North Korean Economy

Posted January 1, 2000

Categories: Articles, Korea

The Seaview Hotel is the North Korean version of the “field of dreams.” The nearly completed luxury hotel and casino overlooks a beach along Rajin-Sonbong, the free-trade zone in the northeast corner of North Korea bordering China and Russia. It is not a particularly well-known or exciting place. Not yet, at least. The zone is well-suited for processing seafood, refining oil, and manufacturing chemical fertilizer, but not for entertaining tourists. The owners of the hotel, a Hong Kong conglomerate called the Emperor Group, have heard the same voice that inspired the baseball fan played by Kevin Costner in the movie Field of Dreams: “build it and they will come.” A slow trickle of gamblers are making the trip by dirt road and staying at a temporary quarters while the main building is being finished for a summer 2000 opening. And so the Seaview Hotel stands, like the first Las Vegas casino alone in the Nevadan desert. With the help of the Emperor Group, North Korea awaits gamblers, capitalists, and the large-scale investments that can make Rajin-Sanbong a foreigners’ paradise.
Twenty years ago, the Seaview Hotel would not have been imaginable, certainly not in North Korea or in communist China. It would not even have been possible in South Korea or Japan. In those days, the barriers preventing foreign direct investment into East Asia were seemingly impregnable. The countries in the region, whether they called themselves capitalist or communist or something in between, were deeply suspicious of transnational corporations and very reluctant to give over control to foreigners. Even Japan and South Korea regulated their markets in such a way to boost local production and maintain control of their manufacturing and service sectors. This do-it-yourself ethos, embodied in the so-called Asian model of development, even inspired U.S. politicians and economists to consider injecting some “industrial policy” into the American economy.
Today in East Asia, however, foreign direct investment is pervasive, even reaching into an explicitly anti-capitalist country such as North Korea. The “Asian model of development,” meanwhile, is besieged on all sides: by trade negotiators and transnational corporations from the outside and by venture capitalists and democracy advocates from within. The state, formerly the primary architect of development, has ceded ground to the market. East Asia, in this regard, is no different from other regions of the world buffeted by the forces of globalization. But East Asia started out with stronger state intervention in the economy. Twenty years ago, the countries of East Asia believed that good fences (to keep out imports and foreign competition) made good neighbors. Today, the fences are coming down and it’s not just the neighbors who are checking out the goods.
Some new developments in the region are positive: lower prices for consumers, greater transparency in government-business relations. But not everyone is happy with this brave new East Asia. It is not, after all, win-win economics. The fall of the “Asian model” – of which the recent financial crisis seemed to be a contributing factor – has given way to a kind of “creative destruction” that is creating wealth for some and destroying the livelihoods of many.
But are reports of the death of the “Asian model” perhaps a little premature?

