THE ECONOMY OF THE KOREAN PENINSULA: the Past, the Present, and the Future

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THE ECONOMY OF THE KOREAN PENINSULAthe Past,
the Present, and the Future

• Yoon-Ho Alex Lee, J.D., Ph.D
• Law Clerk to Honorable Thomas B. Griffith
• U.S. Court of Appeals for the D.C. Circuit

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Objectives

• To see how students would benefit from learning
  about economic history of the two Koreas.
• To see how the two Koreas have come to diverge so
  far in economic performances. Ill be providing
  pointers rather than extensive information.
• To suggest how we can introduce and tie in basic
  economic concepts in teaching economic history of
  the two Koreas.

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Why Teach High School Students About the Economy
of the Korean Peninsula?

• Objection 1. Economic history is too difficult
  for high school history classes
• It requires an extensive background in economics
• It requires many complicated concepts and
  statistics about (arguably) uninteresting
  sectors.
• Objection 2. Its hard enough keeping up with
  the current economy. Why bother study economic
  history?
• Objection 3. How interesting can Korea be?
  Its not one of the superpowers, like the United
  States, Japan, China, or the European Union.

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Why Teach High School Students About the Economy
of the Korean Peninsula?

• Reply 1. It presents a great opportunity to
  introduce economic concepts students would
  otherwise not learn.
• You dont need a Ph.D. to understand the Great
  Depression or the Dot-Com Boom.
• Students learn more economics through history
  classes than through economics classes.
• Reply 2. History revolves around economics and
  ideologies history provides good economics.
• Reply 3. Korea is an excellent case study and
  offers insights, history, and lessons no other
  country can ...

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Why Korea is an Excellent Case Study . . .

• SIZE. Because Korea is a relatively small
  country, the controlling factors and institutions
  are clear. There are few hidden variables.
• BRIEF HISTORY. The entire history can be traced
  back to 1953. We can focus on how the two
  Koreas different approaches have yielded vastly
  different results.
• TESTING-GROUND. With U.S. Japan supporting
  South Korea, and China Russian supporting North
  Korea, the Korean peninsula was the arena for,
  or the focal point of, the battle of the Cold
  War ideologies. Korea was a controlled,
  laboratory experiment of economic ideas, with the
  ultimate outcome not unlike the resolution of the
  Cold War.
• UNIQUE FEATURES. No other country in history has
  experienced economic growth like South Korea has
  over the past 50 years. No other country today
  has the centrally-planned economy that North
  Korea does.

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Suggested Teaching Strategy

• STEP 1. BEGIN with a BRIEF HISTORY of the
  Korean War and the Cold War. Explain the advent
  of the division between NK and SK, and the states
  of their economies in the 50s. Emphasize their
  similarities.
• STEP 2. PROCEED on to the CURRENT STATES of
  their economies. Emphasize their differences.
• STEP 3. Explain (1) basic economic concepts and
  (2) world historical events in conjunction with
  the economic history.
• The key concepts include factor endowment v.
  institution, socialism v. capitalism, planned
  economy v. market economy, perfect competition
  and perfect information, trade and comparative
  advantage, long-term investment v. short-term
  strategies.
• The key events include the Vietnam War, the
  split of China and Russia, the fall of Russia,
  world sporting events, and relevant treaties.

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Suggested Teaching Tips

• TIP 1. AVOID (as much as possible) NUMBERS!
  AVOID all unnecessary references to YEARS.
• TIP 2. AVOID (as much as possible) information
  regarding specific industrial SECTORS. More
  important is whether these sectors are (1)
  CAPITAL-INTENSIVE or LABOR-INTENSIVE, and (2)
  GOODS ECONOMY or SERVICES ECONOMY.

• TIP 3. FOCUS on the BIG PICTURE CONCEPTS
  rather specifics. SIMPLICITY over PRECISION!
• TIP 4. HAND OUT the map of the Korean
  peninsula.
• TIP 5. Frequently ask simple but relevant
  discussion questions.

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Step 1 The Two Koreas In the Beginning . . .
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Prior to the Korean War

• Prior to the Korean War, Korea was colonized by
  Japan. Japan concentrated its industrial
  development in northern Korea.
• SK was heavily-populated agrarian NK was
  under-populated but rich in resources. South, the
  center for rice production North, the center for
  mining industry.
• Although industrialization prompted a brief
  migration from South to North, many exited North
  (at the end of WWII) when Soviet gained control
  over North.

