平和
和平
평화
ASIA
08 June 2014
Korea Fans

Poverty and Prosperity in North and South Korea

The diverse destinies of North and South Korea show that politics is the key driver of policy choices that result in persistent poverty or prosperity.

The diverse destinies of North and South Korea show that politics is the key driver of policy choices that result in persistent poverty or prosperity.

Indeed, the two Koreas are principal exhibits in the analysis of Daron Acemoglu and James A. Robinson that "inclusive" policies, rather than "extractive" policies, are the key to prosperity.

Until the two Koreas were separated at the 38th parallel (of latitude) after World War 2 and the Korean War that ended in 1953, they shared the same history, geography and culture. In fact, prior to these wars, the North was more industrialised than the South.

But today no two countries could be more different. North Korea has a level of economic development and standard of living like the countries of Sub-Saharan Africa, whereas South Korea is now a member of the rich man's club of OECD, with a GDP per capita only just behind France, and ten times higher than North Korea.

When the two Koreas began the post-war period, they both had authoritarian regimes, not democratic. But the economic policies they pursued, and still pursue today, were fundamentally different.

North Korea practised a system of economic central planning. Private property was outlawed. Markets were banned. Business and contact with the outside were prohibited. Freedoms were curtailed in all aspects of life, except for the political and military elite. And education contained much propaganda, as did the state-controlled media, which emphasised American and South Korean hostility towards North Korea, and the racial purity and superiority of the Korean race. In the terms of Acemoglu and Robinson, North Korea had extractive economic institutions which were designed to extract incomes and wealth from society's masses to the benefit of the elite.

By contrast, South Korea promoted a market economy, based on private property and the rule of law. In particular, the South fostered investment, entrepreneurship and exports. A great emphasis was placed on education, such that today Korea is near the top of the OECD's education league table (PISA). In the terms of Acemoglu and Robinson, South Korea had inclusive economic institutions which allowed and encouraged participation by the great mass of people in economic activities that make the best use of their talents and skills.

The result is that North Korea has seen very little economic development, and has experienced recurrent famines. By contrast, the South has achieved spectacular economic development, driven by global corporate giants like Samsung and LG.

Why did North and South Korea take such different paths?

The North Korean political and military elite has sought to maintain their position of power by controlling and repressing the rest of the population. A vast spying apparatus and labor camps aim to keep a lid on dissent. Their survival has been facilitated by nuclear-blackmail and threats towards the West.

Overall, the North Korean regime has been successful in that it is still in power. Opening up to market-oriented policies would be a risk for its elite. Market economies are based on creative destruction, as economic and technological progress result in the new and successful replacing the old and unsuccessful.

But the grotesque economic inefficiency of the North's economic system, together with the seeping of outside information into the North, still represent a growing threat.

We should also not imagine that the North Korean elite believes in its system. The elite is active in black market transactions, and buys many luxury products from the West.

South Korea's first leader Syngman Rhee was by contrast staunchly anti-communist, and had studied at America's Harvard and Princeton universities. The South also received much support from the US, in light of the military threat posed by North Korea. In this context, South Korea's elite was more motivated by the desire to create a strong economy by inclusive policies than to repress the population to remain in control.

As South Korea became more prosperous, its society demanded more freedoms, notably through trade union and student movements, and political dissidents like KIM Dae-jung who ultimately became president. And with the relative equality of national income, the elite had less to fear from pluralism and democracy. Thus, the elite eventually stood aside and permitted the democratisation of the country.

There are many lessons from the North and South Korean comparison. South Korea was not more successful than the North because of a superior culture or because of a more favourable geography.

The South succeeded thanks to the initial choice of "economically inclusive" policies, followed by the subsequent choice of "politically inclusive" policies when faced with demands for democratisation. Politically inclusive policies are critical to enable the South to embrace creative destruction as a force for economic renewal and become an innovation-driven economy.

The comparison of North and South Korea is similar to comparing China under Mao and China after Mao. Today, China faces widespread popular demands for more freedom, and cleaner governance. Its economy now needs more creative destruction and innovation to continue its development path. But the prospect of creative destruction represents a great threat to China's Communist Party elite, especially those leading the very inefficient state-owned enterprises and banks.

The Communist Party's approach is to seek to clean up governance, but while resisting politically inclusive policies and democratization. Indeed, social and political repression is on the rise.

The big unknown is how long can the Communist Party hold on to power for.

Author

John West
Executive Director
Asian Century Institute
Tags: asia, north korea, south korea, why nations fail, Daron Acemoglu and James A. Robinson

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