The Rise and Fall of the Asian Model

In 1979, U.S. pundit Ezra Vogel declared Japan to be Number One. By the mid-1980s, South Korea was poised to take off and become what U.S. economist Alice Amsden called “Asia’s Next Giant.” Taiwan, Hong Kong, and Singapore were all enjoying near double-digit growth. In 1993, the World Bank had officially dubbed the phenomenon the “East Asian miracle” in a report on the region from Japan to Thailand. A couple of decades of economic expansion in East Asia was enough for pundits to declare the 20th century the “Pacific century.”
The original cause for all this enthusiasm was Japan’s stunning recovery from the devastation of World War II. Drawing from the traditions of German corporatism, Soviet communism, Hamiltonian industrialism, and their own Meiji-era development, the Japanese government erected trade barriers, protected local industries, and provided subsidies to key sectors. The success that ensued was not by and large export-driven (particularly at the beginning) but relied on new manufacturing strategies, high productivity, an expanding domestic market, and a very high rate of savings. Japan also took advantage of the U.S. military umbrella and the economic boon of the Korean war. And Japanese success increasingly relied on a regional assembly line that provided access to cheaper labor and proximity to raw materials. The growth rates of the 1960s – which averaged over 11 percent – lent credence to the notion that the Japanese model was the only vehicle that could transport developing countries into the developed world with any degree of equity.
It was South Korea and the other dragons – Taiwan, Hong Kong, and Singapore – that translated the Japanese example into export-led growth. South Korea’s corporations (or chaebols) enjoyed considerable support from a succession of authoritarian governments determined to make the country a leader first in steel and cement, then in cars and boats, and finally, in more democratic times, semiconductors and computers. In 1960, South Korea’s per capita GNP put it at roughly the level of Ghana; by 1992, thanks to deliberate government policy, South Korea had become the world’s tenth largest economy. And its growth, confounding the economists, was accompanied by greater income equality rather than less. The United States needed strong anti-communist powers in Asia; rapid state-led growth fit the bill.
Of course the communist countries, too, were pursuing a variant of the Asian model. In the first decades after their internecine conflict, the North Korean and South Korean governments both formulated five-year plans, restricted imports and emphasized local production, and picked likely industrial winners (North Korea, for instance, put its chips in machine building, metal processing and a synthetic fiber called vynalon). Equally suspicious of China and the Soviet Union, North Korea raised self-sufficiency (or juche) to a supreme virtue. China, meanwhile, switched in the late 1970s from an autarkic version of the Asian model to a market-oriented one, borrowing liberally from the experience of its capitalist neighbors by relying on exports and maintaining strict controls on financial markets.
The countries that followed some variant of the “Asian model” shared certain characteristics beyond simply state-guided economic development. East Asian countries were not democratic (including Japan, a virtual one-party state). Growth came at the expense of the environment (as it had virtually everywhere else), and independent labor unions were suppressed. (As for the applicability of this model in Africa or Latin America, Walden Bello and John Cavanaugh have argued persuasively that the world market can only absorb so many dragons for there just aren’t enough consumers to buy all the new exports.)
Everybody loves a winner, and while the economies of East Asia enjoyed double-digit growth rates, the few critics could be accused of sour grapes. But then the Japanese bubble burst. Since 1990, the Japanese economy has limped along on life support, despite a decade of government stimulus packages amounting to $1 trillion. Then came the regional shock of the 1997 financial crisis. In East Asia, South Korea was hit hardest – its economy contracted 5.8 percent in 1998. The pundits declared the crisis a failure of the South Korean model: government and business colluded, banks engaged in the “moral hazard” of making unwise loans, and chaebols indulged in unwise business investments because of the lack of foreign competition. The neo-liberals, confronted for so many years by the successes of the Asian model, were waiting for just such an opportunity. The International Monetary Fund (IMF) swooped in with a structural adjustment program. Foreign corporations moved in to buy up enterprises at bargain prices. And the richer countries argued that less regulation and more privatization were the answers to the problem.
Rather than a failure of the state, however, the crisis in South Korea was a failure of the market. The rapid liberalization of the financial sector – an expansion of the market at the expense of the state — had resulted in bad loans and high debt-to-equity ratios in businesses. And the “moral hazard” of unwise loans is a feature of unregulated free markets, as the Savings & Loan crisis in the United States attests.
But the temper of the times has changed and laissez-faire principles have become the new consensus. According to this dominant view, markets (in direct contrast to states) can do no wrong. No one in Washington these days talks about “industrial policy” or following the Asian example. Over the past several decades, as Daniel Yergin and Joseph Stanislaw have approvingly chronicled in The Commanding Heights, the market has steadily encroached on the domain of the state through deregulation, privatization, and budget cuts. What once exercised so much control over so many different economies – in New Deal America, in Moscow and Beijing, among the Non-Aligned Nations, and finally in the heart of East Asia – has been boxed into playing a mere referee role.
The corporate sector has certainly collaborated with multinational financial institutions in whittling away the state’s power. So have activists and NGOs (often unwittingly) loosened state control of the economy by demanding greater democracy and decentralization. But perhaps the greatest challenge to the state has come from the state itself. All over the world, states have sold off their property, lowered trade barriers, deregulated markets – in other words, divested themselves of various mechanisms of political control over the economy. Hans Magnus Enzensberger once described the Soviet leader Mikhail Gorbachev as a demolitions expert for his political skills in undermining the structure over which he presided. States all over the world have been involved in a similar process of calculated auto-destruction.
The decline in importance of the state has profound implications for East Asia. Neo-liberals are interpreting both Japan’s decade-long stagnation and the 1997 financial crisis not as downturns in an economic cycle but as the end of the Asian model itself. According to economist Richard Katz, the system that Japan built is “the system that soured.” State-led development may have been useful for catching up to the pack (not unlike how Stalin used the command economy to pull the Soviet Union kicking and screaming into the 20th century). But now that Japan and the four dragons have climbed the ladder of success, Katz argues that they should kick away that very same ladder. All countries need to go through such a stage – as the U.S. government once subsidized canals, railroads, oil (and more recently, by other methods not acknowledged by neo-liberals, Chrysler, Boeing, and the Internet) – and now it’s time for East Asia to grow up. Now it is time, the neo-liberals are insisting, for East Asia to change its ways.

Economic Renaissance?

