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The Korean economies: A comparison of North and South
The Korean Economies: A Comparison of North and South By Eui-Gak
Hwang,
Clarendon
Press,
1993, pp. 347.
Review by Marcus Noland
The North Korean nuclear crisis, the death of long-time North Korean leader Kim IlSung, natural disasters, and growing evidence of economic hardship have focused world attention on developments in North Korea. Unfortunately, the nearly hermetically sealed nature of North Korean society is such that even with recent moves toward opening, our understanding of North Korea is uncertain at best. A professional colleague recently asked me to recommend to him some reading on the North Korean economy in anticipation of meeting a delegation of North Koreans. The Korean Economies was at the top of my list. The book is organized as a comparison of the North and South Korean economies, with a brief introductory chapter summarizing Korean economic history up until the division of the peninsula in the aftermath of the Second World War and the Korea War which soon followed. The remainder of the book follows Korean developments from the 1950s through the 1980s. The development of the South Korean economy has been documented in too many volumes to count, and this book does not make any major contribution in this regard. Instead, Hwang dedicates the bulk of the book to attempting to understand the North Korean economy, and given North Korea’s nature as a closed, secretive society, this is the book’s real strength. The second chapter of the book contains what is to my knowledge the best overview of North Korean economic institutions written in English. Hwang then goes on in the following chapter to put fragmentary data on North Korean output in material product terms into a standard national accounts framework to estimate North Korean national income. This is very important work. The domi-
M~KUS Nohd
l
Institute for International
Economics,
Journal of Asian Economics, Vol. 7, No. I, I996 pp. 149. ISSN:
I1 Dupont I52
Cir., NW, Washington.
DC
20036cmnoland@iie,com>. Copyright
1049-0078
149
0
1996 by JAI Press Inc.
All rights of reproduction
in any form reserved.
150
JOURNAL OF ASIAN ECONOMICS 7(l), 1996
nant (one is tempted to say the only) estimates of North Korean income in the public discourse are those produced by the South Korean government which are questionable for both methodological reasons and the obvious potential for politicization. Hwang’s attempt to estimate North Korean GNP, although heroic, is surely controversial, and will leave many unpersuaded. First of all, due to the extreme scarcity of data (the North Korean government regards even international trade statistics as a state secret), Hwang is forced to rely in large part on the South Korean government’s published estimates of North Korean economic data which themselves are subject to controversy. Then, after constructing an estimate of North Korean national output in North Korean won terms, he faces the problem of converting this estimate into a common currency for comparison with the South. Faced with the North’s multiple exchange rate system, and the absence of independent estimates of the purchasing parity rate, Hwang converts his North Korean WUIZestimates into U.S. dollars utilizing the official (and presumably overvalued) exchange rate used for financial transactions. It is truly unfortunate that purchasing-power adjusted estimates do not exist. Because the South Korean government’s data are explicitly in market exchange rate terms, they likely understate North Korean national income for the same reasons that market exchange rate comparisons understate national income in all poor countries. Hwang’s conversion of his North Korean woyl estimates into dollars at the overvalued official financial rate presumably has the opposite bias, and results in a GNP series that implies that South Korean GNP per capita only exceeded the North’s in the mid 1980s (p.122), which is difficult to square with extensive anecdotal evidence about life in North Korea. Hwang rightly points out that GNP per capita may not be a good measure of welfare (if it is meaningful at all) in a centrally planned economy, and I would add that it is even less so in an economy which is both the world’s most autarkic and-according to the US Arms Control and Disarmament Agency-the world’s most militarized. It would have been desirable if Hwang had also acknowledged the extreme uncertainty surrounding these estimates, especially in light of the dismal record of economists in estimating the size of other centrally planned economies. Indeed, although Hwang disparages estimates of North Korean income using the physical indicators approach which can incorporate purchasing-power adjusted data, studies using this approach (Chun, 1992; Jeong, 1993; Noland, 1996) have generated estimates of North Korean GNP which: (1) explicitly incorporate forecast uncertainty; (2) show smaller differences in North-South per capita income than the official South Korean government estimates; and (3) exhibit less variation than Hwang’s estimates do when alternately the official financial and official trade exchange rates are used to convert his North Korean won estimates into a common currency (Noland, 1996, Table 7). Again, a little more humility about our collective ignorance would have been in order. Hwang then goes on to compare North and South Korean public finance. Again, his description of North Korean public finance is quite useful. However, I believe that
