00 0 Frontmatter.Qxd

E b e r s t

Policy and Economic Performance in Divided Korea a d t

during the Cold War Era: 1945–91

Nicholas Eberstadt

The Korean peninsula during the Cold War provided a cruel but historically unpar - Policy and Economic Performance P

alleled real-world “experiment” in the relationship between polity and material o l advance: an ethnically and culturally homogenous nation was, in 1945, suddenly i c in Divided Korea during the divided by an arbitrary boundary line and then subjected to two radically different y and adversarial political economies for successive decades on end. Assessing the a n

competition between the North and South Korean economies from partition to the d

d Cold War Era: 1945–91

end of the Soviet era, Nicholas Eberstadt argues that the storyline is not quite as u E r

simple as the now-prevailing narrative suggests (that centrally-planned economies c i n are doomed to fail against market-oriented alternatives). Rather, he suggests, the o g n

t race for material progress was just that: a race, the results of which were far from o h m preordained at the outset. e

C In Policy and Economic Performance in Divided Korea during the Cold War Era: i

c Nicholas Eberstadt o 1945–91 , Eberstadt presents an impressive compilation of hard-to-find comparative P l d data on economic performance for the Democratic People’s Republic of Korea e r

W (DPRK, or North Korea) and the Republic of Korea (ROK, or South Korea) over two f critical generations. By a number of indicators, Eberstadt argues, Kim Il Sung’s North o r a m Korea actually outperformed South Korea for much of this period—not only in the r

E years immediately following partition, but perhaps also into the 1970s. a n r

To explain these surprising results, Eberstadt details the impact of government a c : e

policies on the course of growth of both economies and offers some unorthodox

1 i

observations about material performance under these two contending polities. He n 9

finds that prevailing economic development theory on such issues as planned-versus- 4 D market economies, military burden, and the relationship between material advance 5 i – v

and poverty, may require reexamination in light of the experience of the two Koreas 9 i d between partition and the end of the Cold War. 1 e d

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at the K

American Enterprise Institute. o r e a

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ISBN-13: 978-0-8447-4274-8 ISBN-10: 0-8447-4274-0

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Policy and Economic Performance in Divided Korea during the Cold War Era: 1945–91

Nicholas Eberstadt

The AEI Press Publisher for the American Enterprise Institute WASHINGTON, D.C. Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801.

Library of Congress Cataloging-in-Publication Data

Eberstadt, Nick, 1955- Policy and economic performance in divided Korea during the Cold War era : 1945-91 / Nicholas Eberstadt. p. cm. Includes bibliographical references. ISBN-13: 978-0-8447-4274-8 ISBN-10: 0-8447-4274-0 1. Korea (South)—Economic conditions—1948-1960. 2. Korea (South)—Economic conditions—1960–1988. 3. Korea (South)—Economic conditions—1988– 4. Korea (North)—Economic conditions. I. Title. HC467.9.E34 2008 330.9519'04—dc22 200804047712 14 13 12 11 10 1 2 3 4 5

© 2010 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI.

Printed in the United States of America Contents

LIST OF TABLES ix

ACKNOWLEDGMENT xiii

INTRODUCTION: THE EXPERIMENT 1 Limits of Observation 3 Organization of the Study 7

1. COMPARATIVE PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–91 9 A Survey of the Available Estimates for Korea 11 Some Indicators of Comparative Performance 15 Indices of Physical Output 18 Labor Force Trends 20 Urbanization Trends 23 The Official Budget of the DPRK 25 “National Income” 27 Commercial Energy Consumption 27 Official “GNP” Estimates 30 Alternative Endpoints and Their Implications 31 Conclusion 33

2. POLICY AND ECONOMIC PERFORMANCE IN THE DPRK: 1945–91 34 Partition, War, Recovery 40 The 1960s 43 The 1970s and 1980s 45

v vi POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Quantitative and Structural Aspects of North Korean Economic Development during the Cold War Era 56 North Korean Economy Before and After “Liberation” 60 North Korean Economy and Noncommunist Low-Income Economies 68 North Korea’s Economic Structure in Communist Perspective 72 Quantitative Trends in the North Korean Economy, 1960–1990 75 The North Korean Economy’s Mounting Problems 84 Limits to Growth 84 Limits to Reform 89 The Soviet Bloc Collapse 90 Conclusions 92

3. POLICY AND ECONOMIC PERFORMANCE IN SOUTH KOREA: 1945–91 94 South Korea’s Economic Successes: Conflicting Claims to Patrimony 95 The Years 1945–1960: The Interlude between “Hard States” 98 General Park and the Return to Economic Development 100 Foreign Aid and Economic “Takeoff” 103 Desiderata of Development: South Korean Exceptions 108 Microeconomic Issues: Transaction Costs and Uncertainty 109 Macroeconomic Issues: Market Structure, Allocative Efficiency, and Technical Efficiency 116 Development Policy: Some Mistakes Matter More Than Others 127 Induced Dirigiste Distortions: Agriculture, Heavy Industry, and Finance 129 Agriculture 129 Heavy Industry: The HCI Drive 136 Finance 141 Accounting for South Korea’s Rapid Economic Growth: Factor Mobilization versus Factor Productivity 146 The “Contrarian” Reassessment of East Asian Growth 147 Caveats of “Growth Accounting” 148 Total Factor Productivity in South Korea: Indications and Calculations 150 CONTENTS vii

The Enigma of South Korean Growth: How Much Can We Explain? 162 Reconciling Paradigms 169

4. SUMMATION AND CONCLUDING OBSERVATIONS 172 Review of Findings 172 Observations, Speculations, and Issues for Further Research 181

NOTES 193

REFERENCES 271

INDEX 299

ABOUT THE AUTHOR 315

Tables

1-1 Comparing Estimates of Comparative Economic Performance: North Korea vs. South Korea, 1970–1985 13 1-2 Internally Inconsistent Estimates: UN Figures on Real Economic Growth Rates, North and South Korea, 1970–1985 15 1-3 Unstable Estimates: ACDA’s Ratio of South Korean to North Korean GNP, 1961–1992 16 1-4 Unstable Estimates: ACDA Numbers on North Korean “Military Burden,” 1961–1992 17 1-5 Official U.S. and ROK Estimates for Physical Production of Selected Commodities: North Korea vs. South Korea, 1960–1985 19 1-6 Distribution of Civilian Labor Force: North and South Korea, c. 1960–1987 21 1-7 Urbanization in North and South Korea, 1960–1985 24 1-8 Pattern of Changes in Annual DPRK Budget Revenues and Expenditures, 1960–1988 26 1-9 UN Estimates of Per Capita Consumption of Commercial Energy: Korea and Germany, 1989 28 1-10 UN Estimates of Per Capita Consumption of Commercial Energy: North and South Korea, 1970–1989 30 1-11 Implications of Alternative Hypothetical Per Capita Output Ratios for North and South Korea, 1960 and 1988 32 2-1 Retrospective Estimates of Per Capita GNP in North and South Korea for the Early Post–Korean War Period 35

ix x POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

2-2 North Korean Agriculture in Communist Perspective: FAO Estimates of Per-Capita Cereal Production for the DPRK and Selected Marxist-Leninist States, 1961 37 2-3 Distribution of Labor Force by Sector: DPRK and Selected Marxist-Leninist Countries, c. 1987 39 2-4 Per Capita Output and Its Composition: Northern and Southern Korea, 1939–1940 41 2-5 Per Capita Output and Composition of Manufactured Commodities: Northern and Southern Korea, 1939–1940 41 2-6 Estimated Size of Military Forces: DPRK, 1975–1987 53 2-7 Trends and Structure in the North Korean Economy Before and After “Liberation,” 1940–1963 61 2-8 Distribution of Labor Force across Sectors: Selected Noncommunist Countries in the Early Postwar Period vs. Northern Korea, 1940–1960 71 2-9 North Korean Economy in Communist Perspective: Estimates of End-Use GDP Distribution, c. 1960 73 2-10 Targets and Results for Key Economic Indicators: DPRK, 1978–1989 78 2-11 Trigubenko’s Estimates of Output for Selected Products in the DPRK, 1988–1990 79 2-12 Estimates and Indicators of Economic Performance for the DPRK, 1963–1987 81 2-13 Estimated Labor Force Participation Rates for North Korea and Selected Other Countries 86 3-1 Selected Macroeconomic Indicators: South Korea, 1953–1993 109 3-2 Foreign Direct Investment as a Percentage of Capital Inflows: South Korea vs. the Developing Countries, 1962–1990 119 3-3 Estimated Stocks and Flows of Foreign Direct Investment: South Korea and Selected Other Countries 120 3-4 Loans through Government-Controlled Banks and Funds: South Korea, 1980–1992 122 3-5 Relative Domestic Price Levels: Local Deviations from “International Price Structure” Implied by International Comparison Program (IPC) Purchasing Power Parity Estimates, 1980 131 TABLES xi

3-6 Farm Protection in South Korea, Japan, and the European Community: Selected Indicators, 1979–1990 133 3-7 Structure of Production in South Korea, 1953–1993 139 3-8 Estimated Household Savings Rates: Japan, Taiwan, and South Korea, 1960–1989 142 3-9 Real Interest Rates in the Regulated Financial Sector: Japan, Taiwan, and South Korea, 1960–1990 143 3-10 Estimated Annual Rates of Change in Total Factor Productivity for the Manufacturing Sector: South Korea, 1967–1989 153 3-11 Pilat’s Estimates of Sources of Growth in the South Korean Economy, 1963–1990 155 3-12 Kim and Park’s Estimates of Sources of Growth in the South Korean Economy, 1963–1982 157 3-13 Estimated Sources of Growth by Denison-Style “Growth Accounting” Methods: South Korea and Selected OECD Countries, Selected Years 159 3-14 Estimated Sources of Growth: Selected Latin American Countries, 1960–1985 165 3-15 Estimates of Per Capita GDP and GDP Per Hours Worked: South Korea and Selected OECD Countries, c. 1989 167 4-1 Continuities in Long-Term Development: Per Capita Output in Japan, Taiwan, and Korea, 1938 vs. 1988 186 4-2 Continuities in Long-Term Development: Output Structure in Japan, Taiwan, and Korea, 1938 vs. 1988 187 4-3 The Workweek in the Japanese Empire, 1939: Distribution of Average Daily Hours Worked by Factory Hands, Korea vs. Japan 188 4-4 Composition of Manufacturing in Japan, Taiwan, and Korea, 1938 vs. 1988 189 4-5 Legacies of Colonialism: Industrial Structure in Northern Korea and the DPRK, 1939–1982: Composition of Industrial Output 190 4-6 Estimated Expectation of Life at Birth for North Korea, South Korea, and Prepartition Korea, 1940–1985 191

Acknowledgment

The author would like to express his special thanks and appreciation to the Korea Foundation for the generous support it has granted toward the publication of this book.

xiii

Introduction: The Experiment

On its face, Korea during the Cold War would seem to offer the student of political economy virtually unparalleled opportunities for examining the relationship between polity and material development. In its fundamen- tals, in fact, the outlines of modern Korean history sound almost as if they had been specified by a meticulous (if chillingly callous) social scientist who had carefully devised a research experiment involving tens of millions of human beings. Consider the initial conditions:

• After many centuries of rather isolated and perhaps somewhat uneventful self-rule,1 the populace of a kingdom in northeast Asia comes under the thrall of a nearby colonizing power. The colonizers establish control over an unwilling territory by methodically subverting the political authority and social arrangements of the old order and direct a program of purposeful economic change2 (heretofore, a notion utterly alien to the peninsula). • After three or four decades of externally enforced social and economic transformation, the populace is liberated from its colonizing power, but divided in two by an almost utterly arbitrary boundary line drawn by the liberators.3 Though regional characteristics and other distinctions would doubtless be evident to a population long isolated from others and sensitive to indigenous differences, the newly divided population may fairly be described as ethnically homogeneous and, in any event, views itself as a single group with a single language, culture, and heritage.

1 2 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

• The liberating forces represent polities that are radically different from one another. With varying degrees of care and effort, they encourage the formation of local states in the divided peninsula that would reflect, however imperfectly, their contrasting political philosophies.4 After brief experiences under their respective trusteeships, the newly independent states are soon locked together in a costly and devastating war; by virtue of its wide path of destruction, the war seems to level those regional economic differences that had arisen under colonial occupation. • Following their ceasefire, the hostile states have virtually no contact with one another. Instead, they embark on their own, avowedly opposite, paths to reconstruction and development.

Even in its particulars, the circumstances of Korea’s unhappy partition might look fortuitous to the student of political economy. The division of Korea under the peninsula’s two current states has continued for many decades—surely long enough, from the standpoint of experimental design, for divergent polities to evince characteristic social and economic results. The sudden, unexpected, and almost complete separation of the population into two large segments (with the smaller one in the north accounting for as much as one-third of the overall total) limited opportunities for self-selection between the groups, which were divided from each other in as random a fashion as forces of history might seem likely to allow.5 Unlike some other long-divided nations, Korea was characterized by pervasive material deprivation at the time of its partition; just before World War II, for example, life expectancy in Korea was about twenty years lower than in Germany.6 By the end of the Soviet era in late 1991, the results of the “experiment” had been more or less conclusively established. The economy of the Democratic People’s Republic of Korea (DPRK) was mired in stagnation, its citizens exposed to increasing privation; within a few years, North Korea would suffer a catastrophic food shortage—the first and only mass famine ever to befall a literate and urbanized society during peacetime. The Republic of Korea (ROK), by contrast, was enjoying rapid (if erratic) INTRODUCTION 3 economic growth and progressive improvements in local living standards; within a few years, this very recently impoverished society would accede to membership in the Organisation for Economic Co-operation and Develop- ment (OECD), the “club” of affluent, aid-giving industrial democracies.7 Looking backward from our current vantage point—from the era after the Soviet collapse—it might seem tempting to suggest that the results of this experiment were foreordained, that Soviet-style economies are doomed to failure in competition against their market-oriented alternatives. But as we shall see in the following pages, the outcome of this experiment was hardly predetermined. The economic race between North and South Korea between partition in 1945 and the end of Soviet Communism in 1991 was just that: a real race. For much of that period, moreover, it was the DPRK, not the ROK, which seemed to be in the lead in that race. This study is an examination of that race—and of the factors that eventually, somewhat haphazardly, but nonetheless fortuitously, led to the outcome we now take for granted.

Limits of Observation

By the forensics already noted, the modern Korean experience would appear to be framed as much like a gigantic hypothesis-testing experiment as any student of development might care to hope. Unfortunately, there is a catch. Returns from this experiment were accumulating since at least 1948, when the Republic of Korea, with the blessing of the United States, established its sovereignty over the southern portion of the peninsula, and the Democratic People’s Republic of Korea in the north took formal power over the territory the USSR had been helping to Sovietize. But the results are anything but simple to compare. Throughout the Cold War, both states on the Korean peninsula were loath to release the sorts of information that would permit a comprehensive and impartial assessment of their social and economic performance during this period. That reluctance is easy to explain. Simply put, the governments of both North and South Korea asserted that the superiority of their respective orders would be demonstrated by their economic and material records. 4 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Each state went so far as to link explicitly its legitimacy—its right to be a government at all—to the economic and social results for which it took credit.8 Under Korea’s circumstances at that time—with as many as two million soldiers facing each other across a cease-fire line, commanded by governments each claiming sole authority to reunite the peninsula’s populace—legitimacy was more than an abstract consideration. Precisely because both governments regarded the comparison of their records as so vitally important, they both, in varying degrees, went out of their way to obscure the assessment for independent or disinterested parties. In our post-Soviet era of “globalization,” students of all the social sciences have come to take for granted the availability of reliable quantitative data from practically every corner of the world. For inquiries about development economics, comparative development, political economy, and even, surprisingly, economic history, massive amounts of data are often at the ready. One can choose to work with a remarkably diverse array of national and international micro- and macro-data files; with historical data sets; with survey data; with panel data; and more. Indeed, the very plenty of such quantitative information has shaped the research approach in all these areas over the past two decades. Much of the great work in these realms—contributions in both extending the boundaries of knowledge and refining or improving statistical research techniques—have been pred- icated on the surety that a scholar can function fruitfully nowadays as a “data consumer.”9 The present study is very much out of keeping with that tendency in modern scholarship, however—for, in our particular investigation, the “data” are not “given.” Before we can offer an evaluation of the developmental race in the Korean peninsula during the Cold War era, we must first establish the facts of the case—and establishing those facts, even today, is no easy thing. No one familiar with the particulars of governance in North Korea will be surprised to hear that its government is reticent to release information. For well over three decades—from the early 1960s to 1991, for the purpose of this study—authorities in Pyongyang enforced a statistical blackout reminiscent of the most secretive phases of Stalinist rule in the USSR or Maoist power in China. North Korea did not, for example, publish an official estimate of the country’s total population for any year after 1963; it never published a figure for the country’s national income. INTRODUCTION 5

Unlike North Korea, South Korea regularly published a wide range of detailed statistical compendia pertaining to economic affairs during the Cold War period.10 Yet there was less openness and reliability in these data than their publication schedules might of themselves suggest. For many decades, Seoul’s attitude toward “the truth” was somewhat proprietary, as illustrated by its maintenance, within the official Korean Academy of Sciences, of a large research unit whose title could be translated as “The Committee to Edit National History.”11 But it is not only factual questions from the distant past that have invited government emendations, adjustments, or political supervision. For much of the postpartition period, South Korea’s national security legislation contained provisions expressly for the punishment of individuals responsible for unwelcome analysis or interpretation of current events. Until the late 1980s, for example, the South Korean Criminal Code threatened severe strictures against any citizen convicted of “slander against the state” (defined as “spreading rumors . . . distorting facts . . . [and] all other activities which may harm the welfare and interest of or defame the Republic of Korea”).12 The same statute specifically warned that “all Koreans who com- mit the crime . . . in association with foreigners or foreign organizations” are liable under the law (emphasis added).13 One may argue about the actual impact of this statute on the dissemination of facts and figures about conditions in the Republic of Korea.14 But in enacting, and preserving, this legislation, a succession of governments in Seoul explicitly indicated their continuing interest in limiting the availability of potentially inconvenient information to journalists, scholars, businesspeople, and foreign diplomats. The South Korean government also affected international impressions of the country’s development performance through its treatment of official social and economic statistics. On some occasions, politically sensitive statistics were subject to demonstrable miscalculations. To cite but one example: government analysis of the 1966 census resulted in a wild over- estimate of the country’s life expectancy—according to one assessment, perhaps by a decade or more15—despite the availability and competence of local Korean demographers at the time. Other errors embedded in official South Korean statistics have often been more difficult to detect, but may have been profound nonetheless. Data on income distribution in the Republic of Korea offer a case in point. 6 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

South Korean figures on income distribution—which showed the country to have one of the lowest “Gini coefficients” of any postwar low-income country for which the measure has been computed16—for many years did not take into account the actual incomes of households with earnings above a certain threshold (roughly $5,000 a year in the late 1970s) and omitted income from unincorporated businesses altogether.17 These procedures, of course, necessarily limited the measured income of the more affluent strata of South Korean society and had the effect of making income distribution appear to be substantially more even than it actually was.18 Although improvements in coverage since the 1970s have likely increased the repre- sentativeness of official South Korean income distribution data,19 the remaining lacunae in coverage effectively continue to understate the dispersion of income within that society by a considerable margin. Throughout the 1980s and into the 1990s, for example, income from investments and capital gains (including real estate) were seriously under- reported in South Korean data on income and wealth, even though these constituted a substantial portion of the country’s national income. The impact of these omissions was consequential. Whereas estimates by South Korea’s former Economic Planning Board (EPB)20 put the share of income for the poorest 40 percent of the country’s households at about 20 percent of overall personal income in 1988, a World Bank study (adjusting for presumed investment income and capital gains) suggested that the true figure was possibly more like 10 percent; by the same token, where the EPB put the share for the top fifth at 42 percent of personal income, the World Bank’s computations indicated something perhaps closer to 56 percent.21 Put another way: where official South Korean income distribution data presented a ratio of 5.7 to 1 for the top and bottom quintiles for the year 1988, the World Bank study’s adjusted figures suggested a ratio of 23.4 to 1. Needless to say, very different pictures of economic inequality are conveyed by these alternative calculations.22 This is not the place for an extended disquisition on the general accuracy of official South Korean statistics. It may suffice to observe that, as the previous examples attest, the quality of economic and social data for the Republic of Korea was often lower than supposed overseas.23 A variety of official practices and procedures constrained the ability of the South Korean statistical system from providing a faithful representation of the conditions INTRODUCTION 7 in the economy and society it was meant to describe during the Cold War period. Some of these constraints may have been explicitly political in nature. (As David Steinberg once observed of South Korea’s income distribution figures, for example, “Given . . . the enforcement capacity of the [ROK] government to collect [information], the absence of data on the upper income levels can only be regarded as an intentional omission.”24) Yet irrespective of their motivating intent, the fact is that a number of practices and procedures embraced by ROK statistical authorities reduced the reliability of South Korean data and limited their comparability with other countries.25 In sum, relatively little can be stated with certainty about development in North Korea, and some portion of what is often stated confidently about development in South Korea may simply not be so. These are not auspicious circumstances under which to attempt a comparison. Available data, however, do look to be adequate to cast a certain amount of light on the record of the two Korean states in sponsoring material advance and alleviating material deprivation in the societies under their authority. Thanks to the release of some unpublished official North Korean statistics,26 at least a few of the basic questions about the country’s social and economic evolution may now be tentatively answered. Inquiries into North Korea’s material condition were further aided by the collapse of communism in Eastern Europe and the Soviet Union, freeing specialists from the former Soviet bloc to publish frank assessments and uncensored analyses of North Korean affairs. It is therefore possible to make at least preliminary assessments about the performance of the two polities in the material realms. Establishing the basic features of the factual terrain requires some surveying. Even so, description must still suffice in many places where data would ordinarily be expected. False precision will not contribute to our understanding.

Organization of the Study

The study proceeds through four further sections. Chapter 1 reviews what is known (versus what is thought to be known) about the comparative 8 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

performance of the two economies from the 1945 partition until the breakup of the Soviet Union in 1991. Chapter 2 describes the effect of government policies on the evolution and growth of the North Korean economy in the Cold War period. Chapter 3 undertakes a similar examination for South Korea. In chapter 4, I offer some observations and tentative conclusions, speculations, and generalizations about material performance under these contrasting polities.

Comparative Performance of the Two Korean Economies: 1945–1991

Comparisons of material output and material advance for North and South Korea are necessarily problematic and would remain so even if the current constraints on information were greatly relieved. The limits on the reliability of the comparison are ultimately determined by the difficulty of establishing a common measure by which to value economic activity in the two societies. The issue cannot be finessed. For all of the practical and theoretical problems with the measurement of national income in contemporary Western countries—and these should not be minimized—students of those economies may at least proceed on the presumption that prices have a tendency to reflect scarcity and that markets tend to head toward equilibrium.1 Neither of these presumptions is valid for a centrally planned economy. Quite the contrary: in communist economies, official prices are set by political directive, and the allocation of resources is meant to reflect but a single set of preferences—those articulated by state and party planners “on behalf of the welfare of society.”2 The difference is fundamental and irresolvable, and it affects all comparisons between communist and noncommunist economies. The uncertainties inherent in attempting market-style estimates of North Korean economic output are indirectly indicated by the work on other communist economies. No economy in the communist bloc has been studied in the West so extensively as that of the Soviet Union. The U.S. Central Intelligence Agency’s multidecade effort to analyze and assess Soviet economic performance, in fact, may be the single largest social science research project ever undertaken.3 The CIA produced an estimate of Soviet

9 10 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

gross national product (GNP), in rubles, for many years. The CIA’s estimates, in fact, turned out to be very close to the Soviet State Statistical Committee’s ultimately released figures for Soviet GNP, in rubles, for the late 1980s.4 Yet even if these estimates were accurate, they would be open to varied interpretations. Central to the issue is the “purchasing power” of the ruble. Shortly before the USSR’s final crisis, the CIA placed the Soviet GNP at roughly half the American level.5 Other Western analysts, however, argued that it may have been only one-third the size of the American GNP at the time.6 Before the Soviet state dissolved, a Soviet economist made the case that the USSR’s aggregate output might be only one-seventh as great as that of the United States, even though he did not challenge CIA or Goskomstat ruble estimates of Soviet GNP.7 Analogous discrepancies attend the measurement of subsidiary components of the Soviet economy. One exacting evaluation of a CIA study on personal consumption in the USSR, for example, concluded that the official analysis overestimated those per capita levels, in relation to American levels, by roughly 100 percent.8 By the same token, where CIA studies concluded that the aggregate annual value of gross investment was slightly higher in the Soviet than in the American economy in the late 1970s and early 1980s, a Soviet economist, using the same ruble and dollar totals, made the case that the Soviet investment level stood at one-third or one-fourth the level in the United States at the time.9 Parallel problems were evident in measuring the output of the command economies of Eastern Europe. While their governments were still committed to Marxist-Leninist rule, both Poland and Hungary became members of the World Bank and the International Monetary Fund. Member states in the Bretton Woods institutions were required to make available a wide range of financial and economic data; Poland and Hungary seemed to live up to most of those obligations. On the basis of these data, the World Bank estimated Hungary’s 1987 GNP at slightly less than $24 billion and Poland’s at a bit over $65 billion (both in 1989 U.S. dollars).10 By contrast, the CIA’s gross domestic product (GDP) estimates for that year were, respectively, just under $88 billion and $260 billion—or at levels nearly four times higher.11 The World Bank and the CIA also arrived at very different conclusions about the rates of growth of real per capita GDP: according to the World Bank, Hungary’s pace between 1965 and 1980 had been more than 5 percent per year, whereas the CIA estimated it to have been less than PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 11

2 percent a year.12 Though some of the issues contributing to these computational discrepancies have been identified,13 they still have yet to be generally acknowledged, much less settled, by organizations responsible for compiling and analyzing such international economic statistics. For all the thought and care devoted during the Cold War era to the effort of describing the output and performance of the socialist command economy within a Western market-oriented framework, analysts and scholars are perhaps not much closer to this objective today than they were seventy years ago. Basic philosophical and analytic problems dog the effort to compare output from fundamentally different economic systems, whether intertemporally or even at a single point in time.14 The collapse of communism in Eastern Europe and the USSR may have underscored these dilemmas by according them intense, if passing, exposure, but it has done nothing to resolve them.15 With the disappearance of the Soviet state and the end of military confrontation between NATO member states and the Warsaw Pact, the theoretical and practical issues raised by intersystem economic comparisons enjoyed perhaps their greatest attention after German political reunification and economic reintegra- tion. But despite the availability of detailed information on the workings of the economy of the former German Democratic Republic, and the resources (both financial and intellectual) that the Federal Republic brought to bear on measuring the economic transition in its “new Federal States,” little progress seems to have been made in converting national accounts from that centrally planned economy to any meaningful market-economy approximation.16 All in all, this should not surprise. But it should underscore the difficulties that confront analysts attempting comparison of economic performance in divided Korea—and will continue to face them long after the North Korean “data famine” has been relieved.

A Survey of the Available Estimates for Korea

Researchers hoping to quantify North Korea’s economic performance in such a way that it might be compared with the records of market-oriented economies must cope not only with the theoretical issues that have dogged such estimates for the USSR and communist Europe but also with the fact 12 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

that the USSR and communist Europe released vastly more information about their economies during their interludes under socialist rule than has the DPRK. Since its founding, for example, North Korea has apparently never published a figure for the country’s net material product (NMP), the standard measure of national output in the Soviet-style framework for national accounts. Thus, under the circumstances, it may seem almost heartening that the high and low estimates for North Korean per capita output varied by a factor of “only” about two and one-half for 1985 (a year for which many organizations happen to have produced estimates) (see table 1-1). At the very least, however, the range of dispersion will be seen to indicate a lack of consensus about the comparative economic balance in the Korean peninsula among organizations interested in the issue. The range of disagreements about the performance of the two Koreas was perhaps more clearly indicated by two subsidiary estimates. For reasons of security, North Korea’s “military burden” (or ratio of defense- related expenditures to national output) was (and remains) a matter of the utmost interest and concern to many analysts and governments; yet here, too, the range of estimates varied by a factor of about two and one-half. As for estimates of real growth of output in North Korea between 1970 and 1985, these ranged from a high of more than 11 percent a year to an implied low of 0.2 percent—or by a factor of thirty-five! No less nettlesome is the range of comparative estimates for the two Koreas. In 1985, according to the source one prefers, per capita output in North Korea was anywhere from roughly at parity with South Korea to less than two-fifths the South’s level. Estimates of comparative per capita output for North and South Korea were produced for the late 1980s and the early 1990s as well. Though subsequent updates of these official series have resulted (at least temporarily) in a substantial narrowing of differentials in the published range of estimates,17 the seeming convergence does not necessarily signify obvious improvements on previously existing offerings. In fact, the updated figures happen to be characterized by some striking, and as yet unexplained, internal inconsistencies.18 Similarly, over the previous fifteen years, economic growth in the South was estimated to have exceeded that of the North by an average of as much as 7 points a year—or, alternatively, to have fallen behind the annual tempo in North Korea by as much as 2.5 annual percentage points. . - s r s s k d d r r 0 e o o n n e i e ) t i u ) 0 o f a ) ) ) ) 5 k a d c s k b 8 l 7 7 n , f 0 8 1 6 u . n h d t A p 8 t t a . . . . e 1 a – 8 n o o r , 2 S u r d 9 $ a 2 0 4 7 N n o 6 t T H – c h ( ( ( ( i t i S P 1 ( H s ( t s s a g e n – N n e m o d e m m t w h r G e 0 a d o h o o o r c r r A J t y f f ) r 7 w a k l : S b d r , n d e d 9 p ) r n G a r 5 e a e d a o 9 s o v B 1 v e f e a 8 i h a i t 4 c s r r 2 t e i a e m y d – , e 1 e l w t i . 0 0 6 2 e l A r r f r t . . . . . r d 0 l u 7 A d u r e 1 P m t o o t p a o : 6 7 5 0 i N : i d E 7 ( e t 1 o B N A d B s W ( K N I R 9 p 3 n n n G n U e e e 8 n I C 1 O e o a p o 9 l h ; N t i t b % x i a t c 1 2 ; i K ( E p n t e 2 = d 0 E . r a o v 2 E 2 i y 9 o c * H a t l , r 2 p 1 9 r a ; h . a 5 a a T e h , t e 8 n P i 1 , s t R e e l 3 r – p ) U i 8 9 4 0 7 8 – e D e t r i 6 8 ...... 8 u s t 6 R ’ 0 r n O – M 8 G o 8 a 7 8 8 7 9 7 e n 1 e o 9 2 . I e s 9 S d o r 1 K l S 6 1 m t 1 = r o h p s . 1 f , t o e e o S K o l , l S l o . N S e b b W b e I h V d v a a I U t g ; e e r T ; : s u n m a r y A D k 8 d o a o p a l c r r l r 8 S E r d l f o n l m – o , . e o e r R Y t o 7 9 h d r o g d W t c e 8 O 7 o w . : A W v 9 , e y p n S i n k t l ) i . K r 1 s e t n n N e t r 8 e c i : U ( a d e a i h ) 8 d d e e r H B 2 1 t ) 5 S e n t 9 m c r : . . 9 i m A A A s r 8 S m r T a 1 a . d P I 5 o A l l u a 9 2 3 t I n , r o R o r s 9 N N N p m f 1 o e D : d N 2 2 B o r , r e v O n K e N a n n s C i a t s h ; e W e G o g y i t A a t t o / e ; N d r c a d e ; B D b 9 n p g r n u a : I 3 s e 4 a g d e o t d x r . 3 n E 1 i n v n s L g o 0 i o , l , ( a E r a e g i . C ) i 4 t n t l h p e A d a a l 3 5 a h n o N c , l e i c a t 8 r d e n M n a i l m l t 1 i 5 2 3 A A A A i i 9 r a . . . 8 u d P a t r u $ n 4 1 l M 1 s 8 5 e o n o o a 5 5 5 - M N N N o c ( t , i e M d i 9 B s 8 a C w f R 1 K S n s 1 P d o m s a y 9 e m e P ; O r r o s N E i t 1 h 0 5 m a P F n N s t s L r e G 4 5 i i y o l l y R l G n B A i 3 c t , n , a b i . E r a A 4 a E s 1 M n t u S o r e i . 3 : f P $ T r p A l e e p , U : t o h v s u t a i s 8 a e o c T C n K c = r n i 2 e ) I e t d r u h S s c , U A e e i 2 m t . ( g e M t c i / p o r D u d d f a a 8 r r t l e O o f 1 t C 1 ) ) ) ) ) 8 o = a S s p S f 8 9 A N 6 f d 2 9 3 3 8 o s e t x b t 1 ; 9 i e d 8 r o 7 4 8 0 6 O y n ; m * v 1 3 n O 9 a . . . . . a t i c u o t a e : r s 1 C c a i . o o 2 1 1 1 2 r n t e k e u c I ; i p d e o ( ( ( ( ( K h r r E d c r t a t d . g 5 K o o r a : c A a o 3 a A Y o o r S K e E l n r ) r i , r a e S B a p . e N ( V w I h t o c s 5 n I d t p . I e i c r n n o r i K e ; i 8 3 o s t o e T t N t p o i s 5 3 ( P g h t 9 a 5 a A i e a t 6 , N a c l 8 r 3 i N l 1 N c 9 R , a b h m i 9 e 8 o d o . C 9 5 7 f G t 2 t $ t e o 9 i n A 1 7 5 d m N I – n 5 5 0 r r r 1 d e a S n 1 P : I * o 2 6 6 l 8 r e ) t r 3 1 0 o e 8 l o s U a r f r 7 2 o S 7 7 i U M s a 9 f 1 1 2 I o l o P c 8 r ( o K N d 1 , t a p t o O T r 9 K ) e e $ n n S g u 5 1 v 7 N P e R i h o p C S r ; i 8 t r 8 t t : t C m . o e 5 9 u N U n u a f 9 o F 5 d e = 1 o C r o e . s f N : 1 G S , , s O m e . A c D s f r B a i o I p N d e e o , u o h i e S U C r l a U m h r g n e 0 9 0 0 0 7 ; o i o ; w E o e t e N 0 i f s o v s t 3 t 6 8 2 1 6 4 n K s r : e 8 T n u a l 1 g = 5 e o f 9 P r 1 0 0 1 0 0 o i o D A u c o i n – r o 1 a i t t t e o 2 2 2 2 2 2 N i d 2 K a S l ; : M h c e c n f i 5 ) r G s e i I l S l l N o u o 3 a ( A b T b n p o , s d s W a u a ) D c S W e l e e m : e ( t i i p t 9 i C r i n a a k e E 8 s m e o A n e v c n R 9 o e i m a : h K a i t U 1 n t G t s = t w B i C o , s , t h = t o c s t e s N e B k d D a s n I E l e t u b N e , r r U h n S o r R n = s o n a u U a i S e N P a c l e g o A : i t e i r t ; A B W b S y f n r P ) g t o i a e m : u o i M N n S e o n t s K c Y d A p i M s i : K E o r n l m r S e N c h C e o d a B h i y i r h E O D s l t l R h c O t S v u t n T t A t r i a o r R p U E U N I o S C s n O o o o n C C y O f I e L W m i N N U U W A ( o E N r C A ( I S N B S

13 14 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

As this confusing array of contradictory estimates may suggest, the existence of an estimate published by an ostensibly authoritative institution does not necessarily vouchsafe its reliability. Some figures for North Korea stand out as internally inconsistent on first glance. The United Nation’s estimate for the overall growth rate for the North Korean economy, for example, is noticeably higher than the growth rates ascribed to any of its component parts (table 1-2). In sectors said to account for more than 70 percent of North Korea’s economic output in 1985, South Korea’s growth rates during the same fifteen-year period are estimated to have been much more rapid. Yet through some unexplained computational legerde- main, North Korea is given the higher overall growth rate. The irreplicable nature of the estimate is further compounded by the fact that the rate of growth for the North Korean economy as a whole is higher than for any of its subsidiary sectors. To make matters worse, this pattern of internal inconsistencies is simply updated in subsequent editions of the compendium in question: exactly the same configuration of impossible totals can be found in the 1991 estimate.19 If some estimates are obviously internally inconsistent, others were evidently just as unstable over time. The U.S. Arms Control and Disarmament Agency (ACDA), an organization subsumed within the U.S. Department of State, published annual time series estimates of GNP and “military burden” (military expenditures as a proportion of GNP) for North Korea. Even for specific years, ACDA’s estimates changed radically from one annual report to another (tables 1-3 and 1-4). In the early 1970s, for example, official ACDA figures put the 1969 North Korean GNP at 56 percent of South Korea’s (implying, among other things, that per capita GNP was higher in the North). By 1980, North Korea’s 1969 GNP was said to be only 32 percent as large as the South’s, suggesting substantially lower per capita output for the North at the time. While ACDA estimates of North Korean economic performance were gradually revised down in the 1970s, they were typically upgraded retroactively during the 1980s. According to the 1980 edition of World Military Expenditures and Arms Transfers, South Korea’s economy was four times larger than North Korea’s in 1978; by the 1984 edition, the ratio for that year had been revised to 3.7 to 1, and by the 1989 edition it had been reduced still further, to 2.4 to 1. Estimates of “military burden,” for their part, seemed to oscillate by their own rhythms, with little reference to estimates of PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 15

TABLE 1-2 INTERNALLY INCONSISTENT ESTIMATES: UN FIGURES ON REAL ECONOMIC GROWTH RATES, NORTH AND SOUTH KOREA, 1970–1985

123 Economic North South Sector Korea Korea (2 minus 1)

Agriculture 4.1 2.9 (–1.2) Industrial Activity 9.7 13.6 (3.9) Construction 6.3 10.8 (4.5) Wholesale and 2.3 8.7 (6.7) Retail Trade Transport and 2.9 12.4 (9.5) Communication Aggregate Output 11.1 8.4 (–2.7)

NOTE: Estimates are for gross domestic product for South Korea and for net material product for North Korea; national accounting concepts differ, and therefore figures are not fully comparable. SOURCE: Derived from United Nations, Material Accounts Statistics: Analysis of Main Aggregates, 1985 (New York: UN, 1988), 229, 272, 285, 292, 299.

overall output. For a single year—1977—successive ACDA estimates have put the ratio of military expenditure to GNP in North Korea first at 23.4 percent, then at 11.6 percent, and then up once again at 22.6 percent. By contrast, official estimates for North Korea’s “military burden” for 1985 were gradually scaled down by successive editions of the ACDA report.

Some Indicators of Comparative Performance

This contradictory universe of estimates is not only perplexing but dis- couraging. It seems to suggest that one can have little confidence in any quantitative statement about the comparative performance of the North and South Korean economies. Yet this is not the case. Despite the paucity of data on the North Korean economy, a certain amount of information pertaining to economic conditions in the country does exist. Used with 16 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-3 UNSTABLE ESTIMATES: ACDA’S RATIO OF SOUTH KOREAN TO NORTH KOREAN GNP, 1961–1992 (current prices)

Editions Estimate for Year 1972 1974 1976 1980 1984 1987 1989 1992–93 1992 13.85 1991 12.16 1990 8.39 1989 7.27 1988 5.75 6.68 1987 5.20 5.95 1986 4.67 5.32 1985 3.67 4.24 4.79 1984 3.58 4.02 3.24 1983 3.39 3.70 2.94 1982 4.29 3.07 3.34 1981 NA 3.02 3.01 1980 3.37 3.10 2.69 1979 3.74 3.23 2.71 1978 4.00 3.66 3.24 2.41 1977 3.81 3.51 3.07 1976 3.45 3.18 2.86 1975 2.80 2.93 2.61 2.59 1974 2.57 2.96 3.23 1973 NA 2.46 3.07 3.37 1972 2.32 2.13 2.98 3.26 1971 1.99 2.08 3.16 1970 1.83 1.85 1.97 3.16 1969 1.78 1.80 1.95 3.12 1968 1.64 1.65 1.85 1967 1.54 1.58 1.83 1966 1.32 1.32 1.71 1965 1.16 1.21 1964 1.10 1.45 1963 1.18 1.63 1962 1.27 1961 1.33

NOTE: NA = not available. SOURCES: U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers (Washington, D.C.: ACDA), various editions. PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 17

TABLE 1-4 UNSTABLE ESTIMATES: ACDA NUMBERS ON NORTH KOREAN “MILITARY BURDEN,” 1961–1992 (Military Expenditures/GNP, percent)

Editions Estimate for Year 1972 1974 1976 1980 1984 1987 1989 1992–93 1992 25.0 1991 20.0 1990 20.0 1989 20.0 1988 22.0 20.0 1987 21.4 20.0 1986 20.9 20.0 1985 22.2 20.4 20.0 1984 22.2 19.6 20.0 1983 22.5 19.2 20.0 1982 21.6 22.6 18.7 1981 NA 22.2 18.3 1980 18.9 22.6 17.9 1979 9.4 22.4 17.5 1978 NA 10.6 22.7 17.1 1977 23.4 11.6 22.6 1976 23.5 12.8 22.2 1975 10.4 21.6 10.7 1974 10.8 19.4 19.4 1973 NA 11.0 18.8 18.7 1972 9.4 9.4 20.9 21.0 1971 15.3 15.3 18.0 1970 15.6 15.6 15.6 15.7 1969 15.4 15.4 15.4 18.7 1968 17.4 17.4 17.4 1967 15.7 15.7 15.7 1966 12.0 12.1 12.1 1965 14.0 14.0 1964 12.0 12.0 1963 12.2 12.2 1962 11.9 1961 11.3

NOTE: NA = not available. SOURCES: U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers (Washington, D.C.: ACDA), various editions. 18 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

appropriate caution, these indicators point to a consistent and rather interesting picture of the changing economic balance in the Korean peninsula. The indicators are the following: indices of physical output, labor force trends, urbanization trends, the official budget of the DPRK, “national income,” commercial energy consumption, and official “GNP” estimates. Each is discussed in turn below.

Indices of Physical Output. One starting point for comparing North and South Korean economic performance would be measures of physical production. Indices of physical output, of course, beg the question of valuation.20 Few products are by their nature truly homogeneous and thus fully comparable internationally. Indicators of physical output, however, have the singular advantage, in the Korean context, of being available. South Korean statistics have long reported the volume of physical output for a variety of goods, and there seems to be little reason to question the reliability of these particular figures. The CIA, for its part, published its own estimates on the volume of physical output in North Korea for a variety of commodities and goods. These estimates were informed not only by North Korea’s episodic release of statistical tidbits on agricultural and industrial performance but also by the U.S. government’s considerable capacities for gathering information by “technical means.” One may note that industrial capacity can be assessed, albeit within broad limits, by aerial and satellite surveillance. One may also note that heavy industry is not only intrinsically easier to identify through such methods than is production in agriculture and small enterprises but also pertinent to any assessment of a country’s military capacities.21 For these reasons, we may perhaps be most confident in the CIA’s estimates of production in North Korea’s heavy industries.22 We should perhaps also remember, however, that by comparing only physical output in agriculture and heavy industry, as we do in table 1-5, we are choosing terms that tend to favor a centrally planned command economy over a more market-oriented economy.23 Physical indices, after all, take no account of quality differentials or waste, and they necessarily ignore activity in the service sector. Between 1960 and 1985, to judge by the indicators in table 1-5, the balance of basic production on the Korean peninsula shifted dramatically. By these measures, the volume of commodity output would seem to have risen PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 19

TABLE 1-5 OFFICIAL U.S. AND ROK ESTIMATES FOR PHYSICAL PRODUCTION OF SELECTED COMMODITIES: NORTH KOREA VS. SOUTH KOREA, 1960–1985

Commodity 1960 1965 1970 1975 1980 1985 Rice (thous. metric tons) DPRK 1,100 1,300 1,400 2,500 2,300 3,600 ROK 4,151 4,470 5,471 6.485 5,311 7,855

Cement (mil. metric tons) DPRK 2.3 2.4 2.8 5.0 6.6 8.5 ROK 0.4 1.6 5.8 10.1 15.6 20.4

Crude Steel (mil. metric tons) DPRK 0.6 1.2 2.2 2.6 3.6 4.5 ROK — 0.2 0.5 2.0 8.6 13.5

Electricitya (billion kwh) DPRK 9.0 13.4 16.5 22.0 24.0 30.0 ROK 1.7 3.3 9.2 19.8 37.2 58.0

Trucks and Buses (thousands) DPRK 3 4 8 10 12 16 ROK — 1 9 19 54 71

Ratio: ROK to DPRKb (DPRK = 100) Rice 377 344 391 259 231 218 Cement 17 67 207 202 236 240 Crude steel RM 17 22 77 239 300 Electricity 19 25 56 90 155 193 Trucks and buses RM 25 118 185 448 444

NOTES: a = exclude privately generated electricity; b = ratios may not match production figures due to rounding; — = negligible; RM= ratio meaningless, North Korean preponderance. SOURCES: For estimates of South Korean current electricity and truck and bus production: Republic of Korea, National Bureau of Statistics, Korea Statistics Yearbook (Seoul: Economic Planning Board), various issues. All other estimates: U.S. Central Intelligence Agency, Handbook of Economic Statistics (Washington D.C.: NTIS), 1981 and 1989 editions. 20 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

for both Koreas, but it has risen especially rapidly for South Korea. Of the commodities represented, North Korea’s estimated output ratio improved only for rice (and there, as we shall later see, perhaps for reasons that have little to do with underlying changes in productivity). For some of these products, South Korean output was negligible in 1960, and yet it was estimated to be much greater than North Korea’s by 1985 (much less by 1989). When one remembers that South Korea’s 1990 population was roughly twice the size of North Korea’s, one may note that per capita production of such items as cement, steel, and trucks and buses were estimated to have been dramatically higher in the South than in the North by 1989, the eve of the Soviet collapse—exactly the reverse of the situation estimated for 1960. If these figures can be presumed to be reliable in and of themselves, and to be broadly representative of trends for allied goods, they would suggest the proposition that South Korea caught up with, and exceeded, North Korean per capita output in many areas of heavy industry over the course of the final Cold War generation. Insofar as heavy industry enjoys special priority in all Soviet-style economies, a broader significance might be ascribed to such a crossover.

Labor Force Trends. Estimates from a very different source and on a different topic seem to point in a similar direction. These are the officially released, but officially unpublished, figures on the distribution of the North Korean labor force. These data and many others referred to in this chapter were provided to the UN Fund for Population Activities (UNFPA) to meet UNFPA’s requirements for extending technical assistance to Pyongyang for a planned census.24 These and the allied data transmitted do not evidence any obvious and peculiar inconsistencies, although their reliability may have been affected by the actual ability of the DPRK’s statistical authorities to gather and process accurate information on the society under their aegis.25 Table 1-6 presents data on the changing employment structure of the civilian labor force in North and South Korea between 1960 and 1987. Needless to say, these figures must be handled with care. South Korean data on the country’s economically active population have long been treated with a certain measure of caution by informed users. Among other problems, they are believed to have understated unemployment and PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 21

TABLE 1-6 DISTRIBUTION OF CIVILIAN LABOR FORCE: NORTH AND SOUTH KOREA, C. 1960–1987 (percent of labor)

South Korea Agriculture, Social Forestry, and Mining and Overhead Year Fisheries Manufacturing and Other 1965 58.5 10.4 31.2 1975 45.7 19.1 35.2 1987 21.9 28.1 50.0

North Korea Office Cooperative Year Farmers Workers Workers Workers 1960 44.4 38.3 13.7 3.3 1963 42.8 40.1 15.1 1.9 1987 25.3 57.0 16.8 0.9

NOTES: South Korean data refer to proportion of economically active labor force. North Korean figures for 1987 appear to refer to total population ages sixteen and older. Sectoral classification differs for North and South Korea; thus, figures are not fully comparable. For more information, see sources. SOURCES: Social Indicators in Korea 1988 (Seoul: Economic Planning Board, 1988), 92, 105, 110; Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 83. underemployment, especially in the 1960s—and thus possibly to have exaggerated the significance of employment in the agricultural and service sectors.26 The North Korean data, for their part, are unusual in a number of respects. For one thing, North Korea’s 1987 data give a breakdown of sectoral distribution by household, rather than by worker. For another, these data explicitly exclude the country’s huge military sector; to the extent that those in the military are actually engaged in productive labor, and to the extent such labor is disproportionately in the industrial sector, civilian data could tend to understate the overall proportion of the workforce engaged in industry. North Korea’s employment data may also be affected by two potentially significant, albeit opposite, pressures. On the one hand, North Korea’s program of forced-pace modernization may have dictated, for ideological reasons, a greater shift out of agriculture than would be expected from a country with a more liberal polity but the same level of per capita output (and 22 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

may have encouraged the tendency to redefine job categories to comport with its predisposition). On the other hand, as a more closed economy, North Korea is compelled to be more self-sufficient in agriculture than a more open economy with the same level of overall per capita output need be. These qualifications notwithstanding, the comparative trend in table 1-6 seems unambiguous. Both Koreas appear to have made the transition to a predominantly nonagricultural workforce by the late 1980s. In the early 1960s, however, the sector defined as “agriculture” accounted for a much greater share of overall employment in South Korea. By the late 1980s, the share of workers in agriculture was no longer higher in South Korea than in the North, and quite possibly somewhat lower. On its face, in fact, South Korea’s labor force would seem to be somewhat less dependent on agriculture for its employment than would North Korea before the end of the Cold War. Keeping their limitations in mind, these figures would seem to suggest that structural transformation proceeded at a more rapid pace in the South Korean economy over the generation in question. The correspondence between sectoral distribution of a country’s labor force and its level of per capita output is approximate at best in market- oriented economies,27 and more tenuous still for command economies, where broad sectoral changes can be mandated politically. Even so, the patterns in these figures are stark and suggestive. In the early 1960s, South Korea’s labor force was still overwhelmingly agricultural; in North Korea, on the other hand, almost 60 percent of the country’s civilian labor force was reportedly working outside of agriculture. The contrast would seem to be broadly consistent with the proposition that per capita output was higher at the time in the North than in the South. In the late 1980s, South Korea’s reported share of nonagricultural employment was only slightly greater than North Korea’s. In and of itself, this would not seem to argue strongly in favor of decisive differences in levels of per capita output between the two countries. One may recall, however, that South Korea’s population is roughly twice as great as North Korea’s, while North Korea’s reported proportion of “worker” households in its civilian population is roughly twice as high as for South Korea’s corresponding category (e.g., the proportion of working population in mining and manufacturing). Given these offsetting differences, it may be that the absolute number of civilian “industrial” workers in PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 23 the two Koreas in the late 1980s was roughly similar. Yet as we have seen, aggregate production of some basic industrial commodities is believed to be considerably higher by the late 1980s in South Korea than in the North. Taken together, these indications would seem consistent with the proposition that output per worker was considerably higher by the late 1980s in South Korean industry than in North Korean “industry.” According to South Korea’s national accounts data, output per worker was very nearly as high in the “service” sector as in the mining and manufacturing sector by the late 1980s (by official data, 92 percent as high, as of 1987).28 Thus, in sectors employing almost four-fifths of South Korea’s current labor force, per capita output would seem to be considerably higher than in the sector employing almost three-fifths of North Korea’s workforce. Even if per capita output in the residual sectors were equal in the two countries—or somewhat higher in the North—overall output per capita would still have been significantly higher in the South on the eve of the crisis of international communism.

Urbanization Trends. In addition to data on employment, North Korea has also released figures on urbanization. To some degree, urbanization may be taken as a rough proxy measure of economic attainment.29 At the very minimum, sustaining a significant portion of a national population in a densely inhabited, nonrural setting puts pressure on agricultural productivity, transportation and communications, social infrastructure, and organizational capacity—qualities that relate directly to a society’s level of material development. Urbanization was apparently measured differently in North and South Korea. In the era of Japanese colonialism, towns or cities of twenty thousand persons or more were defined as urban areas. In the Republic of Korea, urban areas were defined as towns or cities with a population of fifty thousand or more. North Korea has never volunteered a published explanation of what constitutes an “urban area” in the DPRK. Private conversa- tions with statistical authorities from the DPRK, however, suggest that (1) there is no absolutely fixed definition for urban areas in the DPRK; (2) the approach to defining urban population may have changed since the founding of the state in 1948, and perhaps more than once; and (3) in general, an area can be counted as urban at a lower population threshold in the 24 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-7 URBANIZATION IN NORTH AND SOUTH KOREA, 1960–1985 (percent urban of total population)

North South Year Korea Korea 1960 40.6 28.0 1965 47.5 33.6a 1970 54.2 41.2 1975 56.7 48.4 1980 56.9 57.3 1985 59.0 65.4

NOTES: a = 1966. Definition of urban area for North Korea is unknown. In South Korea, urban areas defined as cities and towns with population of fifty thousand and above. Urbanization rates for North Korea since 1975 refer only to civilian population. Figures may not be fully comparable. For more information, see source. SOURCE: Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 28.

