Commentary and summary on Ruediger Frank’s “Can economic theory demystify North Korea?” Korea Review of International Studies, Vol. 9, No. 1 (2006), 3-26.
The debate over the contributions of Asian values on the post-war economic development of the region has been muddled since the 1997/8 financial crisis – but the discussion is inexorably revisited as adherents of Max Weber’s theory that capitalism is sustained by specific cultural values attempt to resolve the ramifications of this perspective on non-Western societies.
The resulting arguments, variations on how democracy and capitalism must be done away with (or heavily tailored) because they are incompatible with a certain nation’s identity, occasionally gather a large following. But they are all fundamentally flawed – because dependability (through restraint) and solidarity (ameliorating the polarizing effect of market competition), core elements of Protestant ethics which Max Weber cited as underpinning Northern Europe’s economic success in the late 19th century, are socio-economic factors that are valued universally for their intrinsic value.
At the same time, Simon Tay, Chairman of the Singapore Institute of International Affairs, argued that pre-crisis elites in Asia advanced nationalism after the financial crisis as a vehicle of reasserting their influence in the country against external forces (such as foreign investors and the IMF). In addition, as the public’s memory of rampant corruption, cronyism, nepotism, and other causal factors of the crisis began to fade, the displacement of anticipated entitlements led to the public joining reactionary elites against reforms which are characterized as having been borrowed from abroad without taking into account the unique characteristics of the individual nations and cultures.
Why bring this up on a blog dedicated to North Korea’s economic security?
Because the debate over so-called “Asian values” probably influences the way we approach North Korea more than any other country in the region. Pyongyang’s longevity and lack of transparency frequently cause visitors to approach the country with expectations of uniqueness that color their analysis (ex. all of Vice’s coverage of North Korea). The DPRK is certainly a product of a very unique set of historical circumstances, but more tangible and constructive conclusions can be gained from observing the country with the presumption that it is inhabited by people who bear the same basic economic and social characteristics as individuals elsewhere.
This is precisely what Dr. Ruediger Frank asks us to do in his 2006 article “Can economic theory demystify North Korea?” A very concise and informative primer for approaching the DPRK with a fuller perspective.
Dr. Frank’s main argument is that because North Korea’s economic development during the Cold War and its cataclysmic economic meltdown in the 1990s can be explained through conventional economic theories, thus Pyongyang should be analyzed as any other conventional state. While deceptively simplistic, Frank is laying out the intellectual grounds for applying Western methodologies and invoking case studies of other countries in the context of North Korea’s socio-economic and political problems.
But attempting to contextualize North Korea according to conventional economic theories is not an easy task. For starters, the country is certainly underdeveloped, but it exhibits low population growth, a highly urbanized society with high literacy, and a national economy that does not emphasize the primary sector – all classic characteristics of a developed economy. Nonetheless, Frank contends that standing theories can be utilized to explain the DPRK ‘s case with “acceptable results.”
Here are some of Frank’s connections:
According to Adam Smith and the classical perspective on economic development, the political order cannot restrain the underlying individual motive to maximize profit. Therefore, in order for the North Korean economy to allocate resources more efficiently and grow, factors that limit the people from acting on rational motivations must be removed. In the case of North Korea, barriers to the people’s access to the market (questionable legality, limited access to foreign currency, deeply unreliable financial system, etc) constitute this constraint.
From the Keynesian perspective as well, the key obstacle to economic growth is the people’s lack of access to the marketplace. Robust commercial activity, legally sanctioned by the state, would provide the government with an “arsenal of information” which in turn could be used by the state to effectively engage the market and boost aggregate demand.
The urgency of ensuring the people’s access to information would also be emphasized by Oliver Williamson, Douglas North, and Mancur Olson of the New institutional economics school. The absence of property rights and other constraints increase the transaction cost in the society, which include expenses for search of information, bargaining, policing, and enforcement of contracts. Meanwhile, the inefficient economic structure is maintained by an interest groups that maintains its political and economic privilege by monopolizing the channels of information and preventing reforms from going forward.
