A Tale of Two Koreas

SILVA SANTIAGO 9081Santiago Silva Restrepo, MBA/MPA Class of 2016

It has been said, by many authors like Landes (1998), Acemoglu et. al (2001) or Henry et. al (2009), that economic development have many determinants like geography, culture, policies and institutions. Particularly, I am of the opinion that development is a complex process where every mentioned factor is complementary to the other and plays a role in that process. By the same token, Acemoglu and Robinson (2012) had argued that countries with similar initial endowments could present very different development paths depending on the dynamics between those determinants. For example, when Japan lost World War II and had to abandon its Korean colony in 1945, the Korean Peninsula was divided in two countries, North and South Korea, that despite their initial similarities achieved different results in their development path after 1960s.

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Source:  Mark J. Perry Blog (2011)

Even though Acemoglu and Robinson (2012) had argued that neither culture nor geography can explain the North Korea and South Korean phenomenon because institutions are responsible of such divergence, I consider important to analyze each determinant individually in order to have a better understanding of this “tale of two Koreas”.

Geography

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If we understand geography to be the physical characteristics of the land and its underground, then it will be correct to describe the two Koreas’ geography as follow: Even though both countries are located in the Korean Peninsula where, according to Amanda Briney  (2010), 70% of the land is mountain, North and South Korea began their separation era with different geographical endowments.  On the one hand, North Korea began with a bigger area of 120,538 km2 where, according to Doowon Lee (1993), 76% of the mining production was located by 1940. On the other hand, South Korea began with a relatively smaller area of 100,032 km2 and less mining resources. However, the geography affects both countries in other sectors like agriculture, which is minimal in the whole peninsula although it was concentrated in South Korea by 1940. The Korean experience supports what authors like Engerman and Sokoloff (2012) that geography, although is important in many ways,  by itself cannot explain development.

Culture

Before talking about culture in the two Koreas it is important to remember the definition of culture from the Project Globe (2004) that we used in class: “Shared motives, values, beliefs, identities, and interpretations or meanings of significant events that result from common experiences of members of collectivities and are transmitted across generations”. Having this definition in mind is key to understanding the following explanation:

According to the Asian Society (2013), until 1953 both countries shared a common culture that was influenced by their history of Chinese and Japanese occupations. However, authors like Sang Mi Park (2010) and Doowon Lee (1993) had argued that after the separation and particularly after 1960s both countries began a process of cultural change to help their governments in achieving their economic objectives. For example, North Korean (NK) government relied in the ideological stimuli of the Stalinist command economy to support its economic plans of nationalization and imports substitution during the 1950s and 1960s. Later in the 1970s, when NK lost part of its support from China and the Soviet Union, the government implemented a severe form of nationalism called “Juche Ideology”, where each individual is part responsible of the destiny of the collectivity.

In the same way, South Korean (SK) government appealed to a cultural transformation process of its society in order to facilitate the achieving of economic objectives. In the 1950s the government relied on the national sentiment of their people and the constant menace of the communism from the north to align their people in a common cause. Later, in 1960s after normalizing the country’s relationship with Japan, the government introduced the “Cultural Korea” transformation, which was based in Japanese principles of Confucianism like loyalty and filial piety. These cultural transformations, suggests Sang Mi Park (2010), helped the government to build a strong sense of shared identity among the Korean people that facilitated policy implementation under different scenarios.

The cultural transformation implemented in both countries was based in nationalism by some point, and both looked to align their citizens to embrace different policies that eventually may or may not generate economic development. However, in both cases the cultural transformation took years, almost decades of educational policies, and in some cases brutal enforcement, to change people´s mind. One might think that SK’s cultural change was easier and faster because it was based on the Japanese culture that was part of the Koreans since the colonial times.

The experience of the two Koreas in the culture effects on development supports what authors like Lawrence Harrison (2000) exposes that culture and not politics shape the success of a society, and that politics are the only way to change a culture.