And, indeed, East Asia is changing. According to the mainstream economics magazines, such as The Economist or the Far East Economic Review, the region is experiencing an economic renaissance, a spring after the winter of Japanese stagnation and the sharp chill of the financial crisis.
Tokyo, for instance, feels these days something like Warsaw or Budapest of the 1990s. The old system is breaking up; foreign capital is pouring in; consumers are confronted with more choices; entrepreneurs are creating whole new areas of business. In the Tokyo of today, shoppers can drink lattes at Starbucks, sign up for Internet service with AOL, and open accounts at Fidelity’s equity mutual fund. Foreign direct investment, which was very low by international standards, doubled from 1997 to 1998 and was expected to double again in 1999, with big outfits such as Merrill Lynch, General Electric, and Renault entering the market. In what the Japanese call “price destruction,” foreign competition is challenging the high prices traditionally charged for key commodities such as telephone use.
The Japanese economy is currently suffering from bi-polar syndrome. On the one hand, the long recession has been hard on traditional sectors. Old standbys like Mitsubishi Heavy Industry are taking a beating. Japanese corporations are phasing out the traditional “salaryman” positions with their lifetime guarantees. But Internet start-ups like Softbank are booming, and so is the Tokyo stock exchange (not unlike the New York stock exchange’s e-inflation). A new set of entrepreneurs are riding the information technology wave, setting up e-commerce ventures, new software companies, and getting training from kindergarten (pre-schoolers learn about running an enterprise at the new Sun Kids Classroom) to graduate school (at a new school for entrepreneurs called Attackers). Ichizo Oharu, an economic advisor to Prime Minister Obuchi and key “demolitions” expert, is pushing for more deregulation and privatization. Out with the old, in with the new: Oharu wants to introduce “shock therapy” – which Poland struggled through in the early 1990s – to get the Japanese economy back into growth mode.
South Korea, in contrast, has already endured a course of shock therapy administered by the IMF after the financial crisis. Now, the experts are speaking of a full recovery. The shopping malls in Seoul are certainly packed with shoppers. In 1999, the economy posted around 10 percent growth, the unemployment rate has backed down from nearly 9 percent to around 5 percent, the inflation rate has remained low, foreign exchange reserves have been replenished, and the government’s bonds have been upgraded. Here, too, information technology is hot, such as new e-commerce ventures like, a free Internet telephone service.
The neoliberals are similarly optimistic about China, where the government is currently gearing up for entry into the World Trade Organization. Market enthusiasts predict that WTO entry will triple China’s share of world exports in ten years. The Chinese economy grew so fast in the 1980s and 1990s that some declare that it is today the world’s second largest. Shanghai is a new world financial center. Millions of Chinese have been lifted out of poverty, and the Chinese government has privatized so rapidly that the government’s share of the Gross Domestic Product is now lower than that of Sweden, France, or Germany. So much foreign capital has flowed into the country that the majority of exports are made in foreign-owned factories (in 1994, China absorbed nearly $34 billion in foreign direct investment, compared to Japan’s mere $100 million). Although growth has not been as great in the last couple years, the Chinese government is hoping that WTO entry will bring back the heady days of the mid-1990s.