Book Review: The Korean Economies
151
he makes a serious error in interpreting North Korean budgetary expenditures as a true indication of resources devoted to the military. Setting aside the issue of whether additional military expenditures are hidden elsewhere in the budget, Hwang proceeds as though the budgetary expenditures represented the true opportunity costs of the resources devoted to the military. This would be questionable in a market economya conscript army doesn’t have to be paid the market wage-and it makes no sense in a centrally planned economy where prices are simply accounting conventions. According to this line of reasoning, the military is probably far larger than Hwang allows. Indeed, Eberstadt and Bannister (1992) estimate that fully one fifth of working age men are under arms. At the same time, the military operates a parallel economy outside the central plan (amounting to autarky-within-autarky), and as a consequence soldiers appear to perform activities that would be performed in the civilian sector elsewhere. The true size of the North Korean military remains highly uncertain. Hwang next discusses external relations. It is unfortunate that this book was, in effect, written in 1990. The USSR had been North Korea’s primary trading partner and aid donor, and the implications of the withdrawal of Soviet aid and the collapse of the Soviet economy are not really drawn out. Similarly, Hwang doesn’t really evaluate North Korea’s experimental liberalization in the form of the August 3rd movement (to provide consumer goods outside the central plan) and the opening of the Najin-Sonbong special economic zone to foreign investment. Hwang concludes the book with estimates of the prospective costs of unification. His notion of unification is based heavily on the German experience. Unification costs (born solely by South Korea) are calculated as the transfer in the form of capital investment from South Korea to North Korea needed to raise North Koreans’ per cupita incomes to the level attained in the South. These estimates are obviously a function of capital-output ratios and income levels, and imply an extremely large burden for the South. (Curiously, having argued for conversion of North Korean won incomes at the official financial rate earlier in the book, Hwang converts North Korean woy2 incomes to U.S. dollars at the lower official trade rate in this exercise reducing North Korean incomes, and increasing the calculated costs of unification.) Beyond the particulars (Is it really necessary to equalize per capita incomes? Wouldn’t some narrowing of the differential choke off migration in equilibrium?), this perspective is inadequate. Depending on how rapprochement between North and South Korea occurs, international sources of capital including the settlement of North Korean post-colonial claims against Japan, and lending from multilateral development banks, as well as private investment, all should be available-South Korea, with proper planning, will not have to shoulder this burden alone. At the same time, the emphasis on aggregate costs obscures what could be profound distributional implications for the South Korean economy of greater economic integration with the North. Greater economic integration with the North will presumably depress the wages of Southern low-skilled workers competing directly against their counterparts in the North, while higher skilled workers or capitalists may see
JOURNAL
OF ASIAN ECONOMICS
7(l), 1996
their factor incomes rise-this is simply the Stolper-Samuelson theorem at work. Likewise, if the demand for capital in the liberalized North pushes up Southern (or unified Korean) interest rates, the Southern traded goods sector may be disadvantaged, while the non-traded goods sector might experience a boom. The implications of economic integration with the North may vary greatly depending on whether you are a Southern textile worker or a Southern construction company owner. In a field that tends toward elevator analysis regurgitations of South Korean government statistics, Eui-Gak Hwang has written a useful and thought-provoking book on what will surely be an important issue in Asian economics over the next decade. Although obviously I do not agree with all aspects of his analysis, I would heartily recommend this book to anyone interested in the North Korean economy.
REFERENCES Chun, Hong-Tack. 1992. Estimating North Korea’s GNP by the Physical Indicators Approach. Korea Development Review, 14( 1): 167-225 (In Korean). Eberstadt, Nicholas and Bannister, Judith. 1992. The Population ofNorth Korea. Berkeley: Institute of East Asian Studies. Jeong, Kap-Yeong. 1993. Comparing the North Korean Level of Economic Development by Principal Components Analysis. In Young-Sun Lee (ed.), North Korea’s Reality and Unification. Seoul: Center for East and West Studies, Yonsei University (In Korean). Noland, Marcus. 1996. The North Korean Economy. Joint U.S.-KoreanAcademic Studies, forthcoming.