North than in the South.30 Comparisons of urbanization in North and South Korea, therefore, are less straightforward than might be supposed.31 Attendant uncertainties notwithstanding, comparative trends are presented in table 1-7. Before partition, both North and South Korea were overwhelmingly rural by any reasonable definition, although urbanization rates were reported to be somewhat higher in what is now the South. By 1960, to judge from these figures, the DPRK looks to have been more urbanized than the Republic of Korea, although some of this differential may simply reflect differences in basic definitions of the term. By 1987, however, South Korea decidedly looked to be the more urbanized society. If current definitions for urban areas are stricter for South Korea than for North Korea, the differential would be even greater than suggested by table 1-7. One may also note that the figures in table 1-7 report that the pace of urbanization slowed markedly after 1970 in North Korea but continued briskly in the South through the 1970s and early 1980s. Assessing the precise economic significance of these figures is largely a matter of judgment. The relationship between per capita output and reported levels of urbanization may be somewhat different in the two Koreas. In North Korea, spontaneous migration is not officially permitted; all persons PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 25 who change residence are required, at least in theory, to obtain approval beforehand from the government. Under such circumstances, North Korea’s reported slowdown might be at least partly a response to high-level political directive; if so, subsequent trends would not faithfully reflect underlying economic factors. In South Korea, government policy toward rural areas (about which more later) may have resulted in a greater shift of population to urban centers than would be expected for a society at its level of agricultural productivity. Even with such qualifications in mind, however, the numbers in table 1-7 would seem to be consistent with the proposition that per capita output was higher in North Korea in the early 1960s, but was higher in South Korea by the late 1980s, or even the mid-1980s.

The Official Budget of the DPRK. Urbanization data are not the only official numbers pointing toward a slowdown of North Korean economic growth since partition. Data on the North Korean national budget—the single economic datum the regime released annually after the statistical blackout of the early 1960s32—pointed in the same general direction33 (table 1-8, on the following page). According to these numbers, the nominal rate of growth in government revenues and expenditures was just under 12.5 percent a year between 1960 and 1975, but averaged about 7.2 percent a year between 1975 and 1993. Between 1985 and 1989, the rate of growth in state revenues and expenditures is reported to have averaged a bit over 5 percent per year; the pace dropped to a bit under 5 percent a year between 1989 and 1993. The impression of slowdown conveyed by these figures could be misleading if price levels in the DPRK were declining or if the ratio of national budgetary expenditures to national income were dropping. Unfortunately, very little information is available on North Korean prices even for individual items, and nothing like a price index or deflator series for output apparently has been released.34 The ratio of budgetary revenue to “national income,” however, can be calculated, albeit roughly, on the basis of two North Korean revelations. In 1966, according to the DPRK’s Choson Central Yearbook, per capita “national income” was 510 won.35 In 1987, according to official North Korean figures released but not published, “national income” for the country amounted to 47.02 billion won.36 These data, in conjunction with independently reconstructed estimates for North Korea’s 26 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-8 PATTERN OF CHANGES IN ANNUAL DPRK BUDGET REVENUES AND EXPENDITURES, 1960–1988 (millions North Korean won, current prices)

Annual Annual Rate of Reported Rate of Reported Rate of Change/Real Year Revenues Change Expenditures Change GDP S. Korea 1960 2,018 1,975 12.1 12.0 6.5 1965 3,573 3,476 11.8 11.6 10.4 1970 6,232 6,027 13.2 13.5 9.5 1975 11,586 11,367 10.6 10.6 7.6 1980 19,139 18,837 7.1 7.7 7.5 1985 27,439 27,329 5.2 5.0 11.4a 1988 31,906 31,661

NOTE: a = 1985–1987. SOURCES: North Korea: derived from Pak Yong-hi, “Economy and Budget of North Korea (II),” Vantage Point 10, no. 6 (June 1987): 7; “North Korea’s 1989 Budget Set at US$15.6 Billion,” Vantage Point 12, no. 4 (April 1989): 20. For South Korean GDP: World Bank, World Tables (Baltimore: Johns Hopkins University Press), 3rd ed. (1983), 102–3; 4th ed. (1987), 250–51; and World Bank, World Development Report 1989 (New York: Oxford University Press, 1987), 167.

total population, provide a basis for calculating the ratio of the state budget to “national income” at the two endpoints. In 1987, budget revenues amounted to 64 percent of “national income”; in 1966, by these computations, they would have amounted to roughly 55 percent of “national income.” In the intervening years, the average annual rate of reported budgetary growth evidently was more rapid than the implied growth rate for “national income.” Under such conditions, it would seem somewhat more likely that budget numbers would understate than overstate the magnitude of any slowdown in “national income” growth. As an indicator of real economic growth, North Korea’s reported budget would seem to be biased strongly upward. Even so, the reported nominal PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 27 growth rate for North Korean budgetary revenues during the 1980s was lower than the measured rate of real growth in the South Korean economy. Population growth in North Korea, moreover, is believed to have been somewhat more rapid than in South Korea during this period.37 Even without revisions or adjustments, North Korean data would seem to indicate that the country’s economy was growing more slowly than South Korea’s during that decade.

“National Income.” Between 1966 and 1987, North Korea’s “national income” per capita rose from a reported 510 won to about 2,319 won (dividing the official figure for “national income” by an independently reconstructed estimate of total population for the same year). This would work out to an average nominal rate of growth of about 7.5 percent a year. Entirely apart from questions pertaining to the reliability of measurement, these numbers are likely to overstate the actual pace of economic growth for the period. The Marxist-Leninist conception of “national income” allows for a certain amount of double-counting of output, through the avenue of intermediate goods; the more complex an economy becomes, the greater the potential for such double-counting. Being current in nature, moreover, these data would reflect any inflationary tendencies in North Korean domestic price levels. South Korea’s national accounts report real per capita growth between 1966 and 1987 to have averaged 7.3 percent a year. On the basis of these data alone, the presumption would be strong that per capita growth had been more rapid in South Korea over this twenty-one-year period, although precisely how much more rapidly would be a matter of speculation.

Commercial Energy Consumption. The proposition that South Korea’s per capita output came to exceed North Korea’s quite substantially between partition and the Cold War seems to be confirmed, albeit inadvertently, by a different sort of data from the DPRK. While the DPRK’s national budget totals are the only annual economic data published regularly, North Korea also began transmitting information of economic significance to international organizations. Since joining the UN World Health Organization (WHO) in 1974, the DPRK has been in regular, if often perfunctory, contact with the constellation of statistical units under 28 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-9 UN ESTIMATES OF PER CAPITA CONSUMPTION OF COMMERCIAL ENERGY: KOREA AND GERMANY, 1989 (KILOGRAMS OF OIL EQUIVALENT)

Area or Country Kilograms (ratio) Korea North 1963 South 1537 Ratio (South = 100) (128)

Germany East 5342 West 3764 Ratio (West = 100) (142)

NOTE: Per capita consumption estimates as printed in source; margins of error may not be properly reflected in computation process. SOURCE: United Nations, 1989 Energy Statistics Yearbook (New York: UN Department of International Economic and Social Affairs, 1991), 49, 55.

the United Nation’s authority. For whatever reasons, North Korea apparently supplied the UN with official figures on energy usage and production. These data have encouraged the UN to attempt estimates of per capita consumption of commercial energy (i.e., coal, oil, and other nonsubsistence fuels) in the DPRK, results from which can be compared with corresponding figures for the Republic of Korea (table 1-9). On their face, the UN’s per capita energy consumption figures for North Korea have both actual and potential problems.38 Leaving these aside for the moment, the actual result of the comparison might surprise students of the Korean economies. According to these UN estimates, per capita consumption of commercial energy in 1989 would have been nearly 30 percent higher in North Korea than in the South. Such results might be taken as a challenge to the notion that contemporary levels of output per capita are higher in the South than in the North. In reality, no such challenge is posed. The volume of per capita energy consumption can only speak directly to differences in levels of material attainment if “energy efficiency ratios” are comparable. Centrally planned PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 29 economies are characteristically more “energy intensive”—that is to say, less energy efficient—than market-oriented economies.39 For all the caveats that apply to such figures, existing estimates show that the ratio of energy utilization to unit of GDP produced was greater in Soviet-style planned economies than in their more comparable market-oriented counterparts by factors of two, three, or even more.40 This distinction is underscored by comparison of East and West Germany on the eve of their reunion (table 1-9). The estimated level of per capita commercial energy consumption in East Germany (the German Democratic Republic, or GDR) was more than 40 percent higher than that of West Germany (the Federal Republic of Germany, or FRG) in 1989—a greater differential than was estimated for the Korean peninsula for that same year. Yet given the inefficiency of energy utilization in the economy of the GDR in relation to the FRG, substantially higher levels of per capita fuel consumption were perfectly consistent with what we now can be quite certain were markedly lower levels of per capita output. On the eve of German reunification, if we use conventional economic estimates, energy input per unit of GDP would appear to have been three or four times greater in East Germany than in West Germany.41 This exact range may not be directly applicable for divided Korea. We cannot presume an exact correspondence between these two partitioned nations with respect to either product-specific energy intensity or overall product mix. Nevertheless, it is surely informative for that comparison. Even a cautious interpretation of the figures in table 1-9 could lend support to the proposition that per capita output in South Korea was several times the North Korean level by the late 1980s. If official DPRK claims of domestic energy production have overstated actual results, the gap between the two economies would be correspondingly greater.42 UN estimates of per capita commercial energy consumption for North and South Korea are available for the 1970s and the 1980s (table 1-10 on the following page). These numbers are suggestive of a shifting balance between the two economies. By these estimates, per capita energy consumption has risen much more rapidly in South Korea than in North Korea during the past two decades. The same estimates suggest a distinct slowdown in the growth of per capita commercial energy consumption in North Korea between the 1970s and the 1980s. For all the caution with 30 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-10 UN ESTIMATES OF PER CAPITA CONSUMPTION OF COMMERCIAL ENERGY: NORTH AND SOUTH KOREA, 1970–1989 (kilograms oil equivalent)

North South Ratio Year Korea Korea (South = 100) 1970 1410 445 317 1975 1797 625 288 1980 1866 941 198 1985 2001 1098 182 1989 1963 1537 128

Annual Rates of Growth: 1970–1980 2.8 7.8 1980–1989 0.6 5.6 1970–1989 1.8 6.7

NOTE: Per capita consumption estimates as printed in source; margins of error may not be properly reflected in computation process. SOURCE: United Nations, Energy Statistics Yearbook (New York: UN Department of International Economic and Social Affairs): 1981 edition, 121; 1989 edition, 49.

which these estimates should properly be used, and for their inexact correspondence with actual changes or differences in final demand, these energy consumption numbers merely reinforce impressions suggested by other types of data from other sources.

Official “GNP” Estimates. A final datum relating to the comparative performance of the North and South Korean economies was released, but not published, by North Korean authorities in May 1990.43 According to this datum, North Korea’s per capita “GNP” in 1989 amounted to $2,580. The derivation of the figure was not explained,44 and its denomination of North Korean output in American dollars would seem, at the very least, surprising. Nevertheless, the figure would seem to be quite significant. In the past, North Korea has episodically released dollar-denominated figures for the country’s per capita “national income.” While their accuracy was questionable (the figure for 1979, for example, was announced on January 1, 1980),45 they had always been higher than PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 31 dollar-denominated, exchange-rate-based estimates of GNP per capita for South Korea. That tradition was broken for the year 1989. For 1989, South Korea’s exchange-rate-based GNP per capita was officially put at $4,968.46 In releasing the figure of $2,580 in May 1990—after preliminary South Korean estimates for 1989 had already been reported—North Korean authorities seemed not only to be placing per capita output in their country at about half (52 percent) of the contemporary South Korean level but also to be indicating that they themselves knew what they were doing and what they were implying.

Alternative Endpoints and Their Implications

Taken together, these data—drawn from a variety of sources and relating to some diverse aspects of economic structure and performance—seem to point toward a single, consistent reading of economic events in postpartition Korea. By the late 1980s, they suggest, per capita output in South Korea was higher than in North Korea—although exactly how much higher is extremely difficult to gauge. Over the generation between the early 1960s and the late 1980s, they suggest, per capita growth was more rapid in South Korea than in North Korea—although, again, precisely how much more rapid is not clear. In the early 1960s, by some indications, per capita output had been higher in North Korea than in South Korea. Using South Korean economic data as a base, it is possible to make some illustrative, crude calculations about real aggregate and per capita growth in North Korea and implicit “deflators” for North Korean budget data, although obviously these are driven very largely by assumption. Table 1-11 provides an illustrative selection of such hypothetical calculations, based on alternative stipulated ratios of North and South Korean per capita GDPs for the years 1960 and 1988. Although the exercise is purely heuristic, and may or may not capture actual relations between the two economies in any of its given sets of assumptions, it may serve to emphasize some points to which we will later return. First, by a variety of these alternative assumptions, it is possible that North Korea could have attained moderate rates of per capita growth for the 32 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 1-11 IMPLICATIONS OF ALTERNATIVE HYPOTHETICAL PER CAPITA OUTPUT RATIOS FOR NORTH AND SOUTH KOREA, 1960 AND 1988

1960 Ratio 1988 Ratio Implied NK Implied NK Implied NK NK/SK Per NK/SK Per Ann. Per Cap. Ann. GDP Budget Revenue Cap. GDP Cap. GDP GDP Growth Growth “Deflator” Assumption (SK=100) (SK=100) 1960–88 1960–88 1960–88 A 125 80 5.0 7.5 2.6 B 150 67 3.6 6.2 4.0 C 133 50 3.0 5.5 4.6 D 150 50 2.6 5.1 5.0 E 200 50 1.5 4.0 6.1 F 150 33 1.0 3.6 6.6 G 200 33 0.1 2.5 7.7

SOURCES: Implied figures derived from table 1-8 and Republic of Korea, Statistical Yearbook 1989 (Seoul: Economic Planning Board, 1989), 48.

period as a whole. Second, under any but the most “pessimistic” assumptions listed, North Korea’s aggregate output could have been growing quite rapidly for the period as a whole. Third, under any but the most “optimistic” assumptions, North Korea’s budget figures must be deflated heavily, at least for the period as a whole, if they are to provide an accurate representation of actual economic changes within that country. Without even resorting to such hypothetical calculations, however, one can see that these indications suggest the likelihood that per capita output in South Korea—however it is measured—came to equal and then exceed North Korea’s sometime during the 1970s. That presumption would square broadly with the assessments of the South Korean National Unification Board (NUB) and the CIA, the organizations that have to date published the most detailed comparisons of North and South Korean economic performance. In the NUB’s reading, per capita output in South Korea exceeded North Korea’s around 1974;47 in the CIA’s estimate, the crossover point was around 1976.48 Although neither organization has publicly explained the method underlying its calculations, neither date would seem implausible. PERFORMANCE OF THE TWO KOREAN ECONOMIES: 1945–1991 33

Conclusion

The proposition that per capita output was higher in South Korea than in North Korea during the pre–Soviet breakup period is unlikely to shock many contemporary students of international development. Witnessing as we so clearly have the collapse of the communist economic order in Eastern Europe, and the final economic and political crisis of the Soviet state, we may have become accustomed to presuming that centrally planned economies generally and necessarily perform less effectively than more liberal arrangements. The modern Korean experience may be a discipline against such comfortable and mechanistic presumptions. As best as can be told, South Korea did not catch up with, much less surpass, North Korea’s per capita output until sometime in the 1970s: that is to say, until their first quarter century of independent government had passed. Even after the end of the Cold War, moreover, many observers saw North Korea as posing a military threat to the very survival of South Korea;49 such assessments also render an indirect judgment on North Korean economic performance, for South Korea was credited with the most rapid rates of economic growth in the “developing world” over the past generation and further possessed a population roughly twice as large as the DPRK’s. Even if its rate of material advance was slower than South Korea’s over the past generation, North Korea’s pace of progress may still have been quite rapid by international standards. Clearly, the particulars of the North Korean experience deserve closer examination.

Policy and Economic Performance in the DPRK: 1945–1991

For a country about which so little information is available, the international perception of North Korea’s policy has, for decades, seemed remarkably uni- form and clearly drawn. In communist and noncommunist societies alike, the Democratic People’s Republic of Korea is widely seen as a bizarre and even aberrant regime. In the words of one longtime student of Asian affairs, North Korea’s “political system [is] as close to totalitarianism as a humanly operated society could come.”1 Visitors from both East and West characteristically comment on the claustrophobic regimentation and lack of spontaneity in the society they are allowed to observe on their carefully chaperoned tours.2 The cult of personality fashioned around the country’s longtime supreme political personality, Kim Il-sung, and his son and successor, Kim Jong-il, also elicits comment.3 Describing the national philosophy that is not only officially expounded but also apparently officially instilled into every aspect of North Korean daily life, one longtime observer of Korean politics has concluded that “Kim’s juche [national self-reliance] is nothing more than xenophobic nationalism.”4 During the Cold War era, North Korea was perhaps best known for its violent incidents and volatile behavior in the international arena (Panmunjom ax murders, the Rangoon massacre, the KAL bombing, the nuclear inspection standoff, and the like). Indeed, so unpredictable was North Korea perceived to be that its two principal longtime allies, the USSR and the People’s Republic of China (PRC), reportedly saw fit during the Nixon administration to issue private assurances to the U.S. government that they would not be drawn into war if the DPRK should commence hostilities on the peninsula.5 One might be excused for presuming that a closed, rigidly controlled, and unpredictable state would stand little chance in a long-term economic

34 POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 35

TABLE 2-1 RETROSPECTIVE ESTIMATES OF PER CAPITA GNP IN NORTH AND SOUTH KOREA FOR THE EARLY POST–KOREAN WAR PERIOD (US$1982)

Year Source 1956 1959 1960 1965 CIAa North Korea — — — 644 South Korea — — — 421 NUB North Korea — — 410 575 South Korea — — 236 314 Goto North Korea 246 423 — — South Korea 211 245 — — Ratios (South Korea = 100) CIA — — — 153 NUB — — 174 183 Gotob 117 173 — —

NOTES: — = Not available; a = gross domestic product; b = adjusting Goto estimates to a GDP basis for South Korea would result in per capita output ratios of 137 for 1956 and 186 for 1959. SOURCES: Derived from U.S. Central Intelligence Agency, “Korea: The Economic Race between the North and the South,” Research Paper 78 10008 (Washington, D.C.: CIA, January 1978), 2; Republic of Korea National Unification Board, The Economies of North and South Korea (Seoul: NUB, 1988), 30; Fugio Goto, Estimates of the North Korean Gross Domestic Product 1956–1959 (Kyoto: Kyoto Sangyo University, 1990), 45–46; U.S. Bureau of the Census, Statistical Abstract of the United States 1990 (Washington, D.C.: Government Printing Office, 1990), 456.

race with the sort of dynamic, competitive, and increasingly open society that South Korea is widely held to exemplify. But as we have already noted, North Korea’s levels of output per capita were likely superior to South Korea’s for much, if not most, of the period between partition and the end of the Cold War. Retrospective assessments of the performance of the two Koreas may differ in their particulars, but they are consistent on this point (see table 2-1). In the late 1950s and early 1960s, moreover, conditions in, and prospects for, North Korea were viewed as sufficiently auspicious for more than eighty thousand Korean residents in Japan to migrate voluntarily for permanent repatriation;6 no similar exodus accrued to the South. 36 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Regardless of their sympathies, contemporary students of the Korean economies likewise generally recognized the North’s overall performance as superior to the South’s.7 Even leading political figures in the Republic of Korea—including at least one former deputy prime minister—recall their own perception that North Korea’s general level of development was higher than the South’s in the early 1960s.8 And though North Korea’s increasing international isolation over the subsequent generation would seem to bode ill for technological innovation, as recently as 1988 did South Korea’s official National Unification Board, in judging the respective technological levels of divided Korea, come to the conclusion that “the North is a little ahead of the South in large-scale machines and equipment. . . . The North is [also] considered slightly better in power-generating machinery.”9 Such a purported North Korean advantage would appear all the more noteworthy in view of South Korea’s concerted program of promoting heavy industry in the 1970s and 1980s. If all of this would seem out of keeping with the outside world’s image of North Korea, it may be that important elements of the DPRK’s Cold War–era policies have not been widely understood or appreciated. If Kim Il-sung’s DPRK was a fanatical government, that fanaticism evidently did not inure it to very practical considerations. A capacity for sophisticated calculation and adept management, in fact, would seem to be suggested by what did not occur in North Korea. North Korea, after all, bordered both the USSR and the PRC; yet despite this proximity, and the considerable economic and military aid it received from both states since independence, it did not fall into orbit as a “satellite” to either one.10 No less remarkable, perhaps, is what did not happen in the domestic economy during collectivization. Throughout Asia, the transition to collectivized agriculture was followed by economic crisis and by famine. Economic crisis and famine were characteristic of the “socialist transition” in the People’s Republic of Mongolia,11 the PRC,12 the Democratic Republic of Vietnam,13 and later in Cambodia.14 North Korea stands out as the single exception.15 Not only were famine and disruption apparently averted during the transition, but also per capita production in agriculture seems to have reached relatively high levels in the early 1960s16—just a few years after collectivization was completed (see table 2-2).17 (As we now know all too well, famine would eventually POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 37

TABLE 2-2 NORTH KOREAN AGRICULTURE IN COMMUNIST PERSPECTIVE: FAO ESTIMATES OF PER CAPITA CEREAL PRODUCTION FOR THE DPRK AND SELECTED MARXIST-LENINIST STATES, 1961

Estimated Per Capita Cereal Country or Region Production (kg) 1961 Asia China 224 Mongolia 126 Vietnam 298a Europe Albania 177 Bulgaria 553 Czechoslovakia 414 German Democratic Republic 283 Hungary 616 Poland 538 Romania 572 Yugoslavia 484 USSR 581 DPRK 433

NOTES: a = Democratic Republic of Vietnam (North Vietnam) only. Figures given to three places should be understood to reflect the computational process rather than to imply exactness and accuracy of data. SOURCE: Derived from the UN Food and Agriculture Organization (FAO), Production Yearbook 1972 (Rome: FAO, 1973), 14–15. befall North Korea—but not until nearly four decades after collectivization—after the end of the Cold War era, and after Kim Il-sung’s death.) The practical grounding of North Korean economic policy during the Cold War era—external indications to the contrary—may perhaps also be adduced from what did not happen after its most memorable mass mobilization campaign. In 1959, as China’s Great Leap Forward was still in full throt- tle, North Korea initiated its Chollima movement (named after a Chinese mythical horse that was able to travel more than three hundred miles in a single day).18 As in China, North Korea’s mass mobilization was characterized by intensive propaganda, utopian rhetoric, and exhortations that the population push itself to the limits of endurance.19 Whereas China’s campaign 38 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

brought its economy to a virtual collapse, the Chollima movement ushered in the 1960s—the period in which North Korea was perceived to be leading South Korea economically by the principals in that struggle. The ostensible rigidity and inflexibility of the North Korean polity, finally, did not prevent the transformation of the national economy toward a structure suggestive of relatively high productivity. By the late 1980s, North Korea’s reported sectoral distribution of the working population looked much more like that of the Soviet Union than like those of China or Vietnam (see table 2-3). (The significance of this comparison is not negligible; all these economies were similarly subjected to the distorting influence of command planning, if to varying extents.) Per capita output in China is widely thought roughly to have doubled between the late 1970s and the late 1980s;20 yet in 1987, China’s workforce was mainly agricultural, whereas North Korea’s was roughly three-quarters nonagricultural. Evidently, North Korea’s stolid and continuing rejection of “reform” or “restructuring” had not kept its managers and administrators from evincing productivity increases from the national economy over a period of decades. Little detail, unfortunately, is available in the outside world on the specifics of North Korean managerial and administrative procedures.21 Since the advent of juche in the mid-1950s, published and broadcast materials from North Korea increasingly emphasized exhortation and ideological rectification.22 North Korea’s three most prominent approaches to economic management, moreover, remained nominally fixed since their earliest enunciation. The “Three Revolutions” approach to economic modernization (emphasizing the contributions of ideology, technology, and culture) is commonly believed to have been mentioned first in the early 1970s;23 both the “Chongsan-ri method” for agriculture (1960) and the “Taean system” for industry (1961) survived through the Cold War era. Although it is quite plausible that the practices championed under these banners might have undergone evolution, such changes can only be inferred.24 At their incep- tion, all of these approaches did emphasize the importance of reducing economic costs and of eliciting something like competitive behavior from enterprises and individuals.25 These general themes continued to echo through the North Korean media, although details remain almost amazingly sketchy. An “independent accounting system” was, and is, apparently used to instill financial discipline in industrial and agricultural enterprises, but POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 39

TABLE 2-3 DISTRIBUTION OF LABOR FORCE BY SECTOR: DPRK AND SELECTED MARXIST-LENINIST COUNTRIES, C. 1987 (Percent)

Sector Country Agriculture Industry Other USSR (1987) 19a 38b 43 DPRK (1987) 25c 57d 18 People’s Republic 60 18 22 of China (1987) Socialist Republic 71 12 17 of Vietnam (1989)

NOTES: a = Agriculture and forestry; b = industry and construction; c = “farmers”; d = “workers.” Labor force data refers to total employment in national economy for USSR, population sixteen years of age and older by occupation of household head for DPRK, total employment for PRC, and employment of persons thirteen years of age and older for Vietnam. SOURCES: USSR: Narkhoz 1988 (Moscow: Finansy i Statistika, 1988), 26; DPRK: Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 83; China: China Statistical Yearbook 1990 (Beijing: State Statistical Bureau, 1990), 114; Vietnam: Vietnam Population Census 1989 (Hanoi: Central Census Steering Committee, 1990), table 2.2.

its actual workings remain largely a mystery abroad.26 Material incentive also appears to figure squarely in North Korean economic policy, although the extent of incentives is difficult to determine with any precision.27 An “internal accounting system,” for example, was apparently used to allocate performance bonuses—and penalties—in both industry and agriculture,28 and farm households were reportedly allowed extremely small private plots for their personal use,29 but the outside world’s information about these facets of management derive almost exclusively from the recollections of a relative handful of defectors, few of whom could claim any general comprehension about the mechanics of the national economy. Perhaps the most that can be safely said is that the regime preferred to encourage something like competitive economic behavior from managers and workers through exhortation and indoctrination, but was willing to rely on material incentives when it had to. Important as microeconomic conditions necessarily are to productivity and macroeconomic performance, there is simply not much in the way of 40 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

reliable information about them for North Korea.30 One is left largely with the unsatisfying circularity of divining policies and practices from results. However stultifying, distorted, or punitive the economic environment confronting managers, workers, and households in North Korea from the 1960s through the 1980s may be judged in an international perspective, the fact remains that these policies were consonant with a fundamental, and fairly rapid, transformation from a rural to an urban and from an agricultural to an industrial society.

Partition, War, Recovery

We may speak with greater confidence about some of the broad trends that characterized the North Korean economy as a whole after partition— and before it. On the eve of partition, per capita output appears to have been significantly higher in the northern portion of the peninsula than in the southern half (see table 2-4). In 1939–40, by one set of estimates, per capita “commodity product”—i.e., value added in agriculture and industry alone—was almost 70 percent higher in the provinces from which North Korea was composed than in the southern provinces.31 Even allowing for the possibility that the service sector accounted for a much higher share of overall output in the south, overall per capita output would, by these numbers, almost certainly have been more than 25 percent higher in what was to become North Korea.32 Before partition, southern Korea was about as urbanized as the northern half (an estimated 12 percent vs. 11 percent for 1944).33 The northern provinces, however, were much more industrialized. In 1940, for example, per capita output from mining and manufacturing is estimated to have been almost three times higher in the north.34 Industrial production in the north, moreover, had been directed, by Japanese colonial design as well as by geography, much more toward heavy industry: mining, electricity generation, chemicals, and the like35 (see table 2-5). By an accident of history, the territory that the DPRK came to rule had already been developed structurally in directions that would be pleasing to Leninist planners. Despite administrative, economic, and even direct military assistance from the socialist camp, the period 1944–56 may have witnessed absolute POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 41

TABLE 2-4 PER CAPITA OUTPUT AND ITS COMPOSITION: NORTHERN AND SOUTHERN KOREA, 1939–1940 (1936 constant yen)

Northern Southern Sector Korea Korea Ratio Agriculture 42.1 31.8 132 Forestry 7.4 4.2 175 Fishery 5.9 5.1 115 Mining 11.5 1.8 619 Manufacturing 23.2 10.1 230 Total Commodity Product 90.0 53.1 170

SOURCE: Derived from Sang-chul Suh, Growth and Structural Changes in the Korean Economy, 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978), 132, 137.

TABLE 2-5 PER CAPITA OUTPUT AND COMPOSITION OF MANUFACTURED COMMODITIES: NORTHERN AND SOUTHERN KOREA, 1939–1940 (two-year totals; current prices, yen)

Northern Korea Southern Korea Ratio Foods 8.91 (10.5%) 8.08 (30.3%) 110 Textiles 4.10 (4.8%) 1.62 (6.0%) 253 Wood Products 1.04 (1.2%) 0.66 (2.5%) 158 Printing 0.37 (0.4%) 1.18 (4.4%) 31 Metals 6.26 (7.4%) 0.38 (1.4%) 1647 Machine/Tools 2.17 (2.6%) 2.86 (10.6%) 76 Ceramics 5.95 (7.6%) 1.11 (4.1%) 536 Chemicals 50.40 (59.4%) 5.16 (19.2%) 976 Other 6.47 (7.6%) 5.05 (18.8%) 128

Total 84.84 26.93 315 SOURCE: Derived from Sang-chul Suh, Growth and Structural Changes in the Korean Economy, 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978), 132, 141. 42 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

economic decline in North Korea. Japanese withdrawal and the partition of the peninsula had a wrenching effect on the local economy. Nationalization of Japanese property (which comprised the overwhelming bulk of the country’s industrial assets and not a negligible portion of its arable land)36 may have simplified the “Socialist transformation,” but it did little to stimulate production. Between 1944 and 1946, grain production is reported to have fallen more than 20 percent, and electricity output is reported to have dropped by more than half.37 The Korean War entailed even greater losses. Although it may be impossible to place an exact figure on the economic destruction in North Korea during the course of the fighting,38 one may note that the country’s registered population was almost 12 percent smaller in 1953 than it had been in 1949; moreover, the nation’s reported “sex ratio” (of men per 100 women) fell from 99 to 88 over those years—a catastrophic and nearly unprecedented decline.39 Not until 1956—at the completion of the postwar Three-Year Plan—were the per capita production levels reported for many basic agricultural and industrial products back to the levels reported before partition.40 Even within the industrial sector, according to perhaps the most carefully published study on the topic,41 the absolute volume of output of producer goods from prepartition days was probably not reattained until 1957— a lag whose meaning is all the more consequent given the priority this grouping enjoyed. “Socialist construction,” in a sense, commenced with the Five-Year Plan of 1957–61 (whose ambitious targets were reported generally to have been achieved by 1960, a year ahead of schedule).42 The Five-Year Plan saw the completion of collectivization of agriculture, and the almost total nationalization of production in industry. It also recorded very rapid rates of growth: gross agricultural output was said to increase at an annual rate of almost 7.5 percent a year, and gross industrial product was said to have grown by more than 36 percent a year.43 Even allowing for pricing problems, the problematic conception of “gross output” in a socialist accounting framework, and North Korea’s rapid rate of population growth (then approaching 3 percent a year),44 it is likely that the plan period coincided with a sharp increase in per capita product. Although foreign aid is sometimes viewed as a mixed blessing for recipient states, fraternal assistance from the socialist camp figured prominently POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 43 in North Korea’s plan and may have contributed materially to its apparently successful execution. Economic aid from the socialist camp, by one estimate, accounted for more than a quarter of North Korean state revenues for the Five-Year Plan period, and was equal to four-fifths of the state’s total budget for basic investment and construction.45 No less significant may have been the indirect impact of security assistance. From 1953 to 1958, for example, the PRC allowed the forces of a “People’s Volunteer Army” to serve in North Korea;46 as late as 1958, as many as eighty thousand personnel may have been involved in the operation. Even if these units were not themselves directly involved in reconstruction, they enhanced the security of the North Korean regime and enabled the DPRK to devote its own resources more fully to the task of socialist economic growth.47

The 1960s

By 1965, no less an observer of economic affairs than Joan Robinson would write of the DPRK’s performance that “all the economic miracles of the postwar world are put in the shade by these achievements.”48 Yet official dissatisfaction with economic performance emerged during the plan then in progress, initially scheduled to last seven years (1961–67). In the event, the Seven-Year Plan was extended three additional years and was finally declared completed in 1970. Disappointment with results was indicated a year or so into the plan, as the DPRK simply ceased to publish updated data for those few statistical series that had previously been routinely released. It is perhaps also telling that the government chose not to report a variety of achievements at the end of the plan period. (National income, one of the many items omitted from the official accounting of results, had been slated to grow at 10 percent a year.) But if the plan did not meet all official expectations, numbers released nevertheless seemed to suggest relatively rapid growth. Gross industrial output, for example, is said to have increased at a rate of almost 13 percent a year over the decade, and government revenues were reported to have risen at nearly the same pace. Although the North Korean economy was directed according to precepts officially extolling extreme national self-reliance, development trends 44 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

nevertheless seem to have been affected centrally by international events. At the time of the Sino-Soviet rift, for example, North Korea had been lean- ing somewhat toward China (the aforementioned Chollima campaign, for example, referred to a horse from Chinese mythology49). By the early 1960s, the Soviet Union was not disposed to continue its previous flows of economic and technical assistance to the DPRK, and China, still recovering from its catastrophic leap forward, was scarcely capable of doing so.50 Unexpected shortfalls of aid may have contributed to the economic adjustments of the 1960s.51 No less significant, from a North Korean standpoint, was the situation in South Korea. Survival and unification with the South—on Pyongyang’s own terms—have been paramount concerns for the DPRK since its founding. The opportunities and dangers emanating from the South were changing qualitatively in the mid-1960s. In 1965, the Republic of Korea established diplomatic relations with Japan, a country regarded by DPRK leadership as a historic and powerful enemy.52 The United States, South Korea’s ally and patron, was committing itself to a major land war in Southeast Asia.53 And a new leadership configuration in the South, dominated by military men, was supervising a pronounced and unexpected upsurge in the local economy. North Korea’s response to these changes in the correlation of forces in the peninsula and in the world arena was to enhance its military potential.54 In 1965 Kim Il-sung stated that “we must thoroughly implement the party’s line of increasing defense capabilities in all ways while promoting socialist construction to the maximum” (emphasis added).55 In 1968 he declared that “the first and foremost task in all branches of the economy today is to give every possible assistance to the building up of our defense capability.”56 In his report to the Fifth Party Congress in 1970, Kim was even more explicit. “During the period under review [1961–70],” he wrote, “we undertook a number of radical steps to boost our nation’s defense capabilities.”57 Official budget figures certainly seem to bear out his assertion. Reported defense expenditures doubled between 1966 and 1967 and nearly tripled between 1967 and 1971.58 For the years 1967 through 1971, defense was reported to account for more than 30 percent of the national budget—up from a reported 2.5 percent in 1961.59 Implausibly low though that initial figure may have been, there can be little doubt that the extension of North Korea’s Seven-Year Plan into a de facto Ten-Year Plan POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 45 coincided with a concerted new effort to finance the development of the country’s military industries through the state budget. Given the predomi- nance of North Korea’s state budget over its entire socialist economy, the high explicit priority for defense could not but impress itself on overall economic output as well. Like all centrally planned command systems, North Korea’s polity was most ideally suited to managing a war economy; party leadership evidently not only accepted the implications of that comparative advantage but also decided to press them toward their logical conclusion.

The 1970s and 1980s

Even under command planning, however, military expenditures have consequences. “This increase in our national defense capability,” Kim Il-sung warned in 1970, “has been obtained at a very great price. . . . Had we been able to divert even a part of our nation’s defense spending to economic construction, our national economy would have developed more rapidly and the standard of living of our people [would have] been raised markedly.”60 The commitment posed practical problems. Although Kim and his party had no doctrinal or ideological problems with opting for guns over butter, reducing the priority of consumer production within the national economy would diminish inducements for the working population to earn and spend wages; moreover, it could not help but affect casual, impressionistic comparisons with conditions in the South. There are reasons to think that North Korean planners may have believed they could finesse the decision between guns and butter and may have arranged their designs for the Six-Year Plan (framed for 1971–76) around this premise. There are also reasons for thinking that in so doing, they may have engineered a major dislocation in their national economy and inaugurated the obvious economic slowdown reflected in various official data series. Evidence of a dislocation is fragmentary and almost entirely circum- stantial. A major dislocation, however, would seem to explain and unite some otherwise disparate and contradictory soundings on the North Korean economy in the early 1970s. In 1974, for example, North Korea officially announced the achievement of a seven-million-ton grain harvest, asserting further that production 46 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

had grown “by over 30 percent a year in every year in recent years” and had doubled since 1964.61 According to North Korean defectors, however, food rations in the various regions of the country with which they were familiar had been reduced in the early 1970s.62 Defector recollections, moreover, consistently point to a shift in national population policy toward antinatalism, beginning in the very early 1970s and intensifying thereafter.63 No such policy, however, was ever publicly announced. Much to the contrary, North Korea’s officially enunciated policies seemed to reflect the view that the society was labor scarce; the Six-Year Plan, for example, explicitly aimed at augmenting the socialist workforce through the “liberation of women from the kitchen.”64 How are such divergent reports and announcements to be reconciled? A clue may be offered by developments in North Korean wage policy. In the early and mid-1960s, the North Korean government had implemented several general wage increases for the nonagricultural population. Another major across-the-board raise (with prospective increases ranging from 30 to 40 percent) was announced in early 1970.65 “Money illusion” does not generally seem to afflict the workers of bourgeois societies in the modern era, but it may have beset the planners of some contemporary socialist economies. Without a commensurate increase in the supply of purchasable products and services, an increase in the wage fund necessarily translates into an excess of demand, which can only be articulated through “adjustments.” In a highly regimented and inflexible economic system, the “adjustments” provoked by a major monetary shock could be both far- reaching and poorly understood. Although there is no reason to assume that North Korea’s market for consumer goods was in equilibrium on the eve of the 1970 wage raise, a major wage raise conjoined with a reallocation of resources toward the military could only worsen the prospect for such a balance—perhaps precipitously. In the early 1960s, food had reportedly accounted for nearly half the nominal expenditures of North Korea’s nonagricultural workers.66 Among its other possible results, the 1970 wage increase may have thrown the North Korean food distribution system into crisis, as urban consumers tried to translate the greater portion of their wage increments into increased and improved diets for their households. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 47

A variety of measures by the North Korean state in the early 1970s, including measures never officially acknowledged but widely reported by defectors, could be interpreted as efforts to respond to a domestic food problem. The announced 78 percent jump in grain production between 1972 and 1974, for example, is patently implausible: intensive, high-yield cultivation simply does not offer such opportunities for expansion of output. On the other hand, claimed increases of this magnitude would be completely consistent with a major increase in state assessments against, or procurement from, agricultural cooperatives.67 The DPRK, one may note, would not have been the first socialist state to employ this device to squeeze more produce from the farm sector without officially raising procurement quotas: exactly the same procedure had been used in the USSR in the 1930s68 and in China and Vietnam in the 1950s.69 Unannounced reductions in food ration norms, for their part, could be seen as forcing consumers to rely on nonrationed supplies for their supple- mentary purchases. Officially, the unsubsidized price for rice in the DPRK in the 1970s was over six to eight times as high as the price for rationed rice;70 disparities may have been similar for other rationed commodities. Reduction of food ration norms would not only have relieved the state of the direct financial burden attendant on such subsidies but would have also effectively “soaked up” part of the increase in discretionary monetary income granted to nonagricultural households. The hidden antinatalist population control campaign (confirmed, as best can be told, only once, and then by a representative of a quasiofficial, pro-DPRK group in Japan71) could be read as an attempt, however misinformed, to ease long-term pressure on the country’s agricultural system. Independent reconstructions of North Korean population trends suggest that the country’s rate of natural increase in the early 1970s was indeed quite high—perhaps more than 3 percent a year. If DPRK authorities had succumbed to a sort of fallacy of composition and had taken those contemporary rates of growth to be a major cause of subsequent problems in the food distribution system, a forceful population program might have seemed to suggest itself. The DPRK, it may be remembered, would not have been the only communist regime to enforce a secret population-control program and to do so because of concerns about food production: the People’s Republic of China had been 48 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

doing just that in the early 1970s, when the North Korean effort apparently began.72 Finally, one may note that the pace of urbanization in North Korea is officially acknowledged to have slowed markedly in the early 1970s. Between 1965 and 1970, according to released but as yet officially unpublished North Korean data, the country’s registered urban population grew by more than 6 percent a year; between 1970 and 1975, by contrast, the reported rate was 2.7 percent a year. As table 1-7 in the previous chapter attested, the pace of urbanization stayed relatively slow through the late 1980s. Because any change of residence in the DPRK in theory requires official approval, the slowdown in urban growth rates probably reflects a deliberate shift in policy. One must emphasize that there is no direct evidence that any such shift in policy was formulated or embraced. A slowdown in urban growth, however, might be expected, among other consequences, to have an effect on the urban sector’s demand for rural foodstuffs. Whatever actually occurred in North Korea’s consumer sector in the early 1970s, no general wage increases were announced during the following two decades.73 Subsequent North Korean policy, to the contrary, appears to have been intent on limiting the impact of discretionary consumer expenditures on the national economy. In 1979 a new currency was put into circulation—a measure quite consistent with invalidating unauthorized or unwelcome private holdings of the old currency and thus with neutralizing pent-up consumer demand.74 Despite ostensibly rapid increases in nominal national income, rationing appears to have played an enduring, and indeed an increasing, role in the allocation of goods for personal consumption. In the late 1980s, for example, Kim Il-sung’s birthday (April 15) served as an annual occasion for distributing clothing, household articles, and other “gifts” to families throughout the country.75 Despite apparent cutbacks in norms, rationed food continued to figure prominently in consumption patterns of nonagricultural households. According to one official account in 1987, “Through this measure alone [the state] gives each factory and office worker’s family additional benefits to the value of 560 won on average.”76 (This figure would seem to imply that government provisions determined most of the caloric intake of the families concerned.77) And in 1990 in Pyongyang, a three-tiered currency system was observed to be in evidence; in a number of the city’s large department stores, the ordinary currency paid to the wage-earning population could not be used POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 49 for purchases.78 The effect of this system was likely to create an unofficial market for the preferred currencies and thus to raise the actual cost to most urban households for consumer goods well above their nominal prices; the extent of this practice outside Pyongyang, however, could not be ascertained. By the early 1970s, the DPRK’s effort to divorce consumption from consumer preference had already made remarkable progress. In 1973 an article in the party’s theoretical journal, Kulloja, stated that “the share to laborers from state and social benefits is almost equal to the share they receive according to labor.”79 The proportion of personal to total consumption apparently fell in subsequent years. In 1981 two Soviet com- mentators claimed that “while in the European socialist countries, the share of public consumption funds in meeting individual needs is 25– 30 percent, their share in the DPRK exceeds wages of working people.”80 The tendency was apparently taken still further over the course of the 1980s. In 1987 North Korea’s “national income,” as noted in chapter 1, was reported to be about 47 billion won. In that same year, official figures reported the number of households in the country at 4.05 million. Under the very generous assumption that the average North Korean household earned 300 won per month in 1987,81 monetary compensation would have amounted to less than one-third (31 percent) of net material product. An alternative calculation can be made on the basis of a figure given for the economically active population in a 1987 North Korean publication. (According to that statement, “8,950,000 able-bodied citizens have a job and are engaged in creative labor.”82) Imputing a wage of 100 won a month83 to this population would suggest that monetary compensation amounted to less than one- quarter (23 percent) of North Korea’s net material product. Net material product, moreover, tends to be substantially lower than gross domestic product (if both are computed on the basis of administered prices). In the early 1980s, in some World Bank–sponsored efforts, the ratio of GNP to NMP in China and the Soviet bloc was estimated to range from 1.16 to 1.32.84 Scaling back the calculations for North Korea by these margins would result in “generous” alternative computations for the share of monetary compensation in total output of 27 percent and 17 percent, respectively. Even if these World Bank benchmarks for converting NMP into GDP were faultless in terms of accounting, they would bear a problematic correspondence to reality for the countries in question due to the pricing 50 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

problems. It is by no means obvious, moreover, that the DPRK lies within the range that their endpoints demarcate. Yet without attempting to convert these North Korean figures to a GDP base, it is apparent that the ratio of wages and salaries to national output was extraordinarily, astonishingly low in the DPRK by the end of the Cold War era. More than in any other country at its income level at the time, and perhaps more than in any other modern society, discretionary personal demand may have been delimited from the forces propelling economic activity in North Korea. We shall return to this point later. If the consumer market were jolted by dislocation in the early 1970s, it would not have been the only sector to be so affected. During that same period, North Korea’s external sector—its international trade accounts— experienced shocks and adjustments from which it had only partially recovered fifteen years later. The officially extolled doctrine of juche and the autarkic proclivities of command planning notwithstanding, international trade in fact played a fairly important role in the DPRK’s economy in the 1950s and 1960s.85 During those years, of course, the overwhelming majority of North Korea’s trade was with other communist countries, and the difficulties in establishing the actual value of turnover between currencies whose exchange rates are both administratively determined are obvious. Various attempts to measure North Korean trade in current U.S. dollars have independently suggested an export volume of roughly $250 million for 1966.86 If roughly accurate, this would mean that North Korea’s per capita export volume was then roughly twice as large as South Korea’s.87 (South Korea’s per capita exports, by these several estimates, did not exceed North Korea’s until the 1970s.88) On the basis of some crude and highly tentative calculations, it would appear that exports amounted to roughly one-tenth of North Korea’s “national income” in the mid-1960s.89 If the ratio of exports to “national income” connotes the degree of “openness,” North Korea in the mid-1960s would have looked more “open” than most other contemporary communist economies;90 moreover, it would have been an economy in the process of becoming more “open,” insofar as its pace of export growth exceeded reported growth of “national income.” In the early 1970s, North Korea’s trade strategy shifted. Noncommunist countries had accounted for roughly one-fifth of North Korea’s trade turnover in 1970; by 1974 they may have accounted for more than half— POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 51 by one estimate perhaps as much as three-fifths.91 Imports from the West (preponderantly Western Europe and Japan) shaped the trend. Between 1970 and 1974, the estimated current dollar value of Western imports was permitted to grow by a factor of thirteen;92 in 1974 North Korea was apparently importing more from “capitalist” countries than from its communist partners (according to one assessment, virtually twice as much).93 North Korea’s import binge—to a large degree, turnkey factories, capital equipment, and other sorts of machinery—was mostly financed by foreign loans denominated in hard currencies (British pounds sterling, deutsche marks, and yen). Repayments did not proceed on schedule. By 1975 difficulties had already surfaced, and by 1976 North Korea was effectively in default on a large portion of its borrowing from Western countries.94 North Korea’s credit rating collapsed, imports from Western countries sharply contracted, and overall trade turnover fell by perhaps one-third between 1974 and 1976.95 According to several different estimates, North Korea’s total trade turnover in the mid-1980s was about US$3 billion a year.96 Even if some of these estimates overlooked certain items in the North Korean trade account (such as its unreported but perhaps sizeable weapons sales to Iran and other countries),97 it could well be that the country’s trade turnover, valued in real U.S. dollars, was lower than it had been a decade earlier. North Korea’s poor record of loan repayments, and the serious disruption that it provoked, have been adduced to a variety of factors.98 Exogenous shocks in the world economy that may have made repayments unexpectedly difficult, North Korea’s managerial capacity to put imported Western equipment to use, and its government’s unfamiliarity with the workings of the financial and commercial markets in which it was operating are among the issues about which analysts have speculated. It seems to have been the case, moreover, that North Korea enjoyed an element of subsidy in the terms of trade with its communist partners99 and had found them willing to reschedule or even cancel outstanding trade related debts;100 Pyongyang’s approach to economic relations with the West may have been conditioned by such experiences. In all such discussions of North Korea’s trade problems, however, a basic question seems to have gone unasked: was the new trade strategy that the government suddenly embraced in the early 1970s actually intended to be self-sustaining? In the short run, a surge of Western imports could be 52 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

expected to relieve immediate constraints on the domestic economy and augment the nation’s immediately deployable economic power. If the swerve toward commercial contact with ideologically questionable trading partners were governed by security policies rather than by long-term economic considerations, in any event, the departure from previous practices not only would be easier to explain but also might even be seen as contributing materially to the strategic purposes of the state. There is considerable, albeit indirect, evidence that North Korea was quietly embarking on an entirely new phase of militarization during the years that it was embracing this ultimately untenable trade regimen. A new approach to military affairs was indicated, and underscored, by a change in the DPRK’s internal statistical procedures.101 From the founding of the state in 1948 until the early 1970s, the country’s registration system was responsible for tabulat- ing an annual population total for all citizens of the DPRK; beginning in the early 1970s—precisely when is not clear—the process was amended, and only civilians were counted.102 Officially excluded from the new national totals, North Korea’s military population appears to have grown at an amazing pace. (North Korea’s military population can be estimated on the basis of official data on the presumption that the military population accounts for the difference between reported civilian male population and independently reconstructed estimates for the total male population for any given year.103) Around 1970, when two leading specialists described North Korea as “perhaps the most highly militarized society in the world today,”104 the country was thought to have about four hundred thousand men under arms.105 By 1975, to judge by the number of “missing men” in the count of the civilian male population, North Korea’s military may have exceeded seven hundred thousand, and by the late 1970s it could have been approaching one million (see table 2-6). (By this indicator, North Korea’s military numbers apparently continued to increase into the late 1980s.) By the late 1970s, North Korea’s military personnel, by these figures, could have accounted for as much as one-tenth of the country’s total male population and for as much as one-fifth of its men of working ages (15–64). No less significant, by the mid-1970s North Korea’s active-duty military forces, by these estimates, would have considerably outnumbered South Korea’s, which had remained roughly stable at about six hundred thousand for two decades. North Korean forces, it is widely thought, last had a POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 53

TABLE 2-6 ESTIMATED SIZE OF MILITARY FORCES: DPRK, 1975–1987

Estimated Estimated Military Military Forces Forces as % of Total Year (thousands) Male Population 1975 714 8.8 1980 909 10.2 1982 1,040 11.3 1985 1,130 11.6 1986 1,202 12.1 1987 1,249 12.4

NOTES: “Estimated Size of Military Forces” represents the discrepancy between year-end registered DPRK male population figures released to the UN Fund for Population (UNFPA) and reconstructed estimates for total male population. Estimates assume that the Korean People’s Army (KPA) is 100 percent male; female participation would be in addition to estimates for column 1. SOURCE: Derived from Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 88.

numerical advantage over the Republic of Korea’s army on the eve of the Korean War.106 Even if North Korea’s military forces were in some measure self- financing (that is, engaged in producing their own food, material, and other necessities), a buildup of this magnitude could only constitute an enormous expense for the state—and as Kim had acknowledged, a diversion of resources from potentially productive purposes. Kim himself continued to acknowledge the priority defense allocations enjoyed within the North Korean economy. Indeed, in 1976 he declared, “I think that of all the Socialist countries, ours shoulders the heaviest military burden.”107 The motivations and intentions guiding North Korean leadership are often mysterious or obscure to outside observers. Understanding the reasoning behind this military buildup, however, would seem to be central to an understanding of the North Korean economy in the 1970s and 1980s. With the woefully inadequate information presently available on decision making in North Korea, the purposes of this buildup can only be an exercise in speculation and surmise. A single policy or decision, moreover, 54 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

may be prompted by, and in turn may satisfy, a multiplicity of considerations. This being said, one may wonder whether it is entirely coincidence that this far-reaching military effort followed America’s announcement, and implementation, of the Nixon Doctrine. Formulated in 1969, the Nixon Doctrine served official notice that the United States would henceforth expect its Asian allies to meet most of their own security needs.108 By 1970 it was evident that the United States was disengaging from the Vietnam War without having achieved a military victory; it was widely (and correctly) presumed that the United States would ultimately acquiesce in the collapse and liquidation of its ally states in Indochina. One might excuse strategists in Pyongyang for thinking that this turn of events bore implications for the Korean peninsula and presented new opportunities for reunification.109 In a variety of important ways, the situation on the Korean peninsula was significantly different in the early 1970s from the period preceding the Korean War. Even so, a number of strategic and tactical parallels can be drawn between the two. In early 1950, with Secretary Dean Acheson’s now-famous omission of South Korea from his enunciated list of American security interests in Asia, U.S. willingness to defend the Republic of Korea seemed in doubt.110 With the advent of the Nixon Doctrine, the withdrawal from Vietnam, the reduction of U.S. ground strength in Korea by one-third, and Vice President Spiro Agnew’s quoted remark about the withdrawal of all U.S. troops from Korea,111 America’s willingness to intervene on Seoul’s behalf again seemed, at the very least, open to question. Before the 1950 surprise attack against the South, the North Korean government captured the attention of policymakers in Seoul with a series of bold and unexpected proposals for peaceful unification.112 In the early 1970s, North Korea also adhered to a policy of diverting attention from its military buildup. North Korea’s reported government budgets, for example, indicated a cut of military expenditures by more than one-third in 1972 and almost no growth in 1973113—officially disguising the unprecedented military buildup then under way. Other DPRK actions, such as the designation of Pyongyang rather than Seoul as the national capital in the 1972 constitution114 and the initiation in 1972 of a dialogue on unification with representatives of the Republic of Korea “after more than two decades of frozen hostility,”115 also affected the South Korean perception of the threat from the North, whether POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 55 or not this was their motivating intention. Such parallels do not establish that North Korea was preparing to unleash a surprise attack against the South, although they would seem consonant with that possibility. At the very least, it would appear that North Korea had dramatically enhanced its capability to assure unification on its own terms if the opportunity arose. In the mid- 1960s, Kim Il-sung reportedly remonstrated his government’s failure to take advantage of the upheavals in the South in 1960 and vowed that he would never be caught unprepared again.116 It is possible that the military buildup of the 1970s was the operational interpretation of that commitment. Gambling on instability in South Korea in the 1970s, if this is in fact what North Korean strategy was doing, would not have been utterly unreasonable. In 1979, as it happened, South Korea’s president was assassinated by his chief of security; his death was followed by a coup and an uprising in a southern province. Such wagers, however, did not pay off: American security commitments to Seoul endured; South Korea’s economy prospered; and far from collaps- ing, the Republic of Korea embarked on a transition from military rule to competitive and relatively open civilian elections. The economic costs of North Korea’s gamble, if this is what it was, thus became increasingly evident as the 1970s and 1980s progressed. Although the Six-Year Plan for 1971–76 was declared fulfilled one year and four months ahead of schedule,117 no new plan was announced in 1976 or in 1977 (1977 was later designated a “buffer year”). A second Seven-Year Plan for 1978–84 was completed on schedule, but results for a number of key targets (electric power, steel, nonferrous metals, and various chemicals among them) were not announced.118 The second Seven-Year Plan was followed by two years of “adjustment.” A third Seven-Year Plan, for 1987–93, was begun and completed on schedule. In the middle of the plan, however, Pyongyang was dealt a severe and apparently completely unexpected blow. In what amounted to just a few months—between early 1989 and late 1991—the entire Warsaw Pact state system convulsed, collapsed, and disappeared. Seemingly without warning, North Korea was suddenly left without its major international allies and its principal economic patrons. Thanks to events far beyond its control, this state espousing a national doctrine of self-reliance thus ended the 1980s facing the most dire political and economic crisis it had 56 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

experienced since the grimmest months of the Korean War nearly forty years earlier. The saga of the North Korean state, of course, would continue well beyond the end of the Cold War era. The gruesome, indeed tragic, downward spiral of the post-Soviet DPRK economy is a story unto itself. But it does not directly bear on our story here: this investigation of economic performance in the DPRK is bounded at the epoch-ending historical juncture of the collapse of Soviet socialism.

