The chief characteristic of under-development in the modern era has been the prevalence of subsistence farming and high concentration of manpower captured in the primary sector. As an economy grows and develops more robust industries, there tends to be a shift in manpower from the countryside into the cities.
It is this observation on the relationship between the modern industrial sector and the traditional rural sector that led Sir Arthur Lewis (1915-1991) to recognize the reallocation of labor as the key driving force in development. In his seminal 1954 article Economic Development with Unlimited Supplies of Labor, Sir Lewis concluded that the transformation of a subsistence-based economy into a modern industrial economy could be achieved relatively painlessly:
- Workers leaving subsistence farming to pursue fixed-income employment will provide an unlimited supply of labor to the nascent industrial sector
- The vast availability of labor will drive down wages and allow industrial entrepreneurs to maximize profits, which they can then use to reinvest in the economy, driving growth with scarce domestic capital
- At the same time, industrial wages will still be relatively more favorable than subsistence income, improving the general population’s quality of life
- Eventually, the supply of labor from the traditional agricultural sector will ebb (“Lewisian turn”) at which point, real wages for industrial workers will rise and allow the economy to mobilize credit from their income
Like all models, this “Dual Sector Model” also has its flaws and does not accommodate all case studies. For instance, Gustav Ranis notes that this model does not take into account how the agricultural sector can also be dynamic and expanding. In addition, not all wage-earners necessarily consume their income as presumed by Lewis – there is greater room for domestic capital accumulation. Meanwhile, upward pressure on industrial wages could occur independent of the availability of labor due to institutional or political factors (unions, minimum wage, barriers to labor mobility, etc.).
Despite these and other flaws, as Gustav Ranis points out, the model remains “theoretically valid, empirically relevant, and practically useful” in considering the overarching developmental pattern of an industrializing economy. The main takeaway here is that among the factors of production, high population growth, long ascribed by adherents of Malthus to be a detriment to economic development, could act as a pivotal foundation for industrialization.
Turning to the DPRK, we see an economy that Arthur Lewis would have trouble comprehending.
Ruediger Frank, while underscoring the need for researchers to approach North Korea more objectively, noted that the demographics and labor allocation of the DPRK pose a very unique challenge to development economists.
Less Developed Countries (LDCs) are characterized with the following features: a low per capita income, high population growth rate; large unemployment… low productivity; poverty; unequal income distribution; predominance of agriculture in the national economy; and a low level of foreign trade (Ghatak, 2003: 1-20) …North Korea sends mixed signals. North Korea is not among the 177 countries listed in the 2004 HDI; however, the DPRK is classified by the UNDP as a developing country (UNDP, 2005: 281). While per capita income and productivity are indeed low, there is no high population growth rate and no predominance of agriculture in the national economy (around 30%)
The CIA factbook estimated that North Korea’s total labor force stood at 12.6 million in 2012 (while the total population grows at around 0.42%). Of these available workers, according to approximation from 2008, 35% are engaged in agriculture and 65% are engaged in industry and the service sector.
Compare this to South Korea during its rapid economic growth period – in 1965, 58.9% of the population was engaged in the primary sector; in 1973, 50% of the population was still involved in producing food for the country. This meant that South Korea’s economic development plans during these phases could continue to rely on manpower allocation from the primary sector to the secondary (industrial) and tertiary (services) sectors to bolster productivity.
Lacking the capital to invest in labor-saving technologies (mechanization, robotization), North Korea’s industrial development today will be largely reliant on being able to supply the manpower to enhance the marginal productivity of labor as ascribed in the Lewisian model. But where will that manpower come from?
At the same time, the limited capital is made more scarce by Pyongyang’s investment choices.
First, vicarious consumption of capital in Pyongyang via construction of entertainment facilities, which renders necessary reforms difficult, distorts prices elsewhere in the country and forces nominal wages to rise, diminishing the marginal productivity of labor.
Second, reinvestment of capital in Manchuria through Public-Private Partners (PPP) could prove to be a very lucrative foreign exchange earner for North Korea (read more about Chris Green of Sino-NK’s observation of PPPs in Shenyang here); however, the export of capital is precisely what Sir Lewis saw as the key reason why imperialism depressed development in less-developed economies during the 19th century. In addition, in so far as Pyongyang is not planning on sending a statistically-significant portion of North Korea’s service workers to operate these hotels, etc., capital invested in these PPPs could be better invested domestically to provide income for industrial workers. On that note…
Third, Pyongyang is continuing to allocate capital for unproductive industries like steel production – DPRK Supreme People’s Assemblymen hail expanding steel output as advancing the country’s self-sufficiency; however, according to KOTRA’s 2012 report on North Korea’s foreign trade (download the pdf here), North Korea exported about $1,060,000 of steel to Russia while importing $18,300,000 of finished steel products such as rail. As Lewis noted, investment in a capital-scarce economy should be focused on productive enterprises that can drive growth, not ones that are merely sentimentally significant.
Not everything is sturm and drang – there is still untapped labor and capital abound which North Korea can take advantage of to accelerate growth and development. In review of the Lewisian model and the current conditions in North Korea, the Rice and Iron team makes the following policy recommendation:
- Guarantee property rights for the rural sector. A robust and dynamic agricultural sector can spearhead capital accumulation
- Invest the available capital in productive (preferably export-driven) enterprises within the country
- Allow freedom of mobility throughout the country so that the labor force can better re-allocate according to demand
- Ensure monetary stability so that rising prices do not pressure nominal wages in the industrial sector to increase
As always, working progress. More to come.