North Korea: Falling Behind

Looking at the previous post on the country, a question arises: if North Korea was, in some respects, ahead of the South in the early 1970s, to the extent that, in 1970, the Black Panthers could look on it as a model of resistance, and Joan Robinson could speak of a (North) “Korean Miracle” in 1964, when, exactly, did it start to fall behind?

Surprisingly early.

It turns out that South Korea had always had a surprisingly high level of economic complexity of exports, being consistently among the top 25 countries in this measure -even as early as 1964 (click the link for PDF showing the development of South Korea and Peru’s export components). North Korea, meanwhile, remains middling in this regard, but this still means its economy is underrated, because other countries with similar economic complexity are, in every way, much richer.

According to the paper Assessing the economic performance of North Korea, 1954–1989: Estimates and growth accounting analysis., there was only one period in which North Korean per capita real GNP grew faster than South Korea’s: the period 1954-1960. From then on, North Korea, with the exception of the period 1980-1985, consistently had a per capita real GNP growth rate of below 3%, growing an average 1.9% per year from 1954 to 1989. This (except for the early 1980s boom claim) is consistent with the per capita electricity consumption figures, which show that while North Korean per capita electricity consumption from 1971 to 1989 grew at at a thoroughly unimpressive 2.14% per year, South Korean per capita electricity consumption grew at a stunning 11.5% per year during the same period. The energy consumption statistics are more consistent with the early 1980s boom claim. Interestingly, up until the 1990s, North Korean per capita electricity consumption was no different from Argentina’s, suggesting North Korea had a truly abysmal capital productivity, as Argentina had a per capita GDP (PPP) at least three times as high as that of North Korea. The North Korean country study seems to be consistent with the surprisingly early slowdown, describing the post-war three-year-plan and five-year plan of the 1950s as successes and the North Korean economic slowdown as beginning in the “buffer year” of 1960. On the other hand, the semi-socialistic outward-oriented South Korean economy boomed after the 1961 coup. Apparently, the South’s economic surpassing of the North in the 1960s is evident even from the statistics on the sectoral composition of the labor force.

There are some other indicators, all indicating severe zastoy had set in North Korea by the 1970s. Firstly, food rations, which were were stable from 1955, were cut in September 1973, and sugar rations were also eliminated in the early 1970s. Food rations were cut again in 1987.

However, from the 1950s to the 1970s, housing construction boomed while the rest of the economy slowed. Yet, even housing construction must have declined during the late 1970s, as there was a sharp slowdown in North Korean urbanization at the time.

In 2011, North Korea had about the same percentage of its labor force employed in agriculture as China. Yet, China is a much richer country than North Korea. China can definitely feed itself if need be. North Korea can’t.

So when Brad DeLong says he, too, thought Joan Robinson’s support for “absorbing the South into socialism” in 1977 was “loony”, we now know why.

The question remains why the North fell behind the South economically so early in the 1960s and continued doing so during the 1970s and 1980s, and why the North is so much poorer than even neighboring China. This is a question which must be explored in a later post.

Note: Pretty much all this post was written on April 12, 2015. Only the first link and this and the above paragraph have been added, as well as the note on the energy consumption statistics. It is only being published today due to A. Karlin’s response to R. Khan‘s brief post on Communism.

North Korea: Bright Hope for Tomorrow

In all my encounters with data connected to economics, I have found only two guarantees of national minimum RGDP per capita: distance from the equator and economic complexity of exports. North Korea has solid marks in both for a country of its standing.

The fact that the North Korean economy is all too often underrated is obvious. From an outside glance, North Korea does not look or act like a country that has the per capita income of Kenya or the Ivory Coast, but like one that has the per capita income of Honduras. Indeed, despite the lack of consumer electric lights, North Korea’s electricity consumption per capita really is almost the same as that of much-better-lit Honduras.

