The Future of North Korea is South Korea (Or hope springs eternal)

Article in World Economics 8, no. 3

July 1, 2007

The Korean peninsula presents a remarkable “natural experiment” for social scientists. Under Japanese occupation, some of the most advanced industrial facilities in Asia were developed in the northern part of the Korean peninsula; the south was the breadbasket. At the time of the par-tition in 1945 into zones of Soviet and American military occupation, in the north and south, respectively, levels of per capita income and human cap-ital in the north exceeded those attained in the south.

In 1950, North Korea attacked South Korea in a bid to forcibly unify the peninsula, drawing the US and China into the conflict. Most of the capital stock was destroyed as armies from both sides twice traversed nearly the entire length of the peninsula. There was considerable population move-ment as well, mostly from the North to the South, and it is impossible to ascertain with any degree of certainty the capacities of the two countries when hostilities ended in 1953 with the original borders more or less re-established.

The two Korean states subsequently not only pursued divergent devel-opment strategies but also pushed those strategies to extremes. South Korea not only adopted a capitalist system but also went on to pioneer an outward-oriented development strategy, emphasizing international trade as a catalyst. North Korea, in contrast, not only chose central planning but also intentionally time-phased its plans to frustrate linkages with those of other fraternally allied socialist states and in doing so created the world’s most autarkic economy, notable in the degree to which markets were repressed.

Over the past five decades, economic performance in South Korea has been nothing short of spectacular. Between 1963 when a wide-ranging economic reform program was initiated and 1997 when the country expe-rienced a financial crisis, real per capita income growth averaged more than six percent annually in purchasing power adjusted terms. At the start of that period the country’s income level was lower than that of Bolivia and Mozambique; by the end it was higher than that of Greece and Portugal.

As astonishing as South Korea’s economic performance has been, its political development has been as impressive, if not more so: In the space of a single decade between 1987 and 1997, leadership of the South Korean government went from an authoritarian strongman (General Chun Doo-hwan) to his elected but hand-picked successor (General Roh Tae-woo) to an elected centrist civilian politician (Kim Young-sam) to a former dissi-dent (Kim Dae-jung). South Korea is arguably the premier global success story of the past half century.

In stark contrast, North Korea experienced a famine during the 1990s that killed perhaps 600,000 to 1 million people out of a pre-famine popu-lation of roughly 22 million, making it one of the 20th century’s worst. This disaster was very much the product of the country’s political system, an anachronistic Stalinist dynasty that has systematically denied its popu-lace the most elemental human, civil, and political rights.

The failure of the state to fulfill its obligations necessitated entrepre-neurial coping responses by small-scale social organizations—households, enterprises, local party organs, military units—and contributed to a grass-roots marketization of the economy. North Korea’s transition over the past decade can best be understood not as a top-down attempt by the govern-ing authorities to marketize or improve efficiency, as usually characterized, but rather as a bottom-up marketization arising from coping responses to the trauma of famine, which the government has sought to both ratify but also control, and even reverse, ex post. Policy reversals in the fall of 2005 including the banning of private trade in grain, the means through which most North Korean households obtain food, both revealed policymakers’ discomfort with this process and put the populace at risk.

Such retrograde moves together with renewed floods in August 2007 have raised fears of a recurrence of the famine conditions of the 1990s. But North Korea’s economy and its external relations have changed signifi-cantly in the intervening decade, reducing the likelihood of such an out-come. A consensus has emerged in South Korea about the desirability of economic engagement with the North. Indeed, controversies over the his-torical border between China and Korea, and the deepening economic integration between China and North Korea have stoked South Korean fears that China is economically colonizing the North, and helped drive a policy of relatively open-ended and unconditional official transfers and subsidies. The upshot is that North Korea’s economic integration with China, which occurs increasingly on market-conforming terms, may have a greater transformational effect than its more narrowly circumscribed and state-centered interaction with the South.