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THE BIG ISSUES OF NORTH KOREAN ECONOMICS
Korea after Kim Jong-il
Institute for International Economics, Washington, D.C.; 2004
Review by Jerry Winzig
Korea after Kim Jong-il is a serious but plain-spoken and provocative economic and political policy analysis about the future of Korea. Its author is Marcus Noland, a senior fellow with the Institute for International Economics who has long studied and written about the problems of North Korea and the prospects for Korean reunification.
While this is a serious study, Noland cautions that much information about North Korea is unclear: “Former US Vice President Walter Mondale once said that anyone who described himself or herself as an expert on North Korea was either a liar or a fool. y corollary would be to not trust any figure on North Korea that comes with a decimal point attached.”
At times, Noland’s book can be hard to follow, particularly in his third chapter, “Modeling Regime Change,” where he examines North Korea as an economist. Even then, however, his approach is refreshingly direct. He admits his bias as an economist (“To a man with a hammer every problem looks like a nail”) and starts that chapter by saying “So let’s start with the nails.”
Even if you find the third chapter challenging, however, you’ll find the rest of the book readable and thoughtful. Noland points out facts that should be obvious but are not. Speaking of the possible resumption of the currently-suspended commitment by the United States and Japan to help North Korea build two nuclear reactors, he says, “Given the state of North Korea’s infrastructure, the investment of billions of dollars in two nuclear reactors would be daft—the reactors could not be safely operated without rehabilitating North Korea’s creaky electrical power grid, and in any event, the money could be better used on alternative investments.”
In another example, Noland reminds us there are no significant plans for what happens after Jong-il Kim. He concedes the unique dynastic aspect of North Korea’s rule, but then points out that Il-sung Kim began publicly grooming Jong-il Kim at least 20 years before the elder Kim’s death. In a footnote he says, “If a similar dynastic hand-off of power is to occur, it would seem that time is running out to begin promoting the prince.”
Noland tells us the challenges facing North Korea are unique in many ways. First, “the survival of the Kim Jong-il regime is in no small part conditioned on its relations with the rest of the world.” North Korea’s very existence depends to an extraordinary degree on aid and support from other countries; fifty-six percent of North Korea’s per capita income comes from aid. (That aid, of course, is not distributed on a per capita basis but is used by Jong-il Kim to reward “favored constituencies.”)
Second, North Korea has no long-term political viability, in no small measure due to its juxtaposition to a vibrant South Korea. Noland says, “In contrast to other reforming communist societies in Asia, such as China and Vietnam, the divided nature of the Korean peninsula would seem to invite disadvantageous comparisons to the South and pose some very basic issues in terms of political legitimization.”
Third, North Korea lacks a key advantage that China and Vietnam had. When these countries began their reforms, they were able to debureaucratize agriculture and release labor into new, privately-owned manufacturing enterprises that often produced for an export market. In contrast, North Korea has already moved many people out of agriculture into non-productive state-owned manufacturing. Noland points out, “In large part the economy is geared to produce goods (televisions and radios without tuners, to cite one example, or Scud missiles, to cite another) for which there is only limited demand.”
Fourth, North Korea has been so isolated that its policy makers fail to grasp even the most basic principles of a market economy. For example, “when China raised the grain prices at the start of its reforms in November 1979, the increase was on the order of 25 percent. In comparison, North Korea has raised the prices of corn and rice by more than 40,000 percent.” Noland summarizes the explanation of one unnamed official in these words: “the administered price of rise would be raised to the farmers’ market price, but since no one could afford rice at the market price, everyone’s nominal wages would be increased commensurately.” He says the official could not understand they had merely decreased the value of the North Korean won.
In spite of these challenges, however, Noland believes that “economic integration between North and South Korea is in the cards—the only deep uncertainty is whether it occurs abruptly or gradually.” Citing studies on the efficacy of economic aid, he argues that aid to North Korea will not help smooth the transition: “aid tends to be fungible and simply supports government consumption according to the pre-existing preferences of the recipient governments.” He adds, “In essence, aid is a pure rent to the incumbent who can dole it out with the sole object of maintaining the incumbency.”
This does not mean there won’t be significant costs to integration and reunification. North Korea will require enormous amounts of capital investment. Noland argues, however, that investment alone can’t solve the problem, and must be balanced by letting people in the North migrate to the South. (He says it would require $1 trillion to raise incomes in North Korea solely by infusions of capital.) Summarizing the dilemma, he says, “the economics come down to the movement of Southern money north or the movement of Northerners south.”
Noland’s 87-page book is well worth reading for anyone who cares about Korea’s future, and may prompt you to rethink your own preconceptions.
Copyright © 1999-2004 Winzig Consulting Services.