The Free Market 21, no. 4 (April 2003)
After several years of scant media coverage, the Democratic People’s Republic of Korea (DPRK) is back in the public spotlight. Its admission late last year that it had revived its nuclear program has caused a flurry of Washington war planning. For the media, North Korea’s leader, Kim Jong Il, has proved to be an irresistible caricature of the evil dictator. While much has been made about the political evils of this autocratic, Stalinist leader, little attention has been paid to the real tragedy of the North Korean situation: the economic destruction wrought on North Korea’s population by decades of socialism. By turning all property over to the state, the North Korean government precluded the possibility of economic calculation. For over 50 years, the inhabitants have been imprisoned by destitute poverty.
Out of sheer survival instinct there has been a recent effort on the part of the government to reform its economy. The “reforms” are doomed to fail, however, because they attempt to arrive at capitalist outcomes by using socialist means.
Since its inception, the DPRK has been modeled after the collectivized production economy of the Soviet Union, with state-owned enterprises primarily focusing on the development of industrial and agricultural industries. In 1955 North Korea’s founder and first leader Kim Il Sung (the father of Kim Jong Il) conceived Juche, the economic system of self-dependence. While this is not a new path for a socialist country to follow, it has taken on a somewhat mystical importance in North Korea. Nonetheless, it was only a matter of decades before the government had eroded the country’s capital stock and delivered its people into poverty.
The 1990s proved to be a particularly devastating period for North Korea, with GDP growth declining every year from 1990 to 1998. This rapid decline in economic output, coupled with a three-year famine that claimed the lives of an estimated two million people, provides an important backdrop for the events transpiring on the Korean Peninsula today.
While the North Korean government has traditionally remained skeptical of economic reforms that hint of capitalism, the past year has seen a flurry of news reports describing an atmosphere of change in Pyongyang. As reported in the Washington Post, Kim Jong Il circulated a memo early last year in which he called for “real profits” and an end to state subsidies. Then, last summer, the government enacted its reform package in an attempt to boost the failing economy. While the major newspapers ran headlines such as “North Koreans’ New Assignment: Fundamentals of Capitalism” and “A Taste of Capitalism in North Korea,” the adopted policies contained little that resembled market reforms.
Price increases by government fiat typified the policies. In order to increase the productivity of workers, wages were arbitrarily raised by 900 to 2,000 percent. As National Public Radio reported, “the government printed more money, and on one day this past summer, every North Korean worker received a 2,000 percent raise.” That the wealth of a country is independent of the monetary printing press is apparently unknown to the North Korean government.
Also enacted concurrently with the wage increases was a rise in prices for almost every commodity. The price of rice, the staple of most Asian diets, rocketed by 4,000 percent, while the price of electricity rocketed 5,900 percent.
Because private property remains illegal, these new prices for labor and goods are still government controlled and therefore utterly useless. Severe distortions in the market abound and economic calculation remains impossible. It was this fundamental misunderstanding of the price system that typified the socialist calculation debate in which the socialist economists believed that the rational allocation of goods and services could be created through the emulation of a price system without private property. But as Mises wrote, “The value of the price paid is called cost. Cost is equal to the value attached to the satisfaction which one must forgo in order to attain the end aimed at.” Prices are of little use unless they reflect the outcome of consumers’ and producers’ subjective valuations, valuations that only arise with private property.
The Washington Post reports that in order to learn the workings of a market, “Kim has traveled to more than a dozen cities in China and Russia—lingering in stores, factories and stock exchanges.” That one can gain an adequate grasp of the market economy by standing in a store shows the absurd understanding the North Korean economic czars have of a free market.
In another desperate attempt at economic reform, the North Korean town of Sinuiju has been designated a free trade zone. This small enclave on the Chinese border will attempt to entice foreign investment and allow the functioning of a market economy. It began, as all good capitalist economies do, with a legislative mandate.
Second, and also very important for market economies, was the forced removal of the city’s 500,000 residents and its repopulation by 200,000 government chosen workers. In a final act of free-market acumen, the government chose to wall in the city and appoint China’s second richest man, Yang Bin (who has since been arrested by the Chinese government for tax evasion) to oversee economic planning.
Closer in resemblance to a Russian gulag than anything else, the Sinuiju Special Administrative Region is doomed to failure. Capitalism cannot be decreed, nor can any form of socialist central planning emulate its outcomes. As Rothbard wrote, “you cannot plan markets. By their very nature, you can only set people free so that they can interact, exchange, and thereby develop markets themselves.” In addition, adjusting the price level by government decree ignores the foundation of prices and fails to solve the distortions that have destroyed the North Korean economy.
True reform for North Korea would entail the immediate and total removal of the government from the economy. An economy based on private ownership of the means of production will provide the only avenue of escape for a people wrecked by 50 years of socialism and its corollary, central planning.
Some would argue that this “big bang” approach would destabilize the country, bringing about painful structural readjustments that would be too costly in the short run. Gradualism like in the case of China, it is argued, would provide the benefits of liberalization without the costs. Obviously these critics overlook the government-caused famine that murdered two million North Koreans. If this is the cost of stability then the chaos that follows rapid desocialization must certainly be preferable.
In truth, North Korea is on the verge of collapse and stability of the region can only come about with swift desocialization. The adoption of capitalism is now the only policy that can stop the instability that would follow the sudden and total crash in the economy
As our government and media ponder the predicament of this isolated nation in the Korean peninsula, we would do well to remember the pivotal role socialism played in its creation. One can only hope that the news headlines breathlessly proclaiming North Korea’s adoption of capitalism will one day prove true.
Jude Daniel Blanchette is an economics major at Loyola College in Baltimore, Maryland (jblanchette1@loyola.edu).
