North Korea and the South Korean Economy - Research Paper Example

South and North Korea The purpose of this essay is to discuss the differences in the economic performance of two countries, namely North and South Korea. The paper looks into why North and South Korea, despite having same historical and cultural background, are distinguished by their current politics, economic policies and even culture to some extent. There is also an emphasis on the two regime shifts that divided the economic history of both South and North Korea in to three periods, the period of Malthusian stagnation up to 1910 when Japan had annexed Korea, the colonial period after 1910 with the Second World War and the post colonial decades when the economic policies of both the countries were independent of each other, causing the South Koreans to have access to better opportunities and ultimately better living standards, while the North Koreans moved towards starvation and poverty. So, the paper, in short, deals with the economic policies that have been adopted by both the countries, especially in the post colonial decades, so as to explain the differences in economic growth and other macroeconomic variables. Countries that have the same historical and cultural background are likely to progress in the same manner. This is because generally the same culture exists in similar geographic locations. This makes the countries to have access to similar economic resources. The population of such countries also share similar skills and are able to do particular kinds of tasks generally. The system of distribution and allocation of resources might be the same too. In short, countries with the same history and culture are expected to have similar economic policies and are likely to advance in the same manner. However, this might not always be the case. North and South Korea are the prime examples of the countries that, despite having similar ethnographical backgrounds, have different economic performances. South Korea, because of an emphasis on world trade have adopted politics that are aimed at world cooperation while North Korea has adopted stringent political policies that has made it suffer economically and led to increased poverty and starvation. The relation that has to be discussed here is how the political and economic policies can change the fate of countries that were similar before, in almost all aspects. Before moving on to discuss the different economic performances of both the countries, it is important to discuss the major events that shaped the history of both North and South Korea. The economic history of Korea can be divided into three broad categories, the Malthusian stagnation to 1910 when Japan annexed the country, the colonial period from 1910 and 1945 when Korea was considered as a mandate by countries of the West, and the post colonial period where North and South Korea performed in different ways. The following section will discuss a historical overview by focusing mainly on the time period till the 1910. The Malthusian Stagnation Before the 1900s, Korea was, for a long time, ruled by the Choson dynasty. In fact the dynasty dominated Korea for around six centuries from 1392 to 19101. Because the people of the Choson dynasty were fully aware of the economic resources and the productive potential of the people, they imposed a tribune system which was to affect the little commercialized peasant economy that Korea possessed. The tribune system consisted of the collection of taxes on various different products and the mobilization of labour so that the handicrafts and services that were needed by the peasants could be arranged for easily. This process worked out well for Korea as it developed a small agrarian economy that was in a way self sufficient.2 However things did not remain the same. In the late sixteenth and seventeenth centuries, Korea was attacked by different countries, especially Japan and China. The attackers forced the command economic system, where the rulers had the power to intervene at any point, to change to the market economic system. This transition took place because of the general perception to the Malthus model. According to the model, the economic and potential of the countries had been almost nonexistent throughout human history. This was because the standards of living had remained constant for many centuries and what was worse was that they did not even differ across different countries.3 The implication of this model was a rapid transition from the command economic systems to a system of free market forces. The same principle was applied to the case of Korea. Unfortunately the transition to a market economic system from a command economic system, which had worked out well for Korea through many centuries, did not really have good implications. Instead of receiving taxes in terms of products which peasants could easily own, money commodities such as rice and cotton textiles were collected by the bureaucracy. Also, the trade restrictions were removed which meant that the small economy of Korea was exposed to foreign competitors who could charge higher prices because of the quality they offered. Furthermore, the wars caused a removal of slavery and helped develop the labour markets. Despite the emphasis on free market forces, the markets were very slow to develop. The grain markets of Korea were less integrated as compared to the grain markets in China and Japan. This meant that the trade was restricted to some extent because of integration problems and consequent transport problems. Although there seemed no hope in the beginning but the population recovered quickly from the wars. It increased considerably but came to a stop in the 1800s because of an increase in the mortality rate. This was the time when the standards of living started to worsen. The market economic system had failed to allocate the resources in the best manner possible. The wage rates fell tremendously, forcing the poor peasants to rebel against the government. The government, which was already suffering from tremendous budget deficits, could not do anything to help cure the problem. The result was that many peasants left the state of Korea and moved to certain parts of China where they were provided better incentives. Since both acreage and population had almost remained constant (with a decrease later because of the high mortality rates), the contraction of output was responsible for the deterioration of the living standards. The