Quantitative and Structural Aspects of North Korean Economic Development during the Cold War Era

A quantitative assessment of changes in the levels and composition of North Korea’s output from partition through the third Seven-Year Plan would be desirable for at least two reasons. First, it would permit a more exact analysis of the interplay between policy and performance in this strictly controlled command economy. Second, it might help in placing the DPRK’s patterns of economic development in international perspective, thereby casting additional light on those aspects of North Korea’s strategy that seem unusual, even unique, or perhaps surprisingly conventional. Any effort to place North Korea’s growth patterns into numbers that would facilitate such international comparisons, however, is compromised by three problems. The first, generally recognized, is the extraordinary paucity of reliable statistical evidence on material conditions in the Democratic People’s Republic of Korea. The problem is not simply a lack of available information, though this is evident enough. Questions also arise about the quality of those figures that are released. The author’s own discussions with officials from Pyongyang’s Central Statistics Bureau in May 1990 illustrate the situation. In trying to ascertain the definition of an “urban area” in the DPRK, it soon became clear that there was, in fact, no standard specification demarcating “urban” and “rural” communities for the country as a whole. Instead, a general definition was offered—but with the proviso that any given settled gathering of people might be defined as “urban,” even if it failed to meet those qualifications, on the basis of other sorts of considerations. The ad hoc approach revealed in this POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 57 example was recognized by the officials detailing it to be a serious shortcoming, but one characteristic of the country’s overall statistical product. One of these officials joked that within the Central Statistics Bureau itself, “we call these ‘rubber statistics.’”119 From the explication offered, it would be hard to disagree. Indeed, if even such relatively simple issues as standardizing definitions of urban and rural areas are not solved under current circumstances, one’s confidence in figures regarding budgetary flows, national output, or real rates of growth should not be unlimited, insofar as these require standardized and relatively sophisticated statistical computational procedures to produce properly.120 A second problem, already discussed in some detail in chapter 1, concerns the interpretation of economic data from socialist command planning economies. These difficulties subvert, and arguably prevent, the unambiguous or precise quantification of intertemporal changes in net output, or intertemporal shifts in economic structure, even for a given centrally planned economy.121 No less significant, they radically limit what may be expected from comparisons with noncommunist economies, especially efforts to compare patterns of development. Simon Kuznets identified the issue succinctly: “The structure of [modern] society differs sufficiently to give rise to serious problems of comparability. Thus there is a genuine question whether the social structure and price system of the USSR (and even more, of communist China) are sufficiently similar to those in the free countries to give meaning to quantitative comparisons of economic growth—except for such inadequate indexes as steel production, etc.”122 In his own classic study, Modern Economic Growth, Kuznets used estimates of Soviet performance sparingly and with great caution. Indeed, he concluded that “differences in institutional and political structure between the communist countries and those in our sample were so large that the former had to be excluded from a comparative analysis aimed at the common characteristics of modern economic growth.”123 The situation with regard to the North Korean economy, needless to say, is hardly more auspicious for our purposes than was that of the Soviet economy in the 1960s, when Kuznets was surveying it. It is, to be sure, possible to generate numbers purporting to depict trends in communist economies, and even to put them in the same table with figures for market-oriented 58 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

economies, but to do so without careful qualification is to mislead the reader, and perhaps oneself. A third problem has to do with international comparisons of “patterns of growth” themselves. Though less widely appreciated than the first two problems mentioned, these nevertheless constrain the observer’s ability to draw detailed and meaningful inferences from conventional exercises in international comparison. Simply put, the data in these exercises are often not adequately reliable to warrant the exacting computational procedures they are forced to undergo. False precision and systematic bias commonly intrude into the exercises, even though they are seldom acknowledged. The widely cited study by Hollis Chenery and Moises Syrquin, Patterns of Development: 1950–70,124 illustrated the tendency. Patterns of Development served as a model for much of the post-Kuznets research on international trends in the structure of economic growth. For all its computational rigor, the mismatch between its econometric elegance and the nature of the data it employs is striking. To generate estimates for the parameters in the equations it devised, Patterns of Development required a wide array of observations for each “case” (country) in its sample. In many cases, however, the observations necessary were unavailable. According to its appendix on data and sources, the numbers used in the analysis were compiled in 1972. As of 1972, however, quite a number of the countries included in the analysis had not yet produced national accounts estimates. Of the 101 countries in the sample, for example, a dozen had no entry whatever in the 1972 edition of the United Nations’ Yearbook of National Accounts.125 In fact, as of 1970, several of the countries in the study—Afghanistan, Angola, Chad, and Ethiopia among them—had never even conducted a national census: under such circumstances, the objective of obtaining accurate estimates on sectoral output, composition of final demand, distribution of labor force, urbanization, and some of the other indicators the analysis required would seem challenging indeed (if not positively fanciful). In fact, the study mentions in an appendix that “in order to achieve maximum coverage, data were in some cases estimated by IBRD staff.”126 It is impossible to guess precisely what impact such manufactured data points may have had on the exercise as a whole, but because statistical capabilities and per capita output tend to correlate positively, it would seem possible that trends outlined for the lower-income countries may have been shaped to some considerable degree by surmise.127 POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 59

These “comprehensive” international comparisons were thus affected by arbitrary and unexplained procedures. But they also evidence signs of systematic bias. In Patterns of Development, as in many studies that followed it, the independent variable, against which all dependent structural trends were to be traced, was per capita output (GDP). Per capita output, however, was to be computed on the basis of exchange-rate parities for the local currency,128 with no attempt to make adjustments for purchasing- power comparability. In view of the strong negative correlation between purchasing-power parity adjustments and per capita output in international groupings of countries,129 this procedure necessarily biased the coefficients generated in its models. One attempt to recompute cross-sectional trends in sectoral distribution of output, using per capita GDP figures adjusted for purchasing power parity, resulted in substantially different income elastici- ties than those found in Patterns of Development; not surprisingly, the differences were typically greatest for countries at the lowest levels of per capita output.130 Such adjustments, to be sure, did not vitiate or confute conventional generalizations about the sectoral transformations attendant upon economic growth. But they underscored the spurious precision of that quantitative exercise in general. The problems identified above are formidable. Yet they are not totally insurmountable. If economic data for North Korea and other countries are used judiciously, and treated with the respect they deserve, it is possible to draw some limited, but meaningful, quantitative conclusions about the evolution of the North Korean economy, and its relation to structures and patterns evident in other parts of the world. Four aspects of such a quantitative analysis may be pursued with available North Korean data. These are listed in descending order of presumed reliability. The first is a comparison of the economic structure of northern Korea at the end of the era of Japanese colonialism with that that unfolded in North Korea in the decade or so after partition. The second is the comparison of North Korea’s economic structure, by those indicators deemed most reliable, with those of market-oriented economies in the early 1960s—the last period before the current and ongoing North Korean statistical blackout. The third is the comparison, within the limits possible, of North Korea’s economic structure with those of other centrally planned communist economies in the late 1950s or early 1960s. The final and most 60 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

tenuous aspect is the attempt to describe quantitative trends in the North Korean economy in the generation since hard data have been almost completely excised from the DPRK’s official statements and publications (i.e., from the early 1960s to the late 1980s).

North Korean Economy Before and After “Liberation.” North Korea’s economic evolution can best be put in perspective by comparisons with conditions in Korea’s northern five provinces in the years just before the 1945 partition. Data from the Japanese colonial era are available in several areas permitting a fairly straightforward comparison, as well as in others where comparisons are more complex and tenuous. These data are presented in table 2-7. According to official figures from the Japanese Government-General of Korea and the DPRK, the population of North Korea grew by about 25 percent between 1944 and 1963, or by about 1.2 percent a year for the period as a whole. This relatively modest rate of natural increase reflects the upheavals in North Korea during these years, including catastrophic wartime losses and a massive net out-migration of refugees and defectors. But although population growth during this period may have been relatively slow, a rapid structural change is evident from data on urbanization and labor force distribution. One must keep in mind the fact that definitions of “rural” and “urban” areas appear to have been different under Japanese colonial rule and communist administration; certainly definitions were different for occupational classifications. Even so, the figures are strongly suggestive of swift transformation. In the early 1940s, only about one-tenth of the population of northern Korea was classified as urban; two decades later, communist authorities claimed that more than two-fifths of North Korea’s population was “urban.” By the same token, official Japanese data for 1940 indicated that about three-quarters of colonial Korea’s “gainfully employed” population worked in agriculture (a figure consistent with the Provisional People’s Government’s figures for the North for 1946); by 1963, barely two-fifths of the North Korean labor force was said to be “agricultural workers.” The shift out of agriculture, and into the cities, looks to have been particularly rapid during the period between 1953 and 1960. According to official figures, the proportion of North Korea’s population living in urban POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 61

TABLE 2-7 TRENDS AND STRUCTURE IN THE NORTH KOREAN ECONOMY BEFORE AND AFTER “LIBERATION,” 1940–1963

Japanese Colonial Period Postpartition 1940 1944 1946 1949 1953 1956 1960 1963 Population 1. Northern Korea 8.51 9.25 9.26 9.62 8.49 9.36 10.7911.57 Total (millions) 2. Index (1944 = 100) 92 100 100 104 92 102 117 125 Urbanization 3. % Urban 8.7 10.6 — — 17.7 29.0 40.6 44.5 4. % Rural 91.3 89.4 — — 82.3 71.0 59.4 54.5 Distribution/Labor Force 5. % Agricultural 74.2a — 74.1 69.3 66.4 56.6 44.4 42.8 6. % Industrial 7.3a — 12.5 19 21.2 27.3 38.3 40.1 7. % Other 18.5a — 13.4 11.7 12.4 16.1 17.3 17.0 Composition of Gross Material Product 8. % from Agriculture 47b (61.5)c — 72 53 58 40 29 26 9. % from Industry 53b (38.5)c — 28 47 42 60 71 74 Agricultural Output 10. Reported Grain — 2.4 1.90 2.65 2.33 2.87 3.80 5.21 Harvest (mil. tons) 11. Index (1944 = 100) — 100 79 110 96 119 157 215 12. Per Cap. Reported — 261 205 275 274 307 352 450 Harvest (kg) 13. Index (1944 = 100) — 100 79 105 104 118 135 172 Indices of Industrial Output 14. Official Index, Gross — — 100 337 216 615 2100 3100 Industrial Output (1946 = 100) 15. “Goto Index” — 100 26 73 17 9 225 372 (1944 = 100) 16. Per Cap. “Goto Index” — 100 26 70 18 89 218 298 (1944 = 100) (continued on next page) 62 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

(continued from previous page) Japanese Colonial Period Postpartition 1940 1944 1946 1949 1953 1956 1960 1963 Composition of Net or Gross Industrial Product 17. Producer Goods — 51.4 52.1 58.6 37.7 53.9 55 53 as % Gross Industrial Product, Official DPRK Figures 18. Consumer Goods — 48.6 47.9 41.4 62.3 46.1 45 47 as % Gross Industrial Product, Official DPRK Figures 19. Estimates of 72d — — — — 72.8 — — Real Weights Producer Goods in Industrial Output (%) 20. Estimates of Real 28d — — — — 27.2 — — Real Weights Consumer Goods in Industrial Output (%) 21. Ratio 9.3a (4.1)a,c — 2.3 3.2 2.3 3.1 2.8 3.0 (agriculture = 1.0)

NOTES: a = All Korea, 1940; b = gross output for Northern Korea 1940, estimated on the basis of all-Korea gross to net output ratios in agriculture and forestry, fisheries, mining, and manufacturing, applied to 1940 composition of net commodity product in Northern Korea; c = net commodity product; d = Northern Korea, 1939–1940, current prices. SOURCES: Lines 1–4: 1940 and 1944: Dae Young Kim and John E. Sloboda, “Migration and Development,” in Robert Repetto et al., Economic Development, Population Policy and Demographic Transition in the Republic of Korea (Cambridge, Mass.: Harvard University Press, 1981), 40; 1946–1963: Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 28, 32; Lines 5–7: 1940: Sang-chul Suh, Growth and Structural Changes in the Korean Economy, 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978), 51; Joseph Sang-hoon Chung, The North Korean Economy: Structure and Development (Stanford, Calif.: Hoover Institution Press, 1974), 146–47; Lines 8–9: 1940: derived from Suh, Growth and Structural Changes, 139–42, 157–66; 1946–1963: Chung, North Korean Economy, 146–47; Lines 10–11: Chung, North Korean Economy, 48–49; Lines 14–16: derived from Fugio Goto, “Indexes of North Korean Industrial Output, 1944–1975,” KSU Economic and Business Review (Kyoto), no. 9 (1982): 145; Lines 17–18: Chung, North Korean Economy, 146–47; Lines 19–20: 1940: Suh, Growth and Structural Changes, 142; 1956: Goto, “Indexes,” 166. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 63 areas rose by nearly 23 percentage points during those seven years; the proportion of the labor force in agriculture dropped by an almost exactly corresponding proportion, 22 points. Even granting the possibility of official exaggerations, or of “rubber” definitions, these numbers would seem to reflect a far-reaching occupational and geographic reconstruction of North Korean society in a very short time. Figures on the composition of material output are, for obvious reasons, more problematic than the demographic indicators just mentioned. During the early 1940s, the Japanese Government-General in Korea may well have administered the colony in accordance with the needs and precepts of war planning, but market pressures exercised some discipline on the price- formation process;131 no similar presumption can be made for the period after the “Liberation.” Furthermore, for northern Korea before partition, thanks to Suh Sang-chul’s exacting research,132 estimates are available for “net commodity product,” whereas after “Liberation” we are left mainly with data on “gross agricultural and industrial product.” The communist proclivity for “extensive”—which is to say, factor intensive—growth does not make these figures more informative, or more comparable, than they might otherwise be. Such qualifications notwithstanding, one may note an apparent shift in the composition of material output that is consistent, and broadly parallel, with the country’s shifting patterns of urbanization and labor force distribution. In 1939–40, by Suh’s calculations, the ratio of agricultural to industrial “net commodity product” in northern Korea was slightly more than 61 to 39. In 1946, by official DPRK figures, the corresponding ratio for “gross output” was 72 to 28; the difference is perhaps explained at least as much by the collapse of local industrial production attendant on Japanese withdrawal as with any immediate changes in output valuation attendant on the advent of the Provisional People’s Government. Between 1946 and 1963, the proportions of total gross material output deriving from agriculture and industry are said to have reversed themselves, from 72 to 28 to 26 to 74. One may note that by 1953—a time in which the DPRK’s industrial capacity was still crippled by war—more than two-fifths of the nation’s gross material output was said to accrue from industry. We shall return to the implications of this claim in a moment. Figures on reported grain harvests may provide a less-compromised indication of changes in actual levels of agricultural activity. Grain output, 64 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

to be sure, may have been measured differently in colonial Korea and under communist administration—perhaps especially so after the onset of the Chollima campaign in the late 1950s.133 Grain output, moreover, provides at best only an indication of gross output for a portion of the agricultural economy; it fails to represent trends in sericulture and livestock and ignores the forestry and fishing economies. But for better or worse, the latter bias may not be too severe in these particular data. Official DPRK statements claim that “crops” accounted for 76 percent of gross agricultural output in 1963, as against 91 percent in 1946;134 a Soviet source, however, put that total for 1968 at about 85 percent.135 Two tendencies in these agricultural data deserve special comment. First, if the figures can be taken at face value, per capita grain output in northern Korea was fairly high, by contemporary Asian standards, both before and after partition. Although these numbers hardly speak to affluence, they do indicate the availability of a margin above the subsistence level—and thus the possibility for capital accumulation without starvation. This situation may be distinguished from circumstances in other Asian communist economies. Second, per capita grain output is reported to have been increasing during a period when agricultural workers were said to account for a steadily declining proportion of the overall labor force. This would seem to suggest the possibility of substantial improvements in the productivity of the agricultural labor force between the early 1940s and the late 1950s. It is possible, of course, that labor force participation rates rose during the same period, so the actual increments in agricultural workers’ productivity would be overstated by these rough numbers. But in colonial Korea, labor force participation rates were already fairly high. In 1940, according to colonial era data, “gainful workers” accounted for roughly 38 percent of the peninsula’s Korean population;136 at year-end 1963, by contrast, it seemed that about 30 percent of North Korea’s population was said to be working.137 It may equally be true, therefore, that these basic numbers slightly understate the actual improvements in apparent agricultural productivity over the period. In any case, these numbers seem to be consistent with the proposition that North Korea’s postpartition transformation was made possible by the existence of an agricultural surplus and that the scope and speed of that transformation was largely made possible by increases in agricultural productivity. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 65

Though the DPRK purports to have become a preponderantly industrial economy between the 1940s and the early 1960s, actual changes in industrial output are extremely difficult to estimate with the data available. According to official claims, the gross volume of industrial output in 1963 was thirty-one times the level registered in 1946. There have been several Western attempts to adjust or revise these numbers to improve their comparability;138 perhaps the most methodical of these is Fujio Goto’s.139 Goto’s estimates, to be sure, rely in part on supposition—drawing from the established industrial price structures of the USSR (1955) and the PRC (1952) for DPRK (1956) base weights—but his findings are certainly illustrative and arguably informative. Goto’s attempt at an index for net industrial output arrives at results suggesting that per capita industrial production in the DPRK had not quite reattained its prepartition level by 1956, although it purportedly reached nearly three times its prepartition level only seven years later. As for the composition of industrial output, North Korean official figures depict this as having adhered to a relatively stable distribution between producer and consumer goods, the war years excepted, ranging from a low of 51 to 49 to a high of 59 to 41 for the period in question. These figures, of course, would be based on gross value at established prices—problematic complications both. Goto’s effort to compute an industrial index for North Korea leads him to very different conclusions: for 1956, he assigns producer goods nearly three-fourths of North Korean industry’s “adjusted factor cost” value added and consumer goods only somewhat more than one-quarter of the total. For all the unavoidable pitfalls in Goto’s exercise, the difference between his results and official claims are nonetheless striking. No less noteworthy is the correspondence between his results and Suh’s estimate for the composition of industrial output in northern Korea before partition—a correspondence all the more noteworthy, perhaps, in that they were estimated independently of one another and by completely different methods. A number of general observations about the evolution of the North Korean economy may be made on the basis of the figures assembled in table 2-7. First, the figures are quite consistent with the proposition that per capita output in the DPRK in 1960 was rather higher than it had been in northern Korea in the early 1940s. The proposition can be demonstrated, most crudely, by extending forward, by means of the “harvest index” and 66 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

the “Goto index,” Suh’s estimates on the breakdown of “net commodity product” from the colonial era (on the presumption that its distribution in 1939–40 and 1944 were roughly the same). The obvious faults with the method freely acknowledged, the computation would suggest per capita material output in 1960 to be as much as 50 percent higher in the DPRK in 1960 than in northern Korea before partition. This computation should probably be treated as an upper boundary for any real changes in per- capita product over this period.140 Considering the wrenching dislocations and the physical destruction that North Korea endured during the years in question, however, the figure may seem surprisingly high, even as an upper bound. Second, though official figures imply a much more rapid growth of gross industrial production than of gross agricultural production during the period since partition, physical indicators—in the form of grain output claims and the “Goto index,” which measures weighted production claims—tell a rather different story. Between 1944 and 1956, by these indicators, it would seem that per capita agricultural output increased, while per capita industrial output might have declined a bit. On this basis alone, one might expect the ratio of agricultural to industrial product to have been somewhat higher in North Korea in 1956 than it had been in northern Korea before partition. Yet whereas Suh estimates that ratio as roughly 62 to 38 for northern Korea in 1939–40, official North Korean data depict the gross ratio in 1956 to have been 40 to 60—a virtual reversal! The discrepancy is sufficiently stark that we may dare to draw inferences about price relationships in the evolving DPRK command economy. Between 1944 and 1956, it would seem, there was a radical shift in the terms of trade between agriculture and industry. Relative prices of industrial goods must have risen very sharply against those of agricultural products if the sectoral distributions claimed by Pyongyang after the Liberation were in fact achieved. Perusing the figures in table 2-7 more closely, we might infer that the terms of trade between agriculture and industry deteriorated dramatically between 1946 and 1953, although they appear to have improved somewhat in the postwar period. Among industrial goods, it would appear that relative prices of producer goods under communist planning were made to rise almost equally radically against those of consumer goods. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 67

These inferences would lend further support to the proposition that communist North Korea’s early transformation and development, to the extent that it was domestically financed, relied on the resources of agriculture and the consumer. Even so, whatever the distortions and disincentives imposed on the DPRK’s economy may have been, they were apparently not adequate to forestall an improvement in the productivity of agricultural workers or an increase in per capita output between 1944 and 1960. Third, “dualism” between industry and agricultural sectors would appear to have continued on in North Korea from the era of Japanese colonialism to the period of communist rule. Nevertheless, for all their problems, official figures seem to suggest that this “dualism” attenuated somewhat under communist rule. If terms of trade did in fact turn sharply against agriculture after the advent of central economic planning, actual differences in gross output per worker would have been rather lower in the DPRK than they were in the last years of Japanese colonialism. Under conditions prevailing in the DPRK, of course, it is impossible to compare the marginal productivity of agricultural and industrial workers or the contributions of various factors of production thereto. One might guess, however, that the Japanese retreat and withdrawal at the time of partition, the extraordinary destruction resultant from the Korean War, and the sustained and concerted disposition of workers into the industrial sector all may have substantially altered relative factors of production within industry between 1944 and 1960.141 The communist regime’s price policies, to the extent that they have been inferred accurately, could be seen as an attempt to reim- pose “duality” on the national economy in order to finance socialist growth. Finally, some of the continuities between northern Korea’s patterns of output and those reported or deduced for the DPRK are worth noting. Commenting on the patterns of economic change in colonial Korea, Suh described what he viewed as “imposed development.”142 For a relatively poor population, the ratios of industrial to agricultural products and of producer to consumer goods within industry were strangely high. Consumption was strangely low in relation to output, while savings seemed unusually high. In all, he wrote, these patterns were not in conformity with what would be expected in an economy guided by the preferences of local consumers and producers. In its early evolution the DPRK economy seems to have exaggerated these same tendencies still further. The distortions 68 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

evident in the emerging communist economy, in fact, are all the more striking in view of its smaller domestic population (reduced by two- thirds through partition) and its far more limited exposure to international trade flows. By Suh’s estimates, colonial Korea’s trade turnover equaled three-fifths of its “net commodity product” in 1936–40; no similar opportunity for relieving distortions in local production patterns existed in the 1950s or early 1960s. Ironic though it may be, the “independent” economy that was fashioned by Kim Il-sung and his followers in the first decade or two after partition looked, in many ways, to have wrought more fully and even more radically on North Korea the involuntary transformations that had been initiated by foreign rulers during the period of Japanese colonial rule.

North Korean Economy and Noncommunist Low-Income Economies. The notion that North Korea’s “imposed” pattern of development has separated its economic structure starkly from the patterns evident in other low-income countries gains additional support from the attempt to place the DPRK’s economy in an international perspective. Two sets of international comparisons can be used to make the point: the Chenery-Syrquin exercise and the earlier work by Kuznets. The Chenery-Syrquin exercise has already been critiqued. Its shortcomings should not be minimized. Despite them, it may be useful to measure the North Korean patterns against its findings for two reasons. First, the central year in the Chenery-Syrquin exercise is 1965; published North Korean data on a variety of “structural” indicators are available through the early 1960s. Second, the sorts of structural data available for North Korea around year-end 1963—urbanization ratios, labor force distribution—are also perhaps the least conjectural of the many series within the Chenery- Syrquin exercise itself. The most obvious problem in entering North Korea into the Chenery- Syrquin exercise, of course, is in the attempt to assign it a dollar- denominated per capita GNP for 1964, like all the other countries in the “sample.” The problem can be finessed, though not resolved, by subjecting North Korea to the method the other countries in the exercise endured, namely, multiplying estimated per capita output in domestic currency units by the exchange rate between the currency and the dollar at the time. One POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 69 may appreciate that both facets of this computation are unusually problematic under North Korea’s circumstances. If one carries out the calculation, however, one gets an implied “net material product” of $181 for 1964.143 We might guess that the per capita GNP figure corresponding to that number would not be so far from $200. For illustrative purposes, we shall assign North Korea this value in the Chenery-Syrquin equations.144 For what it is worth, if North Korea were to be assigned a per capita GNP of $200 in this exercise, it would share that range with such countries as Brazil, Iran, and Taiwan. Regardless of the accuracy of such a designation, it may be useful to keep this in mind. The classification or grouping against which North Korea is being compared may seem less abstract this way. In comparison with the countries against which the Chenery-Syrquin equations were specified, North Korea at year-end 1963 appears to be significantly more urbanized than would be predicted (45 vs. 36 percent). If North Korea’s figure for urbanization for year-end 1965 (48 percent) is used in the comparison, the society falls beyond the standard error of the estimate (SEE) in the Chenery-Syrquin equation.145 By these equations, North Korea’s reported level of urbanization is one that would be predicted for a country with roughly twice the per capita GNP that it has been assigned here: for example, about $400. (Some of the countries with numbers in that range in the Chenery-Syrquin exercise were Chile, Portugal, and Yugoslavia.) The problems of defining “urban areas,” both in North Korea and in the other countries in question, should not be forgotten. Nevertheless, North Korea’s “outlier” status in this exercise is suggestive of the extent to which forced-pace urbanization and industrialization may have altered the expected contours of that low-income economy. North Korea’s “outlier” status is emphasized all the more by comparisons of the labor force distribution among broad sectors of the economy. For a country with North Korea’s population and assigned per capita GNP, the Chenery-Syrquin equations predict that roughly 56 percent of the workforce would be found in the primary, or agricultural sector. By year- end 1963, however, less than 43 percent of North Korea’s labor force was classified as “agricultural workers”—once again placing North Korea beyond the standard error of the estimate. Again, the predicted value of GNP per capita for a country of North Korea’s size and reported labor force share in agriculture would be about $400. 70 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

As for North Korea’s reported distribution of industrial and other (for example, service) workers, these are completely off the Chenery-Syrquin charts. A country with a $200 per capita GNP assignation is predicted, in that exercise, to find about 16 percent of its workforce in industry and about 28 percent in the service sector. In North Korea at year-end 1963, by contrast, more than 40 percent of the labor force was reported to be “workers”—about two and one-half times the proportion predicted. By the same token, only about 17 percent of the North Korean workforce fell into the category most analogous to “service sector”—two-fifths less than predicted. At no income level is it possible to put North Korea on the Chenery-Syrquin “development paths” with respect to the share of manpower in the service and industrial sectors. Even at $50 per capita (figures ascribed to Chad and Afghanistan), the service sector would be predicted to absorb about one-quarter of the labor force; conversely, even at $1,500 (Austria), industry would be predicted to occupy only 36 percent of the labor force. There is quite possibly some special imprecision in the North Korean explication of its labor force breakdown. The group included in the “workers” classification may include construction, utilities, and some other “social overhead” categories that would appear under “services” in the Chenery- Syrquin taxonomy. Yet even dramatic reclassifications could not make North Korea fit within the standard error of estimate in these equations at any value remotely close to the per capita GNP assigned to it in this exercise. The point is clear enough. By the early 1960s, the allocation of labor within the North Korean economy was far different from what one would have expected from a country at its level of productivity. Its share in agriculture was surprisingly low, its share in something like the service sector was astonishingly low, and its share in something like industry was very high. For all the problems with the Chenery-Syrquin exercise, and with including North Korea within its “sample,” these results are sufficiently striking that one might wish to treat them, in the parlance of the exercise, as “stylized facts.” A more limited, but also less problematic, comparison can be advanced by relying on some of Kuznets’s earlier research (see table 2-8). Using Kuznets’ findings about labor force distribution in richer and poorer noncommunist countries in the late 1940s and early 1950s, we have perhaps a POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 71

TABLE 2-8 DISTRIBUTION OF LABOR FORCE ACROSS SECTORS: SELECTED NONCOMMUNIST COUNTRIES IN THE EARLY POSTWAR PERIOD VS. NORTHERN KOREA, 1940–1960 (percent)

Sector Country or Grouping Agricultural Manufacturing Services 1. Kuznets Groups I + II 18.6 37.8 43.6 (13 countries, 1949–54) 2. Kuznets Groups III + IV 39.5 23.5 35.0 (10 countries, 1949–54) 3. Kuznets Groups V + VI + VII 56.4 17.6 26.1 (15 countries, 1949–54) 4. All Korea, 1940 74.2 7.3 18.5 5. North Korea, 1946a 74.1 12.5 13.4 6. North Korea, 1960a 44.4 38.3 17.3

NOTE: a = Distributions are for “private farmers” and “agricultural cooperative workers,” “laborers,” and all remaining workers. SOURCES: Lines 1–3: Simon Kuznets, Six Lectures on Economic Growth (New York: Free Press, 1959), 45; Line 4: Sang-chul Suh, Growth and Structural Changes in the Korean Economy 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978), 51; Lines 5–6: Joseph Sang-hoon Chung, The North Korean Economy: Structure and Development (Stanford, Calif.: Hoover Institution Press, 1974), 146–47. firmer basis for drawing inferences about the changes in the North Korean economy in the decade and a half after partition. In the early and mid-1940s, colonial Korea’s workforce distribution conformed to the very lowest of Kuznets’ groupings of countries by level of per capita output. This was true as well for North Korea immediately after partition. By 1960, however, North Korea’s share of labor force within agriculture was consonant with the figures for Kuznets’ middle grouping of countries (which included such places as Italy and Argentina). Its share of “workers” within the labor force would have placed it in the highest of Kuznets’ groupings (along with West Germany and the United Kingdom). Its share of workers in the remaining sectors was far lower than the service- sector share for any of Kuznets’ groupings. When we recall that it seems unlikely that North Korea’s per capita output would have been more than 72 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

50 percent higher in 1960 than it had been before partition, we may appreciate the extent to which structural transformation in this economy was indeed imposed by political directive.

North Korea’s Economic Structure in Communist Perspective. Although the distribution of the labor force among broad sectors of the economy may speak to the structure of production in the North Korean economy, it provides no insight into the composition of final demand. North Korea, of course, has never offered such data, nor has it ever published the sort of detailed accounts of material balances in its socialist economy that would help foreign analysts attempt to produce SNA-style (System of National Accounts) estimates for themselves. There has been little work on reconstituting North Korean national accounts in a Western-style framework, even by interested governments that might afford the effort. The U.S. Central Intelligence Agency, for example, reportedly did not attempt to estimate the breakdown of North Korea’s national income—not even when it was preparing its major study Korea: The Economic Race between North and South.146 The South Korean government reportedly maintained a unit within its intelligence agency charged with estimating North Korea’s national income, but most of this work apparently remains unpublished, and what has appeared in print suggests a heavy reliance on so called shortcut techniques of questionable methodological validity.147 In one path-breaking study, a Japanese scholar has published a painstaking effort that presents estimates of GNP and GDP for North Korea for 1956–59.148 In this study Goto offers estimates for the composition of final demand within the SNA framework. There are problems with his method. For one thing, he is forced to draw on “the corresponding Soviet data toward the latter half of the 1950s as a substitution for unknown North Korean data”149 to complete his accounts. No less significant, in deriving Western- style national income estimates for a socialist command economy he must necessarily work with a price structure that was administratively determined by political authorities; neither the adjusted factor cost approach or any other technique is adequate to the task of remedying this deficiency. Yet Goto’s estimates of the composition of North Korean final demand in 1959 (the latest year, in his opinion, that data reliably permit) may be compared with other POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 73

TABLE 2-9 NORTH KOREAN ECONOMY IN COMMUNIST PERSPECTIVE: ESTIMATES OF END-USE GDP DISTRIBUTION, C. 1960 (PERCENT) Country and Year Czecho- DPRK USSR Bulgaria slovakia End Use (1959) (1960) (1965) (1965) Consumption 47 55 59 60 Government 10 8 8 Administration }20 Defense 10 }33 }32 Investment 33 25

GDR Hungary Poland Romania China End Use (1965) (1965) (1965) (1965) (1957) Consumption 66 56 58 59 70 Government 14 9 8 13 Administration }10 Defense }20 }35 }34 }28 Investment 20

NOTES: Figures rounded to the nearest percentage point. Distributions are for estimated GDP at established prices for North Korea; at 1982 factor cost for the USSR; at 1968 factor cost for Eastern Europe; and at constant 1952 prices for China. SOURCES: Fugio Goto, Estimates of the North Korean Gross Domestic Product, 1956–1959 (Kyoto: Kyoto Sangyo University Press, 1990), 48; U.S. Congress Joint Economic Committee, Measures of Soviet Gross National Product in 1982 Prices (Washington, D.C.: Government Printing Office, 1990), 82; Thad P. Alton, “East European GNP’s: Origins of Product, Final Uses, Rates of Growth, and Inter- national Comparisons,” in U.S. Congress Joint Economic Committee, East European Economies: Slow Growth in the 1980s (Washington, D.C.: Government Printing Office, 1985), 1:95; William W. Hollis- ter, China’s Gross National Produce and Social Accounts, 1950–1957 (Glencoe, Ill.: Free Press, 1958), 6.

SNA-style estimates of final demand for communist countries for the same period. For all the obvious qualifications appropriate in such a comparison, it has the virtue not only of placing North Korea’s economic structure in communist perspective but also of doing so through a method whose limitations are consistent with and common to the other countries surveyed (see table 2-9). 74 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

A few words are in order about the various estimates in table 2-9. Goto’s estimates for North Korea for 1959 are based, at least in theory, on established prices and follow the method that Bergson pioneered. The CIA’s estimates for the USSR are also based on the Bergson method;150 these, however, present 1960 breakdowns in terms of constant adjusted factor costs for 1982. The estimates for Warsaw Pact Europe for 1965 come from L. W. International Financial Research, a consulting firm contracted by the U.S. government to produce for Eastern Europe’s economies series comparable to those the CIA produces for the Soviet Union. These figures have also been computed to reflect constant 1968 adjusted factor costs. The estimates for China for 1957 are by William W. Hollister (the CIA apparently never attempted to produce national account estimates for China as they did for the USSR151). Hollister’s estimates are for constant 1952 established prices; though they are among the earliest estimates offered for China, later scholarship arrived at roughly similar breakdowns.152 The figures assembled in table 2-9, then, may arguably be compared against one another, albeit with the understanding that they are not fully standardized. What is perhaps the most striking facet of the comparison is the extent to which North Korea appears to be an “outlier” even within the constellation of communist economies. Even within a group of economies governed by a common political impetus to reduce consumption for the sake of augmenting investment, North Korea’s estimated share of consumption in GDP looks very low, and its estimated share for investment looks unusually high. No communist economy but the DPRK’s is estimated to have allocated less than half its gross domestic product to consumption. North Korea’s estimated share for consumption in 1959 is more than 10 points lower than the estimates for such economies as Poland and Bulgaria for 1965. By the same token, North Korea’s ratio of investment to GDP would appear to be higher, by these estimates, than the USSR’s or China’s. For Eastern Europe, the L. W. International Financial Research estimates con- flate investment and defense. Even so, Goto’s estimate for the fraction of investment in North Korea’s GDP is higher than the combined investment and defense shares for three of the six Warsaw Pact states in 1965. When the DPRK’s estimated defense and investment shares are combined, they are substantially greater than the highest figure from the remaining three (43 percent for the DPRK 1959 vs. 35 percent for Hungary 1965). POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 75

Distinct as the DPRK’s pattern appears to be, these figures may actually understate the structural differences between North Korea and these other communist economies. Goto’s estimates for North Korea are for established prices; the adjusted factor cost approach, by contrast, attempts to correct established prices for the indirect taxes they bear. In Soviet-type economies, turnover taxes tend to be used to underwrite investment at the expense of consumption.153 Even in a poor communist country, the level of these taxes can be high: Perkins, for example, estimated the turnover tax on consumer and producer goods in China in the late 1950s to have been more than 40 percent.154 Goto’s attempts at estimating adjusted factor costs for North Korea are subject perhaps to a greater margin of error than are those for the Warsaw Pact economies. For what it is worth, however, his figures place personal consumption, on an adjusted factor cost base, at about 35 percent of North Korean GDP in 1959 and investment at about 42 percent.155 In no other communist country do the reconstructed estimates for the share of investment exceed those for consumption.156 Whether by established prices or adjusted factor costs, the “imposed” nature of North Korea’s economic structure stands out even against the grouping of countries that exact structural transformation as a matter of political principle. Though North Korea’s level of per capita output in 1959 was likely rather lower than the USSR’s as of 1960, and certainly much lower than the GDR’s in 1965, the proportion of consumption in overall output was apparently depressed far further than in either of those economies, and the share directed to investment, it seems, was correspondingly greater. Even within “the distorted world of Soviet-type economies,” to borrow Jan Winiecki’s phrase, North Korea’s economic distortions appear to have been exceptional. Yet despite these severe distortions, and the disincentives that they would be presumed to convey, it also appears that material progress may have been very brisk in the DPRK in the late 1950s and may well have been rapid for at least the following decade, on into the period of statistical darkness.

Quantitative Trends in the North Korean Economy, 1960–1990. Assessment of quantitative trends in the North Korean economy over the past generation would be difficult enough if the sparse data on economic performance that were released were completely reliable. Unfortunately, 76 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

there is no reason to presume that they are. Some of the economic numbers that have trickled out during this long statistical drought are questionable on their very face. In 1972, for example, the North Korean budget reported a nominal drop in national defense expenditures of more than 35 percent against the previous year and announced that the military portion of overall outlays had fallen from 31 to 17 percent.157 There is no evidence, however, of any contemporaneous demobilization. Quite the contrary: it appears that a buildup was under way at the time. As noted already, by 1986 as much as 12 percent of North Korea’s total male population and one-fifth of its male population of working age may have been in the armed forces.158 Yet in 1986 national defense outlays purportedly accounted for an even lower proportion of the budget than they had in 1972: a mere 14.2 percent!159 The patent implausibility of this number necessarily raises questions about the accuracy of other items reported in the national budget and even perhaps about the budget totals themselves.160 Communist governments, of course, have something of a tradition in falsifying indicators of their military effort. Some other North Korean numbers, however, seem almost equally questionable, even though they depict aspects of the economy not ordinarily associated with national security. North Korea’s figures on grain harvests provide a case in point. These figures are released only irregularly, and then presumably for banner years. Even so, they look to be increasingly artificial. In 1979, for example, North Korea claimed to have achieved a harvest of 9 million tons. This would have amounted to roughly 500 kilograms of grain output per person.161 That same year, however, Kim Il-sung himself implied that the nation’s per capita grain consumption was around 200 kilograms per person.162 Since international trade data indicate that North Korea may have been, on net, a grain importer at the time,163 and because there is no evidence of a domestic feed grain economy for livestock production of any size, it would seem difficult to reconcile this huge discrepancy. One Western analyst, who based his study on a fairly careful examination of the DPRK’s sparse agricultural data, has suggested that North Korea’s 1984 grain production claim was exaggerated by 25 percent.164 Others have concluded, or asserted, that the degree of inflation was even greater. The last East German to serve as ambassador to North Korea, for example, claimed that grain output in the DPRK stagnated between the late 1970s and the late POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 77

1980s; by his figures, the 1984 grain figure would have been padded by nearly 50 percent.165 South Korea’s National Unification Board, for its part, assessed the 1984 North Korean harvest at 6.3 million tons—of husked grain.166 With a 24 percent allowance for milling, this figure would imply a total of 4.8 million tons of edible grain from the 1984 harvest—and would correspondingly imply that grain output had been overstated by more than 100 percent! North Korea’s economic statistics, it seems, are presently subject to countervailing pressures. On the one hand, the need for accurate information for planning a command economy is self-evident. On the other hand, in ascribing any given indicator with political significance, the planning process also creates pressures for the misreporting of results in the direction of success. Ironically, political pressures for the mismeasurement of economic results may tend to be strongest in precisely those areas of performance that the regime deems to be most critical.167 North Korea watchers from the former Soviet bloc have provided illustrations of what they say was the gap between statistical claim and reality in the DPRK in the late 1980s. Although Soviet bloc personnel have complained of their limited access to official North Korean data and of their strict supervision while in the country, long-standing aid arrangements provided the Council for Mutual Economic Assistance (CMEA) diplomats and personnel with a basis for guessing about performance in the sectors of the economy whose infrastructure their projects had helped develop. By tradition, CMEA personnel encamped in Pyongyang reportedly exchanged information on the enterprises and sectors within their country’s purview in an attempt to reconstruct an overall picture of North Korea’s economic situation—without the help of the North Korean government.168 By these assessments, the gap between target and claim, on the one hand, and actual achievement, on the other hand, was enormous in North Korea in the 1980s (see tables 2-10 and 2-11). Whereas, for example, electric power generation was supposed to have reached the level of 56 billion kilowatt-hours in 1984, and was targeted to hit 100 billion kilowatt-hours by the end of the third Seven-Year Plan in 1993, the true volume of production in 1987 was believed by CMEA analysts to be around 33 billion kilowatt-hours. Comparable discrepancies were suspected for some other key products in North Korea’s heavy and light industries. In point of fact, 78 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 2-10 TARGETS AND RESULTS FOR KEY ECONOMIC INDICATORS: DPRK, 1978–1989 (Maretzki’s numbers)

Target Goal Achieved Result Second Third Indicator 7-Yr. Plan 7-Yr. Plan (mil.tons)a (1978–84) (1987–93) 1978 1987 1989 Electricity 56.0 100 23.0 33.0 28.0 (bil. kwh) Coal 70 120 42 52 51 Iron Ore 16 18 11 13 13 Steel 7.4 10.0 3.2 4.2 4.3 Cement 12.0 22.0 7.0 7.8 8.0 Fabrics 800 1500 450 535 540 (mil.sq.meters) Chemical 5.0 7.2 3.4 4.0 3.8 Fertilizers Grain 10.0 15.0 6.8 6.8 6.8 Rice 5.0 7.0 3.9 3.8 4.2 Vegetables — — 2.2 3.3 3.6 Sea Products 3.5 11.0 1.6 2.0 2.1 Meat — 1.7 0.15 0.19 0.20 Tractors 45.0 50.0 24.0 24.5 22.0 (thousand) Oil Imports — — 2.0 2.7 2.4 Reclaimed 100,000 300,000 — 80,000 140,000 Marshland (ha)

NOTE: a = Unless otherwise indicated. Plan targets are official; results are author’s estimates. SOURCE: Hans Maretzki, Kim-isimus In Nord Korea: Analyse Des Letzten DDR-Bostschafters In Pjongjang [Kim-ism in North Korea: Analysis of the Last GDR Ambassador to Pyongyang] (Boblingen, Germany: Anita Tykve Verlag, 1991), 155.

CMEA specialists believed that production levels for many branches of the North Korean economy had begun to drop in the mid- or late 1980s—even as economic targets and official production claims continued to rise. Regardless of the actual limits on North Korean statistics divulged since the early 1960s, the figures released nonetheless report a progressive POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 79

TABLE 2-11 TRIGUBENKO’S ESTIMATES OF OUTPUT FOR SELECTED PRODUCTS IN THE DPRK, 1988–1990

Product Unit of Measurement 1988 1989 1990 Electricity Billion Kwh 35 30 32 Coal Million Tons 54 50 49.5 Iron Ore "" 3.8 3.8 3.7 Pig Iron "" 4.2 4.3 4.2 Steel " " 3.4 3.6 3.5 Rolled Steel " " 3.4 3.6 3.5 Lead Thousand Tons 90 80 84 Zinc " " 180 165 170 Copper " " 30 27 29 Aluminum "" 21 20 21 Metal-Cutting Lathes Thousand 28 28 28 Tractors "" 24 22 23 Trucks " " 10 10 10 Oil Products Million Tons 2.7 2.4 2.3 Chemical Fertilizers "" 4 3.8 3.9 Chemical Fiber Thousand Tons 77 74 — Synthetic Resins "" 92 92 92 Cement Million Tons 8 7.4 7.6 Magnesite "" 1.1 1 1 Paper Thousand Tons 182 182 182 Fabrics Millions Running Meters 540 500 520 Footwear Million Pairs 72 72 72 Aquatic Products Million Tons 2.1 2.1 2.1

SOURCE: Marina Ye. Trigubenko, “Industry of the DPRK: Specific Features of the Industrial Policy, Sectoral Structure and Prospects” (paper presented at International Symposium on the North Korean Economy: Current Situation and Future Prospects, Seoul, September 30–October 1, 1991), 18–19. economic slowdown. As noted in the previous chapter, North Korea’s nominal budget outlays, which were growing at an average annual rate of almost 12 percent a year during the 1960s, were increasing by only 5 percent a year in the late 1980s. On a per capita basis, nominal budget growth was down to a little over 3 percent a year by this time. As we have already seen in 80 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

table 1-11, however, there is reason to believe that nominal changes in reported budget revenues and expenditures overstate real trends in output in the DPRK economy during the statistical blackout—perhaps quite substantially. The “budget deflators” computed in table 1-11 are, of course, hypothetical; in range, however, they are not unreasonable. Applying any of this range of “deflators” for the period 1960–88 as a whole to the reported nominal budget changes for the years 1985–88 would result at best in a calculation of virtual zero per capita growth in output. Most of the “deflators” would seem to imply that the late 1980s was a time of negative per capita output growth in North Korea, and some would seem to imply an absolute contraction. Although per capita economic growth in North Korea may have come to a halt by the late 1980s, there appears to have been considerable change in both the volume and structure of production over the preceding generation. On the basis of official but unpublished figures released on the economy, along with independent reconstructions of population trends, the few officially published scraps of information about labor force breakdowns, and the “national income” datum and indices from the 1960s, it is possible to piece together an outline of economic change in North Korea, as represented in its official data, between the end-years 1963 and 1987 (see table 2-12). By these indicators, “national income” or net material product, however computed, grew in nominal terms by almost 10 percent a year for the period as a whole. With population growth estimated at just less than 2.5 percent a year during the period, the growth of per capita nominal net material product would have averaged just over 7 percent a year. North Korea’s labor force rose very rapidly during this period: according to official figures, it averaged more than 4 percent growth annually. (The pace would be even quicker if the total were adjusted to take into account estimates for the country’s active duty military population, some fraction of whose military service was likely devoted to economic activities.) Net material product per member of the labor force, in nominal terms, looks to have been 3.6 times its 1963 level in 1987. If the calculation is made for net material product per worker in the “productive sphere” (by North Korean data, “farmers” and “workers”), the 1987 level is 3.6 times the level of 1963, implying a growth in nominal “labor productivity,” in the Soviet-style framework of economic accounting, of about 5.5 percent a year on average. By 1987, according to North Korean figures, 80 percent of the country’s net material product originated in industry, and POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 81

TABLE 2-12 ESTIMATES AND INDICATORS OF ECONOMIC PERFORMANCE FOR THE DPRK, 1963–1987

1963 1987 Percent Per Annum Net Material Product (NMP) 5.10 47.02 9.7 (bil. won, current prices) Population 11.46 20.91 2.4 NMP Per Capita 445 2317 7.1 (won, current prices) Labor Force (millions) 3.49 8.95 4.0 Labor Force Plus Armed 3.79a 10.20 4.2 Forces (millions) NMP Per Worker 1463 5254 5.5 (won, current prices) NMP Per Worker and Soldier 1347 4610 5.3 NMP/”Productive Sphere” 1762 6384 5.5 Worker Agricultural Labor Force 1.49 2.26 1.8 (millions) Ag. NMP/Ag. Worker 735 4154 7.5 (won, current prices) Industrial Labor Force 1.40 5.10 5.6 (millions) Ind. NMP/Ind. Worker 2211 7373 5.2 (won, current prices) Ratio Ind. NMP/Worker 3.01 1.77 N/A to Ag. NMP/Worker

NOTE: a = On the presumption of a 300,000-man KPA force at that time; N/A = not applicable. SOURCES: Joseph Sang-hoon Chung, The North Korean Economy: Structure and Development (Stanford, Calif.: Hoover Institution Press, 1974); and Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992).

