable and more efficient satellite towns and housing estates. It has also contributed to the creation of a 'captive' demand market. Between 1961 and 1985, the HDB managed to clear almost $1200milion Singaporean dollar. This provides an idea of the extent of the 'captive' nature of the demand market.

The land-acquisition policy has served to redistribute wealth and resources in Singapore. Acquisition made at the expense of private landowners has enabled the government to assemble land for the development of the massive public housing programme, providing the opportunity for homeownership to almost the entire citizenry. Besides, 'unless government assists in acquisition, clearance, resubdivision of land and planning, the private sector on its own will have great difficulty in obtaining choice sites for proper development, thereby giving indirect rise to urban sprawl' (Head, Urban and Renewal Department, HDB, in Strits Times 18 April 1967) The Land Acquisition Ordinance was first passed in 1920 to empower the British Governor of Singapore to acquire private land for public purposes (Wong and Yeh, 1985, page 40). It was amended in 1946 and again in 1955 to give the government greater power to negotiate more comprehensive land acquisitions. These amendments helped to stabilise land prices and made possible the improvement of roads and the development of public housing and other public improvement projects. 267-268

On the contrary, housing in Korea was not an issue in political and social debate until at least early 1940s. The quality of housing was limited by the availability of materials and the skills of self-builders, but homelessness and housing tenure were unlikely to be a problem. After independence from Japan and partition in 1945 and the Korean War (1950-1953), the quality and quantity of housing was incredibly low. Although housing is an extremely important aspect of human life, it ranks below nourishment. Food, clothing, and therefore economic growth were more urgent and necessary requirements. Although housing was scarce and of a poor quality as a whole, the assumption of the government was that increased household income would be transferred into effective demands for new, decent housing, which builders would supply, increasing the number of households accommodated in decent houses. Given the constraints of defence expenditure, the housing sector had to be insulated from other investment for economic growth. This lack of money available for expenditure on housing by the government has constrained Korea to more negative means of coping with housing problems, such as regulations and controls, rather than positive means, such as direct supply or subsidies. The lack of resources also conditioned the public sector into closer collaboration with the market. The government adopted the private ownership solution mainly because there was no money available. As a means of keeping living costs and wages under control and raising labour productivity, the Korean government adopted food subsidies and mass investment in education, rather than subsidising housing like in Singapore. In 1969, for instance, the government launched the 'dual grain price programme', buying at higher prices from farmers and selling at lower prices to urban workers. At that time, those policies were more efficient given local circumstances. Until the 1970s, household expenditure on foods accounted for over 50 per cent of household income, while that on housing accounted for less than 15 per cent. (Economic Growth, Low Income and Housing in South Korea, Kim Woo-Jin, 1997, 106) Furthermore, the Korean government began to encourage urban renewals as a counter-measure against the economic downturn. Subsequently, general price inflation led by a real estate boom recorded the highest level in a decade. Land, office buildings and real estate in general were demanded not only for use but also for proving wealth. A large proportion of domestic savings was being switched from investment in industry to speculative investment in real estate. Moreover, government regulations over housing price and housing standards created conditions in which management of house builders focused increasingly on the speculative skills of buying land, selling at the right time, arranging favourable deals with subcontractors, and lobbying to change land use under the name of land banking. High inflation under the faltering economy led the government to give the highest priority in national policy to price stabilisation from 1879. In order to stabilise price increases, the government launched a tight monetary and fiscal policy. As a result of the policy, public-sector housing suppliers faced a serious scarcity of funds. With respect to the consumption side, demands for owner-occupation were declining because of deteriorating economic conditions, especially in moderate- and middle-income sectors. (Economic Growth, Low Income and Housing in South Korea, Kim Woo-Jin, 1997, 114)

Compared with PAP's policy in Singapore, South Korean government took quite different methodology and approach to tackle the distribution and economic development issues. South Korean government chose to mainly control the food price in order to dampen the pressure of living costs and left the housing industry to the supply and demand of the market, whereas Singaporean government chose to subsidise in housing market in order to increase disposable income of those who are at low end of wage spectrum.


As I briefly mentioned in introduction, the cultural factor, especially the dominance of Confucianism, may be the only explanation behind the high level of education in East Asia. Confucius' teaching background is evident in his emphasis on the power of education to bring about self-transformation. Confucius believed education helped people open their minds and realize their potential to become noble people in tune with the will of Heaven and in tune with other people. Education is so important to Confucianism that it is one of the primary methods used to reach a higher state of being. Confucius believed studying the liberal arts could create a better-rounded person, with each field of study helping to strengthen a specific aspect of personality. Education included study of six areas: poetry, to refine thought and expression; history, for understanding tradition and developing moral judgment; ritual, for understanding propriety; music, for inner transformation; politics, for social transformation; and cosmology, for achieving harmony with the sacred forces. (Confucianism 101, L.E. Terry, 2005) Based on these facts, the cultural factor cannot be neglected as a minor suggestion when explaining reasons for the high level of education and thus accumulation of human capital. There is a strong possibility that East Asian governments would have known that the accumulation of human capital is crucial for economic growth, but the investment figures of Korea and Singapore in education are unprecedented in any developing countries as well as any developed countries while they were in developing process.

