North Korea's “Epic Economic Fail” in International Perspective
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Asan Report North Korea’s “Epic Economic Fail” in International Perspective Nicholas Eberstadt November 2015 About Table of Contents The Asan Institute for Policy Studies is an independent, non-partisan think tank Abstract 06 that undertakes policy-relevant research to foster domestic, regional, and inter- national environments that promote peace and prosperity on the Korean Penin- Introduction 08 sula, East Asia, and the world-at-large. Putting the North Korean Economy’s Epic Fail into Numbers 10 Author Global Patterns, and Determinants, of Economic Development: 21 Bringing the DPRK Back In Nicholas Eberstadt is the Henry Wendt Chair in Political Economy at the Ameri- Foreign Aid, Economic Assistance, and Net Resource Transfers 36 can Enterprise Institute in Washington, DC. Dr. Eberstadt is also the Senior Advi- from Abroad: Estimating the Flows to the DPRK, 1960-2013 sor to the National Bureau of Asian Research in Seattle, WA. He was also a visiting scholar at the Asan Institute for Policy Studies in Seoul. Dr. Eberstadt research- Aid, Resource Transfers, and North Korean Economic Dependence 48 es and writes extensively on economic development, foreign aid, global health, in International Perspective demographics, and poverty. He received his A.B., M.P.A., and Ph.D. at Harvard University. Official Economic Assistance Recipient Governments’ Policies, 52 and Economic Growth Acknowledgement Concluding Comments and Observations 57 References 60 The author wishes to thank David Dollar, Jo Dongho, James J. Kim, William New- comb, and Marcus Noland for their valuable comments, suggestions, and criti- cisms. Special thanks are due to Mr. Alex Coblin of the American Enterprise In- stitute for his sterling research assistance. List of Figures & Tables Figure 1: Adjusted North Korean Merchandise Trade, 13 Figure 12: Predicting Global Per Capita GDP with Life Expectancy, 30 1960-2013 Urbanization, Education, and Heritage/WSJ Index of Figure 2: Estimated Per Capita DPRK Merchandise Exports, 14 Economic Freedom: 2010 Data 1960-2013: (Current USD vs. Illustrative PPI-Delated Figure 13: Heritage/WSJ-Index of Economic Freedom: 33 Constant 2013 Dollars) Select Countries, 1995-2013 Figure 3: Estimated Per Capita DPRK Merchandise Imports, 15 Figure 14: Economic Growth, Foreign Aid and 56 1960-2013: (Current USD vs. Illustrative PPI-Deflated Recipient Country Policy: Some World Bank Estimates Constant 2013 Dollars) Table 1: Decomposing Differences in Predicted Economic 32 Figure 4: Estimated Share of World Merchandise Imports, 16 Performance by Variables: DPRK vs. China and Vietnam, 2010 1960-2013 DPRK vs. Selected Other Economies Table 2: Actual Results as Percent of Predicted Values from Global 34 Figure 5: Estimated Share of World Merchandise Exports, 17 Regressions Predicting Performance on the Basis of Life 1960-2013 DPRK vs. Zimbabwe Expectancy, Urbanization, and Schooling: 1970-2010 Figure 6: Estimated Merchandise Exports Per Capita vs. Educational 20 Table 3: US Economic Assistance to North Korea, 1995-2010 37 Attainment (15-64): 2010 Table 4: Officially Reported South Korean Aid to North Korea: 39 Figure 7: Predicting Global Per Capita GDP-PPP with Life Expectancy, 24 1991-2008 Urbanization, Education, Index of Economic Freedom (Herit- Table 5: Officially Reported South Korean Economic and other 40 age/WSJ): 1995-2012 Assistance to the DPRK Figure 8: Predicting Global Per Capita GDP (PPP) 25 Table 6: Estimated North Korean Merchandise Trade by Decade 42 With Life Expectancy, Urbanization, Education, and Index of Table 7: North Korean Merchandise Balance of Trade by Country, 44 Economic Freedom (Fraser Institute): 1970-2010 1960-2013 Lagged Variables (five year lag) Table 8: Estimated North Korean Merchandise Balance of Trade 45 Figure 9: Predicting Global Per Capita Merchandise Imports with 27 Deficit by Country, 1960-2013 Life Expectancy, Urbanization, Education: 2010 Data Table 9: North Korean Merchandise Trade Deficit by Country and 47 Figure 10: Predicting Global Per Capita Merchandise Imports with Life 28 Decade Expectancy, Urbanization, Education, and Heritage/WSJ Table 10: Some Measures of “Aid Dependence”: DPRK vs. 50 Index of Economic Freedom: 2010 Data Sub-Saharan Africa and UN “Least Developed Countries” Figure 11: Predicting Global Per Capita Merchandise Exports with Life 29 since 1960 Expectancy, Urbanization, Education, and Heritage/WSJ Index of Economic Freedom: 2010 Data 6 7 Abstract This report previews new research attempting to place the DPRK’s postwar de- 4) We use the ratio of estimated net merchandise inflows to total estimated mer- velopment performance in an international perspective. North Korea is common- chandise exports as a proxy for “aid dependence” or international economic ly regarded by students of international development as a “data-free zone.” dependence. By this metric, the DPRK appears more dependent on foreign We demonstrate that sufficient data exist for an empirical comparison of North economic support today than either the region of sub-Saharan