Hwang,
Clarendon
Press,
1993, pp. 347.
Review by Marcus Noland
The North Korean nuclear crisis, the death of long-time North Korean leader Kim IlSung, natural disasters, and growing evidence of economic hardship have focused world attention on developments in North Korea. Unfortunately, the nearly hermetically sealed nature of North Korean society is such that even with recent moves toward opening, our understanding of North Korea is uncertain at best. A professional colleague recently asked me to recommend to him some reading on the North Korean economy in anticipation of meeting a delegation of North Koreans. The Korean Economies was at the top of my list. The book is organized as a comparison of the North and South Korean economies, with a brief introductory chapter summarizing Korean economic history up until the division of the peninsula in the aftermath of the Second World War and the Korea War which soon followed. The remainder of the book follows Korean developments from the 1950s through the 1980s. The development of the South Korean economy has been documented in too many volumes to count, and this book does not make any major contribution in this regard. Instead, Hwang dedicates the bulk of the book to attempting to understand the North Korean economy, and given North Korea’s nature as a closed, secretive society, this is the book’s real strength. The second chapter of the book contains what is to my knowledge the best overview of North Korean economic institutions written in English. Hwang then goes on in the following chapter to put fragmentary data on North Korean output in material product terms into a standard national accounts framework to estimate North Korean national income. This is very important work. The domi-
M~KUS Nohd
l
Institute for International
Economics,
Journal of Asian Economics, Vol. 7, No. I, I996 pp. 149. ISSN:
I1 Dupont I52
Cir., NW, Washington.
DC
20036cmnoland@iie,com>. Copyright
1049-0078
149
0
1996 by JAI Press Inc.
All rights of reproduction
in any form reserved.
150
JOURNAL OF ASIAN ECONOMICS 7(l), 1996
nant (one is tempted to say the only) estimates of North Korean income in the public discourse are those produced by the South Korean government which are questionable for both methodological reasons and the obvious potential for politicization. Hwang’s attempt to estimate North Korean GNP, although heroic, is surely controversial, and will leave many unpersuaded. First of all, due to the extreme scarcity of data (the North Korean government regards even international trade statistics as a state secret), Hwang is forced to rely in large part on the South Korean government’s published estimates of North Korean economic data which themselves are subject to controversy. Then, after constructing an estimate of North Korean national output in North Korean won terms, he faces the problem of converting this estimate into a common currency for comparison with the South. Faced with the North’s multiple exchange rate system, and the absence of independent estimates of the purchasing parity rate, Hwang converts his North Korean WUIZestimates into U.S. dollars utilizing the official (and presumably overvalued) exchange rate used for financial transactions. It is truly unfortunate that purchasing-power adjusted estimates do not exist. Because the South Korean government’s data are explicitly in market exchange rate terms, they likely understate North Korean national income for the same reasons that market exchange rate comparisons understate national income in all poor countries. Hwang’s conversion of his North Korean woyl estimates into dollars at the overvalued official financial rate presumably has the opposite bias, and results in a GNP series that implies that South Korean GNP per capita only exceeded the North’s in the mid 1980s (p.122), which is difficult to square with extensive anecdotal evidence about life in North Korea. Hwang rightly points out that GNP per capita may not be a good measure of welfare (if it is meaningful at all) in a centrally planned economy, and I would add that it is even less so in an economy which is both the world’s most autarkic and-according to the US Arms Control and Disarmament Agency-the world’s most militarized. It would have been desirable if Hwang had also acknowledged the extreme uncertainty surrounding these estimates, especially in light of the dismal record of economists in estimating the size of other centrally planned economies. Indeed, although Hwang disparages estimates of North Korean income using the physical indicators approach which can incorporate purchasing-power adjusted data, studies using this approach (Chun, 1992; Jeong, 1993; Noland, 1996) have generated estimates of North Korean GNP which: (1) explicitly incorporate forecast uncertainty; (2) show smaller differences in North-South per capita income than the official South Korean government estimates; and (3) exhibit less variation than Hwang’s estimates do when alternately the official financial and official trade exchange rates are used to convert his North Korean won estimates into a common currency (Noland, 1996, Table 7). Again, a little more humility about our collective ignorance would have been in order. Hwang then goes on to compare North and South Korean public finance. Again, his description of North Korean public finance is quite useful. However, I believe that