20 percent originated in agriculture. This would suggest a nominal growth in industrial net material product of almost 11 percent a year between 1963 and 1987. The country’s industrial labor force, however, apparently grew by more than 5.5 percent a year during this period, so “labor productivity” in industry would have risen by a bit more than 5 percent a year on average. 82 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

While this would imply a nominal level of output per worker in 1987 over 3.3 times as high as in 1963, it would also suggest that “labor productivity” was increasing more slowly in industry than in the “productive sphere” as a whole. The indicators of “labor productivity” for agriculture report a much more rapid pace of increase: by these figures, the 1987 level would suppos- edly have been almost 5.7 times the 1963 level, implying an average growth of 7.5 percent a year in the interim. These numbers would suggest a very substantial narrowing of the “labor productivity” gap between industry and agriculture during this period, from a ratio of more than 3 to 1 in 1963 to less than 1.8 to 1 in 1987. The actual meaning of this reported change, however, is not self- evident. It is possible that the shift is partly or entirely an artifact of North Korean statistics. The tendency to double count “net” material product in industry may have been matched, or exceeded, by a tendency to exaggerate agricultural results for the period in question, though there is no way an outsider can actually know. It is similarly possible that the new agricultural policy of the mid-1960s shifted the relative prices of agricultural and industrial goods back toward agriculture’s favor, but there is no way to test this proposition. Moreover, the implications of the reported narrowing of productivity differences, if this really did occur, are ambiguous. In market economies, the reduction of agricultural industrial differences in labor productivity is typical during the rise to affluence, and has much to do with the pace of total factor productivity (TFP) improvements in the farm sector during the “agricultural transformation.”169 Those adjustments, however, are articulated through equilibrium-seeking factors and product markets— neither of which, not to put too fine a point on it, existed at all in North Korea during the period under consideration. To the contrary: the narrowing of productivity differences between “laborers” and “agricultural workers,” under North Korean circumstances, could speak to directives that were further compounding existing disequilibria—by forcing transfer of workers from farm to factory that would not have been justified on grounds of allocative efficiency, for example. Perhaps the most one may say is that the figures, taken on face value, would be consistent with the long- standing official objective of reducing differences between urban and rural areas and would leave North Korea with sectoral differences in output per worker not only lower than in most contemporary communist POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 83 countries,170 but consistently lower than the World Bank’s estimates for the group of market-oriented developing economies it terms “middle income economies.”171 The ostensible drawing together of levels of output per worker in agriculture and industry would be one of very few indicators pointing toward balance during the long period of statistical silence in the DPRK. Most others suggest that an economy already characterized by exceptional structural distortions was being distorted still further at the instructions of its planners. By 1987, for example, North Korea was, by some measures, the most militarized economy on earth. More than 6 percent of its population, by some estimates, was under arms that year—more than in any other contemporary society.172 Although it is not possible to estimate the attendant “military burden” with any precision, the share of national output accruing to defense at a time when nearly one-fifth of the country’s men of working ages were in the armed forces could only be enormous.173 North Korea’s long military buildup appears to have coincided with a further diminution of the share of consumption within national output. Though the DPRK’s ratio of consumption to GDP, by Goto’s estimates, would have been singularly low in 1959, there is reason to believe that it became pro- gressively smaller in subsequent decades. Official announcements, for example, stated that “national income” grew more rapidly than either “actual income of laborers and office workers” or “actual income of agricultural workers” in both the Six-Year Plan and the second Seven-Year Plan (1971–76 and 1977–84, respectively). Because North Korean practice apparently counted monetary income and state subsidies together in “actual income,” these plan results could only betoken a progressive decline in the share of consumption within final demand. Within consumption itself, as already noted, the share accounted for by the wage fund was also diminishing. For the economy as a whole, as we have seen, monetary wages may well have equaled less than one-quarter of net material product by 1987. In the “productive spheres,” that ratio would have been even lower. On the assumption that “laborers” earned an average of as much as 120 won a month in 1987, for example,174 wages would have amounted to less than one-fifth of per capita net material product in industry. If average wages had been 100 won per month, they would have amounted to less than one-sixth of industrial net material product. The dimensions of the transformation in the role of wages in the North Korean 84 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

economy during the period of statistical silence may be appreciated when one considers that as recently as 1959, by Goto’s estimates, the wage fund would have amounted to nearly half of the DPRK’s gross domestic product—and to well over half of its net material product.175 One might well expect these structural shifts and distortions in the North Korean economy to reduce incentives for production—in conjunction with the dislocations experienced in international trade, perhaps even to reduce the capacity to produce. Yet the figures in table 2-12 would seem to indicate otherwise. However one interprets these indicators—and their interpretation most assuredly calls for caution and care—they would seem, in their broad- est outlines, quite consistent with the notion that the period between the early 1960s and the late 1980s was a time of distinct, perhaps even marked, material advance in North Korea. The nominal growth rates in net material product in table 2-12 should be deflated to adjust for exaggerated results and changes in implicit price levels. For the early 1960s, before the statistical blackout, some observers already discerned evidence of an emergence of inflation in the North Korean economy.176 Even then, however, existing data did not permit quantification of inflationary pressures. It is surely not possible to produce a single, unambiguous deflator today. One should note, however, that it would be necessary to impose a deflator averaging 2.3 percent a year on the period as a whole to prevent a tripling in real per capita net material product between 1963 and 1987 and a deflator of more than 4 percent to prevent a doubling in real per capita net material product, from the nominal figures given. By the same token, one would have to posit a deflator averaging more than 2.5 percent per year to keep labor productivity from doubling between 1963 and 1987, and a deflator of more than 3.7 percent per year would be necessary to keep the real improvement in labor productivity over this period at less than 50 percent.

The North Korean Economy’s Mounting Problems

Limits to Growth. Substantial as the rise in per capita output and labor productivity may have been between the early 1960s and the late 1980s, there were unmistakable indications that the North Korean economy was nearing stagnation, or even retrogression, by the end of that period—in POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 85 other words, even before the crisis triggered by the collapse of the Warsaw Pact system. The apparently radical slowdown in material progress, moreover, did not appear to be cyclical or transitory in nature. By the late 1980s, North Korea’s political economy was enmeshed in a trap of its own making. To oversimplify only slightly, sources of extensive growth in the economy had already been assiduously exploited, and avenues for intensive growth were by and large politically unacceptable to the regime. As early as 1964, the theoretical journal of the DPRK’s Korean Workers’ Party (KWP) had written that “most of the people capable of working in our country have been employed. In terms of the proportion of people at work, our country ranks high in the world. This means that the labor force in our country is well mobilized; this means also that there is no additional labor force to mobilize.”177 Yet between the early 1960s and the late 1980s, a further, and massive, mobilization of labor was effected. In 1963, according to independent reconstructions from North Korean data, about 55 percent of those aged fifteen and older were economically active;178 by 1987 the corresponding figure for the civilian population sixteen years and older would have been 74 percent.179 Even among contemporary communist states, this would have been a very high degree of mobilization: it would, for example, be as much as 6 points higher than the corresponding figure for East Germany for 1981180 (table 2-13). During the very years that this labor mobilization was underway, the share of national output accruing to labor probably fell markedly. It is by no means impossible that a Goto-style computation (were adequate figures available) could calculate consumption in established prices to comprise only a third of North Korea’s gross domestic product by the late 1980s. By the late 1980s, moreover, it appears that the majority of a household’s consumption was allocated directly to it by the state; in 1959, by Goto’s calculations, state subsidies and communal services would have comprised less than a quarter of total household consumption at established prices.181 The augmentation of the country’s working and fighting force in the face of a low and declining distribution of product to labor, and under conditions in which the role of personal expenditures within the overall economy was being severely restricted, suggests the rise of coercive measures within the mix of managerial and administrative practices. While incentives surely continued 86 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 2-13 ESTIMATED LABOR FORCE PARTICIPATION RATES FOR NORTH KOREA AND SELECTED OTHER COUNTRIES (PERCENT)

Country or Group Total Male Female Communist States USSR (1979; 20+) 73.3 82.8 65.8 Bulgaria (1985; 20+) 69.9 75.3 64.7 Czechoslovakia (1980) 67.8 75.5 60.8 GDR (1981) 67.5 76.2 60.0 Hungary (1980) 60.5 71.9 50.2 Poland (1978) 67.3 76.6 58.7 Romania (1977) 67.1 74.9 59.6 Yugoslavia (1981; 20+) 62.1 79.8 45.8 PRC (1982) 78.7 86.5 70.6 Vietnam (1989) 77.3 81.6 73.6 Cuba (1981) 53.4 72.8 33.8 Asian NICs Hong Kong (1986) 66.4 80.9 51.2 ROC (1989) 60.1 74.8 45.4 ROK (1980) 56.5 75.1 39.5 Singapore (1980) 63.2 81.5 44.3 Developed Market Economies FRG (1988) 56.5 71.8 42.7 Japan (1985) 63.6 80.3 47.7 Sweden (1985; 20+) 64.9 70.6 59.5 USA (1980; 16+) 62.0 75.1 49.9 North Korea (1986–87; 16+): Excluding Military 73.7 NA NA Including Military 67.8 NA NA

NOTES: NA = not available. All non–North Korea figures come from census data, except for FRG and ROC, which come from labor force surveys. Unless otherwise indicated, labor force participation rate is for economically active population fifteen years of age and older as a percentage of the total cohort. North Korean estimates based on stated official figure for employment, plus reconstruction of population structure and military population. It is not clear whether the reported employed population of North Korea includes the military or refers to civilians only, so we have calculated it both ways. SOURCES: North Korea: Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: Institute of East Asian Studies, 1992); Vietnam: Judith Banister, Vietnam: Population Dynamics and Prospects (Washington, D.C.: U.S. Bureau of the Census, Center for International Research, June 1991); ROC: ROC Directorate General of Budget, Accounting and Statistics, Statistical Yearbook of the Republic of China 1990 (ROC: Executive Yuan, 1990), 57; All other countries: International Labor Office, Yearbook of Labour Statistics (Geneva: ILO), various issues. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 87 to play a role in motivating the North Korean workforce, and exhortations continued to fill the official media, there are signs that the regime may have turned more toward direct administrative controls over the civilian workforce once the military buildup of the 1970s was underway. The early 1970s, for example, saw the advent of the “Speed Battle” in North Korean planning.182 Like “storming” in the Soviet system, this was apparently a technique of enforced mobilization to meet specific targets; whereas “storming” is recognized to be unsustainable and is thus limited to brief periods, North Korea’s “Speed Battles” have been extended from 70 days to 200 days in duration (and there was even talk in the DPRK media of a 10,000-day “Speed Battle”!). The “Speed Battle” was followed by increased official attention to means in which direct pressures could be applied to workers to improve their performance. In 1976, in an address to the State Administrative Council, Kim Il- sung declared, “The Administrative Council must establish strict labor discipline. . . . It would not be a bad idea to cut down food rations for undisci- plined absentees. . . . It would be more effective to control such absentees by means of food rations than by money.”183 In 1977 the state enacted a new Land Law; explaining its significance, the KWP’s daily paper observed that it was “the sacred and honorable duty of our people to diligently take care of the land, fertilize it well and effectively utilize it. . . . Unlike those laws that only define land ownership, our country’s Land Law completely and thoroughly defines all problems arising from the conservation, development and management of land.”184 In 1978, following on the regulations for the agricultural labor force, the Central People’s Committee, the supervisory body formally above the State Administrative Council, promulgated new regulations for labor discipline within the industrial workforce. These regulations, as one paper explained them, were “designed to make socialist working people love labor and faithfully participate in labor.”185 Simultaneously, campaigns were undertaken to extol “law-abiding life” and “socialist legal life.”186 The actual significance of these campaigns may have been revealed in a statement by Kim Il-sung published in his 1981 collection, On the Guidance and Management of the Socialist Economy. In his words, “The state plan is an order of the Party and a law of the state. . . . Nobody has the right to violate it.”187 By implication, failure to achieve stipulated-plan targets would be, in North Korea, punishable legal infractions. 88 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

With any substantial increase in per capita output, the task of managing a socialist planned economy becomes more complex and difficult. The development of interindustry relationships consonant with a more mature economy increases the hazard of “bottlenecks” (and the incentives for managers to hoard);188 changes in factor endowments and the emergence of new products beg the question of price administration; and the very fact of being separated increasingly in time from the era in which competitive and spontaneous forces had exerted so much more influence on the determination of prices and the allocation of resources could only work to the plan- ner’s disadvantage. North Korea’s approach during the 1970s and 1980s, however, gravely added to the obstacles against sustaining economic growth in a socialist context. Expedient as it may have been at the time to maximize growth through the mobilization of able-bodied population and the suppression of consumption, the deliberate decision to reduce the scope of wage-based transactions within economic activity overall compromised prospects for productivity improvement in an incalculable but unmistakable manner. On the one hand, the restriction of the wage fund necessarily implied a corresponding restriction in the role of the pricing system in the market for personal and consumer goods. However imperfectly they may function, personal and consumer goods markets in socialist societies are affected and disciplined by the expressed preferences of individual consuming units. The prices (or shortages) that emerge in these markets convey important information. In opting to undermine such a market, the North Korean government simultaneously was choosing to deprive itself of the benefits, and insights, that might be had through improved allocative efficiency in the one area of the economy where allocative efficiency might be presumed to operate. On the other hand, the restriction of the scope of wage-based transactions may also have had an adverse effect on labor productivity. The very existence of consumer goods markets, in which wage earners may articu- late their demand for preferred products, has an impact on the motivation and disposition of the workforce. This effect is commonly taken for granted in market economies, but it is by no means universal; British colonists, for example, “discovered” it in nonmonetized areas of West Africa, where they acknowledged it in the term “inducement goods.”189 In POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 89 demonetizing the consumer goods distribution system, North Korean planners may well have affected the expectations and outlook of their labor force—and in a way that would hardly be predicted to induce enterprising behavior within the legal economy.

Limits to Reform. While North Korea may have found itself at an economic impasse at the end of the 1980s, the converse to the economy’s extreme distortion was the multiplicity of opportunities for eliciting growth simply by adhering to somewhat less extreme policies and unpragmatic practices. Unpromising as the extensive growth strategy must ultimately be, it would have been possible for North Korea to pursue it a bit further through military demobilization and conversion, which could have released manpower and freed up capital funds for the civilian economy.190 The North Korean regime rejected that option completely. Reflecting on the previous two decades, an article in the party daily in 1987 explained that “our Party successfully conducted the work of consoli- dating the combat capabilities of the Party in the 1970s and the 1980s in conformity with the demands of the developing revolution.”191 There were no signs of interest, much less willingness, to alter this formula for supposed success. North Korea’s leadership also apparently rejected the notion of experi- menting with any significant domestic economic liberalization, precluding thereby potentially major improvements in total factor productivity.192 Under urging (if not pressure) from China, North Korea announced a “joint venture” law in 1984 and promulgated related tax and currency regulations for foreign investment in 1985.193 The entire effort, however, was halfhearted. Foreign analysts noted that although the joint venture law was similar in form to China’s, it lacked substantive guarantees; in the event, it failed to attract foreign interest.194 By the same token, North Korea took no serious steps to improve its international creditworthiness or to attract international commercial contacts.195 An essentially stagnant trade posture, which had reverted to an ill-timed emphasis on communist trading partners in the 1980s,196 seriously limited North Korea’s access to the international technology, managerial skills, and knowledge that might have helped to revitalize even a centrally planned economy. Meanwhile, in addition to the imposing burden of its military expenditures, North Korea insisted on financing enormous showpiece projects 90 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

of questionable economic merit but unquestionable expense. The Western Sea Lock Gate outside Nampo harbor, whose construction was justified (among other grounds) by the need to reclaim farmland from the sea, is officially reported to have cost US$4 billion to complete.197 (The official estimate for the price of the project, incidentally, was given in U.S. dollars.) By the same token, the construction of the “Kwangbok” section of Pyongyang, and other preparations for the international “Thirteenth World Youth Festival” hosted in 1989, are officially stated to have cost US$4.7 billion (here again, Pyongyang formally denominated the cost of its initiative in American currency).198 If these U.S. dollar–denominated sums are compared with the dollar-denominated figure that has been given for North Korea’s 1989 GNP per capita, and with independently generated projections of North Korea’s population for that year, one may see that the stated cost of these two projects alone would amount to nearly one-sixth of national output claimed for that single year. Whatever the actual resource usage or true opportunity cost of these undertakings may have been, it is hard to see how they would have generated high economic rates of return, or how they would have helped to relieve constraints and bottlenecks in the country’s planned economy; the North Korean leadership’s determination to press ahead with such projects, to the exclusion of other economic opportunities, tells much about the pri- orities and outlook of North Korea’s decision makers. Simply put, nothing like economic reform, as the term was understood in Western circles, was under serious consideration in Pyongyang in the late Cold War era.

The Soviet Bloc Collapse. By 1990 or 1991, North Korea’s economic situation was looking increasingly difficult. Writing in 1991, one specialist from the former Soviet Union personally familiar with conditions in the DPRK averred, “Stagnation began in 1988 and is turning into a crisis in 1991. The year 1989, marked by the particularly sizeable fall in production, was especially unfavorable.”199 Rumors and reports of food shortages in the North Korean countryside were circulating widely; whereas South Korean propaganda had long asserted that people in the North were starving, these new accounts of hunger and food problems came from too many different sources, and coincided in so many of their details, that it would seem difficult to dismiss them as a fiction deliberately concocted. POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 91

North Korea’s economic difficulties were immediately and severely compounded by the “revolutions of 1989” in Eastern Europe and by the political disintegration of the USSR. For all intents and purposes, the liquidation of the Warsaw Pact states meant the end, or at very least the prolonged suspension, of aid and trade relations for Pyongyang with the countries in question. At any previous period in its history, such a shock would have augured ill for the DPRK. By a twist of fate, however, North Korea had come to be more dependent on CMEA aid and trade on the eve of the “revolutions of 1989” than it had been for many decades. Although the Sixth Korean Workers Party Congress in 1980 had stipulated that North Korea’s volume of international trade should be greatly expanded over the coming decade, DPRK trade turnover with most regions of the world appears to have stagnated, or to have declined, during the 1980s.200 The single exception to this tendency was Soviet-DPRK trade. Shortly after the accession of Yuri Andropov, Soviet–North Korean relations began to warm perceptibly; Soviet–North Korean trade relations followed suit. Virtually all of North Korea’s increases in global trade turnover during the 1980s appear to be due to its increased exports to, and imports from, Moscow. Over the course of the 1980s, moreover, the USSR exhibited an increasingly forbearing attitude toward North Korea’s deficit in their bilateral trade. By the late 1980s, the reported trade imbalance between Moscow and Pyongyang had ballooned and was running at nearly $1 billion a year (at 1995 official ruble–dollar exchange rates). Imports from the USSR swelled; at 1995 official ruble–dollar exchange rates, they may have accounted for three-fifths or more of North Korea’s total imports by the late 1980s. The composition of these imports is also of interest. Classified according to the Western Standard International Trade Classification (SITC) schema, Soviet trade figures indicate a huge jump in Category 9 goods and services. Although such things as postage stamps and circus animals are classified as SITC 9, the most obvious and likely meaning of this shift was that Moscow had begun to ship substantial volumes of weaponry (also SITC 9 goods) to North Korea on a concessional basis. By 1990 more than half of all Soviet exports to the DPRK appear to have been SITC 9 goods and services. 92 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Although interpretations are necessarily speculative in this regard, these trade data are consistent with the proposition that North Korea’s third Seven-Year Plan (for 1987–93) was built around the presumption of substantial and increasing aid (or implicit subsidy) from the USSR. They are further consistent with the hypothesis that North Korea’s leadership had been promised, and were expecting, substantial and increasing shipments of military materiel from the Soviet Union over the plan period. Major shipments of Soviet weaponry, one may note, would have helped North Korea’s leadership balance the “correlation of forces” against South Korea at a time when so many other tendencies were tilting in Seoul’s favor—and would concomitantly ease pressures for systemic economic reforms. In the middle of the third Seven-Year Plan, however, the USSR—and Soviet exports to the DPRK—collapsed. Thus, at precisely the time when North Korea’s domestic economy was grinding toward a halt, the DPRK not only was deprived of the possibility of external aid from socialist friends but also suffered further and possibly severe military dislocations and security repercussions from their liquidation. The collapse of the Soviet bloc had reverberations throughout the North Korean economy and seems to have ushered in unprecedented official gloom. The third Seven-Year Plan was terminated on schedule, at the end of 1993. But for the first time in the regime’s history, the government’s communiqué on the plan explicitly acknowledged that many of the major targets had not been achieved. Even more unusual was the warning that the country’s economy was in a “grave situation.”201

Conclusions

Few observers writing in (say) 1992—that is, in the immediate aftermath of the disintegration of the USSR—would have suggested that DPRK’s economic and political future looked promising, or that there was anything to commend the “North Korean model of development.” But the vantage point on “lessons of development” from the Korean peninsula would surely have seemed different in the late 1960s—and the narrative might have been vastly different in the 1970s, if history had played out just a bit differently and the South had been successfully unified under the DPRK’s POLICY AND ECONOMIC PERFORMANCE DPRK: 1945–1991 93 authority. Yet, as we know, North Korea in fact missed its opportunity to prevail over the South during the heat of their economic contest. For an economic system specially focused for the achievement of specific political objectives, this was, inescapably, a failure—and a bitter one. That being the case, is there any remaining reason for North Korea’s record of material advance during the Cold War era to be of interest? I would argue so. North Korea’s experience during this period would seem to pose a challenge to much that is thought to be known today about the correspondence between policy and economic performance. How is it that this economy—subject to ostensibly repressive police-state rule, governed rigidly by command planning, directed by rulers obsessed with military buildup, rocked by policy-induced dislocations, insolvent and isolated internationally, insensitive to consumer preference but enormously indulgent in underwriting economically unproductive projects favored by the state—not only avoided complete collapse but seemed to have performed rather creditably in aggregate economic terms for a period spanning more than three decades? Precisely to the extent that North Korea seems to be an exception, the North Korean experience may offer insights into the actual “rules” of economic growth in the modern world.

Policy and Economic Performance in South Korea: 1945–1991

South Korea’s material transformation in the era after partition—its near- septupling of per capita product in just three decades,1 its emergence as an important participant in world commerce,2 its development of indigenous technological capacity3 and internationally competitive industries (including capital intensive industries)4—came as a great surprise to most foreign observers and even to its closest allies overseas. In 1947, for example, a report on the Korean situation specifically com- missioned by President Truman had concluded, “South Korea, basically an agricultural area, does not have the overall economic resources to sustain its economy without external assistance. . . . Prospects for developing sizeable exports are slight. . . . The establishment of a self-sustaining economy in South Korea is not feasible.”5 Such a reading of South Korea’s prospects was close to the consensus of informed opinion at the time. In early 1948, for instance, the deputy military governor of South Korea confidentially advised the U.S. State Department that although the territory could possibly “attain a marginal self-sufficiency” in the years to come, “it could never attain a high standard of living.”6 After the Korean War—in which more than one million South Koreans are believed to have been killed7 and as much as one-quarter of the country’s population made refugees8 and in which enormous damage was inflicted on housing and capital stock9—overseas assessments of the nation’s economic prospects were hardly more optimistic.10 Low expectations, in fact, seem to have been the rule even for some time after the boom had gotten under way.11 The fact that South Korea’s dynamic performance seems to have been so widely unexpected may or may not speak to a broader lack of

94 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 95 understanding about the factors involved in the great postwar augmentation of international productivity and wealth. It does, however, suggest that the limits of the possible in South Korea’s particular case were at first widely and seriously underestimated. Alexander Gerschenkron was writing of the “advantages of backwardness” at the very time when Korea’s economic prospects may have seemed their bleakest.12 At the very least, the South Korean experience would seem to confirm that those “advantages” could be considerable—provided that they fall into the right hands at the right time.

South Korea’s Economic Successes: Conflicting Claims to Patrimony

Although vastly more information is available on material progress in South Korea than the North, a number of misunderstandings of both process and results in South Korea seem to have arisen and to have per- sisted. Now that South Korea’s economic success is taken for granted, these misimpressions are sometimes offered in the form of “lessons for development.” Thus in 1980, for example, did one Nobel laureate in economics illustrate the “tyranny of controls” by contrasting “thriving” South Korea— described as “relying extensively on private markets”—with such countries as Indonesia and India, which “relied heavily on central planning, and have experienced economic stagnation and political repression.”13 Observations of this sort may have seemed unexceptionable for many years, not least because it is an interpretation of events that the government of South Korea itself helped to present.14 Nevertheless, such comments fail to touch on the essence of the Republic of Korea’s economic experience and ignore some of its most interesting aspects. During the 1980s and early 1990s, a very different school of thought proposed to lay claim to South Korea’s exceptional economic record. This tendency, described by some of its proponents as a “market governance” view,15 attributed South Korea’s economic successes in large measure to the deliberate, continuous, and far-reaching interventions of an activist government apparatus. Although exponents of this interpretation differed in their own political leanings (with some describing themselves as 96 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

conservatives and others expressing leftist preferences), they were united by the view that South Korea had enriched itself through a functional dirigisme that refused to accept “market forces” as the arbiter of economic development. Instead, in the words of one analyst, “South Korea’s economic growth and industrial transformation was largely the result of highly centralized and effective state planning.”16 In this reading, South Korea not only “got prices wrong”17 but did so as a matter of policy, and flourished in so doing; in the process, it offered the world a lesson in “the creation of comparative advantage.”18 In academic and policy circles, this seemingly revisionist interpretation19 of the South Korean development experience enjoyed a respectful recep- tion.20 But the favor accorded this interpretation cannot rest fully on the merits of its analysis. No less than the “market liberalism” view—although perhaps less obviously—the “market governance” view misreads the history of South Korea’s development. Whereas a laissez-faire portrait of South Korea’s economic ascent simply ignores a number of evident realities, the dirigiste alternative rigidly posits many of its key findings into existence. It does so by presuming fixed and particular correspondences between policy actions and subsequent economic results on the South Korean canvass. In reality the impact of policy interventions on economic activity is subtle, complex, and varied and typically requires sustained economic analysis to assess. By and large, the sustained engagement necessary to demonstrate (rather than merely stipulate) the connection between policies and achieved results would appear to be lacking from the “market governance” literature on South Korea. Post hoc, ergo propter hoc argumentation, in the final analysis, is no more persuasive for the dynamics of Korean development than on any of the other terrains to which it may be applied. To some degree, conflicting claims on the “lessons” to be drawn from the South Korean experience can be said to reveal the strengths, and limitations, of contending disciplines within the social sciences. It may be relevant that proponents of the dirigiste view of South Korean economic successes are by and large (though not exclusively) noneconomists, whereas those espousing a free market interpretation of South Korea’s performance happen generally not to be students of political science. A “political economy” approach may venture to advance our understanding of the interplay between policy and material performance in South POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 97

Korea by drawing on the insights of two disciplines: political science and economics. Since the 1980s, students of political science and of economics have generated a small library of studies on South Korea’s evolution.21 By drawing on this literature and earlier materials, this chapter will offer an overview of the influence on South Korean material exerted by state policies and practices—both concerted and inadvertent. This synthesis will propose a broad interpretation of the South Korean development since partition and leading up to the end of the Cold War and, in so doing, will try to address a number of as yet unresolved questions and debates among students of South Korean affairs. This review of South Korea’s economic record since the 1945 partition will rest on three perhaps basic but often overlooked points. First, true to the claims of the “market governance” theorists, South Korea’s rapid pace of economic advance was indeed achieved not under a polity resembling laissez faire, but rather during a time of active and far-reaching state interventions into economic life. Second, not only were South Korea’s policies unashamedly dirigiste during the period of rapid economic acceleration in the 1960s and 1970s, but also many of the government’s decisions and practices should have been expected to undercut or retard rapid economic growth. Third, and perhaps most important, considerable evidence suggests that the burdens, costs, and inefficiencies devolving from the South Korean government’s “highly centralized and effective state planning” interventions since the early 1960s were very much as conventional economic analysis would predict. Indeed, due largely but not entirely to distortions imposed on it by policy decisions since 1960, the structure and performance of the Republic of Korea’s economy was in some important ways quite different from those of Japan and Taiwan, with which South Korea has been commonly grouped or associated in contemporary economic and “market governance” analyses. South Korean policymakers’ great success in promoting their country’s material advance must surely be credited, but it should also be properly defined. For the period under consideration, it would appear that the success was more one of mobilizing factors of production than of promoting the efficiency with which such resources have been utilized. 98 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

The Years 1945–1960: The Interlude between “Hard States”

Between 1945 and 1960, South Korea’s economy was anything but vibrant and dynamic—not that these were tranquil or uneventful years. With the sudden and chaotic liquidation of colonial economic administration, and an involuntary partition from the northern provinces to which its economy had been increasingly integrated, South Korea’s output fell sharply on “liberation.”22 It suffered a further severe blow with the Korean War.23 After 1951, when that war dragged into stalemate and demarcation boundaries stabilized, the South Korean economy embarked on a prolonged recovery. But for the period as a whole, a variety of macroeconomic indicators pointed to something like stagnation. In fact, many indicators unfavorably compared the Republic of Korea’s economy in 1960 with that of Korea’s prepartition southern provinces. Though price deflators for a period encompassing a transition from a colonial to a national currency, a hyperinflation, and a destructive war should be approached with appropriate caution,24 estimates of real “net commodity product” (i.e., value added in the agricultural and industrial sectors alone) for the territory that was to become South Korea suggest only a negligible change in the aggregate between 1940 and 1960—in fact, a virtual stasis.25 During those years, however, South Korea’s population grew from about fifteen million to about twenty-five million;26 by those numbers, real per capita “net commodity product” might have fallen by as much as two- fifths. Even presuming a significant expansion in the service sector (say, from a hypothetical 25 percent of GDP in the colonial period27 to the 41 percent reported in national accounts for the years 1960–6228), South Korea’s real level of aggregate output would have been only slightly over one-fourth higher in 1960 than in 1940, and per capita output would have been more than 20 percent lower;29 output per person of working age would be down by a similar magnitude.30 By such a reckoning, in fact, South Korea’s per capita output in 1960 could well have been as low as, or even slightly lower than, its per capita output in the mid 1920s.31 Thus, as South Korea entered the 1960s, one might say that it already qualified as an “outlier” in the realms of economic development—if only because scarcely any other territory on the globe had performed so poorly over the previous three and a half decades.32 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 99

The ramifications of stagnation and retrogression were, naturally, far- reaching. For a population so close to the margins of subsistence, the implications for consumption levels were central—and adverse. Japanese colonial policy, as has been widely written, attempted to suppress the share of output in the Korean economy allocated to local consumption,33 whereas consumption is estimated to have accounted for more than 95 percent of South Korean output in the early 1960s.34 Even so, by these numbers it is hard to see how per capita consumption—at least on average—could have been much higher in South Korea in 1960 than it had been in 1940.35 More likely is the possibility that per capita consumption levels in South Korea were lower than those in southern Korea earlier—perhaps even substantially lower.36 With the widening appreciation of the role that “human capital formation” appears to play in the process of economic development, a growing number of economists would probably argue that long-term stagnation, or decline, in national consumption levels is inauspicious per se for future development prospects—all the more so if those initial consumption levels are low. But South Korea’s economic performance in the years after partition seemed to augur ill for material advance by other, more traditional criteria as well. Between 1940 and 1960, the structure of the economy in what was to be South Korea evolved in directions arguably inauspicious for self-sustaining growth (although comparisons are admittedly complicated not only by measurement problems but also by the exploitative and involuntary nature of the imperial order by which Korea’s economy had earlier been shaped). In the early 1960s, for example, the ratio of exports and imports to national output would have been well over two thirds lower than it had been around 1940,37 and national savings appear to have accounted for no more than 3 percent of GNP38—in all likelihood a lower fraction than in 1940, even after discounting the contemporary accumulation of assets by resident Japanese nationals and other Japanese interests.39 Not even the sectoral composition of product offered hope for, or signs of, “modernization,” for the share of output generated by mining and manufacturing by the South Korean economy of the early 1960s was not clearly higher than it had been in the southern Korean economy of the late 1930s or early 1940s. By this particular measure, in fact, South Korea 100 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

may actually have been less “industrialized” at the start of the 1960s than under Japanese rule decades earlier.40

General Park and the Return to Economic Development

Full recovery to prepartition levels of per capita output and rapid development beyond the levels achieved under Japanese colonial government did not commence in the Republic of Korea until the advent of rule by a series of military figures. To state as much, in one sense, is to acknowledge the obvious. It is a matter of record that, from 1961 until 1988, the Republic of Korea was an apparatus under the direct and virtually uninterrupted authority of a succession of colonels and generals.41 Between 1961 and early 1988 the country’s two maximum leaders—Park Chung Hee (1961–79) and Chun Doo Hwan (1979–88)—had not only been generals in the ROK army when they ascended the presidency but had in fact assumed power through their own respective coups d’etat. South Korea’s president from 1988 to 1993, Roh Tae Woo, unlike his immediate predecessors, was elected to the office through a reasonably competitive mass plebiscite; also unlike his predecessors, he presided over a deliberate, and largely successful, liberalization of the South Korean polity.42 Earlier, however, as General Roh Tae Woo, he had participated in the coup that brought President Chun into command. It is one thing to recognize these facts, of course, and quite another to divine their significance in South Korea’s resumption of economic development. The role of military factors in South Korea’s material advance is a theme to which we will find ourselves returning. For now, it will suffice to suggest that this contribution would appear to be much more important— more profound, more extended, and more complex—than might be imag- ined from a reading of the orthodox economics literature alone. Just as a single individual can play a pivotal role in the history of an entire country, so sometimes one does as well in a nation’s economic affairs. Park Chung Hee, leader and organizer of the 1961 coup, is arguably one such personality. Although much has been written about his later life—the years between his emergence on the national stage and his assassination— there has been some inattention, even on the part of historians and POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 101 political scientists, to the formative experiences of his youth. This is unfor- tunate, for it is in these details of the past that we find the prologue for South Korea’s development policies of the 1960s and 1970s. As a young man, Park Chung Hee had been inducted into a hand- picked elite: though an ethnic Korean, he qualified for officer training in the Japanese Imperial Army. From 1940 to 1942, he was a cadet in Manchuria, at the Japanese Manchukuo Academy; thereafter he won a place in the Tokyo Military Academy43—one of less than forty Koreans ever to do so.44 (In an act rich in its symbolism, Park also assumed a new name for the new life to which he had been introduced: until 1945, he was Lieutenant Okamoto Minoru.45) Japan’s wartime officer training program provided not only instruction in military tactics and strategy but also an introduction to the problems of economic development. It was a grounding of a very particular sort. From the start of their Manchurian adventure onward, the Japanese officer corps assumed a central role in the economic management of that quasi-colony— a role replicated in other colonies and conquered territories as the Pacific war expanded and intensified.46 What they fashioned was a version of state-led growth in which augmenting deployable military power was always the paramount objective of policy. In their pursuit of this objective, Japan’s overseas officers and administrators constructed a political and economic framework defined, on the one hand, by extensive and severe police control over the local populace47 and, on the other hand, by government programs to create and strengthen the sinews of war. The preference for heavy industry, big infrastructure facilities, and state guidance of the economy so strongly manifest in “Manchukuo” and other overseas acquisitions was by no means unknown to the “Home Islands” at the center of the empire—nor was an official ambivalence toward undi- rected private enterprise.48 But the degree to which these tendencies of a war mobilization system (and the political sympathies supportive of them) were embraced by Japanese administrators at home and abroad differed characteristically, even at the height of the war.49 This is important to remember. Throughout the expansion of the 1930s and the Pacific war, the implementation of war-mobilization policies was always more moderate in Japan itself than in its possessions and quasi-colonies—a distinction attributable to many factors, not the least of these perhaps being that the 102 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Japanese military was freer to promote its vision of “development planning” in settings inhabited by non-Japanese populations. Park Chung Hee was thus not only exposed in the classroom and the dormitory to the precepts of this Japanese military approach to economic development. He also witnessed it in practice in Manchuria: first during his years in the academy and then later as a lieutenant in the Japanese Kwangtung Army.50 For a variety of readily understandable reasons, neither Park nor his South Korean critics chose to dwell on this aspect of his personal history. In retrospect, however, there can be little doubt that it made a lasting impression.51 Almost immediately on the heels of the “May 16 Revolution,” as proponents of the new order referred to the 1961 coup, Park and his Supreme Council for National Reconstruction (SCNR) effected far-reaching changes in the structure of the South Korean government. Two of these were especially significant. First, less than four weeks after its seizure of power,52 the new military government established a broadly empowered Korean Central Intelligence Agency (KCIA) to deal with security questions at home and abroad. (Within three years, the KCIA was reportedly to comprise 370,000 personnel and to serve, in the words of one observer, “as the most cohesive organization within South Korean society.”)53 Second, in the following month, the SCNR created the Economic Planning Board (EPB).54 The EPB was, in the words of one analyst, a “super ministry,”55 empowered to devise and implement multiyear economic plans for hastening and shaping the country’s development. Although South Korean bureaucrats and their foreign advisers had episodically gone through the motions of drawing up an economic plan for the country since the end of the Korean War,56 the new EPB betokened a completely different degree of official commitment to, and involvement in, planning. Indeed, as one student of the Korean scene has observed, the EPB allowed Park control of a sort that had not been possible before. “It centralized economic information, taking over planning powers from the former Ministry of Reconstruction, responsibility for the budget from the Ministry of Finance, and statistical collection from the Ministry of Home Affairs. . . . Even the prime minister’s office of planning and coordination had to report to the EPB. . . . Later the EPB took over responsibility for price policy, fair trade administration, and reviews of projects. The EPB also sent midlevel officials to other bureaus.”57 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 103

American diplomats and advisers in Seoul at the time watched this overhaul of the South Korean governmental apparatus with anxiety and trepidation, for they did not know what to make of it. (The KCIA, the EPB, and other new institutions brought into existence by the SCNR clearly were not instruments for an open, liberal society—but it was unclear what sort of transformation they did presage.)58 Yet if the foundations of state so quickly and purposely being grounded by the Park junta were not immediately familiar to an American eye, they were familiar to other eyes, for they bore a strong resemblance to some of the organs of governance from the era of Japanese colonialism.59 To a country that had suffered hardship and humiliation under Japanese rule, the resurrection of a state structure so much like the hated colonial yoke might seem difficult to justify. To many Koreans longing for their own “rich nation and strong army,” however, this turn toward institutions from an earlier time could be explained in purely pragmatic terms. The Japanese colonial era, after all, had been the last—indeed, the only— previous period in which South Korea had undergone sustained material advance.60 The new junta was opting for tested, and proven, tools—tools modified to new specifications, to be sure, but nonetheless tools known and trusted by their prospective operators. In retrospect, it may now seem ironic that the first economic plan for the South Korean economy, prepared by Americans in 1954, advised that “the industrial pattern, which prevailed prior to the invasion, provides a solid foundation for further industrial development.”61 It was precisely from that industrial pattern—with its low levels of saving and investment and its emphasis within industry on light manufacturing and consumer products62—that the junta’s visionaries sought to escape. Their gaze was fixed on industrial patterns and policies of a slightly earlier vintage.

Foreign Aid and Economic “Takeoff”

Like the reintroduction to South Korean political life of various features from an earlier “hard state,” the impact of foreign aid is a delicate but central issue in an evaluation of the country’s material transformation. Between 1946 and 1961, exclusive of its Korean War help, the United States 104 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

provided the Republic of Korea with $5 billion (in current dollars) of direct grants, roughly 64 percent of which was earmarked for development or economic assistance and 36 percent for military or security assistance.63 For a country whose entire GNP in 1953 might be reckoned at about $2 billion (at current prices),64 this was a fantastic sum of money. In total, this aid roughly matched South Korea’s imports from abroad over the entire fifteen- year period; it distinctly exceeded the country’s total allocation for gross domestic investment during those years.65 How did these transfers affect Korea’s material prospects? The question is not easily answered, for it begs a basic reading of the complex interplay between politics and economics during a particularly tumultuous era in South Korean history. In addition, it exposes the seldom-addressed question of the types of concessional transfers that should be examined in the study of economic development in recipient states. Conventionally, economists focus their attention solely on the transfers that are labeled as “economic assistance,”66 yet it is hardly self-evident that fungible resources transmitted through military or security channels are of no consequence to the performance, or evolving capabilities, of the recipient economy.67 Viewed in very broad terms, the impact of these enormous concessional transfers on the South Korean prospect can be described by two generalizations. On the one hand, one may be reasonably certain that these massive donations permitted the survival of the state; even in retrospect, it is difficult to imagine how the Republic of Korea would have sustained itself against domestic collapse or external aggression during those years without vast outside help. On the other hand, while U.S. aid may have preserved South Korea’s political order, it evidently did not coincide with recovery to prepartition levels of per capita output, much less spark an immediate economic “takeoff.” The impact of aid depends in some large measure on the intentions of the recipient government,68 and the ROK’s “First Republic”—the regime of Syngman Rhee (1948–60)—was, in the estimate of both his contemporary critics and some of his close personal advisers, quite content to treat U.S. aid essentially as an ongoing program of external relief.69 Some analysts have even termed Rhee’s policies as “aid maximizing”70: in effect, designed to require large and continuing inflows from its American ally to redress the precarious fiscal and financial conditions they engendered. Needless to say, POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 105 such a strategy would not be predicted to excite rapid economic growth.71 In underwriting it, the United States seems to have purchased the possibility of rapid development in South Korea at a future date, even as its aid effectively precluded that possibility at the time. Rapid economic growth in South Korea in the 1960s may have been directly related to U.S. foreign aid, albeit in a somewhat unexpected manner. There is intriguing evidence to suggest that South Korea’s transition to a regimen of outward-oriented growth was a direct consequence of foreign aid policies: more specifically, of a warning by Washington that it would be terminating its programs for Seoul. By the late 1950s, the Eisenhower administration had become expressly displeased by what it saw as the Korean government’s unhealthy dependence on and unseemly interest in U.S. aid.72 The incoming Kennedy administration shared the sentiment; its top policymakers questioned the aid arrangements they inherited in Korea—under which the ROK was, among other things, America’s single greatest recipient of foreign assistance.73 Official attention to the unsatisfactory state of the program was concentrated further in early 1961, when the “deputy director of the U.S. Operations Mission in Seoul . . . resigned in order to emphasize the seriousness of [South] Korean corruption, and to call for reorganization of the U.S. effort in [South] Korea.”74 With the military coup in 1961, the Kennedy administration’s dis- pleasure with Seoul, and the fact that its subventions were underwriting the SCNR’s antidemocratic actions, increased further.75 Washington’s disapproval of the SCNR’s exercises in political repression was compounded by disenchantment with its new economic measures. Although the junta clearly took long-term economic planning seriously (announcing a detailed Five-Year Plan before the end of 1961), many of the specifics of its programs for accelerating growth were viewed as impracti- cal, irresponsible, or philosophically antithetical.76 American economists and policymakers objected to the initial plan’s seeming indifference to the export sector and its equanimity to deficit finance and the overvaluation of the won; they severely criticized the regime’s embrace of financial repression (about which more later). Many of their misgivings, in fairness, were borne out by the first several years’ performance of the South Korean economy under the new order. Growth was measured to be brisker in 1962–63 than over the previous eight years: 5.6 106 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

percent per annum versus 4.1 percent per annum, according to official numbers.77 At the same time, the inflation rate was, once again, surging up;78 the national savings rate, minimal to begin with, remained virtually stagnant; the growth of exports did not accelerate,79 but the balance of trade deficit widened to nearly 11 percent of GNP, from 8 plus percent between 1953 and 1961. The acceleration in growth evinced by the plan, in short, looked too unsustainable. Indeed, by the internal logic of this new framework, sizeable and increasing amounts of “foreign savings”—overseas aid—would be needed if Seoul’s planners were to maintain stability and growth in the economy without significantly altering their strategy. The U.S. Agency for International Development’s response to the SCNR’s politics and economics was unambiguous—and completely unexpected by the recipient regime. Late in 1962 and early in 1963, the Park government was informed by Washington that an irreversible decision had been reached: although security assistance would continue, U.S. economic assistance would be terminated in an orderly but deliberate manner and would be phased out entirely by the second half of the 1960s. This fact—central to an understanding of subsequent South Korean policies—is curiously neglected in the economic literature on modern Korean development.80 It was, however, nicely captured at the time by a front-page story in the New York Times:

The United States has quietly decided to reduce economic grants to South Korea, a country whose economy is mainly based on such assistance. The decision was taken considerably before the current political struggle between the military regime and civilian leaders. . . . Leading South Korean officials have been told privately to expect reduced aid. For months they decided not to believe what Washington said, but now some of them believe it, and in the words of one American, are in a “dither” about it. Washington has decided it can no longer underwrite all the shortcomings of the South Korean economy. . . . Any future government, civilian or military, will find the flow of United States grants thinner and more carefully controlled.81 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 107

It is easy to see why planners in Seoul would have been in a “dither” about this news. At the time, economic assistance from Washington was the principal vehicle for financing the operation of their state—in fact, those monies accounted for more than half of all the funds the central government raised.82 Radical adjustments in fiscal and economic policy would be required to compensate for this impending loss of revenue. The response to this American challenge was the package of “reforms” implemented between 1963 and 1966, about which so much has been written. Washington’s unwelcome announcement, thus, seems to have served as the proximate stimulus for the Park regime’s decision to embark on an export- oriented development strategy.83 To be sure, the story is not quite that simple. Park and the men close to him are widely thought to have come to power already convinced of the need to promote efficiency, economic growth, and development, in part to forestall the threat from the North; within parameters, they were flexible and open-minded, and an insistence on autarkic development was not one of their parameters. During the Rhee years, moreover, a growing cadre of economic technocrats trained in American universities or sympathetic to the counsel of USAID program officers had been gathering in the foundations of the South Korean government;84 these personnel, and their policy preferences, were becoming more influential with time. And in the event, American aid was not terminated, but rather increased, over the 1960s, with the fortuitous incorporation of the Republic of Korea into the American war effort in Vietnam:85 the threatened schedule for the ending of economic assistance, in other words, was not consummated. It is entirely possible that the South Korean state would have eventually embraced an outward-looking economic policy in any case. (Like all historical contrafactuals, of course, this specific proposition is impossible to test or to falsify.) The credible prospect of a cutoff of American “development assistance,” however, looks to have been the specific and immediate event that prompted South Korea’s highest policymakers to embrace this particular form of economic virtue as a matter of necessity. And embrace it they did.86 Thus, with the end of the SCNR in 1963 and the start of the “Third Republic,” the South Korean state had not only put together a vehicle for its development drive but also stumbled onto a road map. 108 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Desiderata of Development: South Korean Exceptions

The success of South Korea’s export-oriented strategy is no longer open to dispute. Between 1960 and 1993, the ROK’s ratio of exports to GNP rose from about 4 percent to more than 40 percent in 1987,87 settling in the early 1990s at around 30 percent88 (table 3-1). Over that same period, real gross domestic product is estimated to have increased more than a dozen- fold, and real per capita GDP is estimated to have more than septupled. The structural transformation of the South Korean economy over those same years could hardly have been more striking. The national savings rate, which may have been as low as 1 percent in 1960, reached an estimated level of 20 percent in 1973, apparently exceeded 30 percent in 1986, and remained in the high 20s or low 30s throughout the late 1980s and the early 1990s. No less significant than this rise itself was the fact that South Korea’s gross savings ratio was, by the late 1980s, finally higher than its quite substantial gross domestic investment ratio—in some years, dramatically higher. (For 1987, the high-water mark for such structural surpluses, that difference amounted to about 7 percent of GDP.) As a practical matter, the actual merits of such a posture notwithstanding, financial self-sufficiency was fast becoming an option for South Korea: if it so chose, the country would finally be able to finance its continued growth entirely from domestic savings. Indeed, the prospect that South Korea—a country castigated in the early 1960s by aid donors for what was termed its “mendicant mentality”89— might ultimately become a net international creditor no longer sounded fantastic. Between 1981 and 1991, the ROK’s ratio of net foreign debt to GNP fell from 40 percent to 4 percent;90 for the period between 1986 and 1993, South Korea was in fact a net exporter of capital to the rest of the world.91 Pending the political determination (and the appropriate policies) to achieve it, net creditor status for South Korea was within immediate reach by the end of the Cold War era.92 With this remarkable record in mind, it is well to remember what South Korean economic policy did not do to foster growth and development, for the South Korean “developmentalist” state placed its weight behind a panoply of practices and policies that could be expected, by conventional economic analysis, to have inauspicious implications for material advance. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 109

TABLE 3-1 SELECTED MACROECONOMIC INDICATORS: SOUTH KOREA, 1953–1993

Ratio: National Net Foreign Per Capita Year Exports to GNP Savings Rate Debt to GNP GNPa 1953 2.0 1.0 NA NA 1955 1.7 5.2 NA 99 1960 3.4 0.8 NA 100 1965 5.5 7.4 NA 119 1970 14.3 17.3 24.1 173 1975 27.8 16.8 26.2 232 1980 33.9 20.8 35.6 297 1985 34.1 28.6 40.0 409 1990 29.8 25.6 1.4 641 1993 29.4 24.9 5.2b 755

NOTES: NA = not available; a = (1960 = 100); b = 1992. Net foreign debt defined as differences between stock of assets and stock of liabilities with the rest of the world. SOURCES: Derived from Republic of Korea, Bank of Korea, National Income 1994 (Seoul: Bank of Korea, 1994); and Republic of Korea, National Bureau of Statistics, Korea Statistical Yearbook (Seoul: Economic Planning Board), various issues.

For our purposes, a brief survey and enumeration of the most significant of these practices and policies will suffice.