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The Aftermath of the Korean War

• NORTH KOREA
• Rich in natural industrial resources
• Poor in labor force.
• Rich in mining land
• Major Industry heavy industry

• SOUTH KOREA
• Poor in natural industrial resources
• Rich in labor force
• Rich in agrarian land
• Major Industry agriculture

Apart from imbalance of resource
distribution, SK and NK were otherwise similar in
climate, geography, size, GNP (both very poor),
and institutions.
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Shared Aspects of the Two Koreas

• High Literacy (due to ease of learning Korean
  characters).
• Strong Work Ethics.
• Strong Sense of Nationalism.
• Confucianism Family First, Respect for Elders,
  etc.
• One Race an abiding sense of brotherhood.
• Deeply Conformist
• Firm Loyalty to Allies (old tradition dating back
  to the Chinese Dynasty periods)

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Factor Endowment v. Institution

• FACTOR ENDOWMENT
• LAND, GEOGRAPHY, LABOR, CAPITAL, and
  ENTREPRENEURSHIP, which can be used for
  manufacturing.
• INSTITUTION
• Structures of SOCIAL ORDER governing the
  behavior of individuals. E.g., LAW,
  CONSTITUTION, PROPERTY RIGHTS.

• Think of this as Ingredients v. Recipe? If you
  want to bake a great cake, you need both. As to
  which is more important is a hotly debated
  matter.

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Step 2 The Two Koreas Where Are They Now?
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As of 2007 . . .

• NORTH KOREA
• The Worlds Last Centrally Planned Economy
• 40B (92nd)
• 2K
• 25
• 10M
• Military products, machine building, mining,
  chemicals

• SOUTH KOREA
• The Miracle of the Han River
• GDP 1,200B (11th)
• GDP/C 25K
• GDP on Military 2
• Labor Force 25M
• Major Industries Electronics, automobiles,
  chemicals, steel
• Member of APEC, WTO, and OECD.

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Step 3 So . . . What Happened?
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A Snapshot Comparison

• NORTH KOREA
• Capital-intensive
• Socialist/Communist
• Planned Economy
• Isolationist
• Allies Russia China
• Self-Reliance
• Unlucky Breaks Flood, Drought, Famine, Economic
  Sanctions

• SOUTH KOREA
• Labor-intensive
• Capitalist
• Reg. Market Economy
• Open Market
• Allies U.S. Japan
• Export-Oriented
• Lucky Breaks Asian Games, Olympics, World Cup,
  KOR-US FTA

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1950s 1960s The Two Koreas Divergent
Strategies
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Institution Socialism v. Capitalism

• SOCIALISM
• Property distribution of wealth controlled by
  the community. In an extreme form, it advocates
  abolition of money, markets, capital, and labor
  as a commodity.
• Objective Equitable distribution eradicate
  poverty.
• Concern No private incentive to exert best
  effort.
• Names Karl Marx, Friedrich Engels.
• Countries Russia, China, Eastern Europe
• CAPITALISM
• The means of production mostly privately held.
• Objective Growth.
• Concern Poverty concerns. Because rewards are
  performance-based, there is a winner-take-all
  concern.
• Names Adam Smith, Friedrich von Hayek, Max
  Weber.
• Countries U.S., Japan, Western Europe

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Types of Economic Strategies Long-Term v.
Short-Term

• Short-Term Strategy Pursuing immediate needs
  to meet production quota.
• Concern There may be no sustainable growth.
  The country may prosper for three years and
  collapse.
• Long-Term Strategy Education, building
  infrastructure, institution reform, etc.
• Concern The country may go bankrupt before ever
  prospering. The investment may also be misguided
  or misplaced.
• Give a man a fish you have fed him for today.
  Teach a man to fish and you have fed him for a
  lifetime.

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North Short-Term Socialization South
Long-Term Capitalism

• NK (i) pursues short-term investment strategies
  and (ii) moves towards socialization. Replete
  with natural resources but short in human labor,
  NKs chief objective is to squeeze maximum labor
  effort out of its people and to return to its
  pre-war production level.
• SK (i) pursues long-term investments strategies
  by borrowing foreign aids, and (ii) moves towards
  heavily-regulated capitalism. Lacking in natural
  or industrial resources but abundant in human
  labor, SKs chief objective is to educate young
  talents and borrow ideas from developed countries.

