Economics Assessment of South Korea and North Korea - Case Study Example

Economic Assessment: South Korea and North Korea Introduction Central Intelligence Agency s “After World War II, a democratic-based government (Republic of Korea, ROK) was set up in the southern half of the Korean Peninsula while a Communist-style government was installed in the north (Democratic Peoples Republic of Korea, DPRK).” North Korea was under the rule of erstwhile USSR, and the current political system of North Korea founded by Kim Il Sung is practically considered as a totalitarian dictatorship, whereas it is a democratic system with the executive, legislature and judiciary sharing and exercising powers in South Africa. The political background of a country is an important determinant in the economic development of a nation. Therefore, it is in this backdrop the assessment should be made for better understanding of the divergence between these countries in economic performance in proper perspective. Gross Domestic Product (GDP) The GDP is an important primary economic indicator for assessing economic growth of a country as it impacts on the businesses, industries and people. The economic growth measured by comparison over a period of time indicates trends in the economy. GDP Real growth rate refers to GDP growth on an annual basis adjusted for inflation and measured on year-over-year basis. GDP real growth rate North Korea South Korea 2012 (est.) 2.7% 2011 (est.) 0.8% 3.6% 2010 (est.) -0.5% 6.3% 2009 (est.) -0.9% The GDP real growth rate of South Korea during 2010 to 2012 reflects the effect of slowdown in the international economy consequent upon the US subprime crisis and financial crisis in Europe due to its level of exposure to international trade. The strength of the country’s economy could be assessed meaningfully by comparing its GDP growth rates with the other developed countries’. The GDP Growth rates (Annexure – I) in the case of leading economies like US (1.6%), Japan (0.3%) Germany (0.1%), France (-0.3%) and UK (0.3%) confirms the effect of slowdown internationally, and indicates that the economic growth of South Korea is reasonably good. Whereas in the case of North Korea we cannot infer any such pattern because, the country is highly insulated from the world trade due to closed structure of the economy. The developing countries like India (4.5%) and China (7.9%) have higher GDP growth rates as they were not affected by subprime or European financial crisis. North Korea’s GDP growth compared to many of the developing and under-developed countries has been poor. The country had negative growth in 2009 and 2010 against good performances of several Asian and African countries during this period. The industrial development achieved by South Korea over the period of time is linked to its external trade and GDP growth as can be observed from the following table. External Trade of South and North Korea (USD 100 million) North Korea (A) South Korea (B) B/A 2010 2011 2010 2011 2010 2011 Trade Amount 41.7 63.2 8916.0 10796.3 213.8 170.8 (22.3) (51.3) (29.9) (21.1) Exports 15.1 27.9 4663.8 5552.1 308.9 199.0 (42.5 (84.2) (28.3) (19.0) Imports 26.6 35.3 4252.1 5244.2 159.9 148.6 (13.2) (32.6) (31.6) (23.3) Notes: 1) Excludes bilateral trade between North and South Korea. 2) Figures in parentheses represent rates of growth over the previous years. Source: The Bank of Korea, p. 6. “Historically, from 1971 until 2012, South Korea GDP Annual Growth Rate averaged 7.23 Percent reaching an all time high of 18.20 Percent in September of 1973 and a record low of -7.30 Percent in June of 1998. South Korea’s economy became one of the most diversified and technologically advanced in the world in the last 50 years” (Trading Economics, 2012). The sanctions imposed on North Korea by the US and European community has affected the country’s internal trade severely. Apart from South Korea, other trading partners of North Korea are mostly the developing nations of the world. The comparative performance of the