The New institutional economics school’s critique of resource-hoarding elites mirrors Arthur Lewis’ criticism of rich landowners and monopolists in developing economies who do not reinvest their wealth in the economy and engage in unproductive economic behavior such as conspicuous consumption. Lewis’ recommendation was to initiate land reforms and tax the rich, which would allocate purchasing power to farmers and provide the government with capital to support industrialists. Interestingly enough, this is exactly the path that South Korea took through its aggressive land reforms under Syngman Rhee in 1952 and tax reform in 1963.
North Korea’s overly ambitious industrialization plans in the 1950s and 60s can also be understood within the context of contemporary economic theories:
It was vogue during the early post-war decades to believe that industrialization will automatically bring prosperity. Development economist Paul Rosenstein-Rodan advocated what he termed the “Big Push” – investment by developing economies in core industries, which in turn could spark a synergetic chain reaction across sectors as the growth of one sector fosters a market for another sector’s goods.
Of course, because of limited resources and competing demands of defense, North Korea did not follow this path, instead Pyongyang focused on building up its heavy industries – but this too was sanctioned by some contemporary economists. Industries like steel manufacturing were considered a sine qua non in traditional economic development theory and successful developmental states like South Korea under Park Chung Hee and Spain under Francisco Franco developed heavy industries. Furthermore, Albert Hirschman in 1958 strongly advocated for developing economies to deliberately unbalance the investment to maximize the productivity of low-levels of savings. He changed his mind in 1981 when he realized that serious distortions in the market could lead to other sectors breaking down due to scarcity of resources and siphoning, inducing negative growth. And yet Alice Amsden argued in 1989 that South Korea achieved its economic miracle through a state-led “Big Push” that purposefully unbalanced the market.
It is evident, given the myriad of opinions about the roots of underdevelopment and strategies towards growth, many economists watching North Korea’s push for heavy industries during the 1960s would not have foreseen the economic catastrophe ahead. Nor could economists anticipate micro-level issues such as personnel training and other shortfalls in North Korea’s economic management that led to a rapidly diminishing growth trajectory.
There was also the 1950 hypothesis by Raul Prebisch and Hans Singer which argued that, since price of primary goods will fall faster than the price of imported finished goods, a developing economy should strive to transform the economic structure to increase export of manufactured goods and reduce that of primary goods. This would require the state to make strategic investments in industries producing export goods at the expense of further developing the primary sector despite its more immediate importance to the national economy.
An interesting addendum to this theory is that Dr. Frank uses the Prebisch-Singer hypothesis to advocate for unrestricted inflow of aid, which he believes will strengthen domestic demand and contribute to overall development regardless of who the primary beneficiaries are. On the other hand, Marcus Noland and Stephan Haggard strongly advocate for aid to be given under strict conditions. This is a debate that continues to rage between researchers, engagers, and governments.
One fascinating application of theories by Dr. Frank in looking into North Korea’s future involves Fernando Cardoso and Enzo Faletto’s theory that a developmental state could use multinational corporations to extract the necessary capital for development because foreign enterprises require the state to provide access to the market or permit the exploitation of domestic resources – this then creates space for the state to extract resources from corporations to advance development. This idea leads us to consider how further development of Kaesong industrial region and other special economic zones in the DPRK might affect Pyongyang’s financial capabilities. In fact, North Korea might be considering economic reform as a means to bolstering its authority, but looking for means to retain the old political order.
Of course both China and Vietnam provides recent examples of communist state transitioning to a market economy without surrendering the political structure. And as Dr. Frank underscores, North Korea is already beginning to change. As Rodong Sinmun announced in 2003:
In the past, it was recognized as an unbreakable formula in socialist politics to put forth the working class. However, the theory and formula that was generated one and a half centuries ago cannot be applicable to today’s reality… Nation is [positioned] over class and stratum, and the fatherland is over idea and ideology.
This shows that pursuit of national interest or the preservation power are universal interests that cuts across time and space.
As the theories and their application to case of North Korea show, Pyongyang did not pursue economic theories that were wholly unique nor is it today a victim of economic malaise that cannot be explained. North Korea’s ill-condition is knowable to the trained eye and its geographic and cultural characteristics do not change the diagnosis.
Clearly from both an international political economy and developmental economics perspective, North Korea is a country that behaves not too dissimilarly from other societies and economies. This is not to suggest that Pyongyang does not operate with its own worldview and set of objectives. But it does calculate its actions based on costs and benefits – and that critical feature, rationality, points to a human mind beneath the veil of juche and isolationism.