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North Korea in the 50s-60s

• Russia, China, and East European countries
  provided assistance. The top priority was heavy
  industry. Why this made sense as an immediate
  plan because NK already had remnants of
  industrial infrastructure built during the
  colonial period by Japan. By 1957, output levels
  returned to 1949 levels!
• After reconstruction, North Korea sought to
  industrialize and completed the socialization
  process in all sectors by 1958.

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South Korea in the 50s-60s

• The Rhee (1st President) Admin. used foreign aid
  from US to build an infrastructure that included
  a nationwide network of schools, roads, and a
  communications network. Why SK had nothing but
  farms surplus workers.

• Significantly, SK adopted an export-oriented
  strategy. Why SK had poor natural resource
  endowment tiny domestic market. The strategy
  promoted growth through labor-intensive
  manufactured exports, in which SK could develop a
  competitive advantage.

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Why Countries Trade The Law of Comparative
Advantage

• David Ricardos Theory
• Suppose in China, it takes 1 each to make WINE
  BREAD in US, 3 to make WINE 2 to make BREAD.
  While it is cheaper to make BREAD in China than
  in US, it is cheaper still for China to make
  excess WINE, and trade for US BREAD. US, too,
  benefits from trade because it still pays 2 for
  BREAD but it can now get the cheaper Chinese
  WINE.

Countries benefit by producing products for which
their comparative cost is low. E.g., U.S,
economy is capital-intensive Chinese economy is
labor-intensive.
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Interim Reports As of the late 60s

• By all accounts, NKs economy stayed ahead of
  SKs economy in the 50s and this pattern
  persisted until the mid-70s.
• SOUTH KOREA
• Industrialization left the rural sector
  relatively underdeveloped.
• Increasing income disparity between the
  industrial and agricultural sectors.
• Owed a huge debt to foreign countries.
• But by the 60s, it had a well-educated young work
  force and a modern infrastructure that provided a
  foundation for growth.

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Interim Reports As of the late 60s

• NORTH KOREA
• High growth rates (30 1 year!) but serious
  imbalances among different sectors. Because
  rewards were given to individuals and enterprises
  that met production quotas, there emerged
  competition among (rather than within)
  industries, and an industry that performed better
  than others did so at the expense of others.

• .

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Interim Reports As of the late 60s

• Maxed out Delays and bottlenecks began to
  emerge, due to lack of arable land, skilled labor
  infrastructure. Any further growth required
  raising productivity, not by working longer
  hours, but through increased efficiency, an
  expanded resource base, and technological
  advances.

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1960s 1970s SKs Regulated Economy v. NKs
Planned Economy
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Planned Economy, Market Economy Regulated
Economy

• PLANNED ECONOMY Government makes all decisions
  about production and distribution, decides what
  should be produced and direct enterprises to
  produce those goods.
• Criticisms (Hayek) (i) can lead to
  totaliatarianism (ii) planners can never have
  enough information.
• MARKET ECONOMY To each his own Production,
  distribution, and pricing decisions are made by
  private owners based upon individual interests.
• Criticisms Certain market failures, such as
  monopoly information asymmetry, are not easily
  cured.
• Smiths Invisible Hand Theory from The Wealth
  of Nations (1776) The market, while appearing
  chaotic and unrestrained, is actually guided to
  produce the right amount of goods as if led by an
  "invisible hand."
• REGULATED ECONOMY A market economy with general
  government regulation to protect consumers.

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General Principle of Microeconomics

• The economy achieves its perfection with PERFECT
  COMPETITION Where each producer seeks to
  maximize his profit and each consumer seeks to
  maximize her enjoyment of consumption, Price of a
  Good Production Cost. No waste of resources.
  Everyone ends up with just enough good for his
  enjoyment, and production cannot be achieved at a
  lower cost.
• But PERFECT COMPETITION requires (i) a lot of
  firms, (ii) little product differentiation, (iii)
  perfect and complete information, (iv) consumers
  equal access to service and goods, (v) firms
  easy entry and exit. Where one or more of these
  factors fails, the government should aim to cure
  the defect with economic regulation, e.g.,
  price-setting.