two countries reflects the weakness in the political system prevailing in North Korea, and the government’s inability to intervene effectively in the economic process of the country. GDP per capita GDP per capita of South Korea is 17.6 times higher than that of North Korea. GDP per capita North Korea South Korea 2012 (est.) 32400 2011 (est.) 1800 31700 2010 (est.) 1800 30800 2009 (est.) 1900 GDP per capita reflects the income level, consequently the standard of living in a country. Higher income levels lead to higher demand and savings which are essential for increase in consumption which fuels further investment by private entrepreneurs. Higher savings form the basis for capital formation and the economic climate will be conducive for growth due to multiplier effect which leads to sustainable economic growth in a country. A government with fiscal deficit under control and reasonable debt to GDP ratio and surplus in current account would be in a position to intervene effectively in the economic process to avoid hard landing in economic slowdown and play a catalytic role subsequently for revival and growth of economy. Annexure – IV, ‘South Korea GDP per capita’ shows consistent growth in GDP per capita during the past several decades. From around 7000 in the early nineties, the GDP per capita has climbed steadily to 16684.21 in 2012 which is a rare phenomenon in the world economy. During the past decade there has been only a minor slip in 2010 at 15462.7 with a nominal decrease from 15457.85 in 2009. According to Bank of Korea (p. 4) GNI per capita of North Korea stood at 1.334 million won, approximately one nineteenth (5.3%) that of South Korea in 2011. Budget Annexure – V, ‘South Korea Government Budget’ indicates South Korea has recorded a budget deficit of around 2% of the country’s GDP during 2011. Trading Economics (2012) reports “Historically, from 1988 until 2011, South Korea Government Budget averaged -0.1 Percent of GDP reaching an all time high of 3.5 Percent of GDP in December of 2007 and a record low of -4.1 Percent of GDP in December of 2009.” It could be observed that 2007 coincides with growth and 2009 with general slowdown in the international economy. GDP at the peak of 1049.236 has come down to 834.06 during the period (Trading Economics, 2012). The government had the flexibility to intervene effectively in regulating the economy through budgets. At the time of slowdown government’s spending is essential to prevent recessionary fears in the economy and South Korea has stepped up the government’s spending judiciously to avoid slackness in the growth process and promote economic growth. The government has managed to prevent economic slowdown turning into recession. Otherwise, increase in unemployment could cause deceleration in demand when people curtail consumption due to falling incomes. Decrease in demand affects production. This will result in further unemployment setting multiplier effect in motion leading to recession which will be prolonged and difficult to revive. The fiscal deficit at reasonable level and comfortable debt to GDP ratio has enabled the government to regulate the economy effectively by resorting to fiscal deficit. Absence of data in respect of budget in North Korea is an important barrier in making assessment of economy. The budget of North Korea for the year 2007 is estimated with revenue at $3.2 billion and expenditure at $3.3 billion Labour force North Korea is still predominantly an agrarian economy with agriculture, forestry and fishing constitute 23.1%, Manufacturing 21.9% and Services 29.4% of GDP in 2011 against 2.7%, 31.2% and 58.1% respectively in South Korea. (Bank of Korea, p. 4) The composition of the labour force of South Korea engaged in various sectors of the economy reflects the composition as prevailing in the developed countries. Reforms in agricultural sector coupled with industrial growth have been responsible for this shift in employment in the developed countries. Conclusion The comparative performance of the two