Compare the real North Korea with the North Korea of Africa: Eritrea. Do you really think they have the same growth potential or even similar actual RGDP (PPP) per capita? I certainly don’t. Over 97% of Eritrea’s exports are products of primary industry. At the very best (which is extremely unlikely), Eritrea’s future is little better than that of Nicaragua. Despite the local dictator’s pretenses of supporting national independence and aidless growth, Eritrea is a country mired in economic stagnation, poverty, government debt, and a surprising amount of neocolonial dependence on its former colonizer. Like those of Somalia and Libya, Eritrea’s future looks grim, violent, and anarchic. Though Erik Reinert heaps numerous accolades and statements of hope upon Africa’s North Korea:

Note: the video is now gone. This is bad. It was of Erik Reinert speaking in Asmara on Eritrea’s future economic role. Among his statements were that Eritrea should not try to compete via cheap labor, but should encourage its regional specialization, that it had just enough gold to serve as a hard-currency builder but not enough to make the country dependent on it (note: Eritrea is entirely dependent on gold exports), and that Eritrea should follow the path of manufacturing.

, they are best reserved for the real North Korea: Eritrea has little to offer to the world except a steady stream of illegal migrants to its former colonizer.

Nor does Cuba have anything like the economic base of North Korea, and neither does its economic future look much brighter than that of the Dominican Republic. Though it has a well-educated population and a solid medical system, it looks like it never exited its past of naive comparative advantage in primary industry and inherently related “neocolonial dependency”.

In contrast, if North Korea is dependent on any country, it is on China, on which the rest of the world is understandably dependent as well (though, considering geographic distance and their own development, to a much lesser extent). An economic collapse in China would cause economic privations in North Korea, but no substantial change in its economic complexity which, despite the terrible shocks of the 1990s, is between that of Mauritius and Greece -both of which went great economic distances in the twentieth century.

Now, considering the level of malnutrition in the real North Korea, and the fact only a small percentage of the population has regular access to electricity, I wouldn’t be surprised if it turned out that the CIA RGDP per capita estimate is, in fact, a reasonable one. Physically, North Korea looks like a lower-middle income country with unusual gaps in its development fabric; the primary variables missing are consumer sovereignty and any distraction from the constant emphasis on military preparedness at any cost. There’s no point in building up any civilian consumer electricity network, after all, if the assumption is that the West and the Capitalist Occupation Regime could blow it up at any time or that it would quickly need to be dismantled for use of national protection. Indeed, even in the U.S., which never saw any battlefield action on its own soil for decades, civilian consumer electricity was rationed during the Second World War. Indeed, North Korea basically looks like an Asian version of the U.S. if it had never exited the Second World War. The country has a deserved reputation very much like that of Sparta. Kenya and the Ivory Coast could never acquire a nuclear weapon. North Korea could, and did. And, as with the actual post-WW II U.S., a post-Juche boom (after a sharp and brief recession) is perfectly possible in North Korea, even in the framework of a centrally-directed economy. Were it to turn to free-market capitalism, or even implement a more consumer-friendly version of its present economic system, North Korea’s RGDP per capita would quickly rise to the level of Honduras, and, over the next few decades, continue ascending to the level of Mauritius. There is absolutely nothing but royal ideology preventing North Korea from achieving the RGDP per capita of the 1980s Soviet Russia within the next four decades. If the real Soviet Russia could achieve post-1980 Mexican per capita RGDP by the early 1980s, so can North Korea by a simple redirection of resources from military to civilian purposes. The Korean people are generally more intelligent than the Russian, so by letting Korean genius shine, North Korea could rise to middle-income levels even within the rubric of a totally government-controlled economy.

In short, there is a good empirical case behind Scott Sumner’s contention that the fastest-growing economy of the 21st century will most likely be North Korea. North Korea, being an unusually economically-complex, yet, unusually poor country, is very much like Japan in the mid-19th century-just waiting for its opening to the West to shine.

Note: While a totally planned economy can be great at getting a country from lower-middle-income to upper-middle-income, it has never been shown to get one from third world to first. For that, some capitalist framework is required in order to encourage Hayek’s use of knowledge in society and the selective pruning and planting of Mises’s economic calculation. But neither of these is really necessary for a “poor” country of intelligent people to achieve Mexican living standards.