Microeconomic Issues: Transaction Costs and Uncertainty

To begin, there are the practices and policies bearing on the microeconomic framework within which material advance must be achieved. Since the late 1980s, students of development economics have paid increasing attention to the role of institutions in laying an auspicious microeconomic foundation for growth. This foundation is established through rules and procedures that lower transaction costs, reduce the costs of acquiring information, and more generally diminish risks and uncertainties attendant on an individual’s economic activities.93 The South Korean “developmentalist” state of the 1960s, 1970s, and 1980s, however, did not establish a microeconomic foundation for 110 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

economic activity that was self-evidently auspicious. Quite the contrary: in a variety of respects and over the course of several successive decades, government actions repeatedly and often forcefully appeared to undercut the micro-prospects for rapid economic growth in South Korea. Central to these various microeconomic barriers against rapid growth was a single but overarching fact: between the early 1960s and the late 1980s, the Republic of Korea was manifestly a state neither guided by nor restrained by the rule of law.94 Foreign observers devoted considerable critical attention to the implications of this state of affairs for “human rights”95 and political processes96 in South Korea, but they seem to have accorded rather less consideration to its commercial implications.97 Yet those commercial implications were direct, immediate, and adverse. In a formal sense, South Korea during its Third, Fourth, and Fifth Republics (1961–87) did maintain the appurtenances of a legal system: there was a constitution, a legislature, and a supreme court; laws were con- tinuously enacted, revised, or reviewed. As a practical matter, however, this judicial apparatus exerted only an irregular, and often slight, influence on the actual day-to-day rules by which business was conducted in the country. To a far greater degree, those actual rules depended on the decisions or attitudes of those vested with political power. From the lowliest street ven- dor to the wealthiest chaebol magnate, economic agents required specific and particular interventions on their behalf by government officials if they were to avoid running afoul of regulations,98 if they were to have contracts enforced, or even if they were to secure the right to their own property. Such arrangements naturally encouraged the arbitrary, personalistic, and partial exercise of administrative authority at all levels—and given the great diversity of personal interests and attitudes within officialdom, administrative authority itself was often inconsistent or contradictory. The result was a commercial environment in which risks to the individual economic agent were high, information was expensive to acquire, and attendant costs of conducting business were increased due to political considerations. The experiences of foreign firms and corporations in South Korea, during the “takeoff” and after, are to some degree indicative of some of the problems that were faced by businesses of all nationalities under the Third, Fourth, and Fifth Republics. Throughout the 1960s, 1970s, and 1980s, it was commonplace for foreign concerns to find that their contracts signed POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 111 in Korea were locally unenforceable—or actually abrogated post facto by unpredictable governmental interventions.99 For foreign concerns, legal protection for certain kinds of property was completely unavailable: until the late 1980s, for example, the ROK simply did not prosecute infringe- ments of overseas copyrights, patents, and licenses within its domestic market.100 But even when written law formally guaranteed property rights, those protections could be overturned or subverted by ukase—a decree issued sometimes simply at the whim of officiating authorities. Perhaps the most striking example of the practical consequences of this “business climate” was seen in the debacle involving the Dow Chemical Company’s petrochemical facility on the southern coast of the ROK in the early 1980s—the largest single direct foreign investment in the country at the time. After several years of escalating local frustrations—reportedly capped by a sudden inability to purchase from the appropriate South Korean public utility the electric power necessary for the plant’s operation101—Dow recognized that foreign owners would not be able to succeed with the project. It sold its stake to South Korean principals in 1982, reportedly at a loss of one hundred million dollars.102 Though published accounts of this incident conflict on a number of points, and the ultimate failure of the venture may arguably have been “overdetermined”103 (price trends in the international petrochemical market during the period in question, for example, were clearly unfavorable), it has sometimes been suggested that Dow’s difficulties initially stemmed from the unusually bad personal relations that developed between Dow’s local project manager and some senior South Korean military officials, who then used their office to pursue a vendetta against the unlucky operation. Even in the early 1990s—after the transition from military to civilian constitutional rule under the Sixth Republic104— foreign businessmen continued to cope with a business environment in South Korea complicated by the unpredictable, extralegal, and discriminatory exercise of administrative discretion.105 As one association representing many of the foreign concerns in the Republic of Korea observed in 1991, “In Korea, where so many of the bureaucracy’s decisions are made on a ‘case-by-case’ basis, the attitudes of working-level officials are of critical importance.”106 The foreign commercial experience in South Korea has arguably been colored by a special sort of official hostility evidenced toward non-Korean 112 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

concerns (more about which later). By and large, however, the pattern of administrative opaqueness and uncertainty enhancing official practices that has been so familiar to foreign economic actors in the South Korean setting also affected local economic agents—and may indeed have affected them more severely, in view of their much more limited avenues of recourse. During the Third, Fourth, and Fifth Republics, the South Korean state’s interventions in the country’s domestic commerce were wide ranging and often extremely consequential for particular businesses or entrepreneurs. Frequently these activities took the state far beyond the boundaries of the written law. Emblematic of the general approach was the government’s promulgation of “temporary” price controls, a practice repeatedly enacted in the 1960s and 1970s.107 In a high-inflation environment— and South Korea’s average inflation rate approached 20 percent a year over the 1960s and 1970s108—the sudden imposition of such previously unannounced controls, of indeterminate duration and with varying extents of coverage or degrees of severity, exposed producers and sellers to the risk of heavy and unpredictable losses. Assessing the “temporary” price controls of the 1960s, an eminent South Korean economist (later to serve as deputy prime minister and, still later, as governor of the Bank of Korea) observed at the time that “there is no legal basis to the working of this system, but the government influence goes beyond what laws or regulations stipulate.”109 His comment would have been equally applicable to the “temporary” price controls enforced in the 1970s—or to any of a large number of other practices affecting commerce and business in which the government routinely engaged. While arbitrary and extralegal government actions could prove very costly to South Korean firms or individuals, under the Third, Fourth, and Fifth Republics there were no regular procedures through which remedies for the contingent losses might be achieved. As a South Korean legal scholar has noted, “Administrative agencies in Korea are subject to little or no restrictions other than intra-agency procedural regulations. . . . No violation of internal procedural regulations can be redressed by administrative lawsuit.”110 Civil lawsuits against the state offered scantly better prospects for relief. Suits against private persons could sometimes reach a satisfactory set- tlement through compulsory execution, but not so when the defendant happened to be the state. When the state was the defendant and the court POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 113 had ruled against the defendant, the bailiff frequently refused to enforce the decision. As a result, the administrative agency concerned disregarded in practice the court decision, and the court itself took no further action in the case.111 With extensive government involvement in the economy, and few mechanisms for the protection of firms or individuals against government- caused financial losses, the situation facing local entrepreneurs in South Korea was, on its face, one of unusual risk. In fact, conditions were still more uncertain than this summary might suggest, for during the 1960s, the 1970s, and (to a lesser extent) even the 1980s, the South Korean government’s prerogatives included the seizure of the property of targeted groups or individuals through practices ranging from outright confiscation to forced sales at artificially low prices. Perhaps the most well-known of these episodes was the SCNR’s summary nationalization, in late 1961, of South Korea’s entire commercial banking sector.112 Other major “takings” included the 1972 “Presidential Decree for Economic Stability and Growth” that nullified, and then rewrote on highly concessional terms, all of the existing loan contracts extended by the country’s unregulated financial institutions.113 On a more particular basis, the disposition of the property of financially troubled chaebol, always at the behest of the government, often evidenced a confiscatory character.114 Less dramatic and much more routine was the requisition of real estate from owners at below-market prices;115 although ostensibly these “eminent domain” takings in urban and rural areas were justified by the specific needs of given government development projects,116 in practice the broad discretion accorded to South Korean administrative agencies and their officials meant that this process could often be highly selective and arbitrary.117 (Insofar as real estate accounted for the preponderant share of the country’s national wealth—as of 1988, the Bank of Korea estimated that land alone made up nearly three- fifths of South Korea’s gross personal wealth118—the great bulk of private assets, or investments, were thus apparently exposed to the possibility of such governmental expropriations.) In the face of a powerful and potentially punitive state that granted its citizenry neither the transparency of administrative decision making nor procedural checks against the abuse of official authority, it was sound business strategy to cultivate strong personal relationships with the government 114 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

figures who might influence the success or failure of one’s financial ventures. Such personal relationships, in fact, were integral to the “business climate” in South Korea during the 1960s, 1970s, and 1980s.119 And the corollary to this framework for conducting business was the private entrepreneur’s need to lubricate personal relationships with particular government officials through gifts and presents to assure that mutually beneficial arrangements might be established or continued. In fact, bribery in general— and the ability to bribe the right people in particular—was central to doing business in South Korea under the Third, Fourth, and Fifth Republics, irrespective of the businessman’s station in society.120 Clearly, the prevalence and magnitude of bureaucratic corruption are phenomena that resist quantitative measurement and are correspondingly difficult to compare objectively across different settings or in the same setting over time.121 Evaluation of the phenomena tends to be impressionistic and to rely heavily on anecdote—opening the possibility for widely divergent assessments, depending on the viewer.122 Nevertheless, some data bearing on these practices are available for South Korea that may help to place them in some perspective. One source is the estimates by the Federation of Korean Industries of what it called “quasi-taxes”—forced political contributions—paid by large businesses and conglomerates to the South Korean government. Although these figures were not calculated for the 1960s or 1970s, such “quasi-taxes” alone were placed at about 0.5 percent of GNP around 1980 and were said to have risen somewhat over the following decade.123 One may also note that there is a long-standing discrepancy between South Korea’s economic data on income distribution, on the one hand, and, on the other hand, public opinion polls concerning the country’s income distribution. Official figures have for several decades depicted South Korea as enjoying one of the more even distributions of household income among the developing countries—a finding so widely reported internationally that it has become something of a “stylized fact.”124 Over those same decades, however, whenever surveyed for their views, South Korea’s citizens have consistently indicated they see theirs as a highly inequitable distribution of income. One especially striking poll, conducted in the late 1970s, found that barely 2 percent of respondents believed there to be “little” or “no” income POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 115 inequality in South Korea, whereas more than 86 percent of the respondents indicated that South Korea was a country of “extreme” or “strong” income inequality.125 Although subsequent poll results tended to be less polarized, the popular perception of unequal development in South Korea continues to be dominant. As of 1994, for example, three-fifths of the South Korean families surveyed stated that the gap between rich and poor had widened over the previous five years, even though government data showed the Gini coefficient for the county’s income distribution to be declining.126 As one slightly puzzled analyst commented, “There is a strong divergence between what people perceive and what the numbers show [about income inequality].”127 The dissonance between the official statistical portrait of South Korea’s income distribution and the South Korean public’s perception of that same income distribution is profound, and it requires explanation. The reliability of the official South Korean indices of income dispersion is an issue that has been dealt with in detail elsewhere.128 For now, we may simply observe that in South Korea, as in other countries, even a relatively “good” income distribution could be widely regarded as “inequitable” if the processes by which it was generated were held to be deeply lacking in legitimacy.129 Such an attitude, in fact, appears to be prevalent in postpartition South Korea;130 as one newspaper put it, “most [South] Koreans seem to acknowledge the existence of haves and have-nots in capitalist society but do not agree to illegal and unfair methods in amassing a fortune by some well-to-do people.”131 Transition to constitutional civilian rule notwithstanding, ordinary South Koreans apparently viewed corruption as a major, and enduring, issue in their country. Indeed, in a poll of five thousand adults in 1994, “elimination of corruption” was named “the most important problem the country must solve in the future.”132 While the vagaries of popular attitu- dinal surveys are well known, those soundings appear to be, at the very least, consistent with the qualitative judgments of South Korea’s few academic specialists on bureaucratic corruption, whose studies suggest that the phenomenon is more pervasive and serious in South Korea than in such other rapidly growing East Asian economies as Hong Kong or Singapore.133 In reviewing these features of the South Korean institutional setting, we should emphasize that it would be inappropriate to contrast South Korea against an ideal, and unattained, alternative. After all, real-world settings 116 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

have real-world problems. What this survey of South Korea’s “business climate” is meant to illustrate instead is not the peculiar differences, but rather the broad similarities in some important respects between the microeconomic environment in the Republic of Korea and those other developing countries in the 1960s, 1970s, and 1980s. Weak civil institutions, in conjunction with a powerful and far-reaching state apparatus, framed a commercial environment in which transaction costs appeared high, information was costly and often difficult to acquire, and the risks attendant on economic activity and economic exchange were considerable. What would appear to separate the Republic of Korea from most other developing countries during this period is not the institutional structure in which commerce was conducted, but rather the results achieved within that context.

Macroeconomic Issues: Market Structure, Allocative Efficiency, and Technical Efficiency

The South Korean development strategy also encompassed a variety of policies and practices whose consequences for macroeconomic performance, according to conventional economic analysis, should have been broadly adverse. Many of these activities concerned the South Korean state’s far- reaching interventions in both factor and product markets to influence, shape, or even completely reconfigure the market structure in particular industries or entire economic sectors. The literature on “industrial organization” that flourished earlier in the twentieth century, and has enjoyed rejuvenation over the past several decades, points to some of the theoretical issues in question.134 One of the basic tenets of this literature is that “barriers to entry” and other impediments to competition, whether “natural” or imposed, result in misallocations of resources that tend to reduce technical efficiency at the micro level and thus, ultimately, to depress productivity at a macro level. Drawing on— but also drawing beyond—this literature, development economics has paid increasing attention to the macroeconomic (social) costs of “market segmentation” in both factor and product markets brought on by “government failure,” tracing the connections between the misallocation of resources in particular subsectors and suboptimal performance of the economy as a POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 117 whole.135 Although the actual costs (both static and dynamic) of deviations from a competitive market structure have proved very difficult to measure in practice, the proposition that market imperfections of this variety do in fact have macroeconomic costs would not today be generally contested. During the 1960s, 1970s, and 1980s, however, South Korea’s “developmentalist” state routinely imposed a multiplicity of distortions on the country’s factor and product markets, inducing some fundamental and severe imperfections in market structure in the process. In a variety of respects, the government’s conduct directly hindered, or even prevented, market development in key sectors of the economy. Elsewhere its planned and exigent behavior interfered with the ability of existing organizations and industries to allocate resources by market criteria. From the standpoint of technical efficiency, overall productivity, and economic growth, these repeated assaults on market order would appear to have had deleterious effects. In enumerating some of the distortions introduced through official policy into South Korea’s various markets, we may begin with the market for capital. The capital market, in turn, can be considered in terms of overseas and domestic sources of saving. Overseas savings can play a potentially productive role in the material advance of countries in which capital is relatively scarce. Productive application of overseas capital is typically achieved through a diversity of avenues and instruments (e.g., contractual lending, portfolio investment, direct investment). In South Korea, however, government policy placed stringent controls, both legal and extralegal, on direct foreign investment from the early 1960s until the late 1980s. As a consequence, during decades when the South Korean economy evidenced a tremendous demand for international capital, the structure of foreign capital inflows was severely and artificially distorted. We have already touched on some of the difficulties encountered by foreign concerns operating in South Korea during its era of rapid economic expansion. As we have noted, a principal reason for these difficulties was that local government policy did not attempt to create an attractive “climate” for foreign direct investment (FDI). Quite the contrary: with the exception of a limited number of approved joint ventures in designated industries, the government’s attitude toward direct private investment from abroad was, from the early 1960s until the mid-1980s,136 deeply 118 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

suspicious, if not programmatically hostile.137 Until 1984, for example, every foreign investment project in South Korea required specific government permission, and after approval, as we have seen, each faced additional regulatory hurdles that often forced project cancellation.138 (Foreign portfolio investment in the South Korean equity market, for its part, was flatly illegal during the 1960s, 1970s, and early 1980s.139) Official policy instead strongly favored introduction of foreign capital through contracted lend- ing140—with the great majority of the lending in question being either directly contracted to the state or else guaranteed by it.141 Table 3-2 illustrates the results of this posture toward direct foreign investment. From the early 1960s through the mid 1980s, according to official South Korean figures, direct foreign investment accounted for less than 10 percent of the capital inflows into the country. That proportion was consistently lower than the share of direct private investment in capital flows to the developing regions overall, as calculated by the OECD. In the late 1970s and the 1980s, it was much lower than the “Upper Middle-Income Country” average (the income grouping, in OECD and World Bank classifications, in which the Republic of Korea was then placed), ranging instead between the averages characteristic of developing countries as a whole and the “Low-Income Countries”—a grouping that included most of the world’s least developed, and most poorly performing, economies. (Official South Korean definitions, furthermore, may overstate the share of direct private investment in the country’s capital in relation to OECD or World Bank figures.142) Although the share of foreign direct private investment within total capital inflows for South Korea increased sharply in the late 1980s and early 1990s, it nevertheless remained lower than the developing country average—and far lower than would have been predicted simply on the basis of the country’s level of per capita income alone. South Korea’s restrictive treatment of FDI is highlighted by comparison with other so-called newly industrializing countries (NICs) (table 3-3). In the late 1980s, the proportion of FDI in total investments stocks, and total investment flows, appeared to be far lower in South Korea than in any of the other rapidly growing East Asian economies. But it was also much lower than in a number of Latin American countries with policies strongly colored by economic nationalism. In fact, South Korea’s proportionate stocks and flows of FDI were distinctly lower than that of at least one sub-Saharan POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 119

TABLE 3-2 FOREIGN DIRECT INVESTMENT AS A PERCENTAGE OF CAPITAL INFLOWS: SOUTH KOREA VS. THE DEVELOPING COUNTRIES, 1962–1990 All “Upper Middle “Low South Developing Income” Income” Period Koreaa Countries Countries Countries

1962–66 5.5 21.8b NA NA 1967–71 4.2 21.7c NA NA 1972–76 9.3 23.3 NA NA 1977–81 11.3 15.4d 20.1 9.2 1982–86 8.0 13.7 20.0 2.6 1987–90 33.7 35.3 143.3 7.0

NOTES: NA = not available; a = South Korean capital inflows exclude grant aid; b = 1961–65; c = 1966–70; d = 1978–81. “Upper middle income” and “low income” countries defined per classification system of the United Nations and the World Bank; composition of countries in groupings changes over time. SOURCES: South Korea: I1 Sakong, Korea in the World Economy (Washington, D.C.: Institute for International Economics, 1993), 117; all others derived from Organisation for Economic Co-operation and Development, Geographical Distribution of Financial Flows to Developing Countries (Paris: OECD), and Organisation for Economic Cooperation and Development, Development Co-operation (Paris: OECD), various issues.

economy: Kenya. Of all the countries in table 3-3, only India reported a smaller role for foreign domestic investment in the local economy. This restricted composition of capital inflows had both static and dynamic consequences for South Korea’s macroeconomy. In static terms, it prevented risk-managing investors within South Korean industry from effecting a more optimal diversification between equity and debt, skewing their selections heavily toward the latter.143 But direct foreign investment is more than simply an instrument for obtaining financial resources and managing risk: unlike contracted lending, it can bring (among other things) managerial skills and technology transfer along with it. The developmental impact of depriving South Korean businesses of these quantities cannot be calculated, but its expected sign would be negative, not positive.144 The induced distortions evident in capital inflows into South Korea were paralleled by a purposeful segmentation of the domestic financial market (which was mainly funded through domestic savings). We have already 120 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA S E ) s I 5 a R 8 T I 9 N D 1 U 4 3 F ( . . 6 2 5 3 2 6 2 3 ...... O l 7 1 P 0 1 6 5 0 4 1 6 a 1 1 C D u R n G E n H A % T O D w E e o T l g C 6 9 F a E 1 6 0 9 2 8 r 0 9 l 2 0 L 8 4 2 8 6 5 e 3 3 a 8 6 E , , v 1 1 4 9 4 4 u 1 1 S A n n D N A A A E R 4 4 5 5 5 7 7 5 5 5 r 8 8 8 8 8 8 8 8 8 8 O ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ a . – – – – – – – – – – K e 6 7 8 3 7 3 5 5 3 3 3 5 Y H 7 7 8 7 8 8 8 8 8 8 , ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ) T s 0 U 9 w 9 O o 1 l S , F : D . T C l 8 4 3 6 7 5 6 4 i E N 5 1 5 2 2 8 5 3 9 7 E O 4 8 3 3 0 9 7 9 2 1 3 M : , , , , , , , , - 2 1 M s i 1 1 3 3 2 3 4 1 3 $ T r a S E P E L ( B V s e A i N r I t T % n u T s 1 o . 1 a C . 7 P C 6 3 . E 0 s 8 8 1 6 0 g D 2 1 0 . . . . . 7 R 1 n k . I i – – – 3 9 3 3 2 G – c p 2 0 5 6 5 1 1 1 1 o D . . 1 f o l . 2 t e 0 0 o v 5 N S 1 e G D I n E i R s s O e n F e v 6 5 6 4 4 4 4 4 r i F t a i 8 8 ' ' 8 8 8 8 8 8 t ' ' O e e 9 9 9 9 9 9 9 9 s p Y 1 1 1 1 1 1 1 1 S k m c o W o C t O l L S a i r F I t s 0 0 . . . D u 5 D l 6 6 . d i 6 8 5 F . . 3 4 2 6 N n . . . . 1 – – – I B 4 3 A – 2 9 6 0 0 6 0 g 2 1 . . $ 1 n S i 3 4 d K l i C u B O , T l l a S L a D y g e a E j r n e T n o r o a y d a A i S o r K K n o s t n : M p a a I l c E y a h l n g i a i a y C i t a T i z g l x R u n w a n S u i a d U a e n o o e h r a o i O E n C S S T S H M T I B M K POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 121 mentioned the state’s 1961 nationalization of the country’s private banks. That move bespoke a new official approach toward domestic finance, namely, a decision by government authorities that they should be directly and intimately involved in the allocation of investment capital throughout the national economy.145 For the next two decades, state control over the allocation of credit extended far—to the point, in fact, where government officials were to make the ultimate decision about virtually every major investment project, “private” or “public,” in the country.146 Gradual privatization of the banking system was permitted beginning in the early 1980s; even after bank privatizations and announced “liberalization” measures,147 however, government involvement in the credit allocation process (often through “informal” or extralegal channels) remained considerable.148 From the early 1960s through the early 1980s, the South Korean government managed a complex and extensive system of multiple interest rates for domestic borrowers.149 Within this framework, the more preferential rates (not infrequently entailing negative real costs of borrowing150) were offered for projects or activities deemed important to the fulfillment of the government’s Five-Year Plan. Such loans were known as “policy loans,” and although the precise definition of that term has been somewhat elastic,151 it is nevertheless clear that such politically determined allocations accounted for a very large portion of all credit available in the domestic market.152 According to estimates by a former minister of finance, for example, “policy loans” comprised 45 percent of all lending in South Korea over the years 1972–76 and fully 50 percent for 1977–80.153 Similar calculations were produced by a 1972 World Bank report,154 although other studies have suggested that the share might have been even higher.155 An OECD survey has estimated that loans through “government controlled banks and funds” accounted for only about three-eighths of South Korea’s private sector credit as of 1980 (table 3-4); with “financial liberalization,” that estimated fraction fell to roughly one-fourth by the early 1990s, although the decline did not apparently begin until the late 1980s. The fact that political rationing and pricing of credit, or the allocation of credit according to selective nonmarket criteria, frequently results in misallocation of resources and a reduction of rates of return on capital throughout the economy scarcely requires comment. We may mention, however, that one of the particular consequences of the government’s fragmentation 122 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 3-4 LOANS THROUGH GOVERNMENT-CONTROLLED BANKS AND FUNDS: SOUTH KOREA, 1980–1992

1980 1985 1990 1992 Industrial Loans As % of GNP 19.9 30.2 21.4 22.2 As % of private 28.8 30.7 18.1 17.1 sector credit Other Sectoral Loans As % of GNP 5.9 7.7 9.8 10.5 As % of private 8.6 7.8 8.3 8.0 sector credit Total As % of GNP 25.5 37.9 31.2 32.7 As % of private 37.3 38.6 26.3 25.1 sector credit

NOTES: “Industrial Loan” institutions include the following: Industrial Bank, Development Bank, EXIM Bank, Long-term Development Bank, and Bank of Korea. “Other Sectoral Loans” institutions include Housing Bank and Agricultural Banks. SOURCE: Organisation for Economic Co-operation and Development, OECD Economic Surveys: Korea (Paris: OECD, 1994), 107.

of the domestic credit market was an effective bifurcation of the interest rates facing large as opposed to small borrowers.156 By and large, the preferential “policy loans” mentioned above were available only for the country’s larger industrial concerns or for its big conglomerates (the chaebol). This partiality necessarily and artificially raised the cost of capital for smaller enterprises and private households—the repercussions of which we will return to later in this chapter. Large industrial concerns were not the only beneficiaries of the South Korean government’s preferential capital allocation policies or of other practices that protected structurally against market forces. State-owned corporations and government monopolies also benefited from such treatment because parastatals and state-owned enterprises figured prominently in the South Korean government’s development schema during the 1960s, 1970s, and POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 123 early 1980s. (Despite South Korea’s reputation as a “private enterprise economy,” a major study observed in 1980 that “the share of public ownership in industrial assets in [South] Korea . . . is fully as large as that of public ownership of industrial assets in India, with its ‘socialist pattern of society.’”157) The actual share of public enterprise activity within the South Korean economy has never been easy to determine.158 By one estimate, “public enterprises” absorbed 30 percent of all investment in Korea in the 1960s and early 1970s.159 Another estimate suggests that public enterprises continued to account for about 30 percent of gross domestic capital formation in the late 1970s and early 1980s, dropping to about 16 percent in 1986 (following a seriously implemented privatization campaign that commenced in 1984).160 In the 1960s, 1970s, and early 1980s, South Korea’s public enterprises were involved extensively in a range of industries and services, including mining, heavy industry, banking and insurance, and construction. Some students of the South Korean economy have speculated that these enterprises were fairly efficient.161 Little evidence, however, has been available by which to test those beliefs. In 1983, as the privatization campaign for state-owned enterprises was being contemplated, the Bank of Korea prepared an analysis on rates of return on capital at public enterprises. According to that study, the nominal rate of return of capital in 1982 for South Korea’s public enterprises was 7.8 percent, less than one-third of the 27.5 percent nominal rate of return on capital calculated for South Korean industry as a whole.162 Because the official GNP deflator for 1982 was 7.1 percent,163 the disparity in estimated rates of return would have looked even greater if presented in real terms. The year 1982 was in no obvious manner an exceptional year for either the Korean economy or its public enterprises. If these results were not aberrant, but rather representative of differences in performance in earlier years, they would suggest that the government’s efforts to create and nurture state- owned enterprises had actually resulted in serious costs for the rest of the economy. South Korea’s public enterprise policy necessitated interventions in, and segmentation of, both factor markets (capital) and product markets (the various industries within which state-owned enterprises were engaged). The aforementioned “policy loans,” in the same sense, were intended as interventions in both factor and product markets. But the government’s 124 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

activities in the country’s product markets extended far beyond the provision of subsidized credit for preferred industries, projects, or goods. Using cheap credit as its carrot and police powers as its stick, the government managed to involve itself heavily in the development of South Korean industry in the 1960s, and it remained heavily involved throughout the 1970s and early 1980s. The story of this involvement—often described as “industrial policy”—has been told in detail many times before,164 so there is no need to repeat it here. We may simply note that the involvement was not only extensive but also intensive: so deep, in fact, that it was commonplace for government officials to make decisions that reached all the way down to the level of the particular firm, affecting the firm’s output composition, product design, product quality, and marketing strategy. Nonmarket interventions in the development of South Korean industry were perhaps most conspicuous during the periodic government supervised “restructurings” of troubled companies or industries.165 But the same “noncontestable” approach to the development of particular markets and even entire industries was exercised equally during boom years and for financially healthy corporations. As the government became more intimately involved in the development of South Korean industries, the concentration of ownership within industry itself became much more pronounced. In 1973, by one estimate, the five largest chaebols accounted for about 3.5 percent of the value added in the South Korean economy; by 1978 their share had more than doubled, to more than 8 percent.166 The ten largest chaebols had generated an estimated 14 percent of the value added in manufacturing in 1973; by 1984 their share was estimated at 24 percent167—and the manufacturing sector accounted for a greater share of South Korean output in 1984 than it had eleven years earlier.168 By the criterion of concentration, industrial structure in South Korea had come, by the 1980s, to be significantly different from some of Asia’s other rapidly growing economies. In the early 1980s, for example, the share of total manufactured output produced by the nation’s one hundred largest manufacturers was nearly twice as great in South Korea as in Japan and more than twice as high in South Korea as in Taiwan.169 (Evidence for trends in the later 1980s is conflicting; there are various indications of a lessening of concentration, but also other signs suggesting that concentration may have remained steady or possibly even increased somewhat.170) POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 125

Both the causes and the consequences of industrial concentration in South Korea are less self-evident than might perhaps be supposed. Korea’s chaebol had historical roots;171 zaibatsu-style business groups were part of the Korean tradition. Although manufacturing and industry then accounted for a much smaller share of the country’s economic activity than it would in later years, concentration of ownership within industries was already characteristic of the South Korean economy in the 1950s and of the southern Korean economy before partition. Big-business groups in South Korea thus preceded the “developmentalist” state—not vice versa. At the same time, it can be said that government action in the 1960s, 1970s, and early 1980s implicitly172 and explicitly encouraged the industrial concentration then under way through big-business groups: that state planners and decision makers not only tolerated this trend, but appeared positively to prefer it.173 With respect to technical efficiency and productivity, the consequences of industrial concentration per se are not broadly and generally predictable. Much depends on the uses to which market powers are put (and market power itself is notoriously difficult to measure). In and of themselves, in other words, concentration ratios tell us little about the allocative or technical performance of the firms within the industry in question; additional information is required. Official data on firm dominance within the various markets of the South Korean manufacturing sector are available, and these also indicate a high degree of concentration: in the 1970s and 1980s, by these numbers, only about one-fifth of the industrial commodities surveyed, and one-third of the goods shipped, were produced in markets where the top three firms had a market share of under 50 percent.174 But such data likewise beg the question with respect to technical efficiency and productivity, for we cannot presume to divine firm or market practices or performance directly from structural results. What we do know about practices in those markets, however, is sufficient to make the point that South Korea’s trend toward increased industrial concentration occurred during years in which numerous and pronounced barriers to competition existed in the industries in question. The barriers, for their part, were by and large the constructions of the South Korean government. In addition to the selective allocation of subsidized credit to particular firms and industries, two other general and routine practices stand out: import controls and price controls. 126 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

The import controls used to protect South Korean markets from foreign competition in the 1960s, the 1970s, and the early 1980s have been described in detail elsewhere.175 Because of the political sensitivity of the figures, “liberalization ratios” offered by official South Korean sources since the early 1960s have not accurately reflected the true degree of openness to imports of domestic markets; detailed industry-by-industry examinations of actual practices are required to obtain such information. As late as 1982, according to one such study, less than 10 percent of South Korea’s imports were “freely importable goods” in the sense of being subject to neither quantitative restrictions nor special laws nor commodity group tariffs of 60 percent or more.176 Import controls were systematically relaxed in the early 1980s, but as of the early 1990s nontariff barriers still affected many kinds of goods,177 and “temporary” tariffs could be selectively imposed on imported items that were competing too successfully. Import controls help to explain the often substantial gap between domestic market and world market prices for industries in which concentration is pronounced.178 In the 1960s, 1970s, and 1980s, the South Korean government inter- vened directly in the process of commercial price determination in many domestic markets through both “informal consultations” and formal price controls. These formal controls, in contrast to the “temporary” price controls mentioned earlier, were long-term policy instruments intended to influence relative price within the South Korean economy. These yearly “negotiated price controls” constituted a sustained intervention in product markets. During the 1960s, 1970s, and 1980s, they pertained to a wide range of goods. Despite the “liberalizations” in the domestic economy during the 1980s, one observer has pointed out that “at the end of 1986, as many as 110 commodities were controlled, including flour, sugar, coffee, red pepper, electricity, gas, steel, chemicals, synthetic fibers, paper, drugs, nylon stockings, automobiles, and televisions.”179 As late as 1991, a primer on South Korea prepared for foreign businesses could state that “there are no formal [price] controls, but the government closely monitors such matters and can exert considerable influence in pricing decisions. The government has the authority to set price ceilings on most goods and services and can effectively control the prices of foreign and domestic goods” (emphasis added).180 Once again: it is important to remember that practices and conditions in South Korea under “developmentalist” regimes are being compared to POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 127 existing alternatives, not textbook ideals. Many of the interventions in factor and product markets described in the preceding pages are not, at first glance, terribly different from those reported in a number of other developing countries during the same era. Capital account controls, financial repression, import and price controls, and large public enterprise sectors were in fact characteristic of the domestic economic environment in most Asian, African, and Latin American countries during those years; industrial concentration under conditions of restricted market competition was evident in more than a few. These common features of developing-country political economy, however, represent distortions of market structure and impediments to efficient market performance. In greater or lesser degree, their common results are misallocation of resources, reduced technical efficiency at the micro level, and in consequence diminished value added or net production at the aggregate level. What was uncommon about South Korea was the pace of material advance it registered in the face of its government’s market-disturbing conduct.

Development Policy: Some Mistakes Matter More Than Others

In sum, during these several decades of very rapid economic growth, South Korean government policy not only was economically illiberal by any number of criteria but also seems to have violated some of the basic neoclassical precepts about allocative efficiency. To the apparent confuta- tion of “new institutionalist” thinking, neither property rights nor enforceable contracts were strongly developed in South Korea, and transaction costs appear to have been fairly high. Perhaps no less perplexing to students of the “science” of public policy, the climate of administration in South Korea during these years was in many vivid respects partial, personalistic, and ad hoc. How was it possible to have “takeoff” under these circumstances? Such questions can never be answered with complete certainty or to full satisfaction. The importance of the decision to embrace an export orientation, however, might be hard to exaggerate.181 By its very nature, export orientation seems to have imposed a comprehensive and dynamic discipline over the South Korean economy. For 128 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

exportable goods to be competitive in world markets, for example, the exchange rate for the won could no longer be perennially overvalued.182 To maintain a realistic foreign exchange rate, in turn, necessitated budget discipline—a quantity notably lacking during the Rhee years.183 Realistic exchange rates and budget discipline generated pressures of their own. Among them was pressure for a more realistic pricing of the society’s scarce capital; thus, despite the government’s discriminatory approach to credit, interest rates were raised for all borrowers in 1965 with a “reform” that finally brought real interest rates up above zero for most borrowers and lenders.184 In addition to inciting such macroeconomic adjustments, export orientation had the incalculable, but surely important microeconomic consequence of forcing South Korean administrators, entrepreneurs, and workers to cope with and learn from the world economy in which Korean exports were now to compete.185 The world economy tended to reward competitors who were innovative and flexible; South Korea profited by this incentive structure not only in its rapid mastery of and progression through the “product cycle,” but also thanks to the government’s generally deft response to international shocks (as witnessed, for example, in its stabilization policies during 1973–75 and 1979–81).186 Theodore W. Schultz has written of the “value of the ability to deal with disequilibria”;187 to a considerable degree, this skill may have been forced on South Korean society as a whole by export orientation. Insofar as the world economy in the early 1960s was characterized, from a South Korean perspective, by tremendous and still rapidly accumulating stocks of untapped knowledge and by the possibility of permitting significantly increasing returns to scale in production,188 the potential rewards of learning to deal with the disequilibria of the international trade regime would have been enhanced all the more.189 In the final analysis, liberal development strategy is not an option for a self-styled “hard state”: liberal economic policies necessarily undermine the institutions, and the authority, of the dirigiste.190 But in the hands of a “hard state,” export orientation may nevertheless prove to be an extremely productive strategy. So productive, in fact, does this strategy appear to have been in South Korea that it seems to have been adequate to compensate for a variety of practices and policies simultaneously increasing risk and uncertainty or exacerbating inefficiency in the national economy. If South Korea’s POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 129 strategy was not optimal from the standpoint of neoclassical welfare economics, it was evidently a very good “second best” indeed. Like Isaiah Berlin’s “hedgehogs,” South Korea’s military rulers may only have known “one big thing”191 when they embarked on export promotion—but it was apparently big enough to make up for a multiplicity of subsidiary economic errors and mistakes.

Induced Dirigiste Distortions: Agriculture, Heavy Industry, and Finance

In the following pages we will examine three sectors of the economy in which some of the costliest mistakes of the “developmentalist” state were committed: agriculture, heavy industry, and finance. We will devote more attention to the interventions in agriculture than the other sectors, insofar as South Korea’s industrial and financial policies have already been partially discussed above.

Agriculture. If South Korean dirigisme seemed to be justified by its achievements in the export sector, there was no similar justification for its agricultural policies. In the early 1960s, South Korea’s population was almost three-fourths rural. Under those circumstances, agricultural and rural development might have been deemed significant, if only for their impact on overall development prospects. Even if one focused principally on industrial expansion, agricultural development might seem necessary, insofar as enhanced agricultural productivity would release labor for nonfarm employment and stimulate demand for industrial production through the augmentation of rural purchasing power.192 South Korean officials, however, accorded agriculture conspicuously low priority in their first Five-Year Plan (1962–66). Although the government did show an interest in agricultural extension and new high-yield strains of rice, it placed no emphasis on agricultural investment and spent little on upgrading roads or other aspects of the country’s rural “infrastructure.”193 It also enforced an agricultural pricing policy (facilitated, and financed in part, by food aid from abroad194) that kept terms of trade with industry and the cities artificially low. In four out of the five years of the first 130 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Five-Year Plan, for example, rice prices paid producers below world market prices;195 although estimates of the effective rate of protection for various domestic goods are not readily available for those same years, one study for 1968 put the effective rate of protection for the consumer durables in the domestic market at almost 40 percent.196 Discontent with the government’s approach was widespread in rural areas, and in 1971 President Park only narrowly won an officially declared victory in an election (against rival Kim Dae-jung) in which his campaign advantages had been overwhelming. Thereafter, South Korean agricultural policy shifted toward a different extreme: subsidies and price supports were rapidly established and raised, and domestic agriculture was accorded broad protection from imports.197 By 1979, producer prices for barley were almost two and one-half times world market prices; producer prices for rice were at almost three and one-half times the world market level.198 They rose still further thereafter. By 1988, wholesale prices for rice were more than five times those offered in world markets.199 By 1990, consumer prices for rice were almost six times as high as world market prices.200 But it was not only food grains that enjoyed protection: protections extended in varying measure to meat, fruit, and dairy products as well. The new approach to agriculture was, in essence, an incomes policy. Though still a developing country, South Korea had adopted some of the most expensive and economically questionable features of farm policies in certain more affluent societies—and had taken them much further than most Western countries believed they could afford. By 1980, relative domestic prices for food were already higher than those in Japan—a country with a per capita output then more than three times greater (table 3-5). Lest one wonder whether a land-scarce, export- oriented economy need necessarily be characterized by high relative domestic prices for food, one may cite the counterexample of Hong Kong; Hong Kong’s perhaps unexpectedly low relative domestic prices for food reflect its liberal import policies. One may argue, of course, that comparison with Hong Kong is inappropriate, that a territory whose population is 95 percent urban and whose workforce was less than 1 percent agricultural201 simply does not have to contend with the sorts of welfare considerations—or political considerations— that will influence agricultural pricing policies in territories with more

POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 131

TABLE 3-5 RELATIVE DOMESTIC PRICE LEVELS:LOCAL DEVIATIONS FROM “INTERNATIONAL PRICE STRUCTURE”IMPLIED BY ICP PURCHASING POWER PARITY ESTIMATES, 1980 (ICP “International Price Structure” = 100) South Korea Japan Hong Kong Netherlands U.S.

Bread and Cereals 135 132 83 97 110 Meat 178 178 86 97 77 Food, All Items 134 123 90 80 81

SOURCE: Derived from United Nations and Commission of the European Communities, World Comparison of Purchasing Power and Real Product for 1980. Phase IV of the International Comparison Project, Part Two: Detailed Results for 60 Countries (New York: United Nations Statistical Office, 1987), table 8.

substantial rural sectors. That much is surely true. Yet if such reasoning can reject the counterexample of Hong Kong, the counterexample of the Netherlands cannot be rejected. The Netherlands is an open economy with a large farm sector; its population density is similar to South Korea’s.202 As of 1980, moreover, its per capita GDP was nearly four times as high as South Korea’s.203 But as table 3-5 attests, while the Dutch consumer in 1980 did face a domestic price structure in which the relative prices of foodstuffs were comparatively high by international standards, Dutch policy did not finance South Korean–scale distortions of relative prices for bread, cereals and meat—or, indeed, for the overall market basket of food products consumed by its domestic population—despite a much greater capability for so doing, in light of the Netherlands’ comparative affluence. By 1980, South Korea was already an “outlier” in the realm of farm price policy and agricultural protection. Over the following decade, that divergence became still more extreme. In 1990, despite import liberalization for specific agricultural products,204 food in the Korean domestic market was costing consumers roughly three times its world price, according to calculations by the OECD (see table 3-6). This was a level of protection for farm products that far exceeded contemporary Japan’s or the European Community’s. Calculations by the General Agreement on Trade and Tariffs 132 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

(GATT) indicated that the gross cost of South Korea’s farm subsidies and agricultural protection was more than 7 percent of GDP in 1990 and that the deadweight efficiency loss approached 2 percent of GDP205—striking sums, considering that South Korea’s agriculture, forestry, and fisheries sector accounted for less than 9 percent of the country’s GDP, in 1995, at the time.206 Entire segments of the food sector—including the dairy industry and the meat industry—were estimated to be contributing negative value added to the South Korean economy in the 1980s and early 1990s.207 During the 1970s, some infrastructural development was effected through the Saemaul Undong (New Community Movement), which emphasized local self-reliance and relied at times on corvée labor,208 but investment in agriculture and rural development did not figure prominently in the state’s Five-Year Plans.209 Government policy continued to favor subsidies and support over investments to enhance productivity during the 1980s. In 1988, for example, the transfer to the farm sector through subsidies, price supports, and protective barriers to imports exceeded that of all government construction work (only a portion of which was contracted for rural areas) and amounted to more than twice its expenditure on all civil engineering projects.210 The static costs of the government’s agricultural strategies were self- evident. But the dynamic consequences were also predictable and adverse. During the initial phase of export-led industrialization, South Korean rural policies necessarily contributed to a widening of income differences between households in cities and those in the countryside, although these differences were partially disguised in official statistics by a procedure that treated farm assets as “income.”211 With dualism induced, migration to urban areas (especially Seoul) was correspondingly more rapid, and underemployment in the “informal sector” characterized a correspondingly greater portion of the country’s workforce.212 In the 1970s, by contrast, the combination of price supports for agriculture and neglect of rural infrastructure tended to raise production costs by limiting the release of farm workers into the nonagricultural economy and by artificially increasing the cost of food (still the dominant component in the household budget of urban workers). With agricultural incomes depressed by government pricing policies in the 1960s, and investments in improvements of rural productivity largely POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 133

TABLE 3-6 FARM PROTECTION IN SOUTH KOREA, JAPAN, AND THE EUROPEAN COMMUNITY: SELECTED INDICATORS, 1979–1990 (percent)

Protection Country/Region 1979–85 1986–89 1990 Producer Subsidy Equivalents European Community 35 47 48 Japan 64 74 68 South Korea 65a 78 96

Consumer Tax Equivalents European Community 35 75 69 Japan 59 110 92 South Korea 127 150 213 Notes: a = 1982–1985. Calculations for producer subsidy equivalents and consumer tax equivalents covered ten food products but excluded fruits and vegetables. For more details, see source. SOURCE: Organisation for Economic Co-operation and Development, Country Economic Surveys: Korea (Paris: OECD, 1994), 69. neglected in the 1970s and 1980s, the growth of rural output remained surprisingly slow. Between 1970 and 1987, according to United Nation’s national accounts summaries, the output of South Korea’s agriculture, forestry, and fisheries sector increased by about 3.4 percent a year, or by about 1.9 percent per person, if current prices were adjusted by the implicit GDP deflator.213 At 1980 constant prices, however, growth of agricultural output averaged only 2.6 percent per year, or about 1.1 percent per person per year.214 (Bank of Korea national accounts data produce still lower figures: in 1990 constant prices, the growth rate for agriculture over those same years works out to 2.1 percent per annum, or about 0.6 percent per person per year.215) At a time when per capita growth in GDP for the economy as a whole was averaging more than 7 percent a year, the contrast was notable. Over a perhaps comparable seventeen-year period in Japan (1952–69), per capita output rose at an annual rate of about 8 percent, but per capita agricultural output rose by about 2 percent a year in constant 1965 prices216—perhaps twice as fast as in South Korea, or even more. Despite the shift in relative prices during the period in question, farm incomes remained unexpectedly low—limiting not only the size of South 134 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Korea’s domestic market but also its pool of domestic savings for investment. (Though the story of “why Koreans saved so little” in the 1960s, 1970s, and early 1980s is complex, and extends far beyond agricultural policy, agricultural policy may nevertheless have played its part.) High support prices and subsidies in the 1970s and 1980s had other effects as well. They served as a drain on the government budget and a stimulus to higher price levels in urban areas—and thus as an impetus for further countervailing deflationary policies and controls. They distorted the rural real estate market and contributed to the price pressures in the urban real estate market.217 The emphasis on support for cereals, moreover, slowed the shift in output mix toward the higher value-added crops and foods that ordinarily figure more prominently in the diet of more prosperous populations.218 South Korea’s development is often likened to Taiwan’s. The similarities should not be exaggerated. As Harry Oshima has observed, “[South] Korea ended up [in the 1980s] with much larger foreign debts, price rises, deval- uations, smaller international reserves, and higher income disparities than did Taiwan. . . . The neglect of agriculture is a major reason why in the early 1980s [South] Korea was struggling with a heavy debt burden, excess capacity in heavy industries, and continuing social unrest.”219 South Korea’s rural policies can be contrasted not only with those of Taiwan but also with those of postwar Japan. In Japan and Taiwan, government policy encouraged the development of rural industry; off-farm employment today provides the overwhelming majority of the annual incomes of farm households in both countries. In South Korea, where industry was encouraged to concentrate around Seoul, Pusan, and a few other urban centers, off-farm employment made a much smaller contribution to the income of farm households. Per capita income was roughly similar in the South Korea of 1985 and the Taiwan of 1980,220 yet in those respective years Taiwanese farm households earned about three-fourths of their income from nonfarm activities, whereas South Korean farmers depended on farming for almost two thirds of their total incomes. Off-farm earnings accounted for a much lower fraction of the income of farm households in South Korea than was the case in either Taiwan or Japan at equivalent levels of GDP per capita. This divergence between South Korean patterns and Japanese or Taiwanese patterns became pronounced only after 1970: that is to say, after South Korea’s turn to a high-price agricultural policy. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 135

In a country where the mean farm was 1.2 hectares in size, and where land-reform laws restricted family holdings to a maximum size of 3 hectares, the opportunities for generating income on-farm are naturally limited. In South Korea, however, the agricultural population relied on sales of the goods produced on these tiny plots for the bulk of their income. Government policy in South Korea effectively slowed the diversification of the farm population’s income sources. Indeed, over the period 1975–95, South Korea’s agricultural policy, arguably more than that of any other East Asian country, has encouraged its farmers to view subsidies and price supports as a vehicle for increasing household income—not just stabilizing income. Is this reading of modern South Korea’s agricultural policy too severe? Some would doubtless argue that a more sympathetic verdict should be rendered due to the extenuating circumstances of what might be described as the South Korean “special case.” It is surely true that a measured defense of that evolving official agricultural strategy could be crafted. Elements of such a defense might include any or all of the following points. First, state investment in rural and agricultural infrastructure development in South Korea was substantial—albeit principally before the Korean partition, in the era of Japanese colonialism.221 Thanks to that historical legacy, state investment in agriculture after the Korean War was a less urgent priority than it would be in many other contemporary Asian countries.222 Second, for part of the period in which it has been in force, South Korea’s high-price farm policy can be viewed to some degree as a price-stabilization effort rather than a regimen of strict protectionism per se.223 Third, even if the South Korean farm policy did entail a degree of pure protection, some degree of agricultural protection was warranted by the country’s delicate national security situation.224 Finally, no matter what other criticisms might be lodged against them, South Korea’s farm policies clearly did not prevent a rapid transformation of agriculture.225 In fact, by practically any bench- mark, historical or contemporary, the pace of structural transformation during the decades in which high agricultural prices and import restrictions prevailed was exceptional.226 Each of these points, to be sure, has some merit. Yet even if they are taken together—and even if each point were entrusted with considerably more credibility than many readers would be willing to assign227—they still 136 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

do not fashion a persuasive case for the suitability of the agricultural policies that the South Korean government chose to embrace. Rapid though South Korea’s shift away from agriculture may have been,228 it would appear that the government’s agricultural interventions impeded, rather than accelerated, that transformation,229 for the “turning point” in South Korean agriculture (in Sir Arthur Lewis’s sense of the term230) appears to have come around 1969231—on the very eve of the turn to high farm prices and to restrictions on agricultural imports. A “strategy” comprised by relative neglect of rural investment, on the one hand, and massive agricultural price supports on the other hand, is hardly what one would prescribe to elicit an optimal contribution from agriculture for the process of overall economic development.232 The notion that South Korea’s administrators lacked the degrees of freedom that would have been required to frame and implement a less costly and more productive agricultural policy, for its part, looks uncon- vincing at first glance. As we have already seen, the “hard state” that President Park created (or, more accurately, resurrected) did not ordinarily flinch at consequential economic policy decisions, even when those decisions were unpopular with broad segments of the South Korean populace.233 If rural discontent, or unrest, had been a principal consideration in agricultural policy, one might have expected that those concerns could have been satisfied with a less expensive combination of price supports and public investments (for both agriculture and rural industry). Finally, even if food self-sufficiency had been officially endorsed for national security reasons—and such a goal, one should note, was never explicitly enunciated—equivalent results to those actually obtained could likely have been achieved at lower cost with a policy stressing rural investment more and price supports less. In short, it is difficult to identify the putative constraints that would be necessary for us to describe South Korea’s agricultural policy as the best feasible under the circumstances.234

Heavy Industry: The HCI Drive. We have already touched on various aspects of the phenomenon of state-sponsored industrial development in South Korea. Like its approach to agriculture, the South Korean government’s approach to heavy industry has involved considerable expense for, POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 137 and has imparted significant distortions on, the South Korean economy during the era of rapid growth. Unlike its farm policies, these industrial initiatives were in some measure prompted by explicit external national security concerns. The most costly and structurally distorting phase of South Korea’s industrial policy was also the episode most intimately shaped by external security considerations. This was the “HCI Drive”: the push in the 1970s to develop heavy and chemical industries. With the announcement of the Nixon Doctrine and America’s subsequent disengagement from Vietnam, notice had been served that the burden of defense in any future emergency or war could fall largely on Seoul’s own shoulders. To sustain itself against an attack from the North, or to prevail in a conflict with the DPRK, it seemed that South Korea would now have to build its own defense industry.235 The ROK’s third Five-Year Plan (1972–76) placed a new emphasis on developing the chemical and heavy machinery sectors—the sectors needed to sustain basic military production. In January 1973 President Park announced a modification: a “Heavy and Chemical Industrialization Plan” that would accelerate investment and production in the iron and steel, shipbuilding, machine building, and chemical industries.236 The “HCI Drive” is conventionally dated as lasting until the “Comprehensive Stabilization Plan” of April 1979, shortly before President Park was assassinated, although there is some evidence that HCI-promoting policies continued to be in force into the early 1980s237 or even into the mid-1980s.238 The particulars of the HCI drive have been described in detail elsewhere.239 It will suffice here to note a few of its consequences. From a structural standpoint, expansion of the heavy and chemical industries dominated South Korea’s pattern of industrial development in the 1970s and continued to dominate it on into the early 1980s. Between 1970 and 1975, the share of heavy industry in South Korea’s economy increased by half (table 3-7). Between 1970 and 1985, the structural growth of the manufacturing share in South Korea’s economy was entirely due to heavy and chemical industries; the share of light, so-called consumer industries in the South Korean economy actually declined slightly during this period. Remarkably, light manufacturing accounted for the same share of South Korean GDP in 1985 as it had in 1965, despite an increase in per capita output of more than 250 percent in the intervening years. 138 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

As always, comparison with Japan is instructive. By 1983, per capita output in Korea was roughly at the level attained in Japan around 1965. Whereas only about 35 percent of Japan’s manufacturing output in 1965 was generated in the heavy and chemical industries, these accounted for more than half in South Korea in 1983.240 South Korea’s economic performance during its HCI drive can also be contrasted with Taiwan’s. Between 1973–74 and 1983–84, according to one detailed examination of their growth patterns,241 export expansion played a smaller role—in most branches of industry, a much smaller role—in output increase for South Korea than for Taiwan. (A particularly striking difference could be seen in “general machinery”: whereas nearly half of Taiwan’s rise in output for those industries could be attributed to export expansion, less than one-tenth could be so accounted in South Korea.) Further decomposition indicated that South Korea’s more limited export expansion effects could be largely explained, at least in arithmetic terms, by its weaker interindustry linkages in demand. (Those linkages appeared to be particularly weak, by comparison to Taiwan, in South Korea’s metal industries.) Weaker linkages in demand made for weaker interindustry linkages with respect to employment; consequently, despite their common export orientation, export of goods and services also had a significantly more modest impact on the demand for labor in South Korea during the HCI drive years than in contemporary Taiwan. The HCI “Big Push,” it would seem, induced further structural divergence between the South Korean and the Taiwanese economies242—and in precisely the directions anticipated by critics of this variant of “state-led industrialization.” Metallurgy, heavy machinery, and chemical industries are intrinsically capital intensive. Despite the government’s effort to subject the heavy chemical industry drive to economic discipline (in large measure, by gearing these new enterprises to export a substantial portion of their output and thus to face international competition),243 the thrust required a very rapid and abrupt “capital deepening” for the economy as a whole. Incremental capital output ratios provide an indication of the trend. Between 1965 and 1970, South Korea’s incremental capital output ratio was about 2.0; in 1975–80, it was about 4.8—almost two and one-half times as high.244 Even if high rates of return on capital could be consistently achieved, the delib- eration to make heavy industry the leading growth sector in a low-income POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 139

TABLE 3-7 STRUCTURE OF PRODUCTION IN SOUTH KOREA, 1953–1993 (GDP, current prices) Sector Services (Heavy and and Social Chemical Overhead Year Agriculture Industry Industry) Capital 1953 47.3 10.1 (1.9) 42.6 1955 44.5 12.6 (2.3) 42.9 1960 36.8 15.9 (3.2) 47.3 1965 38.0 20.0 (5.7) 42.0 1970 26.9 22.4 (7.9) 50.7 1970a 26.6a 22.5a (8.2)a 50.9a 1975 24.9 27.5 (12.4) 47.6 1980 14.7 29.7 (15.9) 55.6 1985 12.5 30.5 (17.1) 57.0 1990 8.7 29.7 (19.2) 61.6 1993b 7.1 27.4 (19.4) 65.5 NOTES: a = 1970 revised series; b = preliminary. “Industry” includes mining and manufacturing. “Services and Social Overhead Capital” includes services sector; electricity, gas, water and construction; and government services and private nonprofit services to households. SOURCES: Derived from Republic of Korea, Bank of Korea, National Income 1994 (Seoul: Bank of Korea, 1994); and Republic of Korea, National Bureau of Statistics, Korea Statistical Yearbook (Seoul: Economic Planning Board), various issues.