output decreased considerably because the peasants did not have the potential and skills to match the world quality. Because they were not given proper incentives and returns, peasants stopped producing. Furthermore, the labour and labour were used in a very inefficient manner. Without proper attention given to the irrigation system, the output of Korea lessened further. There were a number of reasons responsible for the deterioration of the water control system. As the population grew and there was more emphasis on trade and greater returns instead of self sufficiency, people started burning forests. The situation was quite severe for Korea because there was no concept of property rights. Deforestation led to continuous flooding and soil erosion as there were no tree roots to hold the water and soil. The situation worsened further as the private market forces encouraged self interest and not many private individuals were interested in the repairing of the damages created by excessive flooding. Public initiatives were needed to solve the water problem but the already bankrupt dynasty could not achieve this objective. The result was that rich landowning families sought to control the problem thereby encouraging private interests more. The public officials could offer little to deal with the ever increasing water problem and they finally moved to the taking of bribes for the providing for fertile soil to the rich individuals. This led to an unequal distribution of wealth and income. The rich became richer and the poor became poorer4. The peasants responded to the problem of water irrigation by developing new varieties that were better drought-resistant but this way they were to compromise on the yield. They also helped build waterways that linked the farmlands with the rivers so that the farms could be irrigated by water supplies but this did not work out so well. One reason was the inefficiency of the waterways. The second was the opposition from the farmers who farmed in areas where the flow of the water was downstream. The building of waterways meant that they were not provided with enough water supplies. The government did not help in any way possible too. Rather government intervention further deteriorated the situation. In the later 1800s, the local administrators had started charging illegally for the waterways that had been built by the people themselves. Frustrated and exasperated, the peasants joined together in protest and caused a nationwide rebellion. Since the already weak government could not do anything about this issue, armies were called from Japan and China to settle the problem. This move did not help. Rather, it led to a war between Japan and China in Korea which meant that the destruction due to the war took place on the Korean soil. The water problem had direct implications on the productivity of rice farming. Areas which required greater amounts of water were often left out. The result was that these areas suffered tremendous losses with a continuous decrease in the price of rice. The prices of rice grown in the dry regions of Korea, on the other hand, increased considerably. Many peasants thus moved to the dry regions. Those who could not shifted from agriculture into handicraft and commerce5. Consequently urbanization developed but it was still nowhere the urbanized centres of Japan and China. There were huge differences in the price and output of rice due to the water problems. The uncertainty of the output led to the failure of the government in helping develop the agrarian economy, as no particular policy could be employed. Korea experienced extremely high interest rates and a low output per capita so much that in the mid nineteenth century, the paddy land productivity of Korea was about half of that in Japan. Now that the Mathusian stagnation period has been discussed in much detail, it is important to move onto the period of colonial transition. The Colonial Transition and its impacts on the Korean Economy Japan, as mentioned before, had been continuously attacking Korea. The transition to market economic system and the allowing of free trade were some of the policy motives introduced by the Japanese in Korea. But this was the time when Japan had affected the Korean economy indirectly. Things changed when Japan defeated Russia in 1905 and annexed Korea to its empire. Instead of being a state that was ruled entirely by the bureaucracy of the Choson dynasty, Korea was transformed into a developmental state6. The colonial state of Japan focused on very expensive measures to help develop and modernize the state of Korea. Before the colonial state, the Choson dynasty had invested little in infrastructure. The private individuals had not been encouraged to invest in infrastructure and the bankrupt government itself did not have the potential to encourage public initiatives. Unlike the Choson dynasty, Japan’s primary was to improve infrastructure. As reason responsible for this might have been the approval of the masses of the illegitimate rule of Japan over Korea. Japan worked extensively to help develop the infrastructure in Korea. Railway lines were introduced in areas which were not accessible before along with the extension of railway lines in many areas. Roads and harbours were also improved. This meant that agricultural products and inputs could be moved easily and Korea could become an international market. Along with an emphasis on infrastructure, there was also stress on the improvement of health conditions. As mentioned before, the mortality rates were extremely high in Korea in the early nineteenth century which led to a decline in the population growth in the country. In order to solve this problem, the colonial state helped build medical schools and hospitals. Vaccinations were introduced which reduced the mortality rates to a greater extent. The result was that the population in the colonial period increased by 1.4%.7 Education was also one of the main areas of interest of the colonial period. Traditional schools were immediately replaced by schools that taught the basics of the Chinese language. In 1910, the primary school enrollment had only been 1% because of the negligence of the Choson dynasty in matters of education. However, in the year 1943, the primary school enrollment had risen to 47 percent8. In addition to education, the government also focused on the introduction of property rights. This meant that not only was deforestation greatly reduced, the landowning