Studies on the economics of education in both developed and developing nations formerly focused on the link among education, labour productivity, and output growth. This is not surprising in light of an objective of development during the 1950s and 1960s, the maximisation of aggregate rates of output growth. As a result impact of absolute poverty was largely neglected. Recent studies, however, have demonstrated that contrary to what might have been assumed, the educational systems of many developing nations sometimes act to increase rather than to decrease income inequalities.

The basic reason for this perverse effect of formal education on income distribution is the positive correlation between level of education and level of lifetime earnings. This correlation holds especially for workers who are able to complete secondary and university education where income differentials over workers who have completed only part or all of their primary education can be on the order of 300% to 800%. And as levels of earned income are clearly dependent on years of completed schooling, it follows that large income inequalities will be reinforced if students from the middle and upper income brackets are represented disproportionately in secondary and university enrolments. In short, it for financial or other reasons the poor are effectively denied access to secondary and higher educational opportunities, the educational system can actually perpetuate and even increase inequality in developing countries. Educational economist John Simmons gives the following sketch of how the poor are beginning to regard education:

Schooling, the poor quickly learn, in most countries, is an escape from poverty for only a few. The poor are the first to drop out because they need to work, the first to be pushed out because they fall asleep in class as one result of malnourishment, and the first to fail their French and English tests because upper income children have had better opportunities at home. The hope brought to village parents by the construction of the primary school fades. Enough schooling to secure steady, even menial job for their son, let alone for their daughter, seems just beyond their grasp. Before… any schooling would have done to achieve their aspiration. Now a primary school certificate is needed, and some are saying that even students with some secondary schooling cannot get a steady job; and they could never afford to send their son away to town for secondary schooling.

There are two fundamental economic reasons why one might suspect that many LECD educational systems inherently inegalitarian, in the sense that poor affluent students have less chance of completing any given educational cycle than more affluent students. First, the private costs of primary education (especially in view of the opportunity cost of a child's labour to poor families) are higher for poor students than for more affluent students. Second, the expected benefits of primary education are lower for poor students. Together, the higher costs and lower expected benefits of education mean that a poor family's rate of return from investment in a child's education is lower than it is for other families. The poor are therefore more likely to drop out during the early years of schooling.

Korea and Singapore appear to beat this cycle and have industrialised rapidly because they have invested relatively heavily in education. Educational investments resulted in universal primary education and in widely available secondary education. In addition, the quality of schooling has improved more rapidly in the East Asian economies than in other middle-income economies; as fertility rates fell in the 1970's, education spending per child rose sharply even as education expenditure as a percentage of GNP remained constant or, in some cases, declined. In Korea and Singapore, the school-age percentage of the population dropped by nearly half from 1965 to 1989. (East Asian Miracle, World Bank Report, 20) As argued by Young (1995) and Nelson and Pack (1999), coupled with factor accumulations in physical capital and labour force, an increase in human capital through improved educational levels accounts for the fast economic growth experienced by Korea. The proportion of the Korean workforce with a secondary education has tripled between the mid- 1960s and mid-1990s. This high level of education has enabled the labour force to absorb rapid changes in technology. Moreover, education has played a pivotal role in improving productivity in agriculture and industry within the Korean economy. (Asian Development Report) A well-educated work force, both white- and blue-collar, is a general property of late industrialisation, distinguishing it from earlier industrial change. (Alice Amsden, Asia's Next Giant, 216) Clearly, late-industrialising countries tend to promote greater accessibility to education than was customary in earlier periods of industrial expansion. What is noteworthy here is the relative pre-eminence of Korea, by contemporary standards, in this area of social progress. Even among late-industrialising countries, Korea tends to excel in most indices of education, standardised for population size: secondary students as a percent of eligible secondary-age students, scientists and engineers per capita, and so on. Korea scores higher in most educational indicators than even Singapore, which adopted a high-skill growth strategy before Korea.

Nevertheless, there is also drawback of having many high educated workforces. Over 95% of eighteen-year-old children graduate from high schools, and more than 70% of them advance to higher education institutions. The result of this is that many employers consider an undergraduate degree as a minimum requirement and thus over half of undergraduates carry on their studying to further education level in order to make themselves more employable. This effectively creates further education costs that poor students cannot afford. Moreover, Korean society runs in culture of In-maek, which is alumni relations. The statics show that the students who graduated from Seoul University, Yonsei University and Korea University

Chapter 4: After Asian financial crisis

Explaining the Recent rise in income inequality (Weil,380) The technological advance is the main driving force in the recent rise in income inequality. As with other increases in technological progress, information technology increased the rate of return to certain characteristics of workers – most importantly education. Computers complemented the skills that educated workers already possessed, making such workers more productive, while doing little to raise the productivity of uneducated workers. In 1993, for example, 70% of workers with a college education used a computer in their jobs, while only 10% of workers with less than high school education did so. The new technology also created a fluid situation in which there was a high return to flexibility or entrepreneurial spirit.

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