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North Korea Planned Economy Parallel
Development of Defense

• Kim Complete socialization ? Planned Economy.
  NKs emphasis shifted to pursue parallel
  development of defense capabilities.
• Why Military takeover in SK by Park Chung Hee,
  U.S. involvement in Vietnam, and the China-Russia
  split. Thus, the military first approach was
  stimulated by noneconomic concerns. NK was
  already industrialized in heavy industry. It was
  thought that stimulating a technological
  revolution in the munitions industry would
  promote economic growth and militaristic growth.
• Result In the end, this necessity to divert
  resources to defense stalled the economy and
  caused further imbalance of production and has
  resulted in 1-2 annual growth.

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South Korea President Park Chung Hees
Centralization Plan

• Park Strong Government needed. No other
  institution has capacity to direct economic
  changes.
• Why Small Economy, Developing Institutions,
  Imperfect Information.
• Different from NK A combination of state
  capitalism free enterprise. The economy was
  dominated by a group of large private
  conglomerates, known as chaebols, (E.g., Samsung,
  LG, SK, Hyundai) also by public corporations.
• Mechanism Guide private industry through
  production targets utilizing the control of
  credit, informal means of pressure and
  persuasion, and traditional monetary fiscal
  policies.

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1970s - 1980s Two Competing Visions of
Self-Reliant EconomyActual v. Potential
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• No man is an island. -- John Donne

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North Koreas Juche Philosophy

• With the China-Russia split, NK moved towards a
  completely self-sufficient economy.
• Juche ideology Man is the master of everything
  and decides everything." Juche literally means
  standing alone.
• Application
• 1) People must have independence in thought and
  politics, economic self-sufficiency, and
  self-reliance in defense
• 2) Policy must reflect the will of the masses
  and
• 3) The most important part is molding people
  ideologically as communists.

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North Koreas Juche Philosophy

• NKs aim was an actually self-reliant economy.
  Gradually, this led to NKs isolationist
  movement, independent RD, reduced benefit from
  trade with other countries, and even heavier
  investment in defense.
• Ironically, the Juche economic program resulted
  in economic dependence. Throughout its history,
  NK has been an aid-dependent regime. The country
  was the second largest recipient of international
  food aid in 2005.

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South Koreas Approach

• Unlike NK, Park Chung Hee strived for a
  potentially self-reliant economy. SK cooperated
  with its allies and took advantage of its
  labor-intensive competitive advantage to seek an
  exchange of goods and ideas so that its
  industrialization can withstand the perturbation
  in international affairs and the drift.
• Application
• 1) Workers sent to capital-intensive Middle East
  
• 2) Students sent to America to study
• 3) Western technologies financial innovations
  were readily adopted without incurring
  independent RD costs
• 4) SK relied heavily on U.S. for defense.

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South Koreas Approach

• Large Foreign Debt through the 80s Of south
  Korea, Taiwan, Hong Kong, and Singapore, only SK
  financed its economic development with a dramatic
  build-up of foreign debt, debt that totaled 50
  billion.
• Focus on Education With human capital as SKs
  greatest assets, education becomes a status good
  for society. SK began excelling in International
  Technology Competitions.
• Focus on Exports In the 80s, South Korea was
  the most productive economy (per capita) in the
  world.

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1980s - 1990s South Koreas Liberalization v.
North Koreas Isolationism
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South Koreas Liberalization

• OPENING UP THE CULTURE.
• Tourism began flourishing with 86 Asian Games
  and 88 Olympics. A general welcoming of
  foreigners.
• OPENING UP THE MARKETS GLOBALLY.
• Foreign firms began entering Koreas stock
  market was opened to foreign investments.

• ECONOMIC DEREGULATION.
• The hefty financial banking regulation
  introduced by Park was slowly being lifted off.
• PRIVATIZATION.
• The government began selling stocks of the firms
  it owned.

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South Koreas Liberalization

• Why It Made Sense Maturing economy, increasing
  information cost, more sophisticated
  institutions, and market imperfections have
  diminished. Could trust the market to function.
• RESULT
• Shift from a goods-economy to a service-economy
  (restaurants, hotels).
• With the end of the Cold War, China and Vietnam
  emerged as the world labor economy. SKs
  competitive advantage of the labor market shifted
  from low-skilled labor (manual, low-tech) to
  high-skilled labor (sophisticated, high-tech).
• The conglomerates such as Samsung, SK, and LG
  became critical to SKs economic health.

