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

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


1
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

2
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.

3
(No Transcript)
4
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.

5
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 ...

6
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.

7
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.

8
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.

9
Step 1 The Two Koreas In the Beginning . . .
10
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.

11
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.
12
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)

13
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.

14
Step 2 The Two Koreas Where Are They Now?
15
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.

16
Step 3 So . . . What Happened?
17
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

18
1950s 1960s The Two Koreas Divergent
Strategies
19
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

20
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.

21
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.

22
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.

23
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.

24
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.
25
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.

26
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.
  • .

27
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.

28
1960s 1970s SKs Regulated Economy v. NKs
Planned Economy
29
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.

30
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.

31
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.

32
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.

33
1970s - 1980s Two Competing Visions of
Self-Reliant EconomyActual v. Potential
34
  • No man is an island. -- John Donne

35
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.

36
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.

37
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.

38
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.

39
1980s - 1990s South Koreas Liberalization v.
North Koreas Isolationism
40
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.

41
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.

42
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.)

43
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.

44
Looking AheadThe Economy in the Korean
Peninsula in the 21st Century
45
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.

46
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.

47
ReviewSo Tell Me Again, What Happen?
48
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.

49
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.

50
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.

51
THE ENDTHANK YOU!
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