(and thus capital scarce) society would seem to presage a far-reaching misallocation of resources by the criterion of economic efficiency (although, to be sure, the HCI drive was also framed as a national security policy, and security policy is usually judged against a separate set of standards). As it happened, consistently high rates of return to capital could not be maintained in these industries;245 beginning in 1979 and continuing on into the early 1980s, government-directed “restructuring” essentially wrote off excess capacity in South Korea’s shipbuilding and petrochemical sectors, among others.246 In the contemporary literature on South Korea’s HCI drive, costs are usually described in financial terms: credit mobilized; subsidies extended; losses (of profitability) sustained.247 Though such numbers are relatively easy to compile, they do not measure the economic costs of the initiative: the 140 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

deadweight loss to the entire economy resulting from the inefficient allocation of resources decreed by the particulars of the plan. These are considerably more difficult to calculate. Nevertheless, the static costs of the HCI drive have been suggested by a few econometric exercises. One calculated that the capital efficiency in the HCI area was one-fifth to one-third lower in the late 1970s than for light industry, the difference amounting to 5 or 6 percentage points per year.248 Another estimated that the change in total factor productivity in the South Korean heavy industry sector averaged negative 5 percent per year between 1973 and 1981.249 The dynamic costs of the HCI drive have yet to be calculated. In theory, a sufficiently sophisticated, computable general equilibrium (CGE) model might be able to provide an approximation of the magnitudes involved by simulating the time path impact of a contrafactual, namely, equalizing tax rates, capital costs, and effective rates of protection for South Korea’s light and heavy industries between 1973 and 1981. In reality, a reliable model of this particular sort has yet to be constructed250 and will not be attempted here. We do not need to plunge into econometrics, however, to suggest that the dynamic costs of the HCI drive would appear to stem not only from the misallocation of resources per se251 but also from the corrective macroeconomic adjustment policies these misallocations subsequently necessitated. After all, the loss of economic potential incurred in 1979–81 was hardly trivial. Over those years output growth in the South Korean economy averaged about 3 percent a year, compared with a long-term average of over 8.5 percent a year for the thirty years between 1962 and 1991. Exogenous shocks in the world economy (the second OPEC oil price increase; the U.S. Federal Reserve Board’s shift to a high interest rate policy) would arguably have prompted stringent fiscal and monetary policies and economic slowdown during those years in any case— even without an HCI drive. But the HCI drive clearly contributed to the domestic inflationary and external debt management pressures that troubled the South Korean economy when the adjustment program commenced—implying that some degree of the austerity imposed by stabilization and adjustment efforts between 1979 and 1982 was directly attributable to the HCI drive in and of itself. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 141

Finance. As we have already seen, financial repression was the sine qua non of the South Korean government’s industrial and export promotion policy during the 1960s, 1970s, and early 1980s. The degree of financial repression within the South Korean economy was greater than in either the Japanese or the Taiwanese economy during comparable period in their development.252 The degree of financial repression in South Korea had been gradually diminishing since the early 1970s, but it appears to have remained much more pronounced in South Korea than in these other developed East Asian economies. In 1990, for example, the gap between the interest rates in South Korea’s regulated and unregulated financial sectors amounted to about 14 percentage points; at equivalent levels of per capita GDP, Japan’s spread was about 4 percentage points. By the same token, South Korea’s gap between bank and curb rates was nearly twice as great in the 1970s and early 1980s as was Taiwan’s at equivalent per capita income levels. Financial repression has consequences. One of its consequences in South Korea involved the country’s savings rate. Through the 1960s, 1970s, and early 1980s, South Korea’s domestic or national savings rate was markedly lower than those of other rapidly growing export-oriented economies in East Asia. Some students of development, as Jeffrey Williamson put it in 1979,253 expressed curiosity about “why Koreans save so ‘little.’”254 The factors determining a society’s savings rate, and a population’s propensity to save, are inevitably varied and complex.255 Such com- plexities notwithstanding, however, government credit policies would seem to go far in explaining the paradox of relatively high rates of investment and relatively low rates of savings in South Korea during the Third and Fourth Republic and the early years of the Fifth Republic. When decomposed, South Korea’s “low” rate of domestic savings turns out, in essence, to have been due to low rates of household savings; government and corporate sector savings rates in the 1960s and 1970s compared with, or exceeded, those of other rapidly growing export-oriented economies (table 3-8). In the late 1960s (1965–69), South Korea’s household savings rate averaged under 4 percent, as against roughly 16 percent in both Japan and Taiwan. By the early 1980s (1980–84), South Korea’s household savings rate had increased, averaging more than 10 percent a year for the period. Even so, this was still much lower than the rates in 142 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 3-8 ESTIMATED HOUSEHOLD SAVINGS RATES: JAPAN, TAIWAN, AND SOUTH KOREA, 1960–1989 (percent)

South Year Japan Taiwan Korea 1960–1964 15.3 11.8 0.1 1965–1969 15.8 16.6 3.5 1970–1974 19.5 24.8 7.7 1975–1979 21.4 25.8 14.2 1980–1984 16.7 25.6 10.6 1985–1989 14.9 29.3 17.1

NOTE: For Japan and Taiwan, household savings rate is measured by net household savings as a percentage of household disposable income; for South Korea, household savings is measured by individual savings divided by national disposable income. SOURCES: Japan: Juro Teramishi, “Japan: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 66; Taiwan: Jia-Dong Shea, “Taiwan: Develop- ment and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 273; South Korea: Yung Chul Park, “Korea: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 173.

Japan (more than 16 percent) or Taiwan (more than 25 percent) during corresponding years. Why were household savings rates so much lower in South Korea than in Japan or Taiwan? A large part of the answer may lie in the differences in real interest rates facing potential savers at the household level in the three countries. One indication of these differences can be seen in table 3-9, which contrasts the real rate of interest on term deposits in Japan, Taiwan, and South Korea over the period between 1961 and 1990. In a fragmented credit market, real interest rates on deposits in the formal banking sector will clearly be different from the “effective” or average aggregate rate available for household savings through credit institutions as a whole. Generally speaking, the divergence between the formal and “effective” rates of real interest for household sector savings can be expected to increase in accordance with the degree of financial repression; table 3-9 may therefore exaggerate the differences in the household savings POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 143

TABLE 3-9 REAL INTEREST RATES IN THE REGULATED FINANCIAL SECTOR: JAPAN, TAIWAN, AND SOUTH KOREA, 1960–1990 (percent) Year Japan Taiwan South Korea 1960 1.6 2.9 — 1961 5.7 12.4 1.0 1962 6.2 10.9 –3.4 1963 2.2 6.2 –14.3 1964 4.7 8.6 –15.0 1965 2.0 15.5 20.2 1966 0.8 8.7 11.9 1967 4.0 7.3 10.8 1968 3.0 6.8 9.1 1969 3.3 10.0 8.0 1970 1.8 7.0 7.2 1971 0.9 9.4 7.9 1972 1.1 4.6 –4.7 1973 –5.7 –13.5 –1.6 1974 –8.3 –26.2 –15.5 1975 3.0 17.4 –10.2 1976 –0.2 9.1 –5.0 1977 –0.1 7.1 –2.2 1978 3.3 –2.8 –4.2 1979 3.3 –2.8 –1.0 1980 6.3 –9.0 –4.5 1981 3.7 6.0 –0.7 1982 5.3 11.4 0.9 1983 5.5 9.8 3.0 1984 3.8 7.8 6.1 1985 4.9 9.8 5.8 1986 3.0 8.9 5.8 1987 3.5 8.2 6.5 1988 3.2 6.7 4.1 1989 3.0 8.5 4.8 1990 5.1 10.1 –0.6

Unweighted Average Rate 2.4 6.0 1.0 Standard Deviation 3.1 8.5 8.3

NOTE: For Japan the real interest rate is measured by the average unconditional call rate minus the rate of change in the GNP deflator; for Taiwan, the real interest rate is measured by the one-year savings deposit rate minus the rate of change in the wholesale price index; for South Korea, the real interest rate is measured by the one-year time deposit rate minus the rate of change in the GNP deflator. SOURCES: Japan: Juro Teranishi, “Japan: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 66; Taiwan: Jia-Dong Shea, “Taiwan: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 273; South Korea: Yung Chul Park, “Korea: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea and Taiwan (New York: Oxford University Press, 1994), 173. 144 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

environment between the three countries in question or in a particular country over time. Nevertheless, the differences depicted in table 3-9 remain meaningful and informative. They are meaningful because of their central role in financial asset formation for private individuals and households: deposits in formal banking institutions remained the principal vehicle for personal financial holdings in all three countries throughout the decades in question—even during periods when real rates on demand or time deposits were significantly negative.256 They are more broadly informative, however, for what they may suggest about the financial “climate” with which private individuals and households had to contend. As we see, the real interest rate on deposits in formal banking institutions in South Korea was negative for fourteen of the thirty years between 1961 and 1990. By contrast, real interest rates were negative for only five of those thirty years in Japan and for four of those years in Taiwan. During the years of distinctively low household savings rates in South Korea, moreover, the average real interest rate on deposits in formal banking institutions was also distinctively low. Between 1961 and 1985, the real interest rate on time deposits averaged out to about 2 percent a year in Japan and nearly 5 percent a year in Taiwan. In South Korea, on the other hand, the average for this quarter century implied a long-term real rate of interest on time deposits not appreciably different from zero. As we know, South Korea’s financial policies did not ultimately prevent an embrace by the general public of a high-savings regimen. By the late 1980s and the early 1990s, South Korea’s household savings rate had approached 20 percent; it had risen above the level in contemporary Japan and was nearly twice as high as the average level then prevailing in OECD countries, according to official measures.257 Some students of the South Korean economy have argued that sustained rates of rapid growth were the instrumental factor behind this shift in savings patterns, with household “permanent income” expectations failing to keep pace with the financial reality of ever greater disposable incomes;258 others have suggested the rise was mainly due to “life-cycle” effects more directly contingent on demography, such as the drop in “dependency ratios” with rapid fertility decline.259 It is entirely reasonable to expect that rapid increases in per capita income and changes in POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 145 demographic patterns would have affected personal savings rates in South Korea during these decades. What appears to have been overlooked or neglected in a number of inquiries, however, is the role that changes in official interest rate policies may have played.260 After all, it was between 1981 and 1989—during the longest uninterrupted stretch of positive real interest rates on bank deposits in the country’s history—that South Korea’s household savings rate (as officially measured by national accounts) registered most of its postwar increase, rising from around 10 percent to almost 20 percent. In the final analysis, the precise impact of interest rates on private savings behavior (the elasticity of household savings with respect to interest rates) is likely to remain a matter of dispute for South Korea, as it has been elsewhere.261 Less open to dispute, however, is the fact that segmentation and discrimination within South Korea’s domestic financial markets exposed private households to a relatively unfavorable environment for accumulating savings during the first two decades of the country’s rapid economic growth. Private households, of course, were not obligated to deposit their savings in government-owned banks at any point during the 1960s, 1970s, or 1980s; an informal or “curb” sector also existed in which nominal interest rates were dramatically higher than those offered by the government. The “curb” market, however, was widely perceived as risky— not least because of the risk of episodic government interventions or even de facto confiscations.262 The disincentives for household savings had consequences for the rest of the South Korean economy. The most obvious of these concerned the gap between available domestic savings and planned investment—a gap that the government chose to fill through borrowings from abroad.263 By the early 1980s, South Korea’s ratio of gross foreign debt to GNP had risen above 50 percent264—a ratio similar to those of Latin America’s highly indebted states. But because policymakers in Seoul had decided that a relatively large proportion of South Korea’s debt at the time should consist of short-term borrowings,265 both the sensitivity to short-term interest rate fluctuations and the immediate importance of identifying continuous sources of rollover finance were correspondingly greater for South Korea. An inability to secure adequate external financing in any calendar quarter would have required savage “demand management” policies of the government if it were to avoid the 146 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

perils of rescheduling or defaulting on its existing obligations. Failure to con- tract the necessary new borrowings, in other words, would likely trigger a series of events that would culminate in steep recession: the main question about a resulting recession was whether it would be temporary or prolonged. The early 1980s, as fate would have it, was a time when it was not self-evident that international capital markets would be prepared to advance the South Korean government short-term credit in the volumes that it required. In the wake of the “debt crisis” triggered by Mexico’s 1982 reschedulings, commercial lenders were collectively reluctant to lend to sovereign borrowers in environments where the element of risk was perceived to be nontrivial. South Korea qualified as such a state266 and brushed up against this reluctance. In the event, South Korea did succeed in obtaining the new foreign loans that it needed for 1983. In retrospect, however, it looks to have been a surprisingly close call. For South Korea’s external financing for 1983 was secured only with the assistance of its two most powerful international allies: the Reagan administration in America and the Nakasone government in Japan. It was an official multibillion-dollar loan-and-credit package financed by the Japanese government that provided the South Korean liquidity—and perhaps also credibility—during those delicate months.267 In development policy, as in personal life, it may always be better to be lucky than to be good. Absent a measure of luck, South Korea’s financial- repression policies not only would have distorted the structure of the South Korean economy but also could very easily have been instrumental in inter- rupting its growth.

Accounting for South Korea’s Rapid Economic Growth: Factor Mobilization versus Factor Productivity

Policy-induced distortions of the South Korean macroeconomy affected not only its structure of output but also its patterns of productivity growth. Generally speaking, the distortions described in the preceding sections of this chapter tended systematically to increase the ratio of intermediate consumption to gross output within the production process. By doing so, they POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 147 correspondingly reduced the contribution of total factor productivity to overall growth. Thus, while South Korea enjoyed exceptionally rapid rates of economic growth after its “takeoff,” that pace of growth appears to have derived principally from exceptionally rapid increases of factor inputs. Improvements in total factor productivity appear to have played a distinctly secondary role in South Korea’s economic transformation.

The “Contrarian” Reassessment of East Asian Growth

For South Korea and a number of other Asian economies, the question of total factor productivity’s contribution to overall rates of growth became suddenly, and quite unexpectedly, topical in the early 1990s when several self-described “contrarian” economists reexamined this issue. The “contrarians” asserted that improvements in total factor productivity played only a relatively minor role in the development of the “four tigers” and perhaps as well in the development of Japan.268 As perhaps intended, these studies and articles attracted considerable attention and created controversy. But while those “contrarian” essays outlined a case, they did not altogether prove it. Proving the case—or, more properly speaking, exposing the case to falsification—would require at the very least some painstaking exercises in “growth accounting.” The reassess- ments of the East Asian growth experience began to approach that task, but without all the requisite calculations for a critical examination of their own conjectures.269 Be that as it may, considerable evidence and information about long- term changes in productivity and growth, both in South Korea and other East Asian economies, are already at hand. For South Korea itself, some meticulous and highly detailed studies of the sources of growth for the entire economy have been undertaken. Other studies have examined changes in total factor productivity within specific, broad sectors of the South Korean economy. In addition, some indicators are available that reflect the intensity of the mobilization of factor inputs, even though they do not directly speak to the issue of total factor productivity improvements. By and large, these studies and indicators point toward two conclusions. 148 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

First, in consonance with the interpretation of the “contrarians,” there is persuasive corroboration for the proposition that the contribution to overall economic growth from improvements in total factor productivity was relatively modest in South Korea during the 1960s, the 1970s, and the 1980s. Second—in distinct contrast to the “contrarian” view of the East Asian development experience—there is also persuasive evidence that improvements in total factor productivity may have played a rather larger role in the economic growth of some of East Asia’s other “success stories” than it did in South Korea. The “contrarian” verdict, in short, may apply to South Korea, even though it may not necessarily hold for some of the other East Asian economies to which South Korea is commonly likened.

Caveats of “Growth Accounting”

Before reviewing the data that bear on TFP calculations for South Korea, a word of caution is in order regarding the calculations themselves. There is no getting around it: estimates of total factor productivity, and its role in overall economic growth for any particular economy, are problematic. The problems with these estimates are both theoretical and pedestrian. At the most abstract (and basic) level, any estimate of the magnitude, or relative importance, of nonfactor contributions to economic change will be crucially shaped by the particular theory of economic growth to which the analyst happens to subscribe. Contending theories of economic growth, in fact, differ crucially in their treatment of the role of “technical change” and other matters bearing directly on the nonfactor “residual.”270 Thus, through an inescapable circularity, estimates of the role of total factor productivity in economic growth become dependent on the analyst’s vision of what its role in the growth process should be.271 Inconsistencies within given theoretical frameworks add a further com- plication. “Growth accountants,” for example, have often based their TFP calculations on neoclassical economic assumptions about growth, reinforced by the presumption of constant returns to scale. The favor enjoyed by that particular framework has much to do with the convenient computational prop- erties it offers;272 unfortunately, if the framework is scrupulously applied, it admits no possibility of any improvement in total factor productivity!273 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 149

Alternative approaches toward “growth accounting” lead to other, analogous dilemmas or inconsistencies.274 Where TFP calculations are concerned, computational tidiness is the adversary of explanatory coherence.275 Then there are the more pedestrian problems regarding measurement and data. “Growth accounting” exercises, for example, typically proceed under the assumption that the economy under consideration is evolving along an “equilibrium path.” But in fact, under almost any circumstance, available observations will depict an economy in varying degrees of disequilibrium. Disequilibrium biases TFP calculations.276 Business cycles, changes in capacity utilization, sticky prices and imperfect substitution between factors of production in the face of exogenous shocks: all of these quite ordinary phenomena will influence estimates of the “residual” remaining after factor contributions to growth are computed. For this reason, TFP estimates are sensitive not only to the “growth accounting” framework that an analyst selects but also to the very choice of time periods and endpoints in a data set. Finally, even if an economy were somehow able to maintain a steady long-term equilibrium as it grew, the process of market-oriented development would still raise issues about the measurement of changes in total factor productivity that are not easily resolved. With economic development, for example, intermediate inputs tend to assume a more prominent role in the production process. Whether these increases in product are treated as “costs” or as “output” may matter greatly in computed TFP calculations.277 By the same token, the manner in which markets price the productivity- enhancing innovations incorporated into capital equipment will have direct but unpredictable implications for the measurement of total factor productivity. Just witness the data processing revolutions of the 1970s and 1980s, where extraordinarily rapid declines in the cost of computing power may paradoxically have biased TFP calculations downward!278 In sum, the inexactitudes of the “growth accounting” exercises from which we glean TFP estimates are imposing. Given these inexactitudes, it should not be surprising to find a considerable instability in the corpus of TFP calculations for particular countries, even when these cover similar time periods. In some instances, similarly calculated estimates of changes in total factor productivity differ not only in magnitude but also in sign. Such discrepancies once prompted Oli Havrylyshyn to warn of “the 150 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

noncomparability of studies of TFP.”279 But it may also be fair to speak of the “irreproducibility” of particular TFP estimates, both for South Korea280 and perhaps other countries as well. Total factor productivity estimates are used promiscuously in the contemporary literature on economic development. Even a summary review of the issues involved in producing those calculations will indicate that more restraint is warranted. We cannot hope to answer the fundamental theoretical questions raised by such calculations or even to resolve empirical problems they pose. But by keeping these questions and problems in mind, we can try to treat these calculated estimates with the caution and care that they properly deserve.

Total Factor Productivity in South Korea: Indications and Calculations

That the intensity of factor mobilization in South Korea may have been unusually high during its decades of rapid economic growth is suggested initially by a noneconomic indicator: average weekly hours worked per employee in the manufacturing sector. In absolute terms, South Korea’s averages appear to have been among the very highest, if not the very highest, in the noncommunist world with consistency over the decades under consideration here. This weekly average fluctuated over the years between 1960 and 1990, but without any strong long-term pattern;281 average weekly hours worked in manufacturing, for example, were reportedly somewhat higher in 1985 than they had been in 1965.282 By the 1980s, moreover, average weekly hours per manufacturing employee were distinctly higher for South Korea than they had been in other industrialized or developing countries at similar levels of per capita GDP. This difference obtained not only for Western OECD members and Latin American countries but for East Asian societies as well. By the late 1980s, for example, South Korea’s workweek for manufacturing employees was, on average, more than ten hours longer than Japan’s had been when Japan’s per capita GDP was at that level. Compared to the other “little tigers” at equivalent per capita output levels, South Korea’s manufacturing workweek in the late 1980s was nearly ten hours longer than POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 151

Hong Kong’s, over five hours longer than Singapore’s, and about five hours longer than Taiwan’s. In and of itself, the average workweek in a particular sector cannot tell us anything directly about the growth of total factor productivity in that sector, much less the rest of the economy. As an indicator, average hours worked per week cannot even serve as a proxy for changes in labor inputs unadjusted for quality—the minimal requirement with respect to labor supplies for the very crudest TFP computations. Nevertheless, these hourly averages for South Korea are both revealing and suggestive. They reveal a pattern of labor force development different in key respects from those observed in other parts of the world. Generally speaking, the average hourly workweek declines over the course of industrialization, as per capita output increases. This is a trend informed by the fact that the marginal rate of substitution between income and leisure tends to change with affluence.283 In South Korea, however, the average workweek for employees in the manufacturing sector was extremely high at the onset of rapid industrialization in the 1960s and remained just as high more than two decades later, despite more than a quintupling of the country’s per capita income level in the interim. Within South Korean industries, furthermore, patterns of labor utilization appeared to be quite different with respect to the workweek from much of the rest of the industrialized, and industrializing, world. Whereas the average workweek in Japan (and other countries) tended to be lower in the larger establishments, South Korean data indicated a positive correlation between firm size and hours worked per employee.284 These anomalous patterns cannot plausibly be dismissed as an artifact, statistical or otherwise.285 More plausibly, they can be said to reflect both supply and demand factors in the South Korean labor market—conditions substantially different from those witnessed in other countries at equivalent stages in their development. South Korean workers were apparently willing to trade away much more of their leisure time than were workers in countries with comparable per capita output levels; South Korean plants and firms structured their production routines accordingly to take advantage of this disposition.286 All this, of course, is suggestive of extensive—as opposed to intensive— economic development. And although the coexistence of an unusually long 152 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

workweek with rapid economic growth over a period of several decades does not by itself demonstrate that the contribution of TFP to overall growth is relatively low, it would be entirely consistent with such a result.287 Another indirect indication bearing on total factor productivity changes concerns the capital-output ratio for the Korean economy. One set of calculations prepared at the Korean Development Institute traced changes in capital stock for the South Korean economy between 1953 and 1986. They pointed to a curious paradox: between 1964 and 1986, the capital-output ratios in the South Korean and the Japanese economies were virtually reversed. By these estimates, South Korea’s capital-output coefficient rose from 1.45 in 1964 to 2.53 in 1986, whereas Japan’s fell from 2.24 in 1964 to 1.57 in 1986. The study observed that although both countries achieved a significant capital deepening and a remarkably high rate of increase in capital intensity, their impacts on expansion are differentiated: Japan seems to have achieved more marginal gains in productivity of capital than Korea.288 It would seem surprising that capital-output coefficients should be higher in the country with the lower level of per capita output, where capital scarcity would be greater, and where expected rates of return on capital should correspondingly be higher.289 Once again, this indication does not prove that TFP has been relatively low in South Korea during its phase of rapid economic growth. But the result is consistent with that possibility. TFP calculations have been prepared for particular sectors of the South Korean economy over the course of its economic transformation. Perhaps the most interesting relate to manufacturing, because this was necessarily the “leading sector” in the process of industrialization. Park Seung Rok and Jene K. Kwon prepared one set of estimates for changes in total factor productivity in South Korea’s manufacturing sector between 1967 and 1989 (see table 3-10). The results from Park and Kwon’s study are striking and surprising. By the authors’ estimates, changes in total factor productivity in South Korea’s heavy industries were only marginally positive for the entire period from 1967 to 1989, averaging just one-half of 1 percent per year. No less arrest- ing is their estimate that total factor productivity in South Korea’s light industry was slightly negative over this twenty-two-year stretch, as was, by these computations, the change in total factor productivity for the manufacturing sector as a whole. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 153

TABLE 3-10 ESTIMATED ANNUAL RATES OF CHANGE IN TOTAL FACTOR PRODUCTIVITY FOR THE MANUFACTURING SECTOR: SOUTH KOREA, 1967–1989 (percent)

1967–73 1973–81 1981–89 1967–89 Heavy Industry 4.3 –4.9 2.1 0.5 Light Industry –0.1 0.8 –2.5 –0.5 Total Manufacturing 1.3 –5. 0.8 –1.6

NOTE: In the definitions used in this study, “heavy industry” and “light industry” do not comprise the total manufacturing sector. Source: Park Seung Rok and Jene K. Kwon, “The East Asia Challenge to Neoclassical Orthodoxy,” World Development 22, no. 4 (1994): 637.

Other studies, applying alternative—if arguably less sophisticated— approaches for calculating total factor productivity,290 offered higher (at least, nonnegative) estimates for TFP contributions to the growth of the output in South Korea’s manufacturing sector during its decades of rapid industrialization. In those studies, the “residual” of industrial growth left unexplained after factor increases generally ranges from 1 percent to 4 percent a year, depending on the period appraised and the data sources employed.291 But when one considers the pace at which South Korea’s manufacturing sector was growing during those years—averaging roughly 15 percent per year between 1963 and 1990292—even the more “optimistic” calculations indicate that the overall contribution of TFP to manufacturing sector growth was secondary and rather modest. Even the more optimistic calculations, in fact, suggest that the absolute pace of improvement in total factor productivity in South Korean manufacturing may have been distinctly lower than in the much more slowly growing manufacturing sectors of some OECD countries.293 Finally, there is the question of TFP’s contribution to the growth of the South Korean economy as a whole. Some early studies attempted to decom- pose South Korea’s long-term growth following Denison’s conscientious and detailed “growth accounting” framework. That framework, of course, relies on both general and very particular assumptions about the dynamics of economic growth—as any growth accounting exercise method must. 154 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Denison’s approach has been extensively reviewed—and critiqued—in the literature over the decades; challenges continue to be addressed to the technique.294 Yet whatever its drawbacks, the Denison framework has the singular advantage of offering a basis for careful, itemized, and consistent comparisons over time and between countries. For this reason, it is worth examining the results at greater length. Pilat’s analysis of South Korea’s sources of economic growth295 generally follows the Denison approach, with one important initial difference. Whereas Denison examined changes in national income, Pilat examines changes in GDP. According to Pilat’s calculations (table 3-11), aggregate GDP in South Korea grew by about 8.7 percent a year between 1963 and 1990. Of this growth, by his estimation, an average of more than 6.9 percent a year—almost four-fifths of the total—derived from increases in factor inputs (slightly less than half of this from increased labor inputs, slightly more than half from capital augmentation). Improvements in output per unit of input were estimated to have accounted for an average of about 1.8 percent a year in GDP growth, that is to say, slightly more than one-fifth of this overall total. Pilat’s calculations indicate that both the absolute and the relative contribution of improvements in total factor productivity to economic growth varied markedly in the subperiods between the early 1960s and 1990. By his estimates, increases in output per unit of input averaged about 2.1 percent per year between 1963 and 1973, thereby accounting for roughly one-quarter of the growth of GDP during that decade. Between 1973 and 1979—a period bracketed by the two “oil shocks” and spanning the formal duration of South Korea’s HCI drive—the calculated average rate of increase in output per unit of input plummeted to less than 0.3 percent per year; by this reckoning, total factor productivity improvements would have accounted for a near-negligible 3 percent (that is to say, less than one-thirtieth) of the period’s overall GDP growth. For the years 1979 to 1990, Pilat estimated that increases in output per unit of input averaged 2.3 percent per year and accounted for more than one-quarter of overall GDP growth. In both absolute and relative terms, TFP’s contribution to GDP growth would appear by these numbers to be highest in this lost subperiod of the Cold War. Such a finding might seem to be in keeping with contemporaneous changes in the South Korean policy environment: The 1980s, after POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 155

TABLE 3-11 PILAT’S ESTIMATES OF SOURCES OF GROWTH IN THE SOUTH KOREAN ECONOMY, 1963–1990 (percent per year)

Period 1963–1973 1973–1979 1979–1990 1963–1990 GDP Growth Rate 9.0 9.3 8.2 8.7 Contribution to Growth: Factor Inputs 6.9 9.0 5.9 7.0 Business Labor Input 3.2 3.5 2.7 3.0 Employment 2.3 2.1 1.7 2.0 Hours Worked 0.5 0.5 –0.1 0.3 Age-Sex Composition –0.1 0.3 0.1 0.1 Education 0.5 0.5 1.0 0.7 Nonresidential Capital Input 2.7 4.5 2.5 3.0 Fixed Nonresidential 2.1 4.0 2.2 2.6 Private Capital Inventories 0.6 0.5 0.3 0.5 Residential Capital Input 1.0 1.0 0.6 0.8 Land 0.1 0.2 0.1 0.1 Output per Unit of Input 2.1 0.3 2.3 1.8

NOTES: Totals may not add up due to rounding. SOURCES: Dirk Pilat, The Economics of Rapid Growth: The Experience of Japan and Korea (Brookfield, Vt.: Edward Elgar Publishing House, 1994), 84.

all, witnessed a multiplicity of discrete and limited “liberalizations,” and such measures are commonly said to be conducive to the enhancement of economic efficiency. As we noted earlier, however, TFP calculations can be quite sensitive to the choice of endpoints. So it is in Pilat’s series. If the endpoints in question were shifted by just one year, and we were to examine the period 1978–89 instead of 1979–90, the average annual TFP improvements denoted by the time series would fall from 2.3 percent to 1.8 percent—which happens to be the average for the 1963–90 period as a whole. In relative terms, TFP improvements over the years 1978–89 account for just over one-fifth of the period’s GDP growth—again, very close to the average contribution for the 1963–90 era as a whole. Thus, although it is 156 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

easy to point to year-to-year changes in implied TFP in Pilat’s numbers, it is much harder to divine meaningful trends. Where Pilat improvised off Denison’s approach, Kim and Park’s analysis of South Korean sources of economic growth adhered strictly to the Denison methodology.296 Their study considered South Korea’s growth between 1963 and 1982 (table 3-12). The period of analysis was somewhat different from Pilat’s, the techniques employed were not identical, and the values of the calculated estimates diverged in some meaningful respects. Nevertheless, the findings were broadly similar. Like Pilat, Kim and Park concluded that by far the greatest part of South Korea’s national income growth between 1963 and 1982 could be explained by the pure augmentation of factor inputs. And like Pilat, Kim and Park concluded that the absolute and relative contribution of improvements in output per unit of input in the South Korean economy were distinctly lower in the 1973–82 period than they had been in the preceding decade. The differences between the two sets of calculations are also of interest. By Kim and Park’s reckoning, increases in factor inputs accounted for a little less than two-thirds of the increase in national income for 1963–82, whereas Pilat attributed four-fifths of South Korea’s GDP growth between 1963 and 1990 to factor augmentation. The relative contribution of TFP to growth implied by Kim and Park’s calculations is thus considerably higher than in Pilat’s: over 35 percent for 1963–82 versus just over 20 percent for 1963–90. The “residual” in Kim and Park’s series is also greater in absolute terms than that in Pilat’s: 2.7 percent a year for 1963–82 versus 1.8 percent for 1963–90. These discrepancies are in part due to definitional differences. Pilat used changes in GDP at market prices as his unit of analysis, whereas Kim and Park (like Denison) used national income at factor cost. Given the distinction between the two concepts,297 Pilat’s method would be expected to generate higher numbers for the measured rate of increase in both capital inputs and total output—and a correspondingly lower ratio of TFP improvements to overall growth. But these conceptual differences should not strongly influence the absolute value of the rate of increase in the “residual,” for what is added to output by including capital consumed should be taken away by a correspondingly augmented measure of capital inputs.298 POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 157

TABLE 3-12 KIM AND PARK’S ESTIMATES OF SOURCES OF GROWTH IN THE SOUTH KOREAN ECONOMY, 1963–1982 (percent per year)

Period 1963–1973 1973–1982 1963–1982 National Income Growth Rate 8.2 7.1 7.6 Total Factor Input 4.2 5.6 4.9 Labor 3.1 3.5 3.3 Employment 2.4 2.0 2.2 Average Hours 0.3 0.5 0.4 Age-Sex Composition 0.0 0.2 0.1 Education 0.3 0.4 0.4 Other 0.1 0.4 0.3 Capital 1.1 2.1 1.6 Nonresidential Struc- 1.1 2.6 1.8 ture and Equipment Inventories 0.2 0.3 0.3 International Assets –0.3 –0.9 –0.6 Dwellings 0.1 0.1 0.1 Land 0.0 0.0 0.0 Output per Unit of Input 4.0 1.5 2.7

NOTE: Totals may not add due to rounding. Source: Kim Kwang-suk and Park Joon-kyung, Sources of Economic Growth in Korea: 1963–1982 (Seoul: Korea Development Institute, 1985), 61–62.

Nevertheless, Kim and Park’s series produces a substantially higher residual than Pilat’s. Much of that remaining difference apparently owes to statistical revisions in the interval between the two exercises: official revisions in basic national account statistics by the Bank of Korea and unofficial revisions of time series estimates for capital stock by researchers with the Korea Development Institute.299 The very occurrence of these revisions should serve to remind us just how sensitive TFP calculations can be to the data on which they are based, even in countries whose economic data are generally regarded as reliable.300 Yet because Pilat’s study works with 158 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

figures subsequently considered more accurate, his computations on the sources of growth in the South Korean economy during the 1960s, 1970s, and 1980s should probably be accorded greater confidence than Kim and Park’s. Because Denison-style “growth accounting” exercises have been conducted for a number of countries over the past generation, it is possible to place the findings by Pilat and by Kim and Park in a wider international perspective. Table 3-13 presents these comparisons. Within the Denison- style framework, improvements in total factor productivity appear to be relatively less important to South Korean economic growth than to the growth of some other rapidly growing economies—and may also have been less important in absolute terms as well. Of the eleven OECD country experiences examined in table 3-13, the relative contribution of increases in output per unit of input to standardized national income growth was as low as Kim and Park’s estimate of that contribution for South Korea in only one (Canada, 1950–67). In the other ten OECD countries studied, the share of overall growth attributed to increases in output per unit of input ranged from 48 percent (United States, 1948–69) to 74 percent (France, 1950–62). Pilat’s estimate of the relative contribution of total factor productivity improvements to South Korean GDP growth, however, is much smaller than Kim and Park’s. By his bench- mark, which is not entirely comparable with the methods used for the OECD country studies,301 the share of overall growth attributable to TFP improvements would be far lower for South Korea than for any of the other countries considered. It would, in fact, be only half as great as for Canada, whose relative TFP contribution is the lowest in this particular OECD grouping. Although there is a substantial discrepancy between Pilat’s estimates of increases in output per unit of input and those of Kim and Park, South Korea’s absolute rate of TFP improvement does not compare favorably with the OECD countries during the years in question. If Kim and Park’s standardized estimate is included among the OECD observations, South Korea’s absolute rate of TFP improvement would rank fifth of the twelve—below Japan (1953–71), Italy (1950–62), West Germany (1950–62), and France. If Pilat’s numbers were used instead, South Korea would rank eleventh of the twelve—above only the United Kingdom (1950–62). POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 159 t n e g m h n i p t e l o h s l s g w a a i e l a o v n l t b r e o n a u n i D o G 6 0 1 4 5 0 8 7 0 0 3 0 P 0 i u t e s a c a 5 4 6 7 5 7 4 5 2 4 5 7 7 r d e n e a r i r a N g s e o m p l : e x f P E o K S E o R c : d l D a r r n u a a O I o w w e H t s S d T ( o E E P 2 : . f 8 t o M 9 ) V s 1 r , e S ” – l c a d 3 r R l a G e 6 u e A i u y o 9 N f 5 8 0 5 9 9 9 1 8 2 3 2 4 E I S 1 d k ...... r i : T e o Y e 3 1 2 3 4 3 1 2 1 3 1 2 2 s a h o N e r e p T r D B U o : R ( t E K s % O a T ( a n e C i F r C o C o h E t K S L A w d E o w n r l e H S r a a G T G , n n c ) i a S m r y o W r p i E m o o m a a I t o t O r J o e f a n c R R f n o y a o o T c N h c G s F r t E N E e “ o e f c s w t U ’ o n n p i 8 2 0 2 1 7 1 6 0 9 1 9 0 n E o e s O ...... i a n r e L r s c 2 1 3 1 2 1 2 1 7 4 1 1 1 p % e o C r Y e 3 G a i ( p J u s t T 1 x o e s a - S u E w S D t - e o , b 3 e m r u i C g N h H o c r p n E T , t O c E n L u n g : S I n n I y h B n I O I t o k u A - N w h C n o D T E r C o E . o G D T J K d i C k Y p r E m B a a a L i P R l E l H f i d o h T S n t ) s d W a c r W e i w D d l k a z . o O m n a N i u e r 3 o a s R n a d y A - n 4 3 0 0 7 8 6 0 6 1 4 1 4 r G n o g o 7 – ...... r G c i . o a P n A 2 t e e 6 3 5 4 8 5 4 3 8 2 4 3 s E a 8 i 4 d D E F a p e n , w m n R G ) h e O N K a o 6 T O d D t % c S 7 , e ( . m S t K z 9 n F E i i a I 1 l K d i C d , H r r : P R a n a T 2 d o k U 8 w i r U n t i 9 d ) O a u O 1 t D E t 2 S s i – ) : : S t 6 n 3 s s 0 2 ) r u 9 D 6 n 9 ) ) e ) 6 I 9 9 r 1 E 9 h 2 0 2 9 1 o s 6 t 1 – T f 8 9 g o 6 1 – 9 ) a 0 A s n l 9 9 e 3 – 9 i ) i 1 2 l ) 5 r ) 6 M 1 1 a k 0 1 2 – ) 6 o 2 h I 9 9 7 o t ; – – – 5 ) 6 8 2 9 K 6 1 1 T o 8 6 3 3 w 0 9 ( ) r 1 9 4 6 1 S 9 6 a h 9 o 6 6 B 5 1 t 2 7 1 9 e – r – 9 1 E ( 1 r : 9 9 u g 9 7 6 – 9 m 1 . 0 1 – o – o ( 1 1 t 6 1 9 y 0 o 1 C – 5 0 S ( ( K . 0 ( u , 1 s – 5 n d 0 9 ) ; 5 p 5 D h a a e s a t – g 5 4 3 9 5 1 t 9 t , 9 e e ( u 8 8 d d 0 n 5 1 u 9 a 1 r r n m i 1 9 ( , t o o ( n O 5 9 r o 1 ) ( o o k i 1 t S S K a ( y e 9 r 4 1 r = l g , y : K K r a ( m a 9 r 1 e S e a n e t G d d a t i ( d 9 E e u c h h P e e : n n u i t m h C a 1 w t t t t t h E s n y s a R i r i i g u , t n n T l t d a u u l . a e U p e o s e n n o a a O e r o o o n O t a W n I B D W U N C F C J a S N ( S C I S N U 160 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

We may point out that table 3-13 compares South Korea’s economic growth against the performance of OECD economies during their postwar “golden age” of rapid material advance—before the slowdowns in aggregate growth and productivity improvements that commenced in the early 1970s. One may object that the comparisons are thereby biased and exaggerate the “true” contribution of TFP to the growth of the more advanced industrial economies. Yet comparison of the contemporary South Korean experience with the earlier records of the OECD countries can be justified on at least two grounds. First, the contraposition demonstrates that there were indeed characteristic differences in the role of TFP between these countries during their episodes of rapid growth. Second, because South Korea’s per capita output at the end of the period under consideration appears to have been roughly comparable with those of the OECD grouping at the beginning of the period examined in table 3-13,302 these comparisons further demonstrate that South Korea had not reached a “stage of development” in which TFP contributions were somehow intrinsically more difficult to elicit. The contrast in growth structure between Japan (1953–71) and South Korea is especially informative. Economic growth in both countries was exceptionally rapid, averaging more than 8 percent a year. In Japan, however, most of that growth was attributed to improvements in output per unit of input. The absolute value of Japan’s “residual,” moreover, was much larger than South Korea’s: 50 percent greater by Kim and Park’s calculations and more than 150 percent greater by Pilat’s. Depending on the figures for South Korea that one selects, Japan’s pace of TFP improvement exceeded South Korea’s by either 1.6 percent a year or 3.1 percent a year. Conversely, South Korea’s rate of factor input growth exceeded Japan’s by either about 1 percent a year or 3 percent a year. What is extraordinary about South Korea’s growth, we may conclude from these comparisons, was the amazing pace, successfully maintained, at which labor and capital were inducted into the production process. According to table 3-13, the rate of increase in factor inputs averaged almost 5 percent a year (Kim and Park’s estimate) or almost 7 percent a year (Pilat’s estimate). TFP improvements during South Korea’s sustained burst of growth, on the other hand, look by no means extraordinary—at least when measured against the Japanese experience. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 161

What of TFP comparisons for South Korea and Taiwan? Denison-style “growth accounting” breakdowns, unfortunately, do not appear to be available for Taiwan, and are not attempted here. Using a somewhat less exacting method, however, Oshima compared the growth of TFP in Taiwan and South Korea between the early 1950s and the early 1980s. He concluded that the contribution to GDP growth from improvements in total factor productivity was more than twice as great in Taiwan as in South Korea in the period as a whole (4.7 percent per year vs. 2.3 percent per year).303 Hiroki Kawai came to a similar conclusion for the 1970–90 period, using a similar approach: By his computations, TFP’s contribution to GDP growth averaged 4.5 percent a year in Taiwan—two and one-half times South Korea’s 1.8 annual rate.304 Lim Byung Ok also calculated significantly lower TFP increases for South Korea than for Taiwan for the 1960s, 1970s, and early 1980s.305 Through very different techniques, Alwyn Young and Kim and Lau arrived at similar findings.306 Findings on productivity growth in the leading sectors of the two economies have conformed to the same general pattern. Howard Pack, for example, estimated that TFP growth for Taiwan’s manufacturing industries averaged 5.3 percent a year between 1961 and 1987;307 Shirley Kuo put it at 4.4 percent a year for 1952 to 1980.308 Both of these studies used simple Cobb-Douglas production functions to derive their residuals and in so doing arguably generated “naive” results. Yet equally “naive” models for South Korea, as we have already seen, placed TFP growth in South Korea’s manufacturing industries much lower. The absolute values of the residuals derived in those studies ranged from 1.1 percent to 3.7 percent; their average comes to roughly 2.3 percent.309 When we consider that the rate of growth of the manufacturing sector appears to have been slightly slower in Taiwan than in South Korea between the early 1960s and the late 1980s, these diverse estimates of TFP, although methodologically innocent, nevertheless consistently suggest that the role of TFP in industrial growth was much more limited in South Korea than in Taiwan. In sum, a fairly large number of otherwise unrelated studies commonly indicate characteristic differences in the sources of rapid economic growth between South Korea and Taiwan. Over the four decades from the early 1950s to the early 1990s, and indeed in every subperiod that these studies have examined, the role of improvements in output per unit of input appears 162 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

to have been considerably more important in Taiwan than in South Korea, whereas the rate of increase in factor inputs has typically been distinctly greater in South Korea than in Taiwan. Thus, available evidence suggests that there may have been meaningful qualitative differences between the processes of rapid economic growth in South Korea, on the one hand, and, on the other hand, Taiwan or Japan. Although South Korea’s average annual pace of aggregate growth between 1960 and 1990 was quite similar to those of Japan and Taiwan during their phases of rapid growth, its components appear to have been quite different. Though South Korea’s export-oriented policy proved capable of generating rates of growth comparable to Taiwan’s and Japan’s, the achievement, at least during the Cold War era, seems to have derived in distinctly larger measure from its success in mobilizing factor inputs. Improvements in total factor productivity appear to have played a correspondingly smaller role in South Korea’s rapid growth.

The Enigma of South Korean Growth: How Much Can We Explain?

At the start of this chapter, we pointed out that South Korea’s commencement into and maintenance of exceptionally rapid rates of economic growth came as a surprise to a great many foreign observers—including no small number of area specialists and students of development. Now that we have reviewed some of the interplay between policy and economic performance in South Korea during its era of rapid growth, a few words would seem in order in defense of those who did not anticipate the Republic of Korea’s dazzling economic achievements. For after examining the particulars of the South Korean development record in some detail, we can attest that much remains enigmatic about both the ingredients and recipe in this “success story.” The dynamic transformation of the Republic of Korea from an economy that reported income levels not far different from India’s or Indonesia’s, as it did in the early 1950s,310 to one that applied for membership in the OECD (as it would in 1995) was an event of historical moment—and today is widely recognized as such. But recognizing the obvious is one thing; understanding the obvious is often much more difficult. POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 163

The South Korean development patterns have been extensively, and intensively, examined. South Korea’s growth has been accounted for (in the bookkeeper’s sense of the term), as we have just seen, on many occasions. And the South Korean experience has been held out as a “model” for other societies and governments to emulate.311 Yet it is not asserting too much to say that the experience itself has yet to be comprehensively, unambiguously, and convincingly explained. In many important respects, the reasons that South Korea was able to grow at nearly double-digit rates for three successive decades are still unclear. The enigmatic nature of South Korean growth is underscored by some of the econometric research on “winners” and “losers” in postwar economic development. Following Barro and Lee’s approach,312 for example, William Easterly used pooled cross-sectional data for 110 countries for the years 1960–85 to analyze the international relationship between economic growth rates and some of the variables (or proxies for variables) commonly believed to affect them: initial income levels; investment ratios; educational enrollment ratios; ratios of government consumption to GDP; and political instability as manifest in assassinations, revolutions, and coups.313 Under varying specifications, Easterly’s regressions “predicted” fast GDP growth for South Korea—but nonetheless seriously underestimated the pace of growth that the country actually achieved. The difference between actual and predicted growth amounted to roughly 3 percent a year in each of these specifications. Put another way, nearly half of South Korea’s per capita growth during the years under consideration went “unexplained” by the structural variables in the exercise: in effect, one of the doublings of per capita income over those years was entirely missed. South Korea was, in fact, the most conspicuous “outlier” in Easterly’s study. The gap between actual and predicted growth rates was larger for South Korea than for any other country in one of Easterly’s regressions and second largest (after Singapore) in another. On the basis of his modeled results, moreover, South Korea appeared to be by far the least likely “success story” among the seven countries or territories that actually registered per capita growth rates above 5 percent per year over that quarter century.314 There is little wonder that contemporary observers did not predict South Korea’s prolonged boom and material transformation: econometric techniques do not predict it either, even ex post facto. 164 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Statistical exercises such as Easterly’s, of course, cannot adequately examine, or account for, the far reaching and often subtle impacts of government policies and practices on a country’s patterns of economic activity. We might suspect that some large portion of South Korea’s “residual” of unexpectedly rapid growth was associated with the country’s policy environment. Policy regimens surely have an influence on economic outcomes, even if that influence is often difficult to quantify. Yet as we have seen in the preceding pages, South Korea’s economic regimen between the early 1960s and the early 1990s was marked by expensive mistakes as well as shrewd and disciplined decisions. A succession of South Korean governments embraced specific practices and championed particular policies that would appear, by ordinary economic reasoning, to have adverse implications for economic growth. But despite all those specifics and particulars, South Korea not only recorded rapid rates of growth but also managed to sustain a pace of growth for three full decades that was at the time historically unprecedented.315 That tempo of growth would later be matched, and even exceeded, by the three decades of extraordinary growth that commenced in China in the late 1970s and continued on until the post–Cold War era—but this is another story altogether. Mystery can inspire faith. Reviewing the South Korean record, determinists of diverse persuasions have seen validation of their own preferred theories on the rise and decline of nations and their economies. Deterministic explanations of great historical events, however, are unsatisfying to all but the true believers. To acknowledge that South Korea’s dramatic economic ascent was generally unexpected before the event, and cannot perhaps be fully explained even in retrospect, is not to concede too much—or to misstate the essential facts of the case. In his now famous analysis of America’s postbellum patterns of economic development, Moses Abramovitz described the large unexplained residual in his calculations as a “measure of our ignorance about the causes of economic growth”;316 we are at a somewhat analogous juncture when it comes to explaining why South Korea began to grow, and continued to grow, so very rapidly. But if our understanding of South Korea’s economic advance is far from total, our “ignorance” about it is also far from absolute. With reasonable confidence, we can compose statements about South Korea’s development that are both true and important. One of these derives from exercises in POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 165

TABLE 3-14 ESTIMATED SOURCES OF GROWTH: SELECTED LATIN AMERICAN COUNTRIES, 1960–1985

A B Ch Co M P V Average Average GDP Growth 2.1 6.0 3.1 4.9 5.7 3.5 3.4 4.1 (% per year) Average Contribution 2.8 5.2 2.7 4.6 5.7 3.8 4.2 4.1 to GDP from Growth of Factor Inputs (% per year) Average Contribution –0.6 0.8 0.4 0.2 0.0 –0.3 –0.1 –0.1 to GDP from Improve- ments in Total Factor Productivity (% per year)

NOTE: A = Argentina; B = Brazil; Ch = Chile; Co = Colombia; M = Mexico; P = Peru; V = Venezuela. Figures may not add up due to rounding. SOURCE: Derived from Victor J. Elias, Sources of Growth: A Study of Seven Latin American Economies (San Francisco: ISC Press, 1992), 51–52.

