One of the most free-market economies in the world has started experimenting with a Universal Basic Income system. Here’s how it has fared.
Note: The following approximate conversion rates are used for reference. Conversions are made as of November 5th, 2020.
- 1.5 trillion KRW = 1.3 billion USD
- 1,000,000 KRW = 884 USD,
- 500,000 KRW = 442 USD,
- 250,000 KRW = 221 USD,
- 100,000 KRW = 88 USD
By Haanbi Kim
Despite being an economic powerhouse, South Korea has indicated an underwhelming long-term outlook. In a 2018 Organisation for Economic Co-operation and Development report, Seoul contributes to 50% of the country’s GDP, hinting at economic inequality (“Regions and Cities”, 2018). As of June 2019, South Korea had one of the highest youth unemployment rates at 10.4%, higher than that of the United States. Alongside this, the decreasing fertility rate, which has hit below one birth per female during 2018, raises concerns of human capital supply (Kim, 2019; “Fertility rate, total”). In response, one province has started experimenting with a Regional Currency and Universal Basic Income (UBI) system in hopes of alleviating poverty and tackling these problems.
Initiated in early 2019, Gyeonggi Local Currency is the said experiment that is operating across 31 counties and cities within Gyeonggi-do, a province of the Seoul Metropolitan Area. According to the program’s website, it is defined as an “alternative currency” used freely by everyone within their respective city or county of residence. It is used primarily through a debit card, but cash and pay-by-phone forms are also available, though limited in coverage. The system has a specialized youth dividend program providing 250,000 KRW every quarter, or 1,000,000 KRW for one year for those who are 24-years-old, and a maternity subsidy program distributing 500,000 KRW for each newborn in every household to incentivize childbirth. Outside of these programs, residents can regularly charge their Gyeonggi currency balance by “purchasing” the currency from their bank accounts, with all purchases with the currency receiving a 6% discount and additional 30% in income tax deductions later on (“Introduction of Gyeonggi”). However, there is one caveat: the money can only be spent on local businesses and traditional markets, an attempt to increase economic circulation throughout Gyeonggi province, while also benefiting small businesses (“Introduction of Gyeonggi”). Incentivizing expenditure within the local economy through its transaction discounts has also alleviated the pressures small businesses have faced, especially during the pandemic (“South Korea Universal Basic Income”, 2020).
Whether this project is beneficial for the long-term is still up in the air, given its young age. Although it has gained much traction, especially during the pandemic, it should be a consistent social-security net rather than a one-time wonder, and not just relied on during a time of economic hardship to be successful. The aforementioned “one-time wonder” scenario seems unlikely, as a research report by the Gyeonggi Research Institute mentions that positive long-term economic growth can be realized if the project can grow, as there existed a positive correlation between volume of currency distribution and economic growth (Lee et al., 2018). However, significant amends are yet to be made to the system to be an advanced social net. Less than 10% of small businesses accepting local currency transactions experienced an increase in revenue, and less than half of businesses acknowledged that the program was at least somewhat helping with sales (Lee et al., 2019). On the consumer front, 3,500 24-year-olds who applied for the quarterly 250,000 KRW payments were unsatisfied with the amount of subsidization and the aspect of having to apply every quarter, signifying the need for better bureaucratic processes to distribute these funds (“1Q Survey”, 2019, pp. 1).
Gyeonggi province’s governor Lee Jae-myung aims to expand the program by eventually providing 500,000 KRW to each individual. One concern behind this is financing an adequate budget so that 500,000 KRW can be effectively distributed to everyone every month, as doing so would cost over half of the national budget (Suzuki, 2020). An example of inadequate funding was witnessed through Mongolia’s short-lived full-scale UBI program, where a fall in commodity prices led to increased budget deficits and payments falling behind schedule, resulting in distributed income plummeting to $7 per person (“Golden Dream”, 2020; Gentilini, 2020, pp. 55). Another concern is unwanted inflation as local spending balloons and markets overstimulates. These subsidies can be vulnerable to rising inflation rates as seen with Iran’s failed UBI program, where inflation eroded the distributed income’s purchasing power by two-thirds (Gentilini, 2020, pp. 54-55). Some scholars have also suggested a negative impact on labor markets, especially in an aging population, which aptly captures the current trend in South Korea’s demographics (“Golden Dream”, 2020). Going forward, the program should take into account these factors as well to avoid downfalls experienced by previously unsuccessful counterparts.