Africa (SSA) or Korea’s postwar patterns of development in relation to those in the rest of the the collectivity of the world’s most impoverished countries (i.e., the UN’s des- world. In doing so, we try to cast light on the dimensions of, and the dynamics ignated ‘least developed countries’ or LDCs). behind, the DPRK’s spectacular economic decline since 1970.1 5) Foreign economic assistance looks to have played a critical role in making pos- 1) Utilizing “mirror statistics” on Pyongyang’s international merchandise trade, sible North Korea’s epic economic fail. Ironically, a government with less out- we show that, by the criterion of world market share, North Korea’s trade per- side money and resources would be constrained by economic reality and forced formance since 1960 is worse than either Argentina’s or Haiti’s—two countries to be more pragmatic and less destructive in its policies, practices and busi- notorious respectively for relative and absolute long term economic decline. ness environment. 2) We further show that North Korea’s prolonged economic decline appears to These findings have a number of important implications. They cast a special light be readily explainable in terms of familiar conventionally described determi- on the role Pyongyang’s official policies and practices had on the DPRK’s long- nants of modern economic development. In quantitative terms, North Korea’s term economic decline and on the apparent role of foreign economic assistance exceptionally poor trade performance can be largely explained by its excep- in helping finance this decline. Meaningful long-term economic progress should tionally inhospitable business climate. not be expected unless Pyongyang’s authorities systematically improve their glob- ally “worst in class” business climate. Furthermore, the apparent centrality of out- 3) We utilize “mirror statistics” on international merchandise trade not only to as- side aid in perpetuating long-term economic failure in North Korea raises ines- sess the DPRK’s trade performance, but to proxy net aid and resource trans- capable ethical questions for international purveyors of economic assistance (and fers from abroad over the decades since 1960. even ostensibly humanitarian assistance) for the DPRK. 1. Earlier portions of this report have been presented at the Asan Institute-Asia Foundation Confer- ence on Economic Transitions in Asia (Ulaan Baatar), at the Korea Economic Institute (Washing- ton DC), the Korea Political Science Association (Seoul) and the Korea Society (New York City). 8 9 Introduction official secrecy (then as now), an array of unclassified data seems to corrobo- rate that judgment.3 Modern economic history is a tale not only of progress and successes, but un- As an important new vein of academic research reminds us, understanding the fortunately also of retrogression and failures. The best-known example of long- roots of national economic failure is scarcely less important than understanding term economic failure in the modern era is perhaps Argentina, which managed the foundations of national economic achievement.4 Understanding just how to chart a path from the First World back to the Third World over the course of North Korean economic development went from ascent to stall, and then into a the Twentieth Century. Argentina’s long-term development failure, however, is a dreadful downward spiral, demands attention. Yet by and large, the worldwide story of relative decline: other places, including postwar Haiti and Zimbabwe development and policy research communities have neglected, or avoided, work experienced long-term absolute decline, not just relative. on this most troubling modern case study in protracted economic decline. The most arresting tale of economic failure from modern times, however, may Why should this be so? The most obvious answer is the North Korean govern- be Democratic People’s Republic of North Korea (also known as the DPRK, or ment’s statistical blackout policy, very successfully enforced for what is now North Korea). The signature episode that characterizes the DPRK’s style of eco- fully a half century. Naturally, this lacuna discourages attempts to include North nomic failure is the Great North Korean Famine of the 1990s. Many societies have Korea in any examinations of patterns of international development. suffered famines at some juncture—but North Korea’s circumstances were ar- guably unique. So far as can be told, in all of human history North Korea is the In the following pages, we attempt to demonstrate that the data required to place only literate and urbanized society ever to have fallen into famine during peace- North Korea’s long-term economic performance in international perspective can time. If one needs but a single fact with which to illustrate the modern North actually be gathered, despite Pyongyang’s vigilance. Korea’s epic economic failure, this one will do it. This report brings to the table new research on the dimensions of economic fail- And yet there was a time when North Korea was a peer economic competitor of ure in modern North Korea, offers a quantitative view of how nations develop in South Korea.