Institutions

Institutions can be understand in many ways, particularly for this analysis I would like to rely my analysis on Douglas C. North’s (1990) definition “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction”. In North Korea, the government and its institutions were influenced by China and the Soviet Union with their socialist philosophy while in South Korea the government and its institutions were shaped by the United States and Japan. Institutions like democracy, rule of law and market structures shaped the two Koreas development in different ways.

After the separation and even after the Korean War in 1953, both countries were commanded by authoritarian regimes where democracy was not considered and many freedoms were restrained by the government. Democracy is one of the main one the main rules of interaction among humans and is perceived as fundamental in many countries around the globe, however there is little evidence about its effects on development.  Authors like Robert J. Barro (1996) had shown that once a country had established the rule of law, free markets, human capital and a small government consumption, the effects of democracy over economic development are even negative.

However, according to Barro, the effects of economic development might be significant because after a process of continued improvement of living standards high sectors of the society began to demand more democracy. Therefore, it is not a surprise that at least South Korea achieved great economic development during nearly 30 years without democracy, in fact the South Korea history supports Barro´s hypothesis that after a long period of economic growth the society is willing to adapt democratic institutions.

Other was the case of the market structures in both countries were one of them adopted a socialist economy while the other embraced free markets. On the one hand, according to Dowoon Lee (1993), in North Korea the government adopted an inward-oriented economy where nationalization of the means of production and import substitution were the main characteristics. The strategy worked well during the 1950s and 1960s thanks to the support of China and the Soviet Union and the initial endowments in industries like mining production and electricity generation that North Korea had inherited from the Japanese occupation. However, by the end of the 1960s the decreased assistance of the North Korea´s main allies and the inefficiencies of the adopted model led the economy to a long period of stagnancy and a later decrease.

On the other hand, according to authors like Katrin Voegeli (2008) and Charles R. Frank et al. (1975), South Korea adopted some institutions from a free market scheme. In the early 1960s the internal market continued to be protected, but changes in the institutions allowed the economy to imitate global industries by importing technology and knowledge from countries like Japan. Institutions were created to facilitate exports, protect private property and promote foreign investment. According to Voegeli, these institutional arrangements impacted economic development in South Korea allowing the country´s annual GDP to grow around 7% on average from 1971 to 1996 and after the Asian financial crisis 6% on average between 1999 to 2007.

Policies

For this part of my analysis I would like to consider polices as the mechanisms through which, given a set of institutional arrangements, governments implement their development plans. Considering my definition of policies, I can say that the history of the two Koreas have showed how institutions and policies must work together in order to obtain the expected development results.

In North Korea, for example, Doowon Lee (1993) shows that several industrial policies were adopted by the government in order to increase self-reliant production of goods and services. The government implemented nine Development Plans between 1947 and 1993 with an initial success based in external support from China and the Soviet Union, but with long term consequences in the economy. Particularly after 1970 when the government implemented an industrial renovation program based on technology imports that soon conduced North Korea to a balance payment problem that deepened its poor economic growth.  By the same token, by the 1980s the government implemented some economic reforms to create incentives for a foreign investment, but some competition from other socialist states like Vietnam and the country´s institutional arrangements made difficult its success.

By contrast, according to Voegeli (2008), in South Korea, institutional arrangements and policies worked together to implement several Development Plans.  Beginning in 1960s the government introduced some institutional arrangements that facilitated the implementation of industrial policies like concentrating scarce resources in pre-selected sectors (automobile, electronics and semiconductor among others), internal market protection for infant industries, export subsides and low interest credits. After the economic slowdown in the 1980s, the government moved from a direct role in the economy to a mostly regulatory role and decided to implemented new rules like a financial markets liberalization. All these policies helped to created a healthy environment for economic development in South Korea that still exists until our days.

To conclude, I would say that the tale of two Koreas is a natural probe of how development´s determinants like geography, culture, institutions and policies are play a complementary role in shaping development. In the same sense, it is probable that there might exist a dual causality between development and its determinants like the one suggested by Chang (2008) between culture and development.

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