Book Review: The Korean Economies
151
he makes a serious error in interpreting North Korean budgetary expenditures as a true indication of resources devoted to the military. Setting aside the issue of whether additional military expenditures are hidden elsewhere in the budget, Hwang proceeds as though the budgetary expenditures represented the true opportunity costs of the resources devoted to the military. This would be questionable in a market economya conscript army doesn’t have to be paid the market wage-and it makes no sense in a centrally planned economy where prices are simply accounting conventions. According to this line of reasoning, the military is probably far larger than Hwang allows. Indeed, Eberstadt and Bannister (1992) estimate that fully one fifth of working age men are under arms. At the same time, the military operates a parallel economy outside the central plan (amounting to autarky-within-autarky), and as a consequence soldiers appear to perform activities that would be performed in the civilian sector elsewhere. The true size of the North Korean military remains highly uncertain. Hwang next discusses external relations. It is unfortunate that this book was, in effect, written in 1990. The USSR had been North Korea’s primary trading partner and aid donor, and the implications of the withdrawal of Soviet aid and the collapse of the Soviet economy are not really drawn out. Similarly, Hwang doesn’t really evaluate North Korea’s experimental liberalization in the form of the August 3rd movement (to provide consumer goods outside the central plan) and the opening of the Najin-Sonbong special economic zone to foreign investment. Hwang concludes the book with estimates of the prospective costs of unification. His notion of unification is based heavily on the German experience. Unification costs (born solely by South Korea) are calculated as the transfer in the form of capital investment from South Korea to North Korea needed to raise North Koreans’ per cupita incomes to the level attained in the South. These estimates are obviously a function of capital-output ratios and income levels, and imply an extremely large burden for the South. (Curiously, having argued for conversion of North Korean won incomes at the official financial rate earlier in the book, Hwang converts North Korean woy2 incomes to U.S. dollars at the lower official trade rate in this exercise reducing North Korean incomes, and increasing the calculated costs of unification.) Beyond the particulars (Is it really necessary to equalize per capita incomes? Wouldn’t some narrowing of the differential choke off migration in equilibrium?), this perspective is inadequate. Depending on how rapprochement between North and South Korea occurs, international sources of capital including the settlement of North Korean post-colonial claims against Japan, and lending from multilateral development banks, as well as private investment, all should be available-South Korea, with proper planning, will not have to shoulder this burden alone. At the same time, the emphasis on aggregate costs obscures what could be profound distributional implications for the South Korean economy of greater economic integration with the North. Greater economic integration with the North will presumably depress the wages of Southern low-skilled workers competing directly against their counterparts in the North, while higher skilled workers or capitalists may see
JOURNAL
OF ASIAN ECONOMICS
7(l), 1996
their factor incomes rise-this is simply the Stolper-Samuelson theorem at work. Likewise, if the demand for capital in the liberalized North pushes up Southern (or unified Korean) interest rates, the Southern traded goods sector may be disadvantaged, while the non-traded goods sector might experience a boom. The implications of economic integration with the North may vary greatly depending on whether you are a Southern textile worker or a Southern construction company owner. In a field that tends toward elevator analysis regurgitations of South Korean government statistics, Eui-Gak Hwang has written a useful and thought-provoking book on what will surely be an important issue in Asian economics over the next decade. Although obviously I do not agree with all aspects of his analysis, I would heartily recommend this book to anyone interested in the North Korean economy.
REFERENCES Chun, Hong-Tack. 1992. Estimating North Korea’s GNP by the Physical Indicators Approach. Korea Development Review, 14( 1): 167-225 (In Korean). Eberstadt, Nicholas and Bannister, Judith. 1992. The Population ofNorth Korea. Berkeley: Institute of East Asian Studies. Jeong, Kap-Yeong. 1993. Comparing the North Korean Level of Economic Development by Principal Components Analysis. In Young-Sun Lee (ed.), North Korea’s Reality and Unification. Seoul: Center for East and West Studies, Yonsei University (In Korean). Noland, Marcus. 1996. The North Korean Economy. Joint U.S.-KoreanAcademic Studies, forthcoming.