countries reflects the weakness in the political system prevailing in North Korea, and the government’s inability to intervene effectively in the economic process of the country. In the case of South Korea consistency in GDP growth over the past few decades placed the country at par with the top economies in terms of GDP per capita at 16684.21 in 2011(Annexure – VI) far ahead of emerging economies like India (837.75) and China (2634.71) and at par with European economies like Spain (15511.93) and Italy (18935.05). Higher base of GDP per capita enables a country to withstand economic slowdowns. Nominal or slightly negative growth in GDP will not alter the consumption pattern of the public drastically. The economies of developing countries and under developed countries like North Korea are vulnerable to negative growth as it will push them into recession easily. Accumulated fiscal deficits will give no headroom for government spending which is necessary to prevent such a situation. References Central Intelligence Agency, 2013. The World Factbook, [online] Available at: [Accessed 8 March 2013]. Central Intelligence Agency, 2013. The World Factbook, [online] Available at: [Accessed 8 March 2013]. The Bank of Korea, 2012. Gross Domestic Product Estimates for North Korea for 2011, [online] Available at: [Accessed 8 March 2013]. Trading Economics, 2012. South Korea National Statistics, [online] Available at: [Accessed 8 March 2013]. Annexure - I GDP Growth YoY Country GDP Billion USD GDP YoY GDP QoQ Interest rate Inflation rate Jobless rate Gov. Budget Debt to GDP Current Account United States 15094 1.60% 0.10% 0.25% 1.60% 7.90% -8.70% 101.60% -3.10 Euro Area 13076 -0.90% -0.60% 0.75% 1.80% 11.90% -4.10% 87.30% -0.60 China 7298 7.90% 2.00% 6.00% 2.00% 4.10% -1.50% 25.80% 4.00 Japan 5867 0.30% -0.10% 0.00% -0.30% 4.20% -9.70% 211.70% 2.00 Germany 3571 0.10% -0.60% 0.75% 1.55% 5.90% 0.10% 80.50% 5.70 France 2773 -0.30% -0.30% 0.75% 1.20% 10.60% -5.20% 86.00% -2.20 Brazil 2477 1.40% 0.60% 7.25% 6.15% 5.40% 2.01% 65.10% -2.40 United Kingdom 2432 0.30% -0.30% 0.50% 2.70% 7.80% -7.80% 85.00% -1.90 Italy 2195 -2.70% -0.90% 0.75% 1.91% 11.70% -3.00% 127.00% -3.20 Russia 1858 2.90% 0.60% 8.25% 7.30% 6.00% -0.02% 9.60% 5.50 India 1848 4.50% 0.60% 7.75% 6.62% 3.80% -5.20% 68.05% -3.70 Canada 1736 1.10% 0.20% 1.00% 0.50% 7.00% -1.50% 85.00% -2.80 Spain 1491 -1.90% -0.80% 0.75% 2.70% 26.02% -9.40% 69.30% -3.50 Australia 1372 3.10% 0.60% 3.00% 2.20% 5.40% -4.10% 22.90% -2.20 Mexico 1155 3.20% 0.77% 4.50% 3.55% 5.27% -0.60% 42.85% -0.82 South Korea 1014 1.50% 0.40% 2.75% 1.40% 3.20% -2.00% 34.00% 2.40 Source: Trading Economics, 2012. Annexure – II Annexure – III Annexure – IV Annexure - V Annexure – VI GDP per capita TOP ECONOMIES LAST PREVIOUS HIGHEST LOWEST UNIT REFERENCE FREQUENCY CHART AUSTRALIA 27427.64 26693.71 27427.64 10449.84 USD Dec/2011 Yearly BRAZIL 4803.40 4716.61 4803.40 1448.14 USD Dec/2011 Yearly CANADA 25933.29 25588.29 26192.94 9374.88 USD Dec/2011 Yearly CHINA 2634.71 2425.47 2634.71 72.32 USD Dec/2011 Yearly EURO AREA 21379.53 21096.43 21808.81 6264.20 USD Dec/2011 Yearly FRANCE 23016.85 22884.95 23584.66 7482.07 USD Dec/2011 Yearly GERMANY 26080.52 25329.32 26080.52 11858.58 USD Dec/2011 Yearly INDIA 837.75 822.76 837.75 180.86 USD Dec/2011 Yearly INDONESIA 1206.99 1143.83 1206.99 194.43 USD Dec/2011 Yearly ITALY 18935.05 18601.38 20000.52 5819.18 USD Dec/2011 Yearly JAPAN 39578.07 39309.65 40707.00 7117.79 USD Dec/2011 Yearly NEW ZEALAND 14646.00 14629.00 15392.50 8042.68 USD Dec/2011 Yearly RUSSIA 3052.15 2923.14 3052.15 1510.54 USD Dec/2011 Yearly SOUTH KOREA 16684.21 16372.50 16684.21 1109.86 USD Dec/2011 Yearly SPAIN 15511.93 15458.21 16369.13 3715.88 USD Dec/2011 Yearly SWITZERLAND 38059.75 37666.39 38240.75 18970.15 USD Dec/2011 Yearly TURKEY 5740.64 5348.57 5740.64 1556.00 USD Dec/2011 Yearly UNITED KINGDOM 28032.79 27321.13 28928.94 10479.68 USD Dec/2011 Yearly UNITED STATES 37691.00 37330.00 38699.01 14091.08 USD Dec/2011 Yearly Source: Trading Economics, 2012 Read More