Disaster Relief Funds Spark Heated Debate in Academia Over 'Selective vs Universal' Approach

Gyeonggi Research Institute: "Universal Payments Effective in Boosting Consumption"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Regarding the conflict between the Democratic Party of Korea and the government over the target recipients of the 4th disaster relief fund, academia advises that the precise effects of the policy should be carefully examined. Universal payments to all people are effective in stimulating consumption, while selective support is positive for improving redistribution.

Kim Eulsik, a research fellow at the Gyeonggi Research Institute, made this assessment in the report "The Consumption Stimulus Effect of the 1st Disaster Relief Fund," presented at the Korean Economic Association's "2021 Joint Economics Conference" held over two days on the 4th and 5th.

Last year, the central government and Gyeonggi Province provided the 1st disaster relief fund universally, while Seoul City separately provided selective payments to low-income households. Kim argued that as a result, Gyeonggi Province had a greater consumption stimulus effect. He stated, "The marginal propensity to consume (MPC) in Gyeonggi, which provided the largest universal disaster relief payments by city/province, was 30.5%, the highest, while Seoul, which selectively provided metropolitan disaster relief funds to only 50% of recipients, had the lowest MPC at 28.0%." The overall MPC was estimated at 29.2%.

The marginal propensity to consume refers to the additional consumption effect of the disaster relief fund; for example, an MPC of 30% means that when 100,000 won is provided, an additional 30,000 won worth of consumption occurs. The remaining 70,000 won either replaced consumption that would have occurred anyway or was used for savings or debt repayment.

Kim pointed out that the main recipients of the 2nd disaster relief fund last year, the self-employed, did not contribute to stimulating consumption. However, he explained, "Low-income groups, the self-employed, irregular workers, and minor households, which are discussed as targets for selective support, may be appropriate targets for redistribution purposes."

This view contrasts with that of Professor Jang Yong-seong of Seoul National University’s Department of Economics, presented at the same event. In his paper "Economic Effects Analysis of Basic Income Introduction," Professor Jang evaluated that "universal welfare has no economic effect and rather increases the national burden and inequality among low-income groups." He argued that introducing basic income inevitably requires tax rate increases and has significant negative impacts on the overall economy. To provide a monthly basic income of 300,000 won to 39.19 million adults aged 25 and over in Korea, an annual total of 141.1 trillion won (7.35% of GDP) is needed. If the funding is fully covered by income tax, the income tax rate would rise from the current 6.8% by 17.6 percentage points to 24.4%. Total production (-19%), total capital (-22%), and total labor (-16%) would significantly decrease.

Additionally, conflicting claims among scholars about the effects of the "disaster relief fund" continued. Three scholars, including Professor Lee Woo-jin of Korea University’s Department of Economics, presented findings that "the emergency disaster relief fund for all citizens generated a consumption stimulus effect of up to about 11 trillion won." This study was submitted to the Presidential Committee on Income-Led Growth.

The study analyzed the MPC of the 1st disaster relief fund to be between 65.4% and 78.2% (combined for the 2nd and 3rd quarters), showing a large difference from the Gyeonggi Research Institute’s analysis. Previously, the Korea Development Institute (KDI) analyzed the MPC of the 1st disaster relief fund to be about 30% and stated that "the effect of the disaster relief fund is minimal in face-to-face service industries with infection risks."

This content was produced with the assistance of AI translation services.