Tuesday, November 10, 2009

[DeCal] My Response Paper (Updated)

While not precisely looking for this, this is what I had hoped would be gained from the past few weeks. This is my response to the question I posed on the topic : What explains the dramatic divergence between North and South Korea?

Short, Response Paper: Why the divergence?

By Joseph

Though the Republic of Korea (South Korea) begins without the popular support that the Democractic People’s Republic of Korea (North Korea) does, she is able to produce sustained economic growth that over half a century can primarily be explained by the power of institutional advantages aggregated over a long period of time and the uniquely favorable geopolitical situation that South Korea finds herself in at the height of the Cold War. Though South Korea is governed by dictators for close to four decades, the dictatorial regimes are only “moderately corrupt” in that the dictators implement forward looking policies that produce sustained economic growth. Institutional advantages, such as a Confucian society that places a high value on education and a long history of a single, homogenous identity, bequeath the Republic of Korea (South Korea) with a cheap, educated workforce that believes that they too have a stake in the government. This allows the government to coerce a high savings rate from its people and channel investment to key strategic industries, such as automobiles and shipbuilding. In turn, this gives way towards outward looking policies as the government looks to further develop the nation’s strategic industries by buying capital goods, such as machine tools, from abroad with export earnings, translating into sustained economic growth. Moreover, as South Korea’s governments are led by dictatorial regimes, the government is able to implement more draconian measures in order to support these strategic industries, such as systematically devaluing its way out of recessions, uncompetitiveness, and balance of payments crises (and in the process steal money from the nation’s savings) or simply quadrupling the price of gasoline by fiat in the wake of the oil crisis in 1973. And, the importance of having the United States as an ally during the Cold War should not be overlooked; for example, when South Korea faces a balance of payments crisis in 1980, South Korea received a quiet bailout from Japan at the insistence of the United States, whereas after the Cold War, the country receives a bailout from the International Monetary Fund only with a heavy set of conditions. I would say this is basically the story of South Korea’s economy up until 1997.

Of course, North Korea, too, has the same set of institutional advantages as outlined in the CBO report. However, North Korea must cope with the accrual of huge organizational inefficiencies inherent in a planned economy. Moreover, as North Korea is not allied with the richest country in the world, the country simply does not have the option of developing its economy by buying capital goods from abroad in exchange for selling light manufactured, consumer goods, such as shoes. Additionally, North Korea without the protection of Soviet or Chinese troops in her territory must spend a disproportionately large share of income on defense spending, which has no tangible benefits and, which in North Korea’s case, has most likely retarded economic growth. Finally, even after it became clear that the Stalinist model or a planned economy would simply not be able to catch up with an economy that allocates the production of goods and services through largely price signals, the country simply did not have the option of fully embracing market reforms like that of the Soviet Union or China as it would declare that a society like South Korea’s is preferable. And, even when the government does attempt small scale free trade zones, such as the Rajin-Sonbong Special Economic Zone on its border with China and Russia, the country does so only half-heartedly and it is never clear that the country would give foreign investors legal protection or that there even exists a market for goods produced from this zone. This is North Korea’s story up until the collapse of the Soviet Union, at which point North Korea’s decision to be heavily dependent on the Soviet Oil for her heavily mechanized agricultural sector leads to a famine. It is at this point that signs of economic reforms do show up as markets spring up in the countryside; however, this reflects the loss of state control more so than it does of deliberate attempts of economic reform. The latest constitution seems to make it official that the government has largely given up on producing sustained economic growth as its military first policy (Songun) smacks of extortion from her people directed at the state level.

With respect to how democratic institutions evolved in South Korea, this is much tougher to explain (and it's something that there is not a lot of material available on). But, what is clear is that this is something that should largely be credited to the South Korean people as, by and large, the United States simply watched as South Korea's military dictatorships systematically and, at times, violently put down demonstrations. It becomes even more difficult to explain if one were to consider the argument where increasing prosperity leads to a more representative government (a more prosperous Japan should have developed democratic institutions first) or that Confucian societies naturally lends itself to autocratic and dictatorial governments (South Korea, a more Confucian society should be the more autocratic country here). I suspect that unequal development combined with the former argument could be one possible explanation; South Korea’s dictators overtly left southwestern, Jeolla provinces underdeveloped for decades.

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