families who owned great amounts of land were to pay taxes. Hence, a progressive tax system was introduced that led to a better allocation of resources and a more equitable distribution of wealth and income. Because of the taxes, the government was able to get rid of the budgetary deficits that had been a problem in the time of the Choson dynasty. The colonial government in Japan also implemented an industrial policy. In the 1920s, a Rice Development Program was introduced. This program was introduced as a response to the Riots that had taken place in Japan. The main objective of this policy was an increase in the supply of the rice crop throughout the colonies of Japan. Because of the program, Korea experienced better and efficient land use, as the process of the decay of the water control was reversed. Many incentives and subsidies were provided by the government to the private investors who would help introduce other irrigation projects. Furthermore, institutions were set at the farm level to help the farmers deal with the common issues of farming and to provide information pertaining to new and improved varieties. Hence, the yield of rice was increased to a greater extent. Also, in 1927, a fertilizer factory was set up which meant that the farmers could now benefit from very high yield varieties which were otherwise subject to be attacked by pests. However, despite the efforts for an increase in the rice prices, they fell because of the Great Depression of the 1930s. As a result, the development program had to be suspended in the year 1933. The manufacturing sector also developed when Korea became a colonial economy. From the year 1911 to 1940, the share of the manufacturing in the GDP rose from just six percent to twenty-eight percent while the share of agriculture fell from seventy six percent to forty one percent9. There were many reasons responsible for this gradual change. The first and foremost was the Great Depression of the 1930s. Because of the Depression, countries were keener to produce manufacturing products as compared to the agricultural ones. The adoption of the manufacturing sector had helped Japan to recover more readily from the Great Depression so the same policy was applied to Korea. Manufacturing sector was also likely to prosper more in Korea because of the presence of natural resources and cheap labor as they could attract Foreign Direct Investment more quickly10. Another reason for the development of Korea’s manufacturing sector was derived from the need of Japan to create Korea as the industrial base for the development and production of weapons against China. The policies that were adopted by the colonial government led Korea to the path of economic growth and development. The wage rate and the rent rate, unlike before, increased. Also, as the population increased due to the medicinal programs, the labor supply was enhanced and the full employment level rose to a higher degree. The per capita output also increased by more than one percent in the colonial era. 11 However, as the rents increased at a greater rate than the wages, the landowning families benefited more, thereby leading to an unequal distribution of wealth and income. Despite the better living standards of the people, studies show that the per capita grain consumption in Korea fell considerably in the colonial period. Critics believe that this might have been the result of the exploitation of Korea by Japan. But in reality, the real per capita grain consumption increased. Also, Korea experienced better living standards and better educational facilities. The life expectancy grew from 37 years to 43 years in the colonial era and the mortality rate fell more than half. Now that the colonial period has been discussed to a greater degree, it is important to focus on the main and the more important part of the paper, i.e. the differences in the economic prosperity of South and North Korea. South Korea After the Second World War, Korea was divided into two regimes, North and South Korea. The South Korean government was set up by the US military while the North Korean government was funded by Russia. Because of the recent decolonization process, Korea could not maintain its trade ties with Japan. Since the economy of Korea had been greatly dependent on Japan in the colonial era, this meant economic recession. In order to deal with some of the problems faced by the agricultural sector, in 1948, the first South Korean government introduced land reforms that favored land possession by agriculturists. This led to turmoil and ultimately the Korean War in 1950 as people started protesting. The war caused the economy to deteriorate further because a quarter of the capital stock was destroyed12. The war caused the government to review its policies and thereby Korea, following the example of other Western countries, invested in industrial processes. Industries were targeted and given privileges like borrowing at lower interest rates. This was done to incentivize private individuals to invest more in industrialization. Tariffs and quotas were also introduced to safeguard the local manufacturing sector of the economy. Further, import of technology meant greater productivity. However these policies did not operate properly. The Import substitution industrialization policy encouraged risk takers to bribe politicians. These unproductive profit seeking activities caused the efficiency in the economy to fall enormously. As a result, the standards of living remained constant and then later fell resulting in the fall of the First Republic in 1960. In 1961, a military coup threw the Second Republic in Korea. With the military ruling the country, there was increased emphasis on the promotion of exports (or EP). Under the EP policy, the government was to provide many benefits, like lower interest rates, to the exporting firms. This was done to encourage producers to produce world quality products. The stress on the exports also meant that Korea was to indulge more with the developed countries in trade. The result of this policy was that the growth in the efficiency was fairly high for the export industry but other sectors of the economy felt left out13. In just ten years, the per capita output increased in the country by double amount. Also, the share of agriculture fell to just 25 percent from 45 percent which meant that South Korea had now developed into an industrialized state. In the 1970s, it seemed that the US was getting weaker as compared