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"North Korea has a 99 percent literacy rate, a disciplined, hardworking society, and a US$900 per-capita GDP. Morocco has a 44 percent literary rate, a society that spends all day drinking coffee and pestering tourists to buy rugs and a $3,260 per-capita GDP."
In the late 1980s, American economist P.J. O'Rourke pointed to North Korea and Morocco as evidence for his theory that a free market is the decisive element in determining a country's prosperity. A properly functioning market is more important than educational standards or the diligence of a people, he suggested.
In his book "The Birth of Plenty", investment strategist William Bernstein cited property rights, the scientific method, capital markets and communications as the four institutions necessary for prosperity and national wealth. Maintaining that property rights are the most important of the four, Bernstein referred to O'Rourke's example above. The dismal state of the North Korean economy is because the communist system doesn't recognize private ownership, Bernstein said.
The economic takeoff of China and Vietnam, both socialist countries, started with the recognition of property rights. Prior to encouraging foreign investment in their countries, they carried out reforms that gave farmers the right to sell surplus goods and effectively allowed land ownership. As a result, Vietnam, which had suffered food shortages even with triple-cropping, saw a drastic increase in agricultural production -- to the point where it is now the world's number two rice exporter. Vietnam permitted private businesses, introduced the corporate system and opened a stock market. China has begun privatizing state-owned enterprises.
But while China and Vietnam have made revolutionary changes in the past two to three decades, North Korea has changed little. Reports have it that some signs of change can be seen in the North, like the existence of black markets and the emergence of "red capitalists" backed by the power elites. But the changes don't seem to be significant. Free economic activity is still impossible; society is so closed and rigid that North Koreans are flabbergasted by even the terms "reform" and "market opening." The North has yet to ignite the engine of economic development.
Accordingly, it is doubtful if the expansion of economic cooperation agreed upon at the second inter-Korean summit will be able to revive the North Korean economy. A number of Third World countries have built roads and constructed dams and factories with assistance from the World Bank and elsewhere, but few have managed to develop their economies; typically only the powerful have accumulated wealth. There is no small risk that our support to the North in the name of economic cooperation will meet the same fate.
That's not only because entrepreneurs who want to operate in the North have to make under-the-table payments. The bigger problem is that it is unlikely that investment there will spur other productive investments and lead to more production. Improved highways and railroads are unlikely to result in a logistical or distribution revolution, and the construction of plants and shipyards probably won't lead to the development of related industries like parts suppliers. With property rights and markets unrecognized, few business-minded entrepreneurs are expected to emerge in North Korea.
Nonetheless, North Korea appears to be operating under the mistaken belief that it can sort out its economic woes with South Korean assistance without reforms and without opening its market, both of which would threaten the maintenance of the system there. This sort of inter-Korean economic cooperation cannot but be pouring water into a bottomless pit. If our cooperation is to really help the North Korean economy, the North must level off the base of growth on its own. The starter will be a market economy reform in which property rights are recognized.
This column was contributed by Chosun Ilbo in-house columnist Kim Ki-cheon.
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