The Other Side of the Story

From Tokyo to Beijing, the neo-liberals are as triumphant after the Asian financial crisis as the Cold War liberals were after the collapse of the Berlin Wall. The crisis not only revealed the cracks in the edifice, it has also enabled outsiders to come in with their new ideas. But this triumphalism can only be maintained by a perverse form of tunnel vision. The neo-liberals are conveniently ignoring the millions of “losers” in the new East Asia. Privatization, mergers and acquisitions, and outsourcing have all combined to downsize the labor forces in the region. None of the governments in the region has developed strong social safety net (previously, job security and social bonds prevented people from falling out of the economy). Nor is there a developed social service sector to pick up the slack. The Asian model produced reasonably equitable growth (at least in Japan and South Korea). The erosion of this model has meant an enormous increase in inequality.
In Japan, for instance, one million full-time jobs have been lost since 1998. The unemployment rate reached a record 4.9 percent over the summer of 1999. The new entrepreneurial start-ups can’t begin to absorb these laid-off workers. Nor can Starbucks or Toys R Us. Secure well-paid Japanese jobs are being replaced by part-time jobs. Some have fallen out of the economic system, and the homeless have become more visible in parks in the major cities. Others are opting out altogether. There were a record 31,700 suicides in Japan in 1998, one quarter of them attributed to unemployment.
In South Korea, 1.5 million workers were laid off during the financial crisis. One million remain out of work. Women, as the first fired, have born the brunt of the crisis. Here, too, labor has become more “flexible”: less secure, less well-paid, less unionized. The proposed solution to the problem – information technology – is one of the worst culprits in terms of relying on temps, subcontractors, and outsourcing. Although Korean companies posted record profits in 1999 (excluding the bankrupt Daewoo and its affiliates), workers have seen very little of the profits. Today in South Korea, the top ten percent of the population is 8.5 times better off than the bottom ten percent – compared to only 6.9 times two years ago. The income gap between white collar professionals and blue collar workers is widening as well.
In China, the market has created an enormous gulf between rich and poor. Over 100 million workers are floating around the country in search of jobs. Working conditions in the free trade zones are frequently miserable and sometimes deadly. Those still employed in the state sector are often not paid and when they are, it’s barely survival wages. And, as journalist He Qinglian points out in her book China’s Pitfall, the market transition has allowed a small number of private citizens to siphon off vast pools of public wealth – through privatization, preferential state bank loans, and outright theft.
As in Eastern Europe, populations whose security has been dependent on a strong state are particularly vulnerable when the state begins to shrink. It has been said that a state should be measured by its capacity to care for the weakest members of society. In their attempt to integrate more fully into the world economy, the states of East Asia have seemingly forgotten about their responsibilities to the most vulnerable. Out with Confucianism and in with Social Darwinism.

New Openings

Not all the changes wrought in East Asia have been negative. Given the manifold flaws of the Asian model, it is no surprise that loosening up the system has yielded some important benefits. During the heyday of Korea’s economic growth, for instance, banks, governments, and business formed a cozy triangle rife with corruption. Both authoritarian leaders and democratic politicians in the 1990s profited enormously from kickbacks and sweetheart deals. Civic activists have used the financial crisis as an opening to address corruption and croneyism. The watchdog group People’s Solidarity for Participatory Democracy has led a shareholder revolt against the chaebols – asserting civic rights in an arena traditionally dominated by the rich and powerful. At the political level, too, there is ferment. This past January, 470 civic groups published a list of the most corrupt Korean politicians in the hopes of rooting out the remnants of authoritarianism.
In Japan, foreign competition is not simply driving down prices for consumers. It is going to heart of the collusion between government and business that have kept prices high. For instance, the politicians who have guaranteed high rice prices (by shutting out foreign competition) receive handsome kickbacks in the form of campaign contributions. Foreign competition can serve as an external lever to pry apart this collusion.
The increased flows of capital also have the potential for improving certain geopolitical relationships. In the 18th century, economists spoke of trade as le doux commerce for its role in softening the relations between peoples and countries. As a general principle, this is flawed, since trade often sharpens conflicts rather than softening them (consider US-Japanese relations in the 1980s). However, in certain cases, such as on the Korean peninsula, the principle applies.
North Korea, in a desperate economic crisis because of the collapse of the Communist trading bloc, the loss of subsidized energy and various natural disasters, has for more than a decade been attempting to attract foreign capital. In 1984, the North Korean government passed a business-friendly joint venture law; in 1991, it created the Rajin-Sonbong free trade zone. But with a few exceptions, like the Emperor Group, foreign capital has stayed away. North Korea defaulted on loans in the late 1970s. Its infrastructure (roads, telecommunications) is in terrible shape, and energy supplies are inconsistent. The workers are hardworking and often well-trained, but better “deals” (read: lower wages) can be had in China, Vietnam, or Cambodia.
One set of investors, however, is motivated by something more than just profit: South Koreans. Despite a divide much sharper than the one that divided the two Germanies, South Korean businessmen are traveling to the North far more frequently in the 1990s. As a result of President Kim Dae Jung’s engagement policy with the North, trade has been increasing, rising by 50 percent in 1999 over the previous year. In the corporate field, Hyundai has been at the head of the pack with a tourism project that brings South Korean passengers (over 150,000 so far) by boat to Mt. Kumgang in the north. Hyundai is now setting up the first South Korean office in Pyongyang in order to build a gymnasium named after the corporation’s founder, Chung Ju Yung.
The Cold War divide is so entrenched and so dangerous in East Asia that anything that “softens” the relations between North and South Korea would seem worthwhile. But the trade is not taking place between equals. After being roughly equal until the 1970s, the South Korean economy is today roughly 20 times larger than that of North Korea. North Korean factories are largely quiet and its agriculture is not producing enough to feed the population. North Korea is so desperate for hard currency that it has imported 10,000 tons of waste at $200 a ton. It is difficult to assess how much Hyundai is making huge investments in the North out of national feeling or out of consideration for a future bottom line.