But, improving the liquidity of such subsidization seems like a more important endeavor for now. Arguably, the program’s greatest downside is that it transfers cash into a less liquid form by restricting the types of transactions the local currency can make. Entirely restricting consumer activity to the local economy may increase its economic circularity, but may not efficiently raise welfare to tackle the problems the program was put in place for. Taking the youth dividend, for instance, if one would want to use that money towards tuition or job training programs, that may not be possible depending on whether those institutions are classified as “local businesses” or not. Traditional markets can only provide so much in diversity of products, and products that consumers actually need, and restricting the acceptance of the currency to specific economies may hinder individuals from being able to access goods that will increase consumer welfare. In other words, these restrictions may not accommodate consumer preferences.
To improve this burgeoning social-net, it is crucial to gauge the balance between benefitting local vendors, families on maternity leave, and those vulnerable to youth-unemployment. Eventually, this should expand to a wider array of recipients: it’s not only 24-year-olds who are vulnerable to youth unemployment, and it’s not only households with newborns who need compensation for childcare. The impact of the program is still unknown, especially with the development of COVID distorting expectations of its effects under more “normal” conditions. But, the ideal goal is still certain: to mitigate the country’s deepest socio-economic problems. □
- Image source
- 1Q 2019 Satisfaction Survey Report on the Youth Basic Income in Gyeonggi Province. (2019, August). Retrieved from https://basicincomekorea.org/wp-content/uploads/2019/10/1Q-2019-Satisfaction-Survey-Report-on-Gyeonggi-Youth-Basic-Income.pdf
- Basic Income research Group (BIRG). (2019, August). 1Q 2019 Satisfaction Survey Report on the Youth Basic Income in Gyeonggi Province. Retrieved from https://basicincomekorea.org/wp-content/uploads/2019/10/1Q-2019-Satisfaction-Survey-Report-on-Gyeonggi-Youth-Basic-Income.pdf
- Fertility rate, total (births per woman) – Korea, Rep. (n.d.). Retrieved from https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=KR
- Kim, Y. S. (2019, July 28). Korea overtakes US in youth unemployment. Retrieved from http://www.koreaherald.com/view.php?ud=20190728000088
- Gentilini, U., Grosh, M., Rigolini, J., Yemstov, R. (2020). Exploring Universal Basic Income: A Guide to Navigating Concepts, Evidence, and Practices. Retrieved from http://documents1.worldbank.org/curated/en/993911574784667955/pdf/Exploring-Universal-Basic-Income-A-Guide-to-Navigating-Concepts-Evidence-and-Practices.pdf
- Introduction of the Gyeonggi Local Currency (경기지역화폐 소개) (n.d.). Retrieved from http://gmoney.or.kr
- Lee, S. H., Park, N. R. (2018, December). Economic Impact of Alternative Currency Systems in Gyeonggi Province: Focusing on Youth Dividend. Retrieved from http://www.gri.re.kr/%EC%97%B0%EA%B5%AC%EB%B3%B4%EA%B3%A0%EC%84%9C/?brno=12323&prno=6171
- Lee, S. H., Yoo, Y. S., Kang, N. H., Park, N. R., Lee, D. K., Lee, J. H. (2019, December). Performance Analysis and Promotion Strategy for the Local Currency in Gyeonggi-Do.
- Regions and Cities at a Glance 2018 – KOREA. (2019, March 5). Retrieved from https://www.oecd.org/cfe/KOREA-Regions-and-Cities-2018.pdf
- Suzuki, S. (2020, September 24). Universal basic income gains support in South Korea after COVID. Retrieved from https://asia.nikkei.com/Politics/Universal-basic-income-gains-support-in-South-Korea-after-COVID\
- Universal Basic Income: ‘This is the Golden Dream of Artistic Bohemians’. (2020, March 2). Retrieved from https://www.hse.ru/en/news/346244733.html
- [Wall Street Journal]. (2020, Oct. 9). South Korea’s Universal Basic Income Experiment to Boost the Economy | WSJ [Video]. YouTube. Retrieved from https://www.youtube.com/watch?v=EbWv_1NbWyw&ab_channel=WallStreetJournal