“growth accounting,” imperfect as they may be. In arithmetic terms, South Korea’s extraordinarily rapid growth seems to have been based on perhaps heretofore unexcelled rates of factor input mobilization, enhanced by less extraordinary but nonetheless positive improvements in total factor productivity. Modern economic growth, as we know, relies on both factor accumulation and the improvement of the productivity with which factors of production are utilized. Yet in the contemporary world, despite all its diverse stimuli for material advance, neither high rates of factor mobilization, nor even positive rates of TFP, are quantities that countries or their governments can take for granted. The record of the past two generations, indeed, suggests that a great many countries and governments have been unable, with any consistency, to elicit one or both of these quantities from their local economy. Victor Elias’s study of the sources of growth in seven Latin American economies between 1960 and 1985 is instructive in this regard.317 To go by his estimates, over this period increases in both factor inputs and output per unit of input would have been markedly lower for this group of countries than they were in South Korea (see table 3-14). 166 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

The unweighted average of the rate of GDP growth for this grouping was put at about 4.1 percent per annum—slightly above the rate for OECD countries during those same years,318 but less than half South Korea’s (see table 3-15). The unweighted average rate of growth for factor inputs in the Latin American economies was distinctly slower than in South Korea—perhaps as much as 3 percentage points lower, if we trust Pouh and Kim’s numbers. No less striking, however, are the suggested differences regarding productivity improvements. According to Elias’s calculations, improvements in total factor productivity made no overall contribution to economic growth in this grouping of economies: in fact, its unweighted average was slightly negative. Although Elias’s and Pilat’s approaches to “growth accounting” are somewhat different, the contrast between their results is meaningful. In proximate terms, Latin America’s political economy was less successful than South Korea’s in arranging for material advance because it failed to match the latter in either factor mobilization or productivity improvements. Sub-Saharan Africa offers an even starker contrast. Few growth- accounting exercises have been attempted for that region for the years under consideration here, owing to the limited availability of economic data in the sub-Sahara and the poor quality of those data that do exist. Even so, rudimentary comparisons are suggested by the numbers produced in the World Bank data.319 According to World Bank estimates, aggregate GDP growth in sub-Saharan Africa averaged 2.5 percent per year between 1970 and 1993. Over those same years, the sub-Saharan labor force is said to have grown by an average of 2.8 percent a year; real investment, World Bank data suggest, rose by about half a percent per year.320 One may rightly be skeptical about the reliability of each of these figures. They plausibly imply, however, that the growth of output in sub-Saharan Africa was slower than the growth of its potentially active labor force. On the basis of such very tentative statistics, it is not clear whether TFP for the sub-Sahara would be positive or negative. No matter what assumptions about weights or factor shares in the sub-Sahara’s production processes are used, however, it is clear that TFP growth cannot have been high—and that factor mobilization has been distressingly slow. Indeed, cast in a South Korean perspective, sub-Saharan Africa’s pervasive pattern of economic failure was mainly due, in proximate terms, to an inability to POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 167

TABLE 3-15 ESTIMATES OF PER CAPITA GDP AND GDP PER HOURS WORKED: SOUTH KOREA AND SELECTED OECD COUNTRIES, C. 1989 (USA = 100)

(1) (2) Country GDP per capita GDP per hour worked (1)/(2) U.S. 100 100 1.00 Canada 94 91 1.03 Japan 84 65 1.29 Norway 83 83 1.00 Sweden 81 81 1.00 Finland 77 70 1.10 France 76 95 0.80 Germany 75 79 0.95 U.K. 74 81 0.91 Australia 74 78 0.95 Italy 71 81 0.87 Belgium 70 89 0.79 Netherlands 70 92 0.76 Austria 69 75 0.92 Spain 55 70 0.79 Ireland 45 65 0.69 Greece 41 47 0.87 Portugal 40 41 0.98

South Korea 36 27 1.31

NOTE: GDP is estimated in constant 1985 dollars at international prices. SOURCES: Angus Maddison, “Explaining the Economic Performance of Nations, 1820–1989,” in William J. Baumiol, Richard R. Nelson, and Edward N. Wolff, Convergence of Productivity: Cross-National Studies and Historical Evidence (New York: Oxford University Press, 1994), 40.

generate or sustain growth of factor inputs (although some part of the difference between South Korean and sub-Saharan growth rates may also be explained by differences in the pace of improvements in total factor productivity). To those of us who tend to view the challenge of economic development as a quest to enhance the efficiency of resource use, the contrast between South Korean and sub-Saharan economic performance should serve as a reminder that sheer resource mobilization can matter very greatly as well. 168 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

South Korea’s political economy—its export-oriented economic policies and the arrangements (financial, political, and social) on which export orientation rested—achieved its great success, for whatever particular reasons, because it permitted factors of production to be accumulated at a prodi- gious pace: but there was more. The arrangements that defined the South Korean political economy were also adequate in the event to assure that resources mobilized would be put to use with increasing efficiency—at least over the long run and for the economy as a whole. In more concrete terms, these social, political, and economic arrangements generated a tremendous and sustained demand for labor, for education, and eventually for savings, all of which the local population would prove capable of supplying; and as they were provided, these quantities were applied in a way that assure that the whole would grow more rapidly than the sum of its parts. This is to describe what took place (and what was avoided) in the contemporary South Korean political economy. Formulating a concise, and yet accurate, explanation of just how and why it took place, as we have stressed, is not a simple task. Pressed for a succinct but not misleading char- acterization of the forces at work in South Korea’s political economy, however, we might find it difficult to improve on the hypothesis put forth by Wontack Hong:

We contend that the outward-oriented growth strategy is more than a simple unbiased trade regime with minimal or neutral government interventions. . . . [South] Korea, like many other developing countries, had a vast supply of educated, hardwork- ing human resources. With these resources, Korea instituted a controlled but competitive market system that maximized the energy and effort of individual citizens and implemented policies and regulations that channeled the individual energy into the most productive activities for the nation’s economy: in other words, outward-looking, export-oriented activities. As a result, the [South] Korean economy integrated itself into the world economy, taking full advantage of its abundant human resources. With a tolerably correct system and a tolerably correct set of policies, [South] Korea captured a significant portion of international markets. As [South] Korea’s exports expanded POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 169

rapidly, its foreign exchange earning and the productive employment of its human resources expanded rapidly. Most importantly, there were tremendous dynamic learning effects arising from international competition.321

Reconciling Paradigms

Though much remains unclear about the mechanics of South Korea’s postwar economic development, our review of the interplay between policy and economic performance during its years of rapid growth may nevertheless help address one of the controversies in the scholarly literature: the one regarding the nature of the South Korean “example.” We are now perhaps in a position to reconcile some of the dissonance between the “market liberalism” and the “market governance” views of that experience. Some of the confusion arising from those conflicting interpretations is needless. The political economy of South Korean economic development, it would seem, has been partly captured and partly missed by both the “market liberalism” and the “market governance” paradigms. The “market liberalism” view of South Korean development, in obvious respects, is clearly not in keeping with the realities of South Korean development during the Cold War era. As we have detailed, the dirigiste impulse within the South Korean state was strong, and dirigisme was omnipres- ent in the South Korean setting. Other aspects of the South Korean institutional setting also deviated markedly from the liberal economic schema. “Market governance” theorists seem to have the facts on their side when they describe the nature of the South Korean development planning effort, which was decidedly illiberal by the “market liberalism” school’s own desiderata. But the “market governance” viewpoint is rather less convincing on precisely the point on which its own argument hinges, namely, that the South Korean government’s ambitious and intrusive interventions into economic life actually accelerated the country’s development. As we have seen, there is considerable evidence that particular policies and practices of this “developmentalist” state may have imposed high costs on the South Korean economy, slowing its growth. The relatively small contribution of improvements in total factor productivity to South Korea’s 170 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

long-term economic growth, moreover, suggests that the South Korean development pattern was not overwhelmingly successful in achieving economywide increases in output per unit of input that are required of “late- comers” aspiring to catch up with “leaders” in the world economy. By Pilat’s estimates, South Korea’s output per unit of input was about 60 percent higher in 1990 than it had been in 1963. Over those same years, by Pilat’s estimates, the increment of labor and capital inputs employed in the South Korean economy was on the order of 510 percent. This was, without dispute, a “success story”—but a story of a very particular kind. Although the South Korean growth rate has been exceptional, the pace of improvement in the efficiency with which resources were utilized evidently was not. This rate of improved efficiency would have been anticipated, we may emphasize, by a “market liberalism” (or even a conventional neoclassical economic) analysis of the South Korean state’s development policies. The “market governance” viewpoint, by contrast, offers no indication that the intensity and scope of the South Korean government’s efforts to effect a nonmarket allocation of resources should have an adverse impact on economy-wide efficiency. Indeed, “market governance” theorists do not even seem to recognize that basic problem, much less contemplate the possibility that it may be represented in contemporary South Korean growth patterns. Thus, though both renditions are adequate for depicting some of its scenes, neither the “market liberalism” school nor the “market governance” school really convey a sense of the main drama in the tale of South Korean development. That drama was defined by an overarching tension between a state’s quest for central control of the development process on the one hand and the unmanageable but ineradicable impulses of liberalism and liberalization on the other hand. Under a “hard state,” as already mentioned, the dirigiste variant of export orientation may well have been an effective “second-best” development strategy, capable of accelerating the pace of material advance well above its previous tempo. In South Korea, this acceleration spoke mainly to a success in mobilization. At any given point in its economic ascent, a more economically liberal policy regimen, other things being equal, would have been predicted to accelerate growth still further by enhancing the POLICY AND ECONOMIC PERFORMANCE S. KOREA: 1945–1991 171 efficiency of resource allocation and increasing the overall returns to both capital and labor. But under South Korea’s “hard state,” other things were not equal. If that state was hard, it was also fragile. Coups, assassinations, and revolts episodically emphasized this delicate but obvious fact. At the extreme, completely relinquishing the tight political control over the economy that the “developmentalist” state had arrogated for itself could have had consequences for the stability of the entire South Korean system—the implications of which would hardly have been auspicious for economic growth. At the margin, a more liberal economic policy offered the possibility of utilizing factors of production more efficiently—but also may have threatened the sustainability of continued growth in ways outside observers have not always understood. That is, although efficiency might have been enhanced by such relaxations, and although these relaxations might even have led to an acceleration of aggregate growth, in the divided Korean peninsula such improvements would not have been of lasting value unless they also added to the foundations of the country’s military strength and international security. Racing as it was for survival against its counterpart across the demili- tarized zone, what happened to matter rather significantly to a succession of governments in Seoul was what Marxist-Leninists would have called the “correlation of forces”322 between the DPRK and the ROK. From this perspective, a dirigiste regimen for developing a heavy industrial base in South Korea would have had its own compelling merits, even if a more liberal light-industry strategy might have promised faster growth and quicker wealth. From more than just a technical standpoint, the Republic of Korea, at the end of the Cold War era, was a contested territory that had been in a state of war since 1950. If we neglect the influence of military considerations on South Korean development planning, our appraisal of the South Korean political economy during the Cold War era—and our appreciation of its differences from the political economies of postwar Japan and Taiwan—will be unnecessarily incomplete.

Summation and Concluding Observations

We have at last arrived at the point where we must evaluate the great and terrible “experiment” in political economy to which we referred at the start of this study. This concluding chapter will begin by recapitulating our basic findings. It will finish by offering some observations, speculations, and hypotheses that have been stimulated by our examination of policy and economic performance in divided Korea; although these conjectures have not been formally pursued in the body of our text, and may in various instances prove difficult to render testable, they may nevertheless present avenues for further research.

Review of Findings

The unhappy events that framed modern Korea’s history from partition to the Cold War—and that visited so much torment on its people— also, ironically, recommend the land for study. By dint of its interlude of subjugation under modernizing imperialists, its sudden and unexpected partition, the formalization of its division by the establishment of two separate and mutually hostile governments on its soil, and the self- conscious economic race in which these two contending states deliberately engaged for decades, the Korean peninsula offers the student of political economy an unparalleled example of comparative development in action. More than any other spot on the globe—more even than Germany during its nearly two generations of enforced and involuntary postwar division—Korea presents a case study of economic performance

172 SUMMATION AND CONCLUDING OBSERVATIONS 173 and material progress for a single population under two radically different political systems. Despite the surface allure of these forensics, however, the Korean “experiment” happens to be unexpectedly difficult to evaluate—more difficult, indeed, than many casual observers might appreciate. The extraordinarily secretive state in the Korean north, the Democratic People’s Republic of Korea, enforced a virtual statistical blackout on the society under its command, releasing only tidbits believed to be harmless or to cast its own performance in the best possible light. In the Korean south, the Republic of Korea published vastly more data and information about local economic and social conditions; yet even here, official data were not always as reliable as they seemed and thus require handling with care by those who wish to use them for meaningful cross-country comparisons. But even with much greater access to unadulterated statistics on economic performance in North and South Korea than can presently be expected, the researcher attempting to assess the comparative record of the two Korean states during the Cold War faces a fundamental and irresolvable problem. Output, value added, and productivity are measured and calculated by completely different means in North and South Korea. The DPRK’s Soviet-style centrally planned economy relied on a system of established prices set by the state; it allocated resources by administrative design (or, inadvertently, by shortage). By contrast, the ROK’s market-oriented economy relied in principle on market forces in price formation and resource allocation. There is no common and unambiguous medium of value for converting the results from one economic system into the terms of the other—try as scholars might to devise one. Nevertheless, it is possible to describe and compare the results of the race for material progress in divided Korea since its partition in quantitative, and meaningful, terms. We did so in chapter 1. To do so, we used physical, rather than economic, indicators of development. These included estimates of output for particular key commodities and estimates of energy consumption. In addition, we utilized a number of demographic indicators, including reported levels of urbanization and reported sectoral distribution of the labor force. These physical indicators pointed to a single and consistent reading of the economic race between the South and the North. Around 1960, they suggested, the level of material attainment appeared to 174 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

be distinctly higher in the DPRK than in the ROK. By the mid- or late 1980s, on the other hand, the situation was reversed: any reasonable interpretation of these later numbers could not but conclude that South Korea’s per capita output was by then substantially greater than North Korea’s. Some arguably relevant economic and financial data seemed to corroborate this story, or at least crucial portions of it. The North Korean government, for example, released a U.S. dollar–denominated figure for the country’s 1989 per capita “GNP” that was barely half as high as South Korea’s. Irrespective of the technical questions raised by that datum, the fact of its release at all signified an implicit but official recognition in Pyongyang that the North Korean economy was lagging well behind the South’s even before the final crisis of Soviet communism. Moreover, the nominal rate of growth in revenue and expenditure of the DPRK state budget (the only economic figures annually released by the regime during the period in question) was lower than the estimated real rate of growth of GDP in South Korea over the eighteen years between 1975 and 1991. To a sensibility informed by memories of the systemic failure and collapse of the Soviet bloc, and the subsequent international retreat of Marxist-Leninist movements and political parties, the proposition that a communist-run economy would fare less well than a market-oriented rival in the quest for sustained material advance might—nowadays—seem utterly unexceptional. Yet North Korea’s economic performance during the Cold War era is not so easily or summarily dismissed. Although it is impossible to be precise in dating the “crossover,” the physical indicators adduced in our study seem to lend support to the proposition that per capita output in the South finally exceeded levels in the North in the early or mid-1970s. By such a reading and such criteria, economic performance in communist North Korea would have been superior to that of its “capitalist” counterpart to the south for the first twenty-five or thirty years of their forced separation—hardly an epiphenomenon. Furthermore, while the ROK appears to have outpaced the DPRK during the 1970s and 1980s by an array of quantitative proxies for economic performance, material progress in the North, according to those same physical measures, was nevertheless substantial and fairly rapid. Against any less fearsome contestant than the ROK, the average pace of material advance in the DPRK between the early 1960s and the mid-1980s SUMMATION AND CONCLUDING OBSERVATIONS 175 might have appeared quite creditable. Finally, an indirect but nonetheless meaningful indication of the DPRK’s economic performance is registered by the state’s military potential. Though evaluations of the combat capabilities of untested armies necessarily involve speculation, impartial observers generally voiced the opinion that the DPRK fielded a more powerful defense force than the ROK throughout the 1960s, the 1970s, and the 1980s. In view of the fact that the ROK armed forces ranked as one of the postwar world’s largest (in manpower terms), that the rate of growth of the South Korean economy during this period ranked among the world’s fastest, and that the population of the DPRK was only half as large as that of the ROK, North Korea’s success in maintaining a credible military threat against the South over a period of decades also qualified as an economic accomplishment. We attempted to examine the interplay between policy and economic performance in the DPRK in depth in chapter 2. Beyond the ruling circles in Pyongyang, surprisingly little is known today about actual managerial practices, plan-implementation measures, or the outline and content of economic directives under North Korean socialism. Taken together with the paucity of hard data on economic conditions in North Korea, the constraints on this portion of our study loomed especially large. Even so, it was possible to describe a number of important changes or occurrences in the North Korean economy during the decades under consideration and to relate these to the policy directions determined by the state’s supreme leaders. The first, and most important, trend that could be identified was a long- term tendency toward economic slowdown, evidenced over the three and one-half decades between the end of the Korean War and the start of the final Soviet crisis in the late 1980s. This overarching trend established, and, increasingly, limited, the range of choices available to those that the North Korean economic system served—not least its top leadership. The slowdown in economic growth was not smooth, but it was steady. After what appear to have been rapid strides in reconstruction and development during the 1950s, the 1960s saw the economy begin to stumble: a seven-year plan was turned into a ten-year plan, and economic data all but disappeared from the DPRK’s published compendia. “Buffer years” following multiyear plans became a tradition, as did increasingly selective and spotty official reports on plan completion. By the mid-1980s, 176 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

to judge by the growth of the state budget, per capita economic growth in North Korea may have been near zero. By the late 1980s, according to some students of the DPRK from the erstwhile Soviet bloc, output of key industrial products and commodities was declining, and “national income” was shrinking. Whether these observers are correct that it was in decline—rather than stagnation—in the late 1980s, there is little doubt that the North Korean economy went into a terrible downturn with the final crisis of the Soviet bloc. The demise of the Warsaw Pact states compounded the autotherapeutic dis-orders of the DPRK economy by administering a severe and unexpected external shock. Almost overnight, North Korea’s primary trading partners—and its principal providers of economic assistance—simply disappeared. The repercussions were immediate and adverse: the North Korean system could withstand the blow but could not cope with it. At the end of 1993, North Korea’s leadership announced that their third Seven-Year Plan had failed to meet many of its major targets and publicly described their economy as being in a “grave condition.” The second defining characteristic of North Korean development, overlapping with the first, was the tendency toward militarization, or perhaps even hypermilitarization, of the economy. By the late 1960s, this tendency was already strongly in evidence: at that time, more than 30 percent of the reported state budget (or nearly 20 percent of the country’s net material product) was officially said to be going into defense, and top leadership was publicly warning of the negative effects these heavy expenditures were having on development. Reliable published data on the military burden for later years are not available. In the 1970s, however, the military buildup appears to have shifted into even higher gear. Reconstruc- tions based on population data underscore this relentless rise. By 1987, the estimated number of noncivilian adult males (presumably, armed forces personnel) in North Korea had increased to roughly 1.25 million. This would have comprised fully one-fifth of the male population of economically active ages and would have amounted to more than 6 percent of the total population. For other countries, such levels of military mobilization have only been reported in times of total war (for example, World War II). Despite North Korea’s mounting economic difficulties, there was no strong evidence of any diminution of military effort by the regime. To the SUMMATION AND CONCLUDING OBSERVATIONS 177 contrary: despite slowdown, stagnation, and perhaps worse, the proportion of the country’s male manpower deployed in noncivilian spheres traced an uninterrupted increase between the mid-1970s and the late 1980s, where our relevant DPRK demographic time series ends. An apparently unshakable long-term commitment to augment and indeed maximize deployable military might would appear to have been a central—indeed, the central—consideration behind North Korean economic policy since the early 1960s. North Korea’s foreign, domestic, and unification policies during those decades were necessarily and inextricably linked to, and informed by, this all-pervasive determination for military buildup. Understanding the reasons for and the consequences of this formidable military buildup is thus critical in assessing the relationship between policy and performance not only in the economic realm but also in virtually every other area of North Korean policy as well. Third, North Korean economic policy was characterized by a long- standing, and quite possibly uniquely successful, effort to restrict the size and scope of the consumer sector within the national economy. To some degree, of course, the decision by economic planners to limit private consumption can be viewed as a corollary to the decision to underwrite full-blown and open-ended military buildup. North Korea’s disposition toward repressing its consumer sector, however, would appear to predate its expansive military policy. Attempts to reconstruct North Korea’s national accounts for the late 1950s (the DPRK’s period of greatest statistical openness) strongly suggest that both total and private consumption accounted for a dramatically smaller share of national output in the DPRK than in the contemporary Soviet Union, even though North Korea’s income level was probably quite a bit lower than the USSR’s at the time. North Korea, in fact, appears to have had a lower ratio of consumption to output than any other communist state in the 1950s. Through the 1960s, the 1970s, and the 1980s, available evidence suggests that the North Korean consumer sector became increasingly mar- ginalized. Very rough calculations imply that by the late 1980s, the population’s wage bill would have amounted to no more than one-quarter of net material product and possibly as little as one-sixth of the country’s GDP. The withering away of the sector affected by consumer choice coincided with the rise of direct administrative provision as a mechanism for 178 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

supplying households with goods and services. By the 1970s, according to North Korean reports, publicly provided benefits exceeded income within the typical household remuneration package; the imbalance appears to have increased in subsequent years. To an astonishing degree, North Korean planners appear thus to have demonetized their national economy. Indeed, it seems quite possible that monetary relationships may have played a less prominent role in economic activity within the DPRK economy in the Cold War era than they did in the economy of the late Yi Dynasty in Korea a century earlier. Fourth, our study could identify few indications that North Korean economic policy was adjusting, relaxing, or “liberalizing” in the face of its growing economic troubles. To be sure, a certain amount of policy movement, particularly in the areas of decentralizing light industry and promul- gating legislation for foreign investment, could be detected from 1984 onward. These stirrings, however, came as a grudging response to immediate economic exigency; and they were not, in any possible reading, even remotely adequate to relieve the strains they were intended to address. Major constraints on the performance of the economy, including the military preponderance policy, the repression of the consumer sector, and an increasingly cumbersome apparatus for “planning without facts,” appear to have been left totally unchallenged. In effect, an economic disaster was just waiting to happen—and with the sudden, unexpected end of the Soviet empire, that disaster struck North Korea with remorseless force.1 In chapter 3 we examined the relationship between policy and economic performance in the Republic of Korea. The experience of rapid economic growth in South Korea has been extensively studied, and many facets of it are already familiar to the specialist. Our review of this experience, however, emphasized a number of points that have not perhaps attracted adequate attention. First, the onset of very rapid economic growth in the ROK did not commence until the state structure and economic policy apparatus reverted from the immediate postpartition arrangements to something much more closely resembling the administrative system of colonial Korea under Japanese rule. This reversion was effectuated by the May 16, 1961, military “revolution,” led by General (later President) Park Chung Hee. Within days of assuming control, Park and his junta established an Economic Planning SUMMATION AND CONCLUDING OBSERVATIONS 179

Board for long-term economic planning and plan implementation; in responsibilities and functions, the EPB was strikingly similar to the analogous unit Government General of Chosen in the 1930s. The junta also immediately created a broadly empowered Korean Central Intelligence Agency, an organization that bore more than a passing resemblance to the colony’s prepartition Kempei Tai (the Imperial Japanese Army’s military police and intelligence corps). These similarities were far from accidental. As an officer in Imperial Japan’s Kwangtung Army, Park Chung Hee was directly exposed to and involved with this earlier variant of rule in Korea— a variant that, for all its grave defects from a liberal economic perspective, elicited considerable material advance in the peninsula during its tenure. Second, the onset of very rapid economic growth in South Korea appears to have had much to do with American aid policies—although in a perhaps unexpected manner. Although U.S. military and economic aid had sustained the ROK after the Korean War, arguably permitting the survival of the state, by the late 1950s Washington had become expressly displeased by Seoul’s dependence on American largesse. The military revolution evidently brought matters to a head. South Korea’s new rulers were reportedly informed in late 1962 that America’s economic assistance would be deliberately terminated over the next few years. For a government that had come to rely on American aid for more than half its budgetary revenues, such an announcement could not but have concentrated the attention. By 1964, the full weight of South Korean policy had been thrown behind a strategy of export-promoted growth. Thus the ROK’s subsequent economic performance appears to have been affected not only by the provision of massive foreign assistance but also by the threatened termina- tion of these flows. Third, once it was actually under way, the ROK’s burst of very rapid economic growth was sustained over the course of decades in the face of a general economic environment, and a multiplicity of policy interventions, that might have been expected to dampen it or to end it altogether. At the microeconomic level, the lack of firmly established rule of law or property rights, together with the reality of an active, powerful, opaque, and often unpredictable state apparatus, would appear to have created a climate in which both information costs and transaction costs for economic agents were high. At the macroeconomic level, dirigiste policies, enthusiastically 180 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

embraced during the 1960s, 1970s, and early 1980s, raised the specter of broad allocative inefficiency. In agriculture, heavy and chemical industries, and the financial sector, government policy would induce, underwrite, and preserve dramatic and costly distortions of economic incentive. All the while, the South Korean economy boomed ahead. Explaining this apparent paradox is no simple task, and our study does not offer a comprehensive explanation for it. A partial explanation of the dynamic, however, may derive from consideration of policies simultaneously embraced that were promoting such things as budget discipline and realistic exchange rates, dynamic learning effects, technological innovation, and economies of scale on the macroeconomic plane, while helping to lower information and transaction costs at the micro level. In the constellation of these salutary South Korean policies, we argue that the policy of outward orientation, or export promotion, ranked by far as the most significant and influential. South Korea’s economic performance should demonstrate, at the very least, that it is possible for a country to prosper while policymakers get many things “wrong”—so long as they get one big thing “right.” Nevertheless, the predicted inefficiencies that should have been induced by South Korea’s policy regimen do show up within the country’s patterns of economic growth. We demonstrate this by reviewing the evidence on sources of growth in the ROK economy over the period between the early 1960s and 1990. From a methodological standpoint, “growth accounting” is a problematic and somewhat treacherous pastime. Yet a convincing weight of evidence suggests that South Korea’s recent experience with rapid economic growth can be explained, in proximate terms, mainly by the unparalleled success with which it mobilized factors of production. Improvements in total factor productivity, by contrast, appear to date to have played a relatively minor role in South Korea’s economic growth during this period. Even in absolute terms, the contributions to South Korean growth from improvements in total factor productivity look unexceptional when compared with those of advanced European and North American economies during their “golden age” of postwar growth. South Korea’s absolute improvements in output per unit of input, on the other hand, appear to have been much lower than those in Japan during comparable periods and may also have been much more modest than those enjoyed by Taiwan. SUMMATION AND CONCLUDING OBSERVATIONS 181

It was no mean feat, of course, to augment factors of production by nearly 7 percent a year for these decades—and to achieve positive rates of total factor productivity over the duration. As we know all too well, even in our modern world economy many countries have failed to maintain positive “residuals” over time; others have proved virtually unable to augment factors of production for prolonged periods.

Observations, Speculations, and Issues for Further Research

Our review of the record on progress and poverty in divided Korea touches on a number of issues on which scholars debate today and addresses some specifics not currently under active discussion that might nonetheless benefit from further sustained examination. Any effort to establish the basic facts of a given situation, regarding material performance or some other identifiable phenomena, is necessarily particular. Our focus has been on the circumstances of the Korean population in the Korean peninsula—a people whose reputation for particularism dates back many centuries. The particularity of the Korean tradition has been shaped by many factors, including the nation’s deliberate, and by and large successful, measures to seal itself off from contacts with the world of outsiders for several hundred years. (It was not for nothing that Korea came to be known as the “hermit kingdom” in the West during the nineteenth century.) The very “Koreanness of Korea”2 may seem to beg the question of why outside observers should be interested in the material experience of the peninsula. Apart from those actually somehow engaged in the great political and economic struggle that has been under way since partition in the Korean peninsula, or for those given outsiders who might be immediately affected by its outcome, is there truly any reason for a scholarly interest in this matter? Put crudely: are there “lessons” from the modern Korean experience that are likely to be of significance to anyone who is not Korean himself? This study has indicated that some of the important characteristics defining the material transformation of the peninsula from partition through the end of the Cold War may indeed be particular to the Korean 182 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

nation and its star-crossed history. Yet the execution of the study also implicitly indicates the author’s answer to the question. I do not mean to state the case too strongly. Generalizations which are based on a particular experience and which do not respect the nature and the limits of the evidence underpinning them are likely to mislead. What the Korean experience can be said to offer is an example—not in the sense of a model for emulation but rather in the sense of a reported set of outcomes of human events. Placing this set of outcomes within the greater mosaic of modern experiences with material transformation may improve our understanding and appreciation of the processes by which national wealth is augmented—not least because the exceptional aspects of the Korean case may temper generalizations that take it into account. Thereby, in the final analysis, the social scientist who looks to the Korean peninsula of the Cold War era for a great experiment in political economy will not be disappointed. This is the juncture in our study where it seems appropriate to comment on the consequence and implications of the facts, trends, and indications that have already been outlined. Those facts, trends, and indications seem fully capable of drawing us beyond the confines of the peninsula and into the realms of a more general inquiry into both economic history and political economy. It is in the spirit of commencing rather than concluding such discussions that the following observations, comments, and speculations are offered. First, the central economic and political fact about the performance of the two Korean regimes seems to be that output per person was higher in the North before partition, and apparently for some decades thereafter, but that it was decidedly higher in the South by the end of the Cold War. It is, however, one thing to recognize it as a reality and quite another to assign it a meaning. Does one take this as a general reading on the performance of communist and noncommunist systems? If so, it would only be at peril to the facts of the case. Between the early 1960s and the late 1980s, South Korea’s measured pace of economic growth was extraordinarily rapid by almost any standard. North Korea’s pace of growth, however, appears to have been quite rapid as well for much of the period since partition, and the country may cumulatively have evinced a very considerable increase SUMMATION AND CONCLUDING OBSERVATIONS 183 in per capita output (however that may best be measured for centrally planned socialist economies). By the same token, it may be said (and, in some circles, often is) that the modern Korean experience illustrates the superior potentialities of a more liberal political order. But once again, such comments must be carefully qualified if they are to retain any validity. For at least some part of the postpartition period, to repeat, it appears that communist North Korea was outperforming—and even outpacing— the South. Moreover, rapid economic growth in the South did not commence until its political order underwent a distinctly illiberal overhaul following the 1961 coup. By comparison with the North, South Korea’s political and economic arrangements do look extremely open and in fact always have. But as much could perhaps be said of Poland and North Korea—or of Cuba and North Korea. North Korea is an “outlier” on the contemporary political spectrum, and it is easy to fall into errors of eco- logical composition in comparisons with outliers.3 If liberality and economic performance were the issue, one would be justified in concluding that North and South Korea both achieved their economic results while straying far from the desiderata of a classically liberal order. Both governments embraced a strongly statist approach to economic development in their periods of rapid growth. Whether this is a predictable or even necessary characteristic of “late industrialization,” as some have concluded, need not detain us here. The fact is, however, that South Korea’s state interventions into economic life have been far more selective than those in North Korea—and, from today’s vantage point, look to have been far more effective. If socialist economic planning betrays “the fatal conceit” (in Friedrich A. Hayek’s memorable formulation4) that given individuals possessed with political power can successfully improve on, or replace, the complex workings of the market mechanism, South Korea’s approach to planning seems to have been tinged by at least some of that hubris too. But South Korea’s performance during the Cold War era would not be seen as having suffered grievously for the transgression. It may be suggested, however, that regimes and polities opting for dirigisme and its various compulsions find it easier to mobilize resources for economic development than to utilize those resources efficiently. In both Koreas, economic growth after partition, to some considerable degree, was driven by the mobilization of “inputs”: labor and capital. The role of total 184 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

factor productivity improvements in South Korea’s growth, although hardly negligible, was nonetheless perhaps surprisingly small. When factors of production are fully mobilized, and economic processes are growing more complex, it is possible that the costs of Hayek’s “fatal conceit” tend to become more evident. In the last decade of the Cold War era, South Korea took important strides toward a more liberal political order and some tentative steps toward a more liberal economic order (progress that continued in the subsequent years not covered in this study). The flexibility of the political orders in Korea—their capacities to evolve and to “deal with disequilibria”—may look to bear a direct correspondence to the economic results over which they presided. Second, although both Korean regimes find it painful to be reminded of their Japanese colonial legacies, the colonial period may provide an important vantage point for the modern Korean development experience. The Japanese interlude not only helps to account for the nature of the polities that were to emerge in the divided peninsula. It may also provide an appropriate starting point for measuring the peninsula’s long-term patterns of economic growth and the government policies that have accompanied them. It is sometimes said that the pull of history is strong in Korea. But that gravity derives from continuities as well as upheavals. If the colonial period was Korea’s springboard for economic growth, it may also have launched the peninsula on a somewhat slower and more familiar trajectory than is commonly appreciated. The choice of endpoints is consequential for the picture of material progress that emerges for modern Korea. Per capita growth in South Korea between the early 1960s and the late 1980s is conventionally estimated to have run at a rate of 6–7 percent per year. If instead one attempts to estimate the pace of per capita growth for the period 1937–85—attendant difficulties not neglected—one arrives instead at a figure more like 2.4 percent per annum. (The pace for North Korea, of course, would be commensurately slower.) An average of 2.4 percent per annum, as fate would have it, was precisely the per capita growth rate the Korean peninsula is believed to have experienced between 1911 and 1938 (before the shift in colonial policy to war-supporting development). Thus, at least through the mid-1980s, South Korea’s tempo of economic growth can be viewed as a continuation of earlier trends. Sustained over decades, a 2.4 percent growth rate produces formidable results; over a century, it will increase any quantity under consideration by SUMMATION AND CONCLUDING OBSERVATIONS 185 a factor of nearly ten. Yet the difference between this rate and the more spectacular rates computed for the years since South Korea’s “takeoff” would be imprudent to ignore. Viewed from the longer perspective, South Korea’s pace of material transformation looks more comparable with some of the records of now-industrialized countries. Per capita growth in South Korea between 1937 and 1990, for example, would have proceeded, according to a variety of estimates, at a tempo similar to Sweden’s (1861/69–1963/67), Germany’s (1936–1963/67),5 or Japan’s (1874/79– 1963/67). One may object that this longer view ignores the impact on Korea’s progress of the upheavals, changes in regimes, and devastating wartime losses during the interval. Vast wartime losses and reconstitutions of political order, however, were also known to the German and Japanese experience. The longer view may help in placing the modern Korean experience in “growing out of backwardness” in historical perspective, and may further provide some insights into current constraints on maintaining or hastening today’s high rates of economic growth. The longer view may also help in assessing other aspects of performance and policy in divided Korea. Viewed from a colonial vantage point, for example, South Korea’s postpartition record might not seem so surprising: in 1988, after all, both the ranking and the relative differences in output per capita between Japan, Taiwan, and (South) Korea look very much as they did fifty years earlier (see table 4-1). All three territories, of course, exhibited a distinctly more rapid tempo of material advance than the rest of the world during those decades; their “mechanisms of growth” were unusually effective. To the extent that economic policies figured in these mechanisms, some of the patterns may be revealed by comparison of economic structures in 1938 and 1988 (see table 4-2). In Japan, Taiwan, and Korea in the late 1930s, the ratio of gross domestic fixed capital formation to GDP was already high, as was the ratio of trade turnover to GDP; conversely, the ratio of government consumption to GDP was low, despite the government’s wide-ranging prerogatives in economic life. Exactly the same was true in these countries in the late 1980s. Samuel P. S. Ho has written that the years 1940–60 were in many ways the exception with respect to economic policy in Taiwan6 from what had come before or would appear later. As much may be said of the years 1945–61 for South Korea. In a meaningful sense, it would appear that 186 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 4-1 CONTINUITIES IN LONG-TERM DEVELOPMENT: PER CAPITA OUTPUT IN JAPAN, TAIWAN, AND KOREA, 1938 VS. 1988

Per Capita GDP, 1938 Per Capita (1934–36 Ratio GDP, 1988 Ratio Country constant yen) (Japan = 100) (1990 intl.$) (Japan = 100) Japan 288 100 17028 100 Taiwan 185 64 9357 55 Korea/South Korea 119 41 7829 46

SOURCES: Year 1938: Toshiyuki Mizoguchi and Matoji Uehara, eds., Basic Economic Statistics of Former Japanese Colonies, 1895–1938: Estimates and Findings (Tokyo: Toyo Keizai Shinposa, 1988), 231, 235, 239; Year 1988: Angus Maddison, Monitoring the World Economy, 1820–1992 (Paris: OECD, 1995), 197, 205.

South Korea did not so much “discover” a framework for growth in the early 1960s as recover a lost memory. We may note in passing a few of the particularities of the Korean political economy during this period that appear to trace their lineage back to the era of Japanese occupation.7 South Korea’s extraordinarily long workweek, for example, appears to be a colonial rather than a postwar artifact (see table 4-3). The drive for “heavy industry” in South Korea in the 1970s, for its part, can be seen against a colonial backdrop in which military-oriented industrialization had laid a surprisingly deep foundation for heavy industry for a nation with such low levels of per capita income (see table 4-4). Even North Korean policy bears visible traces of the colonial legacy. Ironically, for example, it would appear that the DPRK’s economic planners never managed to reattain the awesome ratio of producer goods to total industrial output that was reflected in manufacturing figures for northern Korea from the early 1940s—much as they might have wished to (see table 4-5). Third, the modern Korean experience raises questions about the relationship between military affairs and economic performance. As the widely used phrase “military burden” intimates, it is today widely assumed that allocations of resources to defense activities constitute a near complete economic loss for the societies concerned.8 Evidence from the Korean peninsula suggests the interaction may be more complex and a good deal less SUMMATION AND CONCLUDING OBSERVATIONS 187

TABLE 4-2 CONTINUITIES IN LONG-TERM DEVELOPMENT: OUTPUT STRUCTURE IN JAPAN, TAIWAN, AND KOREA, 1938 VS. 1988 (percent)

1938 1988 South Japan Taiwan Korea Japan Taiwan Korea GDCF/GDP 26.0 15.0 18.1 29.9 20.8 29.2 Exports/GDP 19.9 38.2 29.6 10.0 54.3 39.9 Imports/GDP 23.7 30.6 35.5 7.8 43.6 31.7 Government Consump- 11.5 6.7 5.1 9.2 15.0 9.8 tion/GDP Agriculture, Forestry, 16.2 39.0 46.7 2.6 5.1 10.5 and Fishing/GDPa Mining and Manufacturing/ 35.9 25.2 18.7 29.0 38.3 33.2 GDPa Construction, Commerce, 44.1 32.0 30.7 63.1 46.2 47.2 Services, Facilitating Industries/GDPa

NOTES: GDCF = Gross Domestic Capital Formation; a = figures for 1938 refer to composition of net domestic product. All data in current prices, local currency. SOURCES: Year 1938: Toshiyuki Mizoguchi and Matoji Uehara, eds., Basic Economic Statistics of Former Japanese Colonies, 1895–1938: Estimates and Findings (Tokyo: Toyo Keizai Shinposa, 1988), 229–37; Year 1988: Japan and South Korea: United Nations, National Accounts and Statistics: Main Aggregates and Detailed Tables, 1992, part 1 (New York: UN, 1994), 1048, 1053, 1124, 1128; Taiwan: Statistical Yearbook of the Republic of China, 1994 (Taipei: ROC Directorate-General of Budget, Accounting and Statistics, 1994), 161; Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries, 1993 (Manila: Oxford University Press, 1993), 299. one-sided. By any contemporary measure, both North and South Korea bore high “military burdens” in the period after partition. Yet they also, apparently, enjoyed a more rapid pace of material advance than many other low-income societies. (This is apparently true, one should emphasize, for North Korea as well as South Korea.) If military requirements impose obvious costs on an economy, it may also be that they can confer less tangible, but nonetheless real, stimuli and opportunities as well. The specifics of the Korean situation may have provided very powerful incentives to the peninsula’s respective regimes to make use of any such stimuli or incentives. By the same token, both North and South Korea suffered tremendous human 188 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 4-3 THE WORKWEEK IN THE JAPANESE EMPIRE, 1939: DISTRIBUTION OF AVERAGE DAILY HOURS WORKED BY FACTORY HANDS, KOREA VS. JAPAN (percent of total factory workforce)

Korea Japan Less Than 8 Hours 0.8 1.4 9–10 Hours 28.7 45.3 11–12 Hours 11.9 43.6 More Than 12 Hours 46.9 0.3

Source: Choi Ho-chin, “The Strengthening of the Economic Domination by Japanese Colonialism (1932–1945): Statistical Analysis,” Korea Observer 2, no. 4 (1970): 63.

and capital losses during their terrible war. These losses, however, did not preclude the survivors from accomplishing a rapid recovery to prewar economic levels, nor did it preclude rapid material advance thereafter. More sustained examination of military challenges and responses, and their impacts on economies, might indirectly shed additional light on the nature of economic development processes.9 Fourth, the modern Korean experience may offer some special insights into the relationships between material advance and material poverty. In market-oriented systems, where patterns of consumption are conditioned by some inescapable measure of consumer sovereignty, it is widely assumed that material deprivation and its manifestations are generally and inversely related to the purchasing power of individuals or households. Over the Cold War decades, South Korea’s real per capita income is estimated to have risen by a factor of more than seven, and measured per capita private consumption has more than quintupled. Even if the distribution of these increments was not as “equitable” as commonly presumed, it would still have had to presage a very broad improvement in popular standards of living. Yet paradoxically, by a variety of indicators, material deprivation still seemed to figure prominently in South Korea’s lifestyles at the end of the Cold War. High mortality rates, especially for adult men, were perhaps but a single measure of such deprivation,10 but they are meaningful—especially to those concerned. Even more intriguing was the apparent correspondence in levels of life expectancy at birth for men and women in North and South Korea SUMMATION AND CONCLUDING OBSERVATIONS 189

TABLE 4-4 COMPOSITION OF MANUFACTURING IN JAPAN, TAIWAN, AND KOREA, 1938 VS. 1988 (percent)

1938 1988 South Japan Taiwan Korea Japan Taiwana Korea Food Processing 14.7 72.5 35.4 11.5 10.7 15.0 Textiles and Clothing 25.9 2.1 11.1 15.9 13.0 Wood and Wood Products 2.3 4.2 1.1 }20.7 2.3 1.4 Paper and Printing 2.3 4.2 7.3 4.4 4.1 Chemicals 17.2 11.1 24.8 12.1 22.4 20.6 Metal 14.6 4.2 12.7 8.3 8.5 8.5 Machinery 18.1 1.6 3.0 43.4 28.6 31.3 Ceramics and Others 4.9 2.0 4.7 3.9 7.1 6.1 “Light” Industries 45.2 81.1 54.9 32.2 33.3 33.5 “Heavy” Industries 54.8 18.9 45.1 67.8 66.7 66.5

NOTES: a = 1987. Compositions derived in 1934–36 constant yen for 1938, in current prices and local currencies for 1988; 1938 data are for net domestic product; 1988 data are for gross domestic product. SOURCES: Year 1938: Toshiyuki Mizoguchi and Matoji Uehara, eds., Basic Economic Statistics of Former Japanese Colonies, 1895–1938: Estimates and Findings (Tokyo: Toyo Keizai Shinposa, 1988), 229–37; Year 1988: Japan and South Korea: United Nations, National Accounts and Statistics: Main Aggregates and Detailed Tables, 1992, part 1 (New York: UN, 1994), 1061, 1140; Taiwan: Statistical Yearbook of the Republic of China, 1988 (Taipei: ROC Directorate-General of Budget, Accounting and Statistics, 1988), 109.

between the early 1960s and the late 1980s—despite differences in political systems, social and economic policies, and trajectories of economic advance (see table 4-6). It is not immediately clear that there is any established theory of “development” that would have predicted such a result for the peninsula. The surprising apparent similarity of North and South Korean trends in life expectancy at birth over the Cold War decades bring us to a fifth point: one regarding the role of human resources in economic development. While the presumption that human capital makes a critical contribution in long-term trends in economic growth seems unassailable in general terms, the curious, ostensible near-identity in life expectancy trends in divided Korea during these decades of manifestly divergent economic performance 190 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

TABLE 4-5 LEGACIES OF COLONIALISM: INDUSTRIAL STRUCTURE IN NORTHERN KOREA AND THE DPRK, 1939–1982: COMPOSITION OF INDUSTRIAL OUTPUT (percent)

Year “Group A” “Group B” Northern Korea: 1939–40 72 28 1944 74 26 DPRK: 1946 57 43 1949 61 39 1953 38 63 1956 54 46 1960 56 44 1965 51 49 1970 62 38 1975 64 36 1980 64 36 1982 65 35 NOTE: Figures rounded to nearest percentage point. “Group A” refers to producer and intermediate goods; “Group B” refers to consumer goods. For northern Korea, estimates refer to composition of net commodity product at market prices; for DPRK, to “national income” at established current prices. SOURCES: Years 1939–40: Sang-Chul Suh, Growth and Structural Changes in the Korean Economy, 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978), 142; Years 1944–1946: G. V. Griaznov, Stroitel’stvo Material’no-Tekhnichestkoi Bazy Sotsialisma v KNDR [Construction of the Material and Technical Basis of Socialism in the DPRK] (Moscow: Nauka, 1979), 91; Years 1949–1982: M. E. Trigubenko, Koreiskaya Narodno-Demokraticheskaya Respublika [The Democratic People’s Republic of Korea] (Moscow: Nauka, 1985), 64.

begs the question of just which aspects of human capital are critical to long- term growth—and how we might go about measuring these. Health and education are widely taken as two key components of “human capital”— but during the Cold War era, by the highly limited and imperfect indications available to us today, it would appear that North and South Korea’s trajectories were surprisingly similar not only in life expectancy but also in educational attainment (as proxied by enrollment, graduation rates or years of schooling).11 Years spent in school, to be sure, may prove to be an SUMMATION AND CONCLUDING OBSERVATIONS 191

TABLE 4-6 ESTIMATED EXPECTATION OF LIFE AT BIRTH FOR NORTH KOREA,SOUTH KOREA, AND PREPARTITION KOREA, 1940–1985

North Korea South Korea Both Both Year Sexes Male Female Sexes Male Female 1940–1945 (prepartition) 43.4 42.0 44.8 43.4 42.0 44.8 1955–1960 NA NA NA 49.6 46.9 52.5 1960 49.0 46.0 52.1 NA NA NA 1960–1965 51.9 48.9 55.0 50.7 48.1 53.5 1970–1975 61.3 58.2 64.6 NA NA NA 1978–1979 65.2 62.1 68.4 NA 62.7 69.1 1980 65.7 62.7 69.0 64.9 61.2 68.8 1985 67.2 64.1 70.4 NA 64.9 71.3

NOTES: NA = not available. Estimates for prepartition Korea are for the country as a whole. For more details, see source. SOURCE: Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: University of California Institute of East Asian Studies, 1992), 48. especially inadequate index of the true knowledge, skills, and attitudes upon which economic performance depends (all the more so in a setting such as the DPRK). And mortality patterns alone may not be the most informative of other economically significant components of human health. Robert W. Fogel’s innovate anthropometric investigations, for example, suggest there may be a close correspondence in the era of modern economic growth between long-term economic performance and what he calls the “techno-physio evolution” (conjoint changes in mortality and body mass index, reflecting improvements in nutrition and other aspects of human capital). Fogel illustrates this correspondence with his depiction of “Waaler surfaces,” mapping height, weight and mortality for populations over time.12 We cannot yet compute a “Waaler surface” for the DPRK, nor can we guess when such a prospect will look even remotely feasible—but it is possible that such calculations could greatly improve our understanding of the true role of human capital in economic development in the two Koreas during the Cold War. 192 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

A final comment must concern the role of chance in economic development. Philosophers and men of letters have long debated whether it is better to be lucky or good. That argument will not be settled here. Inconvenient though it may sometimes seem to be, however, it is well to remember that “chance” —or what Machiavelli called Fortuna13—does play a very real role in economic and political affairs. Its role, indeed, may at times be sufficiently great to affect overall assessments of long-term performance. In modern Korea’s circumstances—where competition between two regimes claiming domain over the entire peninsula has been enduring and fierce, and where the margin for error has often been very slight, chance may factor more prominently in such assessments than elsewhere. After all, neither Pyongyang’s ultimate failure, in the 1960s and 1970s, to achieve unconditional unification of the peninsula on its own terms (by absorbing South Korea), nor the sudden and almost universally unexpected collapse of the Soviet bloc in 1989–91 were preordained occurrences. Rather, they may instead qualify as instances of the impact that chance may exert on human affairs. From the standpoint of the North Korean state, the influence of chance in both examples was highly adverse—yet it is also true that “chance,” in both these cases, has decisively colored any verdict an outside observer may venture about the performance of the North Korean political economy during the Cold War era. South Korea, one may certainly argue, has had more than its share of misfortune. Yet it has also benefited from intrinsically unpredictable events beyond its control. The international petrodollar surplus in the 1970s and the international disinflation of the early 1980s are but two of the less con- troversial factors that have affected South Korea’s economic performance in such a manner. One may argue that there is a very real economic benefit in learning to “deal with disequilibria”—which is to say, to cope with Fortuna; i.e., with unexpected (and perhaps unforeseeable) but major changes in events and conditions. To ask the analyst or observer to deal with the disequilibria in the societies and economies under scrutiny would seem to be very much in order as well. Developed as a skill, such an intellectual approach might itself generate high rates of returns.

Notes

Introduction: The Experiment

1. For an overview, see Ki-Baik Lee, A New History of Korea, trans. Edward W. Wagner with Edward J. Shultz (Cambridge, Mass.: Harvard University Press, 1984). For an interesting analysis of economic and administrative policy during the later years of this “uneventful” period, see James B. Palais, Politics and Policy in Traditional Korea (Cambridge, Mass.: Harvard University Press, 1975). 2. Estimates of this progress can be found in Sang-chul Suh, Growth and Structural Change in the Korean Economy, 1910–1940 (Cambridge, Mass.: Harvard University Press, 1978); Toshiyuki Mizoguchi, “Economic Growth of Korea under the Japanese Occupation: Background of Industrialization of Korea, 1911–1940,” Hitotsubashi Journal of Economics 20, no. 1 (1979): 1–19; and Ramon H. Myers and Mark R. Peattie, eds., The Japanese Colonial Empire, 1895–1945 (Princeton, N.J.: Princeton University Press, 1984). 3. Reportedly, officials at the U.S. Department of State were given thirty minutes to draw the demarcation line through the Korean peninsula. See Bruce Cumings, Origins of the Korean War, vol. 1, Liberation and the Emergence of Separate Regimes, 1945–1947 (Princeton, N.J.: Princeton University Press, 1981), 120. 4. For background on the development of the two regimes, see Cumings, Origins, vol. 1; Bruce Cumings, Origins of the Korean War, vol. 2, The Roaring of the Cataract (Princeton, N.J.: Princeton University Press, 1990). For more information on the founding and evolution of the regime in the Korean North, one may consult the classic study by Robert A. Scalapino and Chong-sik Lee, Communism in Korea, vol. 2, The Society (Berkeley and Los Angeles.: University of California Press, 1972) and two more recent studies: Erik van Ree, Socialism in One Zone: Stalin’s Policy in Korea, 1946–1947 (New York: Berg, 1989) and Hak Soon Paik, “North Korean State Formation, 1945–1990” (PhD diss., University of Pennsylvania, 1993). For additional information on the evolution of the polity in southern Korea, reliable accounts may be found in Gregory Henderson, Korea: The Politics of the Vortex (Cambridge, Mass.: Harvard University Press, 1968) and Joungwon A. Kim, Divided Korea: The Politics of Development, 1945– 1972 (Cambridge, Mass.: Harvard University Press, 1975).

193 194 NOTES TO PAGES 2–4

5. Between 1945 and 1949, by Kwon’s estimate, about three-quarters of a million refugees managed to escape to South Korea from the North. Tai-Hwan Kwon, Demography of Korea: Population Change and Its Components, 1925–66 (Seoul: Seoul National University Press, 1977), 177. Naturally, some nonrandom differentiation was attendant on the process of partitioning Korea. Given the nature of the policies then going into effect in the North, there would be reason to expect that these refugees would include a disproportionate number of landlords, businessmen, and entrepreneurs. Thirty years after partition, Jones and Sakong found that persons born in northern provinces were heavily overrepresented in the South Korean business elite in relation to their weight in the total population. See Leroy P. Jones and Il Sakong, Government, Business and Entrepreneurship in Economic Development: The Korean Case (Cambridge, Mass.: Harvard University Press, 1980), 214–15. Even so, one may argue that the degree of self-selection under Korea’s particular circumstances was no greater than in the partition of Germany and markedly less than in the peopling of Taiwan or Hong Kong—economies often compared with China’s. 6. Life expectancy at birth in Germany in 1932–34 is estimated to have been slightly more than sixty-one years; in Korea in 1930–35, it has been estimated at roughly forty years. United Nations, Demographic Yearbook 1957 (New York: United Nations, 1957), 568–69; Kwon, Demography of Korea, 304, 312. 7. The Republic of Korea joined the OECD in December 1996. 8. The attitudes may be illustrated best by direct citation: “The average lifespan of our people today is over 74. This is 36 years longer than at the time when our country was liberated from Japanese domination. This is the happiness that has been provided to our people because our party is great, our fatherland is benevolent, and our country’s socialist system is superior.” Pyongyang Domestic Radio Service, 12 December 1989, translated in Foreign Broadcast Information Service (hereafter FBIS), Daily Report: East Asia, EAS-90-001, 2 January 1990, 22. “It is evident which system of the two is superior. It is widely known that the Republic of Korea is overwhelming North Korea in terms of economic welfare, not to speak of the guarantee of basic human rights. . . . In theory, it may be thought that South and North Korea share the sovereignty in some restricted areas but as far as the present situation goes, South Korea only inherited firmly the historical sovereignty.” Republic of Korea National Unification Board, The Identity of the Korean People: A History of Legitimacy on the Korean Peninsula (Seoul: NUB, 1983), 214–16. 9. To illustrate a much greater tendency with just a few illustrious examples: Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and Democracy (New York: Cambridge University Press, 2006); Robert J. Barro, Determinants of Economic Growth: A Cross-Country Empirical Study (Cambridge, Mass.: MIT Press, 1997); Gary S. Becker, Tomas Philipson and Rodrigo Soares, “The Quantity and Quality of Life and the Evolution of World Inequality,” American Economic Review 95, no. 1 (2005): 277–291; Paul Collier, The Bottom Billion: Why the Porest Cuntries Are Failing and What Can Be Done About It (New York: Oxford University Press, 2007); Richard Layard, Happiness: Lessons NOTES TO PAGES 5–6 195 from a New Science (New York: Penguin Books, 2005); and Gregory N. Mankiw, David Romer, and David N. Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics 107, no. 2 (1992): 407–37. 10. According to one source, South Korea was publishing about 450 official statistical series in the early 1980s. Sang-Woo Lee, “Die Probleme der amtlichen Statisitik in Entwicklungsländer dargestellt am Beispiel Korea” [The problems of official statistics in developing countries, as represented in the example of Korea], Angewandte Statistik und Ãkonometrie 21 (1982): 92. 11. In Korean, the unit in question is called Kuksa Pyongchan Wiwonhoe. Officially, this is translated as “The National History Compilation Committee.” I am grateful to Dr. Steven W. Linton of the Eugene Bell Foundation for apprising me of the existence of this institution and of the ambiguous nuances suggested by its name. 12. The most recent version of this “slander against the state” statute was promulgated under Park Chung Hee’s “Yushin” government in 1975. The statute outlasted Park Chung Hee himself and carried through the entire Chun Doo Hwan era. It was formally in force during the first year of the presidency of Roh Tae Woo. For some details, see Asia Watch, Assessing Reforms in South Korea (Washington, D.C.: Asia Watch, 1988), 7, 12, and William Shaw, ed., Human Rights in Korea: Historical and Policy Perspectives (Cambridge, Mass.: Harvard University Studies in East Asian Law, 1991), 310 n. 37. The statute was finally repealed by the Republic of Korea National Assembly in December 1988—roughly a year after the country’s first relatively open and competitive presidential election. 13. From article 104, section 2 of the Republic of Korea’s Criminal Law. For a full translation, see U.S. House of Representatives, Committee on International Relations, Investigation of Korean-American Relations: Appendices to the Report of the Subcommittee on International Relations, vol. 1 (Washington, D.C.: Government Printing Office, 1978), 868. Infractions of article 104, section 2 could be punished by seven to ten years impris- onment; convicted violators could also be stripped of their property. 14. Not many Western students of South Korean affairs were aware of the existence of this statute. It has rarely been mentioned or acknowledged in the scholarly literature. One of the very few references to it may be found in Hans U. Luther, “Saemaul Undong: The ‘Modernization’ of Rural Poverty in South Korea,” Internationales Asienforum 10, no. 3–4 (1979): 332. We may note, however, that the general lack of familiarity with the provisions of this statute on the part of Western experts does not in itself demonstrate the ineffectiveness of the regulation. 15. In the words of one group of Korean demographers, “The expectation of life at birth for [South Korea for] 1965–70 is 61 from official life tables and 50 according to census [based] estimates showing 11 years difference. . . . The government estimate . . . appears to be obviously an over estimate.” Tai-Hwan Kwon et al., The Population of Korea (Seoul: Seoul National University, The Population and Development Studies Center, 1975), 24. 16. On the basis of such numbers, an influential World Bank Study, Redistribution with Growth, declared in 1974 that “the distribution of income in [South] Korea was among 196 NOTES TO PAGE 6 the best in the developing world.” (Hollis Chenery et al., Redistribution with Growth: Policies to Improve Income Distribution in Developing Countries in the Context of Economic Growth [London: Oxford University Press, 1974], 284). Two decades later, this view was still widely held by students of development economics. 17. See Edward S. Mason et al., The Economic and Social Modernization of the Republic of Korea (Cambridge, Mass.: Harvard University Press, 1980), chap. 12, esp. 410–13. 18. John Sloboda cautions us against the assumption that these methodological limitations were intended to bias the sample’s income distribution. He notes that the income and expenditure series from which these results were drawn was originally used for analyzing consumer spending patterns—and only later (and improperly) used for Gini coefficient calculations (personal communication, November 1995). 19. In 1978, some of these defects in South Korean income data were reportedly dealt with and resolved. Subsequent studies suggested that significant problems remained. In the early 1980s, for example, nearly two-fifths of South Korea’s households were categorically excluded from official income and expenditure surveys. As Yoo noted, “The fact that this exclusion is large and that the exclusion contains sensitive groups of the population, namely, the very rich (for example, medical doctors) and the very poor (for example, small farm households) means that the derived degree of income inequality based on these data sources may not be reliable.” Jong Goo Yoo, “Income Distribution in Korea,” in Jene K. Kwon, ed., Korean Economic Development (New York: Greenwood Press, 1990), 75. 20. The ROK Economic Planning Board operated from 1962 until 1997; for more discussion on this organ of ROK governance, see chapter 3. 21. Danny M. Leipziger et al., The Distribution of Income and Wealth in Korea (Washington, D.C.: World Bank, 1992), 22, 27. 22. Revisions of this magnitude, for example, would classify South Korea as a “high inequality” economy (rather than a “low inequality” economy) in the Redistribution with Growth taxonomy. By these revised numbers, in fact, South Korea’s income distribution would be likened to those reported for the Philippines or the Ivory Coast in the 1960s. See Chenery et al., Redistribution with Growth, 8. Official income distribution data for other countries, of course, are also marked by shortcomings. It seems unlikely, however, that the degree of bias evident in ROK data would prove common among other developing economies. 23. A few quotes by specialists corroborate the point: “One cannot expect a particularly good quality from [South] Korea’s statistical data if one considers the particulars and the situation of official statistics in Korea. . . . It borders on the amazing that [South] Korea has succeeded in its long-term development plans without having devised and partially achieved a solid base of official statistics for that purpose.” Lee, “Die Probleme,” 92–93. “The existing reality of the health data and information system is much more serious than a casual observer can imagine.” Hakchung Choo, “National Health Data and NOTES TO PAGES 7–9 197

Information System,” in Chong Kee Park, ed., Human Resources and Social Development in Korea (Seoul: Korea Development Institute, 1980), 170. “The MTI [Ministry of Trade and Industry] declared export targets at the beginning of [every] year. If there appeared any possibility that the target would not be fulfilled, the MTI officials as well as other officials related with export administration worked to expedite the administrative process. . . . If all such measures failed to achieve the target amount, MTI officials even tried to adulterate export statistics. . . . This tradition continued even after the Park era.” Wontack Hong, Trade and Growth: A Korean Perspective (Seoul: Kudara International, 1994), 36–37. 24. David Steinberg, “Development Lessons from the Korean Experience: A Review Article,” Journal of Asian Studies 42, no. 1 (1982): 91–104, citation at 101. 25. One might argue that the shortcomings in South Korean statistics are quite characteristic of data from low-income countries, reflecting the incapacity of the government rather than its special intervention. It would take us far afield to describe the nature and special characteristics of the official ROK statistical system. One may note in passing, however, that arguments about general statistical capabilities of low-income countries would no longer seem to apply to South Korea. The Republic of Korea, after all, had already applied for membership in the Organisation for Economic Co-operation and Development. By 1989, according to estimates by Angus Maddison, real per capita domestic product in South Korea, after adjusting for purchasing power parities, was almost as high as in Greece. By such numbers, in fact, per capita GDP in South Korea in the late 1980s would have been distinctly higher than per capita product in Japan in the early 1960s. See Angus Maddison, “Explaining the Economic Performance of Nations, 1820–1989,” in William J. Baumol, Richard R. Nelson, and Edward N. Wolff, Convergence of Productivity: Cross-National Studies and Historical Evidence (New York: Oxford University Press, 1994), 20–61. Neither the Greece of the 1990s nor the Japan of the 1960s evidenced the sorts of limitations in their social and economic statistics that have been characteristic of South Korea’s. 26. These data were released initially to the United Nations Fund for Population Affairs (UNPFA, subsequently renamed the the United Nations Population Fund) in 1989; the author was given permission to use them in Pyongyang in May 1990. For more details, see Nicholas Eberstadt and Judith Banister, The Population of North Korea (Berkeley, Calif.: Institute of East Asian Studies, 1992), xii, 2, 6.