to its competitor Russia. This alarmed the South Korean government because it was constantly under threat from North Korea. Hence, there was an emphasis on ISI again because only ISI could be used to build weapons and heavy chemical industries (HCI) to help in a possible war14. Chaebols (or businesses owned by single families) were invested in readily because they had been given the task for the production of the HCI. However, the government intervention did not help in this matter and the HCI suffered from inflation and corruption. In the 1980s, there was another regime shift. This regime tried to remove the unfavorable consequences that had risen because of the investment in HCI. There was an increased emphasis on the regulation of trade and financial sectors. The liberalization of the capital account was one of the moves taken by the government for economic stability. However it backfired. This was so because it led to an accumulation of debts. The debts, along with the already destabilized financial sector, led to the financial crisis in 1997. 15 As a result, there was more focus on the capital and financial reform in the coming years. Overall, after the early 1960s, the South Korean economy boomed and the per capita output grew by 7% per year. 16 South Korean standards of living increased rapidly in the 1970s with a rising trend in the Gini coefficient. A reason for the growth in the output per capita was the intensification of inputs, especially physical capital. Capital accumulation meant that the high savings were encouraged. Also the dependency ratio had fallen rapidly because of the policies introduced in the colonial period. Another reason for the growth in the economy is the accumulation of the human capital which arose because of the investment in the education by the Japanese in the colonial era. Further, the South Korean economy developed the most in the time of the military coup and the military leader was none other than a former officer of the Japanese army. This meant that he introduced a system that was based on the colonial system of government. Consequently, it would not be wrong to say that South Korea never developed on its own. Rather, it carried out its economic prosperity because of the roots that were set up by the Japanese. North Korea The example of North Korea is no different from South Korea. North Korea’s economy had also experienced a boom because of the policies that had been introduced by the Japanese in the colonial era. In the colonial era, the standards of living of North Korea had been higher than that of the people of South Korea because it had been given more importance by Japanese in case of a war against China. In the 1950s, the North Korean government was confident about the economic advantage it had but by the 1960s it was obvious that South Korea was prospering far more rapidly. In the 1990s, there was a sharp decline in the standards of living of the people of North Korea in contrast to an increase in the living standards of South Korea. After the Korean War of the 1950s, the North Korean government adopted a strategy of forced saving. This was done to increase an investment in the economy. However this policy was unsuccessful. Firstly, the workers were not encouraged to improve their productive potential or increase their efficiency. In addition, the political policies of the government put it aloof and isolated from the rest of the world. This meant that it could not benefit from the advantages of trade, as South Korea had done. Furthermore, there was a lack of consistency in the planning sector. Because of the downfall of the economy, the elites were allowed to introduce material incentives to encourage private investment. However, this meant a constant threat to the totalitarian rule so the reform of providing incentives was not really accepted. The government also tried to attract foreign direct investment but it failed to do so because the economy of North Korea was falling constantly and at that point, there was no encouragement provided to the investors. North Korea also defaulted on the loans that had been lent to it by the Western banks. But what was worse was yet to come. In the 1980s, the command economies collapsed. North Korea’s economy was no exception. Although there were attempts made to improve the state of agriculture in the 1990s, the climatic conditions never allowed the attempts to be successful and North Korea suffered from greater food shortages and starvation. Conclusion To conclude, North and South Korea are the prime examples of countries that had similar historical and cultural backgrounds but because of different economic and political policies, differed in economic performances. The Malthusian stagnation period and the colonial period were experienced by both Koreas but South Korea developed more as compared to North Korea. This does not necessarily mean that South Korea developed on its own. It did in fact dwell on the historical remnants of the Japanese. However, it should be given credit because of the stress it put on the role of world trade in contrast to the North Korean policy of isolation. The South Korean regimes throughout history experimented with different economic policies. The industrialization processes introduced in the 1960s, the development of the EP program, and the introduction of HCIs were all measures that might have failed individually but the South Korean economy overall boomed growing at 7% each year. In contrast, the North Korean leadership always adopted stringent economic policies, like the forced savings one, that were impractical to implement. Bibliography Amsden, A. Asias Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press, 1989. Ban, S. Agricultural Growth in Korea. Honolulu: University Press of Hawaii, 1979. Cha, M. The Colonial Origins of Koreas Market Economy. London: Routledge, 2000. Cha, M. Facts and Myths about Koreas Economic Past. Australia:Australian Review of Economic History44 (2004). Cole, D. and Y. Chul Park. Financial Development in Korea, 1945-1978. Cambridge: Harvard University Press, 1983. Dollar, D. and K. Sokoloff. Patterns of Productivity Growth in South Korean Manufacturing Industries, 1963-1979. Journal of Development Economics 33, no. 2 (1990). Galor, O. and D, Weil. From Malthusian Stagnation to Modern Growth. American Economic Review, 1999. Gill, I. Stature, Consumption, and the Standard of Living in Colonial Korea. 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