Posted by: B Gourley | October 18, 2007

The Sad Story of North Korea

It is hard to imagine a better example of the role that governance (good or bad) plays in the economy than can be seen on the Korean Peninsula. The two Koreas are like twin siblings in which one twin is a veritable genius and the other is completely retarded. South Korea is one of the few examples of the convergence that macroeconomic growth models predict, but which has been decidedly the exception in the real world. Convergence referring to faster than average growth in developing countries that can allow them to catch up to developed countries. South Korea has propelled itself relatively swiftly into the ranks of industrialized nations, and has made itself a top-teir competitor in the global economic arena.

North Korea, on the other hand, has a Gross Domestic Product (GDP) per capita in line with the poorest nation in the Western Hemisphere (Haiti), and below which, with very few exceptions, lie only countries that are war-torn, sub-Saharan African, or both. In the early days of the Cold War, the North was the more industrially developed portion of the peninsula, but decades of rule marked by incompetence, narcissism, and gangsterism have left the economy barely functioning.

Stories of North Korea’s famously bad decision-making are ubiquitous. The example with the most significant effect is probably the relatively massive investment (as a percentage of GDP) that the DPRK has made in its military, an expenditure that crowds out far more useful spending on things like innovation, economic development, and infrastructure. About a fifth of the labor force is tied up in military and security related endeavors. Of course, the fact that the military economy includes many components that would be in the realm of private enterprise in most nations, and that military forces are used for many tasks outside the bounds of provision of security, make any figures difficult to compare with other nations. Estimates of military spending as a percentage of GDP range from about 8% to 20%, and so even the low end is quite high.   

However, there are much more amusing examples of Korea’s ill-considered economic policy. The famous 105-story, 3,000 room hotel that sits uninhabited and windowless in Pyongyang is an intriguing case. Despite the restricted flow of visitors that would make such a large hotel useless most of the time, the fact that it was done so poorly as to be uninhabitable makes it all the more confusing. While it was clearly meant to stand as a glorious example of what the Kim Dynasty could achieve, because the craftsmanship was so poor, it stands as a monument to ineptitude. Windows could not be put in because none of the sills are level.

The role that Kim Jong Il’s narcissism plays in DPRK decision-making has been noted on many occasions. The case of the fake remains that North Korea submitted to Japan (stating that they were the ashes of hostages captured in the 70s and 80s) is a prime example of this narcissism in action. Kim, thinking he was smarter than everybody else, likely came to the conclusion that he could easily pull off the deception. Another likely example is North Korea’s claims attributing  statements about having a uranium enrichment program to translation error. In 2002, a North Korean alledgely told Ambassador James Kelly that the DPRK did have a uranium enrichment program, but they later recanted saying they had been misunderstood. It was no surprise that they had pursued the idea of uranium enrichment, that was known from the A.Q. Khan case. However, it wasn’t known if they had done anything with the plans and components sold to them. It really remains to this day an unknown.  

Returning back to the theme of the initial paragraph, the table below shows a shocking disparity between the North and the South. 

Comparative Statistics

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