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Short, Response Paper: Why the divergence? By Joseph Though the Republic of Korea (South Korea) begins without the popular support that the People’s Republic of Korea (North Korea) does, she is able to produce sustained economic growth that over half a century has translated into exponential gains in material wealth. 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.1 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. 2 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 and balance of payments crises (and in the process steal money from the nation’s savings) or quadrupling the price of gasoline 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. 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 1

See The Role of Foreign Aid in Development: South Korea and the Philippines. Washington, D.C.: Congressional Budget Office, 1997 2 See “Getting Interventions Right: How South Korea and Taiwan Grew Rich” by Dani Rodrik, Gene Grossman and Victor Norman. Economic Policy, Vol. 10, No. 20 (Apr., 1995), pp. 55-107

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 famine, after which point signs of economic reforms or markets springing up in the countryside have reflected loss of state control more so than legitimate attempts at economic reforms. 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 of her people at the governmental level. With respect to how democratic institutions evolved in South Korea, this is much tougher to explain. 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 the one dictatorship gave way to another and its government clamped down on large scale demonstrations by civilians and labor union activists. It becomes more difficult to see especially if one considers the argument where increasing prosperity leads to a more representative government (Japan would be the counter-example here) or that Confucian societies naturally lends itself to autocratic and dictatorial governments (Japan would again be the counter example here). I suspect that the former argument, taking out Japan, and the fact that South Korea’s dictators largely ignored economic growth in the southwestern, Jeolla provinces could be an explanation here.

Why the divergence between North and South Korea?  

Quick overview on how the Koreas have diverged over the course of the past half century or so