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The 1997 East Asian Financial Crisis

• An Inevitable Price? With opening up its markets
  globally, SK became susceptible to international
  economic crises.
• How Korea Got Over Its Crisis.
• Institution Reform w/ emphasis on stability over
  growth.
• The Gold-Drive. People gave away gold to the
  government in exchange for Korean money the
  government sold gold for US Dollars. (One
  nation, one race.)

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North Koreas Isolationism

• JUCHE, RUSSIA, CHINA. NK loses strategic trade
  arrangements with Russia and experiences a
  strained relation with China (following China's
  normalization with SK in 1992).
• BAD BREAKS NK experienced record-breaking
  floods (95 96) followed by years of severe
  drought (97). This, compounded with
  already-deficient arable land and an inability to
  import the goods necessary to sustain industry,
  led to a severe famine.
• ECONOMIC SANCTIONS. By 1999 foreign aid reduced
  the number of famine deaths, but NKs nuclear
  program led to a decline in international food
  and development aid.

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Looking AheadThe Economy in the Korean
Peninsula in the 21st Century
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South Koreas Road Ahead

• The IT Industry. The Government began to
  actively support the IT industry, led by Samsung
  LG.
• Success in the Semiconductor Industry. Success
  at home with the development of technology, and
  abroad, with Korean IT products and services
  capturing the market share in key sectors.
• One of Next Eleven. SK has been termed one of
  the Next Eleven economies and is expected to
  surpass England and France by 2025.
• US-KOREA FREE TRADE AGREEMENT (2007). The second
  largest trade agreement for US, after NAFTA.

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North Koreas Road Ahead

• The Danger of Another Famine.
• Continuously Dependent on Foreign Aid.
• Nuclear Non-Proliferation Treaty. In 2005, NK was
  promised food and fuel aid from SK, US, Japan,
  Russia, and China in exchange for abandoning its
  nuclear weapons program and rejoining the
  Non-Proliferation Treaty.
• Still Authoritarian (Mobile Technology
  Forbidden). In 2004, mobile phones became
  forbidden in NK.
• Emergence of Capitalism. A small amount of
  capitalistic elements are gradually spreading
  from the trial area, including a number of
  advertising billboards along certain highways.

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ReviewSo Tell Me Again, What Happen?
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South Koreas Story

• Everything that couldve gone right did go right.
  
• SK succeeded because
• The 50s-60s long-term strategy paid off
• Took advantage of trade and used its surplus
  labor strategically (produce exporting goods or
  send labor force offshore)
• Regulated its economy when it needed to
  Liberalized it just about the right time
• By maintaining a harmonious relationship with
  U.S. and Japan, it could focus on economic
  development
• The nation came together as one race in crises
• Received lucky breaks in hosting international
  events and gaining international recognition
• Made sound judgment calls in shifting its
  economys focus from production industries to
  service industries.

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North Koreas Story

• Everything that couldve gone wrong did go wrong.
  
• NK failed because
• The 50s-60s short-term strategy backfired w/
  bottlenecks and failed to adopt a long-term
  strategy
• The country became more and more isolated even
  from its allies and gave up gains from trade
• Vindication of F. von Hayek the government can
  never have enough information to plan the
  economy
• Russia, lost its own glitter and faced its own
  demise, and with all of its allies falling apart,
  the nation had to focus on its defense,
  eventually ending up with economic sanctions from
  the U.S. and others.
• Unlucky breaks including flood, drought, and
  famine
• Never sought to induce perfect competition and
  increase efficiency of the economy.

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Key Take-Away Lessons from Koreas Experience

• Koreas experience demonstrates (i) the
  importance of implementing sound macroeconomic
  policies, (ii) improving competition through
  deregulation and market opening, (iii) building a
  good institutional environment, and (iv)
  developing human resources.
• The value of strong country ownership revealed by
  the degree of commitment and single-mindedness
  that Korea has brought to its task cannot be
  overemphasized.
• Koreas experience is clear evidence that the
  main vehicle for poverty reduction is growth.

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THE ENDTHANK YOU!