Looking into the Future

Is the Asian model dead?
First of all, the governments in East Asia have not privatized themselves out of existence. The previous practice of “picking winners” is still in effect. This time, the Japanese and Korean governments are subsidizing information technology industries. Some of the Japanese stimulus money is going to pork barrel, some to the so-called welfare industries (construction, chemicals). But some of it is going to create a Super Internet. And the Ministry of International Trade and Industry (the legendary MITI) has invested 10 billion yen into new ventures, many of them in information technology. The South Korean government, too, is aiming to build a Silicon Valley in Seoul itself. It expects to create 35,000 ventures and over a million new jobs. To encourage e-commerce, the government is the government is beginning to make its purchases on-line. The Chinese government is pursuing a similar tack of promoting information technologies (despite the potential political risks) as well as biotechnology to increase agricultural yields. It is also providing financial support to key outfits such as Haier and Baoshan Iron and Steel.
Contrary to the received neo-liberal wisdom, successful states all have industrial policies. Sometimes the policies come under different headings – R & D, military procurements, corporate tax policy, overseas investment credits. In this sense, the Asian model is alive and well all over the world.
In East Asia, however, the Asian model is certainly evolving. Take the question of nationalism. In his 1979 book on Asian nationalism The Widening Gulf, journalist Selig Harrison argued that U.S. corporations should never expect to gain controlling interests in Asian firms: nationalism anti-imperialism, or just plain anti-Americanism would never allow such a foothold. Today, U.S. firms and other transnationals own controlling shares of properties from downtown Tokyo to the farthest reaches of China. Nationalism and anti-Americanism, while present in pockets in the region, have been largely delinked from economic policy.
A second ideological component of the Asian model has been Confucianism, a tradition strong in Japan, China, and the two Koreas. Confucianism has suffered a roller coaster ride of popularity in the 20th century: dismissed by Weber as not conducive to capitalism, praised in the postwar era for promoting hard work and social cohesion, and once again dismissed in the 1990s for encouraging a dulling conformity and a rigid caste system. Free trade, popular culture, and democracy are the new acids at work dissolving Confucianism in East Asia, eating away at the bonds of family loyalty that largely substituted for a public welfare system.
Without nationalism and Confucianism, what kind of Asian model will exist in the 21st century?
That will depend a great deal on actors in the region other than the state. Independent trade unions, for instance, may play a big role in shaking up the systems in a positive way. One of the most visible labor forces in the world is in South Korea. They dropped 5.5 percent in membership in 1998 and lost some key strikes such as the subway strike in April 1999. But they have won the right to participate in politics and recently launched a new labor party. Independent labor unions, as they emerge, will similarly have a great deal of influence on the future path of the Chinese economy. It will take the organized strength of labor unions and other social organizations to remake the East Asian state.
Because, in the end, the East Asian state is actually not strong enough. In the new globalized economy, states have to be strong enough to protect their populations from the adverse effects of free trade in goods, services, and capital (it is no contradiction that Sweden, Austria, and the Netherlands – all very open economies – also have the strongest welfare states in the world, even with recent neo-liberal changes). The new “flexibility” of labor is eliminating social protections once guaranteed at the workplace. Private savings, the source of so much of the capital that fueled the growth of past decades, will not be sufficient to cover all the social needs of the population. What South Korea began to construct in the wake of the financial crisis – a true social safety net – will likely be the future of the East Asia.
The future will also be greater regionalism. So far, there is no economic grouping in East Asia. In the wake of the 1997 financial crisis, Japan provided considerable short-term aid to help the battered economies. It also challenged the IMF in an attempt to create a stronger regional economic identity. The “Asian Monetary Fund” that Japan proposed in the fall of 1997 would have protected economies in the region from speculative attack. The U.S. and the IMF, unhappy at giving Japan a larger role in the region, vetoed the plan. While replacing US economic hegemony with Japanese hegemony may not seem much of an improvement (Japan aid is often connected to buying Japanese products; loans are public money underwriting private losses), Japan is in fact a great deal more tolerant of industrial policy and state intervention in the economy. Such a yen-based regionalism promises to be more equitable than free trade arrangements such as NAFTA.
The new East Asian state – democratic, environmentally sensitive, social welfare-oriented, regionally connected – will no longer play catch up to the West. Shaped in no small part by non-state actors like unionists and social activists, a new East Asian state could serve as a model to be emulated, not only in the developing world, but in the developed one as well.

Dollars and Sense, 2000

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