Chapter 1: Comparative Performance of the Two Korean Economies: 1945–1991

1. Some of these questions are addressed at greater length in Nick Eberstadt, The Poverty of Communism (New Brunswick, N.J.: Transaction Books, 1988), chap. 11, esp. 255–63. 198 NOTES TO PAGES 9–11

2. The literature on this point is extensive. For some early contributions, see Naum Jasny, The Soviet Price System (Stanford, Calif.: Stanford University Press, 1951), and Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.: The Belknap Press of Harvard University Press, 1962), esp. chapters 8 and 10. 3. On this score, see Nicholas Eberstadt, “The CIA’s Assessment of the Soviet Economy: Questions, Problems, Implications,” in Nicholas Eberstadt, ed., The Tyranny of Numbers: Mismeasurement and Misrule (Washington, D.C.: AEI Press, 1995), 136–49. 4. For 1988, the CIA’s estimate of Soviet GNP was 788 billion rubles (1982 prices); the Soviet State Statistical Committee’s estimate, adjusted to “constant price,” would have been 767 billion rubles. U.S. Central Intelligence Agency, Handbook of Economic Statistics 1989 (Washington, D.C.: Government Printing Office, 1989), 58, and U.S. Central Intelligence Agency, Measuring Soviet GNP: Problems and Solutions (Washington, D.C.: Government Printing Office, 1990), 186. 5. CIA, Handbook 1989, 58; the precise ratio given is 52 percent. 6. See, for example, Henry S. Rowen and Charles Wolf, Jr., eds., foreword to The Impoverished Superpower (San Francisco: Institute for Contemporary Studies Press, 1990), xiii. 7. Viktor Belkin, “Market and Non-Market Systems: Limits to Comparability,” in Nicholas Eberstadt and Jonathan Tombes, eds., Comparing the Soviet and American Economies (Washington, D.C.: AEI Press, 2000). 8. Igor Birman, Personal Consumption in the USSR and the USA (New York: St. Martin’s Press, 1988). 9. Luisa Nochovkina, “Comparisons of Soviet and American Investment Levels,” in Comparing the Soviet and American Economies, ed. Nicholas Eberstadt and Jonathan Tombes (Washington, D.C.: AEI Press, 2000). 10. Derived from World Bank, World Development Report 1989 (New York: Oxford University Press, 1989), 165. 11. U.S. Central Intelligence Agency, Handbook of Economic Statistics, 1988 (Wash- ington, D.C.: Government Printing Office, 1988), 25. 12. Derived from World Bank, World Development Report 1989, 167, 215; CIA, Handbook 1988, 34. Even when methodologies appear to be standardized, considerable discrepancies can emerge in computations by separate authorities. A United Nations–sponsored study (International Comparison Project, Phase 4), for example, estimated Hungary’s per capita GDP in 1980, after making adjustments for the purchasing power of local currencies, at 40.5 percent of the U.S. level; a CIA estimate for the same year, apparently adopting the ICP’s approach, put Hungarian per capita GNP at 46.9 percent of the U.S. level—a difference of almost one-sixth. Differences were even greater for the year 1985 with ICP Phase 5 estimates: for that year, ICP estimated Hungary’s per capita GDP to be 42 percent of the American level, while the CIA placed Hungarian per capita GNP at 63 percent of the American level! For more detail, see Eberstadt, “The CIA’s Assessment,” 144–46. NOTES TO PAGES 11–12 199

13. See, for example, Jan Winiecki, “Four Kinds of Fallacies in Comparing Market- Type and Soviet-Type Economies: Issues and Outcomes,” Banca Nazionale Del Lavoro Quarterly Review, no. 164 (1988): 79–103. For a more general treatment of these differences, see Jan Winiecki, The Distorted World of Soviet-Type Economies (Pittsburgh: University of Pittsburgh Press, 1988). 14. For static comparisons of communist and noncommunist economies, the purchasing power issue is key. Intertemporal comparisons are further complicated by the index problem. One great effort to surmount both problems was offered in the form of “adjusted cost factor” pricing, a technique pioneered by Abram Bergson. His classic contribution with this technique is in The Real National Income of Soviet Russia since 1928 (Cambridge, Mass.: Harvard University Press, 1961). Ingenious as this device is, however, it cannot correct established prices into scarcity prices and thus at best can only provide a presumed approximation for intersystem comparisons. For one critique of the adjusted factor cost approach, see Henry S. Rowen and Charles Wolf, Jr., Impoverished Superpower, 10–11. As they note, however, “It is easier to criticize the [adjusted factor cost] method than to design practical improvements” (11). 15. With the collapse of Soviet bloc communism, vivid illustrations of seemingly abstract economic issues are now at hand. One of these is the distinction between production potential and utility in a Soviet–type economy. With the passing of communist power, ancien regime product mixes—characterized by the surfeit of unwanted goods and idiosyncratic availability of preferred goods—were suddenly exposed to domestic and international market forces. The consequence was to reduce the exchange-rate parity GNPs of the countries in question quite radically. With consumer sovereignty, “welfare effects” enter the price formation process—reducing the “purchasing power parity” prices of tradeables by the degree to which current production is mismatched against consumer preferences. For an exposition of some of the issues at play in this process, see Steven Rosefielde, “The Illusion of Material Progress: The Analytics of Soviet Growth Revisited,” Soviet Studies, 43, no. 4 (1991): 597–611. 16. A sense of this German literature may be had from the following sources: Doris Cornelsen and Wolfgang Kirner, “Zum Produktivitätsvergleich Budesrepublik–DDR” [The Comparison of Productivity in the Federal Republic and the GDR], DIW Wochenberichte 57 (1990): 172–74; Bernd Görzig, Produktion Und Produktionsfaktoren Für Ostdeutschland: Kennziffern [Production and Factors of Production in East Germany: Reference Numbers] (Berlin: Duncker Verlag, 1992); Bundesrepublik Deutschland, Statistisches Bundesamt, Rückrechnungen Gesamtwirtschaftlicher Daten Für Die Ehemalige DDR: Beiträqe Zu Einer Statistiktagung In Berlin [Retrospective Calculations of Macroeconomic Data for the Former GDR: Contributions to a Statistical Conference in Berlin] (Stuttgart: Metzler-Poeschel Verlag, 1993). 17. For the year 1990, for example, the London International Institute for Strate- gic Studies (IISS) gave North Korea a GNP of $22.76 billion (The Military Balance; 1992–93 edition, 152). The Republic of Korea National Unification Board put the figure at $23.1 billion (Namkoong Young, “Assessment of the North Korean Economy: 200 NOTES TO PAGES 12–18

Status and Prospects,” in Research Institute for National Unification, U.S.-Korean Relations at a Time of Change [Seoul: RINU, 1994], 7–27, citation at p. 10). The CIA made it $23.3 billion (World Factbook, 1992 edition, 202). The U.S. Arms Control and Disarmament Agency said it was $29.7 (World Military Expenditures and Arms Transfers [Washington, D.C.: Arms Control and Disarmament Agency], 1993–94 edition, 70). Thus, the highest estimate was “only” 30 percent above the lowest. 18. South Korea’s numbers are illustrative. Revised official South Korean estimates gave a ratio of barely 1 to 5 for North to South Korean per capita GNP for the year 1989. Korea Update 1, no. 8 (1990): 3. For the year 1993, South Korea’s per capita GNP was said to be more than seven times greater than North Korea’s. Young, “Assessment,” 10. These results seem anomalous on their very face. Official South Korean figures also happen to state that per capita GDP was nearly three-fourths higher in the DPRK than the ROK in 1960. Republic of Korea, National Unification Board, A Comparative Study of the South and North Korean Economies (Seoul: NUB, 1985), 29. The revised figures necessarily thus implied that South Korea’s per capita rate of GDP growth on average exceeded North Korea’s by 7.7 percent per year between 1960 and 1989 and by 8.0 percent per year between 1960 and 1993. That implicit differential, however, was greater than South Korea’s estimated annual per capita growth rate over those years. According to South Korea’s own revised national accounts, per capita GNP growth in the ROK averaged 6.4 percent per year between 1960 and 1989 and 6.1 percent per annum between 1960 and 1993. Bank of Korea, National Accounts 1994 (Seoul: BOK, 1994), table 1. Those estimates, in short, imply that overall growth rates for per capita output in the DPRK were negative for most of the South’s economic race against the North. More specifically, they would imply that North Korea’s per capita output declined by more than 30 percent between 1960 and 1989—before the final crisis of Soviet communism—and by 1993 had fallen below the level of South Korea in 1960. 19. United Nations, National Accounts Statistics: Analysis of Main Aggregates, 1988–1989 (New York: UN, 1991), 127, 164, 171, 184, 191, 198. Although the average annual rate of sectoral growth between 1970 and 1989 is said to range from a low of 4.6 percent (agriculture) to a high of 9.9 percent (industry), North Korea is nonetheless awarded an average rate of growth for total output (NMP) of 10.0 percent. And whereas growth rates are said to be more rapid (often considerably more rapid) in South Korea for every major sector save agriculture over the years 1970–89, North Korea was still granted the faster overall pace of annual growth! 20. The literature on this issue, again, is extensive. For some early treatments of the question in the Soviet context, see Gerschenkron, Economic Backwardness, esp. chap. 6; Gregory Grossman, Soviet Statistics of Physical Output of Industrial Commodities: Their Compilation and Quality (Princeton, N.J.: Princeton University Press, 1960); and G. Warren Nutter, Growth of Industrial Production in the Soviet Union (Princeton, N.J.: Princeton University Press, 1962). Some more research has attempted to use a physical indicators approach to estimate aggregate output in the DPRK. See, for example, NOTES TO PAGES 18–21 201

Chun Hongtack, “Estimating North Korea’s GNP by the Physical Indicators Approach,” unpublished paper prepared for Korea Development Institute International Symposium on the North Korean Economy: Current Situation and Future Prospects, September 30–October 1, 1991; Kap-young Jeong, “The North Korean Economy: Structure, Performance and International Comparison,” Korea and World Affairs 16, no. 1 (1992): 22–39; and Marcus Noland, “The North Korean Economy” (Institute for International Economics, APEC Working Paper Series 95–07, 1995). 21. As Dwight Perkins has observed, “Heavy industrial development is the one key prerequisite to an armaments industry.” Dwight Perkins, “Industrial Planning and Management,” in Alexander Eckstein, Walter Galensen, and Ta-chung Liu, eds., Economic Trends in Communist China (Chicago: Aldine Publishing Co., 1968), 598. 22. As we shall see in the next chapter, however, confidential assessments of the performance of North Korea’s heavy industries in the 1980s by Soviet bloc specialists on the scene typically offered estimates of physical output for particular products than the CIA’s. 23. Given the notoriously poor performance of agriculture under command planning, it may not be obvious that comparison of physical output of agricultural goods tends to favor the nonmarket system. Yet it does. Physical indices take no account of a product’s quality, palatability, perishability, or location in regard to the consumer. For these and other reasons, physical indices tend to overstate the performance of communist agriculture in relation to market-oriented agriculture. Reported physical indices, for example, suggest that Soviet agriculture produces about three-fourths as much output as that of the United States. Commenting on those figures, a Soviet agricultural specialist, academician Vladimir Tikhonov, has written that “a Soviet citizen would laugh himself to death if you told him that the Soviet agriculture produced three-fourths as much as American agriculture.” Vladimir Tikhonov, “Agriculture in the USA and the USSR,” in Eberstadt and Tombes, Comparing the Soviet and American Economies. 24. For more detail, see Eberstadt and Banister, Population of North Korea, 6. The 1988 edition of the United Nation’s Demographic Yearbook listed the DPRK as having scheduled a national population and housing census for 1992; it identified the last census for the area as having occurred in 1944, under Japanese colonial rule. (In the event, that DPRK census was eventually conducted in early 1994.) 25. See Eberstadt and Banister, Population of North Korea, 6. On the general question of data reliability under socialist command planning, see Jan Winiecki, “Are Soviet-Type Economies Entering an Era of Long Term Decline?” Soviet Studies 38, no. 3 (1986): 325–448. 26. Hakchung Choo’s assessment of the quality of South Korea’s employment data in the 1960s is worth quoting at some length: “At the risk of repetition, the disaggregated employment data problem seems to be most severe in [South] Korea, partly due to the adoption of the ILO definition of employment and sampling procedures. But, in its comparison with 1966 Census data, there is an overestimation [in the labor force survey] of about 10 percent respectively in mining and manufacturing sectors, while there 202 NOTES TO PAGES 22–25 were consistent underestimations in all other sectors. . . . The problem with employment data for the social overhead sector seems to be even more serious, lacking consistency over time. . . . The relative share of employment in the ‘other services’ sector seems to increase without being accompanied by comparable increases in its relative share in current GDP.” Hakchung Choo, “Pattern of Growth and Change in the Industrial Structure of Korea, 1953–73,” Social Science Journal (Seoul) 2 (1974):19 nn 6, 30. 27. For a now classic exposition on this topic, see Simon Kuznets, Modern Economic Growth: Rate, Structure, and Spread (New Haven, Conn.: Yale University Press, 1966), chap. 3. For some additional examinations, see Hollis B. Chenery and Moise Syrquin, Patterns of Development, 1950–1970 (New York: Oxford University Press, 1975), 48–53; and Hollis B. Chenery, Sherman Robinson, and Moshe Syrquin, Industrialization and Growth (New York: Oxford University Press, 1986), 102–3. 28. Derived from Republic of Korea Economic Planning Board, Korea Statistical Yearbook 1989 (Seoul: National Bureau of Statistics, 1989), 78, 466. 29. For an attempt to indicate the trend—and variance—between per capita output and urbanization for a large number of countries, see Chenery and Syrquin, Patterns of Development, 53–56. 30. From the author’s personal communication with officials from the DPRK Central Statistics Bureau, Pyongyang, May 25, 1990. For more detail, see Eberstadt and Banister, Population of North Korea, 24–25. 31. In theory, satellite imaging might also be used to measure urbanization in divided Korea. An imaginative attempt to do so may be found in Kyun Hyung Han, “Estimation of Major City Population in Korea Using Landsat Imagery” (PhD diss., University of Utah, 1985). Analyzing Landsat imagery from the 1970s (1973–75), Han estimated the “built-up” area of Pyongyang to encompass 44.6 square kilometers, as against 195.6 square kilometers for Seoul. Informative as such indications may be, however, they do not necessarily provide an accurate insight into comparative levels of “urbanization.” Such imaging measures only heat differentials; with differing patterns of energy use or dwelling density, significantly different numbers of people could inhabit two “built-up areas” of the same size. Whereas, for example, Han’s estimate of Pyongyang’s 1973–75 population tracks plausibly with official DPRK figures for the city’s population in 1980 (1.7 million vs. 1.84 million), his estimates for the city of Chongjin look much too high (700,000 for 1973–75 vs. 509,000 for 1980). Eberstadt and Banister, Population of North Korea, 22. Though satellite imagery may be unlikely to have any precise demographic use for now, it may nonetheless perhaps serve as a check against wildly falsified claims in the realm of urbanization. 32. Even this trickle of statistical information was ultimately interrupted. By tradition, the DPRK’s national budget numbers—results for the previous year and targets for the current year—were announced each spring at the meeting of the Supreme People’s Assembly (SPA). With the death of Kim Il-sung in July 1994, however, North Korea went into a prolonged period of official mourning—one demonstration of which was the unannounced postpone- ment, for several years on end, of the previously annual SPA meetings. NOTES TO PAGES 25–29 203

33. Yet even these seemingly straightforward budget data must be handled with care. William Newcomb of the U.S. Department of Treasury has pointed out that any analysis of DPRK budgetary trends must assume a rough comparability in the definition of revenue for earlier and later periods. He cautions that North Korean budgetary revenues may include foreign assistance and the “net” of subsidies from socialist countries, as in China’s before 1985. He further notes that the treatment of extrabudgetary accounts, such as retained earnings by firms, is poorly understood by outsiders and may have changed over time (personal communication). 34. An implicit wage deflator for a few years in the 1950s and 1960s has been published in North Korea, as well as a few tidbits about changes in retail price levels during the same period. Little else, however, seems to have been available. The most comprehensive treatment of the early development of the DPRK economy is probably Joseph Sang-Hoon Chung, The North Korean Economy (Stanford, Calif.: Hoover Institution Press, 1974); see esp. appendix B. In sum, even less can be found on price levels in the DPRK between 1955 and 1963—the regime’s most statistically open years—than in contemporary Maoist China. For details on Chinese price data from that period, see Dwight H. Perkins, Market Control and Planning in Communist China (Cambridge, Mass.: Harvard University Press, 1966), appendix B. 35. Chung, North Korean Economy, 146. 36. This datum appeared, in longhand, on the data tables transmitted to the UNFPA in 1989. See Eberstadt and Banister, Population of North Korea, 7. 37. Ibid., 33, 105. This estimates a rate of natural increase of 1.7–1.9 percent during the 1980s; in South Korea, the corresponding rate was about 1 percent. 38. UN estimates of North Korea’s population in the late 1980s appear to be somewhat (about 4 percent) high. See Eberstadt and Banister, Population of North Korea, 33–35. Per capita estimates using these as a denominator would somewhat understate actual availabilities. On the other hand, it is quite possible that North Korean claims overstate actual energy production levels, perhaps even by an increasing margin. 39. See, for example, John R. Moroney, “Energy Consumption, Capital and Real Output: A Comparison of Market and Planned Economies,” Journal of Comparative Economies 14, no. 2 (1990): 199–220. Moroney concludes that “it is disputable that the CMEA countries as a group consume, on average, roughly twice as much energy per unit of capital and per unit of real GDP as the economies of Western Europe. This pattern of intensive energy use may well be a rational response by end users to historical energy subsidies and to central planning emphasizing energy-intensive industry” (212). 40. For some “energy intensity” comparisons for China, see World Bank, China: Economic Structure in International Perspective (Washington, D.C.: World Bank, 1985), 31–33. CIA, Handbook of Economic Statistics 1991, 28–29, provides one basis for comparisons of domestic per capita energy consumption and per capita gross domestic product for “G-7” economies and those of the former Soviet bloc. If these CIA estimates overstate per capita output in the former Soviet bloc, actual “energy intensity” ratios for those countries would be even greater. According to the then chief economist of the 204 NOTES TO PAGES 29–33

World Bank, for example, “Estonia itself consumes nine times the amount of energy for every unit of national income as does Sweden.” Lawrence H. Summers, “Quotation of the Month,” Transition 2, no. 10 (1991): 10. 41. The CIA’s revised estimates, for example, suggest that per capita output in Eastern Germany was at roughly half the Western German level in 1989. CIA, Handbook of Economic Statistics 1991, 28. Some observers, though, have argued that even these revised figures may understate the true differential between West and East Germany. 42. One scholarly attempt to produce a North Korean energy balance sheet for 1989 suggests that per capita final consumption of energy was more or less equal to that of South Korea, not almost 30 percent higher. See Young-Sik Jang, “North Korea’s Energy Supply and Demand: 1971–1989,” unpublished paper prepared for Korea Development Institute International Symposium on the North Korean Economy: Current Situation and Future Prospects, September 30–October 1, 1991, table 1. The study further suggests that the absolute volume of energy consumption in North Korean and South Korean industry was almost exactly the same—a result quite in keeping with the proposition, tendered earlier in the chapter, that the absolute volume of industrial output was several times greater in the South than in the North by the end of the 1980s. 43. This datum was transmitted to the author in a meeting with authorities from the DPRK’s Central Statistics Bureau, Pyongyang, May 25, 1990. 44. Perhaps the most expansive official statement on this methodology was offered in June 1991 at the United Nations by the deputy chairman of the Committee for the Unification of the DPRK: “GNP is calculated differently in the East than in the West.” See Eberstadt and Banister, Population of North Korea, 126. 45. Kim Il-sung, New Year’s Address, January 1, 1980 (Pyongyang: Foreign Languages Publishing House, 1980), 5. 46. Korea Update 1, no. 8 (1990): 3. 47. Republic of Korea National Unification Board, The Economies of North and South Korea (Seoul: NUB, 1988), 28. 48. U.S. Central Intelligence Agency, Korea: The Economic Race between the North and South (Washington, D.C.: National Foreign Assessment Center, 1978), ii. 49. For example: “North Korea’s conventional military superiority over South Korea constitutes a significant threat to South Korea.” Koo Cha Young and Tae Ho Kim, “The Emerging World Order and Korea’s Changing Climate in Northeast Asia,” Korea and World Affairs 17, no. 1 (1993): 127. Similarly: “Excluding U.S. forces in and around Korea, North Korea is now the predominant military power of the Korean peninsula, an assessment true for both the quantity and quality of the forces deployed.” Richard T. Detrio, Strategic Partners: South Korea and the United States (Washington: National Defense University Press, 1989), 62–63. A 1985 study by the Rand Corporation estimated that North Korea’s military capital stock exceeded that of South Korea in 1983— the most recent year for which it attempted such comparisons. Charles Wolf, Jr. et al., The Changing Balance: South and North Korean Capabilities for Long-Term Military Competition (Santa Monica, Calif.: Rand Corporation, 1985), 48. NOTES TO PAGES 34–36 205

Chapter 2: Policy and Economic Performance in the DPRK: 1945–1991

1. Robert A. Scalapino, The Politics of Development: Perspectives on Twentieth Century Asia (Cambridge, Mass.: Harvard University Press, 1989), 67. 2. Such comments by communist visitors and officials were not made only in private. Starting in the glasnost era, South Korea’s semiofficial Naewoe press episodically reports them in two of its English-language publications, North Korea News and Vantage Point. For a sampling, see North Korea News, April 23, 1990, 2–3, and Vantage Point 13, no. 9 (1990): 22–24. 3. For a sampling of that international commentary compiled in South Korea, see The Real Dynasty (Seoul: Institute of North Korean Studies, 1982) and Kim’s Kingdom: Though the Eyes of Journalists and Cartoonists (Seoul: Institute of North Korean Studies, 1984). 4. Dae-sook Suh, Kim Il Sung: The North Korean Leader (New York: Columbia University Press, 1988), 313. 5. Henry A. Kissinger, White House Years (Boston.: Little, Brown, 1979), 1251. 6. Edward W. Wagner, “Failure in Korea,” Foreign Affairs 40, no. 1 (1961): 128, 132–3. 7. Typical is the assessment by Y. T. Kuark: “But even if one makes allowance for Communist propaganda and window dressing, however, it appears indisputable to this author that North Korea has made greater economic strides during the post Korean war period as a whole than has South Korea.” Kuark, “Economic Development Contrast between South and North Korea,” in Joseph S. Chung, ed., Patterns of Economic Development: Korea (Detroit: Cellar Book Shop, 1966), 95. 8. Interview with former deputy prime minister Nam Duk-woo, September 18, 1984. 9. Republic of Korea, National Unification Board, The Economies of North and South Korea (Seoul: NUB, 1988), 69–70. 10. For more detail, see Suh, Kim Il-sung, chap. 10. 11. For details, see C. R. Bawden, The Modern History of Mongolia (New York: Frederick A. Praeger, 1968), 303–15, 345–46. 12. For estimates, see Judith Banister, China’s Changing Population (Stanford, Calif.: Stanford University Press, 1987), 59–60, 84–85. 13. Van Chi Hoang, “Collectivization and Rice Production,” in P. J. Honey, ed., North Vietnam Today: Profile of a Communist Satellite (New York: Frederick A. Praeger, 1962), 118–19. 14. Charles H. Twining, “The Economy,” in Karl D. Jackson, ed., Cambodia, 1975–1978: Rendezvous with Death (Princeton, N.J.: Princeton University Press, 1989), 149–50. 15. It may be argued that North Korea’s relatively high level of per capita agricultural output at the time of collectivization afforded a margin of safety that was absent in those 206 NOTES TO PAGES 36–38 other Asian communist states. This is true but irrelevant to the argument at hand. Per capita grain output was higher still in the USSR in the late 1920s; this did not prevent Stalin from implementing a collectivization in which millions perished from hunger. For one account of that Soviet experience, see Robert Conquest, The Harvest of Sorrow: Soviet Collectivization and the Terror Famine (New York: Oxford University Press, 1986). 16. Not all analysts concur with the UN’s estimates for crop production in North Korea during these years. See, for example, Scalapino and Lee, Communism in Korea, 2: 1088–93. Official figures report a drop in grain production in 1959, from 3.7 to 3.4 million tons. Ibid., 1089. 17. One difference between North Korea’s collectivization and those of other Asian communist societies seems to have been the degree to which “terror” was used as an instrument of enforcement. One detailed study, for example, contrasts North Vietnam’s land reform and collectivization with North Korea’s. It concludes that the former relied heavily on terror whereas the latter by and large did not. Paul Stephen Ello, “The Commissar and the Peasant: A Comparative Analysis of Land Reform and Collectivization in North Korea and North Vietnam” (PhD diss., University of Iowa, 1967), 302–4. North Korea’s land reform even allowed dispossessed landlords to receive and work land themselves—with the proviso that the new plot be in a different county. Reportedly, almost four thousand of North Korea’s nearly seven thousand designated landlords availed themselves of this opportunity. Philip Rudolf, North Korea’s Political and Economic Structure (New York: Institute of Pacific Relations, 1959), 47. The North Korean approach may have reflected Kim Il-sung’s own particular interpretation of “class struggle.” In contrast to other contemporary communist rulers, his early writings and speeches are said to emphasize the redeemability of landlords, entrepreneurs, and other “bad elements.” Cumings, Origins of the Korean War, 2: chap. 9. This tendency, which does not conform to the outside perception of a “Stalinized polity,” is also evident in power struggles at the upper reaches of the Korean Workers’ Party. In 1968, for example, General Choi Kwang was purged for alleged participation in a conspiracy to weaken the nation’s defenses. In 1989 he reemerged, filling the office of chief of the general staff of the Korean People’s Army. In 1995 he assumed the title of minister of defense. In Stalin’s own system, his survival—much less his reascendance— would have been unthinkable after such an incident. 18. For more detail, see Scalapino and Lee, Communism in Korea, 2: 539–43, 1114, 1219–22. 19. According to contemporaneous estimates by the World Bank, for example, real gross domestic product in the People’s Republic of China rose by an average of 10.3 percent per year between 1980 and 1988 while population grew at a rate of 1.3 percent per year; by that reckoning, China’s per capita GDP would have more than doubled during those years alone. Data from World Bank, World Development Report 1990, 180, 228. Subsequent World Bank estimates for those same years offer a similar picture: according to the 2008 version of the World Banks’s World Development NOTES TO PAGES 38–39 207

Indicators (WDI), for example, per capita GDP rose by 100.5 percent in constant 2000 US dollars, and by 100.4 percent in PPP-adjusted constant 2005 US dollars. 20. Some attempts have been made to outline North Korean economic management policies. See especially Scalapino and Lee, Communism in Korea, 2: chaps. 13 and 14; Chung, North Korean Economy, 32–46, 62–75, and Frederica M. Bunge, ed., North Korea: A Country Study (Washington, D.C.: Government Printing Office, 1981), 129–35, 139–46. 21. Some analysts took the change to indicate an increasing influence of Kim Jong-il, the son and successor, in economic policy; the younger Kim, for example, was already noted in the 1980s for having declared that “it goes against the fundamental character of the socialist system to bring material incentives to the fore.” Masao Okonogi, “The Ideology and Political Leadership of Kim Jong-Il,” in Masao Okonogi, ed., North Korea at the Crossroads (Tokyo: Japan Institute of International Affairs, 1988), 18. While that identification may ultimately be proved correct, one need not posit an increasing influence for the younger Kim to account for the tendency itself. A variety of conflicting approaches to economic questions were apparent in the published writings of Kim Il-sung in the years before his son rose to prominence. Moreover, an emphasis on ideological exhortations through the state media may be but one component of the official response to the country’s apparent economic slowdown—even if it is the only component visible to the outside world. 22. According to one Soviet source, however, these same “Three Revolutions” were promulgated within North Korean agriculture as early as 1964. M. E. Trigubenko, “Agriculture in the DPRK,” Ekonomika Selskogo Khozvaystva, no. 1 (1970), translated in U.S. Joint Publications Research Service (hereafter referred to as JPRS), no. 32069 (December 28, 1970), 12. This earlier dating would only strengthen the point. Perhaps the most detailed analysis of the history and significance of the “Three Revolutions” is found in Ho-min Yang, “Origin and Development of the Three Revolutions,” Pukhan Hakpo, no. 1 (1977), translated in JPRS, no. 72345 (December 1, 1978), 1–48. 23. A similar point is made in John Merill: “The particular interpretation of chuché can be made to fit the needs of the moment. . . . As a working economic philosophy, it is malleable.” Merill, “North Korea’s Halting Efforts at Economic Reform,” in Chong Sik Lee and Se Hee Yoo, eds., North Korea in Transition (Berkeley, Calif.: University of California Institute of East Asian Studies, 1991), 144. 24. Bunge, North Korea: A Country Study, 129, 131, 144–45. For one of the most illu- minating defector accounts of the inside workings of the “Taean system” within one enterprise in the 1960s, see U.S. Department of the Army, “The Taean Management System,” Psyop Intelligence Notes, no. 283 (April 13, 1972). Perhaps the most informative official explication of the “Taean Work System” appeared in Nodong Sinmun, November 9, 1986, translated in JPRS, no. KAR-87-002 (January 8, 1987). 25. Bunge, North Korea: A Country Study, 131, 133. 26. An attention to competitive economic forces is visible as a continuing, if not always dominant, strand in the writings of Kim Il-sung. A selection of quotations from 208 NOTES TO PAGE 39 his On the Guidance and Management of the Socialist Economy (Pyongyang: Foreign Languages Publishing House, 1981) can illustrate the tendency. Though many of these quotes were from his writings or speeches in the 1950s, 1960s, and 1970s, their inclu- sion in the volume indicates that they were still in keeping with official policy as of the early 1980s: (a) “Correctly applying the business-accounting system in all fields of the national economy means intensifying planned guidance and control at enterprises, economizing in labour, materials, and funds, reducing all non-productive expenditures, and mobilizing internal productive reserves in a rational way so as to ensure profit for the enterprise” (47); (b) “To make light of the principle of material incentive, while claiming that we are building socialism, is a violation of the elementary principles of Marxism-Leninism. We must resolutely combat such a phenomenon” (48); (c) “The people who have turned out high quality products and the people who have done a great deal of work should as a matter of course be appraised more highly and receive more money than the people who have not” (51); (d) “More often than not, however, prices of new items are not properly assessed, and there are no tangible differences between the prices of high and low quality goods. As a result, producers are not at all interested in increasing the variety of goods and raising their quality” (52); (e) “Wage leveling is a wrong practice, which must be rejected. We must set scientific remuneration for over-fulfilling work norms” (107–8); (f) “In order to stimulate the workers’ enthusiasm for rising labour productivity, the piecework system should be introduced in all applicable fields of the national economy as soon as possible” (108); (g) “Each state enterprise must increase labour productivity, economize on raw and other materials and systematically lower its production costs so as to increase its income and state accumu- lations” (120); (h) “All factories, enterprises, and transport facilities should be operated independently without relying on state subsidies; they should bring profits to the state” (122); (i) “Socialism is not a society of equalitarianism. Under socialism, one has the right to work hard, earn much, and spend lavishly on the socialist principles of distribution” (212); (j) “At the socialist stage the peasant market cannot be done away with completely” (218); (k) “There is more good than bad in the continued existence of side- line production and the peasant market in socialist society” (219); (l) “Scarcity of pick- led plank tonic and ordinary shrimps, shellfish and various other foodstuffs produced by peasants is due mainly to their prices being fixed too low to stimulate them to enthusiasm for production. As you see, prices greatly affect the productive zeal of the commodity producers” (229–30); and (m) “The price of apples in autumn when they are plentiful should be different from that in winter or spring when they are scarce. Only when the price of apples is set higher in winter or spring than in autumn, the shops will be encouraged to store apples for sale later” (232–33). 27. Bunge, North Korea: A Country Study, 131. The incentive system in one factory in 1981 is described in Gregory Henderson, “Trip Notes” (unpublished paper, 1981), 13–14. 28. Bunge, North Korea: A Country Study, 146. Such policies can in fact be traced back to the earliest days of the regime. See Cumings, Origins of the Korean War, 2:339–40. NOTES TO PAGES 40–42 209

Cumings concludes Kim Il-sung “borrowed voluntarist methods from China and mate- rialist methods from the Soviet Union, always with a pragmatic eye toward what worked in a Korean context” (340). 29. The problem is not unique to the economy. For a useful commentary on what outsiders can (and cannot) divine from North Korea’s meager revelations, see Vincent S. R. Brandt, “North Korea: Anthropological Speculations,” Korea and World Affairs 7, no. 4 (1983). 30. Suh, Growth and Structural Changes, 132, 137; estimates of “commodity product” are for 1939–40 (1936 prices), and population figures are for 1940. 31. If, for example, the service sector had accounted for 40 percent of gross domestic product in the south but only 20 percent in the north, per capita output in the north would have been about 27 percent higher than in the south. If the proportions had been 35 and 25 percent respectively, per capita output in the north would have been about 48 percent higher than in the south. 32. Eberstadt and Banister, Population of North Korea, 28. These figures come from Dae Young Kim and John E. Sloboda, “Migration and Korean Development,” in Robert Repetto et al., Economic Development, Population Policy and Demographic Transition in the Republic of Korea (Cambridge, Mass.: Harvard University Press, 1981), 40. Note, however, that Suh offers a figure of about 15 percent for southern Korea and about 11 percent for northern Korea for 1944. The former estimate is based on the a strict mapping of the territories above and below the 38th parallel, the latter on province-level estimates, based on whether most of the province ended up in Soviet or American occupation zones. 33. Derived from Suh, Growth and Structural Changes, 132, 137. 34. Ibid., 136–42, 200. See also Chung, North Korean Economy, 57–59. 35. According to Soviet sources, Japanese capital accounted for more than 90 percent of North Korea’s industry on the eve of “liberation,” and more than 90 percent of all the industry of North Korea was taken by the new provisional government. As for agriculture, Japanese holding, according to United Nations reckonings, had accounted for roughly 5 percent of North Korea’s arable lands, or roughly one-tenth of all the area redistributed under the land reform. In view of Japan’s prerogatives in colonial Korea, however, it is quite possible that these Japanese holdings had accounted for rather more than 5 percent of the regime’s agricultural output. See Rudolph, North Korea’s Political and Economic Structure, 35, 48–49. 36. Chung, North Korean Economy, 48, 86. 37. Ibid., 146. One Soviet source gives a figure of “much more than 420 billion won” for the total economic losses sustained by the DPRK during the course of the Korean War. See M. Meshcheryakov, “Soviet-Korean Relations: Thirty Years,” Far Eastern Affairs (Moscow), no. 3 (1975): 48. The total presumably refers to some contemporaneous estimates; in 1958 the DPRK implemented a “currency reform” in which one hundred units of the old currency were exchanged for every unit of the new currency. By these presumptions, the Soviet figure 210 NOTES TO PAGES 42–43 would come to 4.2 billion of the present won. The figure can be compared with Chung’s estimates of North Korean net material product (1966 won) for 1953 and 1956: 0.79 billion and 1.74 billion, respectively. See Chung, North Korean Economy, 146–47. While the derivation of the Soviet figure is not explained, and the number may be questioned on a variety of grounds, it is clearly consistent with the proposition that North Korea suffered enormous damage during the Korean War. In the 1960s, according to Joseph S. Chung, a group of Japanese reporters visiting North Korea “were told that total wartime damage was estimated to be approximately 630 billion Japanese yen which amounts to 1.75 billion United States dollars.” Joseph Sang-hoon Chung, “The North Korean Economy: Structure and Development” (PhD diss., Wayne State University, 1964), 53. At the administered “commercial” exchange rates in the early 1960s ($1 = 2.57 won), this would work out to about 4.5 billion new won—not so different from the figure cited by Soviet sources. 38. See Eberstadt and Banister, Population of North Korea, 32, for reported sex ratios. In South Korea, by contrast, the country’s sex ratio in 1955 was enumerated at fully 100. Korea Statistical Yearbook 1990, 35. North Korea’s wartime demographic losses are most nearly comparable to the USSR’s in World War II. In 1959—fourteen years after that war’s end—the USSR’s reported sex ratio was still only 82! Stephen Rapawy and Godfrey Baldwin, “Demographic Trends in the Soviet Union: 1950–2000,” in U.S. Congress, Joint Economic Committee, Soviet Economy in the 1980s: Problems and Prospects (Washington, D.C.: Government Printing Office, 1983), 2:272. 39. See Chung, North Korean Economy, 48–49, 86–87, 146–47; and Suh, Growth and Structural Changes, 132. Even so, per capita production of a number of important commodities was still lower in 1956 than it had been in 1944: among them were electric power, coal, graphite, sulfuric acid, chemical fertilizers, cement, and marine products. The figures for the mid-1950s, moreover, may be affected by a certain overreporting of results. See, for example, Scalapino and Lee, Communism in Korea, 2:1090, esp. n. 107. 40. Fujio Goto, “Indexes of North Korean Industrial Output 1944–1975,” KSU Economic and Business Review (Kyoto), no. 9 (1982): 146. For the economy as a whole, by Goto’s calculation, “the year for which prewar output was reattained is 1955–56.” 41. Chung notes, however, that 1960 was officially described as a “buffer year” and infers that the Chollima campaign had exacerbated or induced serious imbalances in the North Korean economy. Chung, North Korean Economy, 96. 42. Ibid., 41–45, 81. 43. Eberstadt and Banister, Population of North Korea, 104. By these estimates, North Korea’s rate of natural increase in 1960 would have been 2.7 percent; due to contemporaneous migration of Koreans from Japan, the overall rate of population growth was estimated at about 3.1 percent for the year. 44. Yeon Ha-cheong, “Economy,” in Republic of Korea, National Unification Board, A Comparative Study of South and North Korea (Seoul: National Unification Board, 1988), 73. A Soviet source provides a parallel assessment: “In 1954–60 the commodities received via free socialist aid and credits accounted for 77.6 percent of the DPRK’s total NOTES TO PAGES 43–44 211 imports and for about 75 percent of its capital investments.” V. Smirnov, “Development of Foreign Economic Ties of the Democratic People’s Republic of Korea,” Far Eastern Affairs (Moscow), no. 4 (1984): 37. For an interesting and somewhat contrary analysis of the impact of Soviet bloc aid on North Korean industrialization, see Erik van Ree, “The Limits of Juche: North Korea’s Dependence on Soviet Industrial Aid, 1953–76,” Journal of Communist Studies 5, no. 1 (1989): 50–73. 45. Nena Vreeland, ed., Area Handbook for North Korea (Washington, D.C: Government Printing Office, 1976), 34. At peak deployment, as many as 200,000 Chinese “volunteers” may have been laboring in North Korea during the mid-1950s. 46. The direct impact of security assistance from fraternal states may have been consequential as well. Trigubenko, for example, claims, “The military aid rendered by the USSR to the DPRK exceeded its economic assistance by 100 percent.” Marina Trigubenko, “Industry of the DPRK: Specific Features of the Industrial Policy, Sectoral Structure, and Prospects” (paper presented at the International Symposium on the North Korean Economy: Current Situation and Future Prospects, Seoul, September 30–October 1, 1991), 4. Unfortunately, she does not indicate totals or dates for these transfers. 47. Joan Robinson, “Korean Miracle,” Monthly Review 16, no. 9 (1965): 542. 48. The horse figures in the classical Chinese novel Tales from the Three Kingdoms. Chung, North Korean Economy, 96. 49. Chung, North Korean Economy, 116–24; Suh, Kim Il-sung, 182–85. 50. Doctrine notwithstanding, North Korea evidently made use of foreign help in quite unexpected ways. Documents captured during the Korean War, for example, reveal that the economic plan for 1947 listed 105 of the country’s 1,262 “top-grade experts” as Japanese nationals. Cumings, Origins of the Korean War, 2:338. By the same token, between 1970 and 1974—a period of chilly Soviet-DPRK relations—“about 600 Soviet specialists were awarded [DPRK] medals and decorations.” Meshcheryakov, “Soviet-Korean Relations,” 50. 51. With the normalization of diplomatic relations, the Republic of Korea also received a commitment for official Japanese grants of $300 million, for public loans of $200 million, and for commercial credits of an additional $300 million. Anne O. Krueger, The Developmental Role of the Foreign Sector and Aid (Cambridge, Mass.: Harvard University Press, 1982), 154, 240. 52. Between 1965 and 1973, the Republic of Korea also committed troops to the Vietnam War; at the apex of this commitment, two divisions, totaling nearly fifty thousand men, were stationed in Vietnam. See Henderson, Korea: The Politics of the Vortex, 370, and Young-nok Koo, “The Conduct of Foreign Affairs,” in Edward Reynolds Wright, ed., Korean Politics in Transition (Seattle: University of Washington Press, 1975), 220–25. In all, something like 300,000 South Korean troops may have rotated through Vietnam during those war years. 53. Suh Dae-Sook dates the military buildup back to 1962 and views it as a reaction to the Cuban missile crisis. Suh, Kim Il-sung, 180. Another student of North Korean affairs also dates it to 1962, specifically, to the fifth plenary session of the Fourth Korean 212 NOTES TO PAGES 44–46

Workers’ Party Central Committee in December 1962. Yu Han-song, “The Arms Race Elbows Aside National Welfare,” Wolgan Choson (December 1989), translated in FBIS, EAS 90 050, March 14, 1990, 33. Scalapino and Lee, however, view the missile crisis as an “excuse” for the new policy. In their estimate, “there are strong indications that Kim Il-sung, lamenting the fact that he was not prepared to take advantage of the 1960 student revolt which toppled [Syngman] Rhee, had decided to establish a definite time table for the ‘liberation’ of South Korea and that military plans consequently had to be geared to this goal.” Scalapino and Lee, Communism in Korea, 2:1273. Scalapino and Lee’s reading appears to be corroborated by explications offered by some Soviet bloc scholars. According to one East German source account, for example, “In the course of 1961 and the following years, the military situation [in Korea] was worsened by the activities of the Junta in South Korea. For this reason a course correc- tion was necessary in 1962. Parallel to the development of the people’s economy, the defense of the country now had to be assured.” Hans-Ulrich Pews, Korea—Land der Morgenfrische [Korea—Land of the Morning Calm] [Gotha, Germany: Geographisch Kartographische Anstalt, 1987], 89. Whatever the particular motivations of Pyongyang’s leadership, however, the December 1962 KWP plenum publicly marked this consequential turning point in government policy. For a somewhat more recent assessment of this change, see Bon-hak Koo, Political Economy of Self-Reliance: Juche and Economic Development in North Korea, 1961–1990 (Seoul: Research Center for Peace and Unification of Korea, 1992), 108–15. 54. Kim Il-sung, “On the Occasion of the 20th Anniversary of the Workers’ Party of Korea, October 10, 1965,” in Selected Works (Pyongyang: Foreign Languages Publishing House, 1971), 4:327. 55. Kim Il-sung, “Let Us Develop the Chollima Work Movement in Depth, May 11, 1968,” in Selected Works (Pyongyang: Foreign Languages Publishing House, 1972), 5:66. 56. Kim Il-sung, “Report to the Fifth Congress of the Workers Party of Korea on the Work of the Central Committee, November 2, 1970,” in Selected Works (Pyongyang: Foreign Languages Publishing House, 1972), 5:431. 57. Bunge, North Korea: A Country Study, 240–41. 58. Ibid. 59. Kim Il-sung, “Report to the Fifth Congress,” 432. 60. Vreeland, Area Handbook for North Korea, 253. 61. Republic of Korea, National Unification Board, Pukhan Ichilhwa Siltae Chosa [Survey of the Heterogenization of North Korea] (Seoul: National Unification Board, 1978), esp. interviews with refugees nos. 66, 65, and 64. A Comparative Study of North Korea (Seoul: National Unification Board, 1982), 109, states that “since 1973, when the accumulation of provisions against emergency, i.e. war, began, two day’s ration has been deducted apiece fortnightly”—suggesting perhaps a reduction of rationed quantities by one seventh. A report by Asia Watch also refers to deterioration in the mix of rationed NOTES TO PAGES 46–47 213 grains: “In the mid-1970s, the ratio was reportedly changed in favor of the wheat and/or corn blend.” Richard Kagan et al., Human Rights in the Democratic People’s Republic of Korea (Washington, D.C.: Asia Watch, 1988), 198. 62. See Republic of Korea, National Unification Board, Pukhan Ichilhwa Siltae Chosa, esp. interviews with refugees nos. 61–68. 63. Changsoo Lee, “Social Policy and Development in North Korea,” in Robert A. Scalapino and Jun-Yop Kim, eds., North Korea Today: Strategic and Domestic Issues (Berkeley: University of California, Institute of East Asian Studies, 1983), 124. The tenor of the contemporary approach is indicated by Kim Il-sung’s 1971 speech, “On Some Measures for Solving the Acute Manpower Shortage,” reprinted in Kim Il-sung, Works, vol. 26 (Pyongyang: Foreign Languages Publishing House, 1986). The drive to incor- porate women into the paid labor force apparently proceeded rapidly. In 1976, Kim Il- sung reported that “women form 48 percent of the workforce in our national economy,” Kim Il-sung, Works, 31:77. 64. Vreeland, Area Handbook for North Korea, 95. See also Pang Hwan Ju, Korean Review (Pyongyang: Foreign Languages Publishing House, 1987), 152, where it is reported that “on one occasion in the latter half of 1970 [the pay for office and factory workers] leapt by an average of 31.5 percent.” 65. Chung, North Korean Economy, 151; the Engel coefficient given for farm households in 1962 was 58.9, and for “industrial and office workers” in 1965 it was 45.5. 66. In 1974 the DPRK announced the official abolition of all direct taxes on workers, and in-kind taxes on agricultural cooperatives had been reportedly eliminated in the mid-1960s. However, procurements by the state, and charges by the state against the harvest, continued as policy. Among the aphorisms of Kim Il-sung reprinted in On the Guidance and Management of the Socialist Economy are two of particular interest: (a) “Grain deliveries to the state should be prompt and the grain procurement plan fulfilled without fail” (214), and (b) “Those who manage the cooperative farms and rural Party organizations should teach the farm members to have a correct understanding of the procurement of grain by the state, and to see to it that assignments under the procurement plan are carried out promptly and without fail” (214). 67. Naum Jasny, The Socialized Agriculture of the USSR (Stanford, Calif.: Stanford University Press, 1952), 736–44. 68. Nicholas R. Lardy, “The Chinese Economy under Stress, 1958–1965,” in Dennis Twitchett and John K. Fairbank, eds., The Cambridge History of China, vol. 14 (Cambridge: Cambridge University Press, 1983), 379–81; Gerard Tongas, L’Enfer Communist au Nord-Vietnam [North Vietnam, Communist Hell] (Paris: Nouvelles Editions Debresse, 1961), 225. 69. According to Trigubenko, the policy of subsidizing agriculture began in 1964; she does not, however, specifically mention the subsidization of consumer prices. Trigubenko, “Agriculture in the DPRK,” 12. In her 1964 visit to North Korea, however, Joan Robinson already observed that “rice in the town is sold at less than a fifth of the procurement price.” Robinson, “Korean Miracle,” 547. It thus appears that the North 214 NOTES TO PAGES 47–48

Korean policy of agricultural subsidies prefigured those which were to emerge in the more prosperous Soviet economy in the 1970s and 1980s. For a description of Soviet policies, see Vladimir G. Treml, “Subsidies in Soviet Agriculture: Record and Prospects,” in U.S. Congress, Joint Economic Committee, Soviet Economy in the 1980s: Problems and Prospects (Washington, D.C.: Government Printing office, 1983), vol. 2. The wedge between procurement prices and consumer prices evidently continued to expand after 1965. According to Pang, in 1987 “the state purchases rice from the farmers for 60 chon per kilogram and supplies it to office and factory workers for 8 chon” (Korean Review, 153). Chae-Jin Lee, who visited North Korea in the summer of 1981, wrote, “The government pays farmers 62 chon . . . per kilogram of rice and 40 chon per kilogram of non-rice cereals, but grain costs consumers only 8 chon per kilogram for rice and 6 chon for other grains.” Chae-Jin Lee, “Economic Aspects of Life in North Korea,” in C. I. Eugene Kim and B. C. Koh, eds., Journey to North Korea: Personal Perceptions (Berkeley: University of California, Institute of East Asian Studies, 1983), 48. It is unlikely that above-ration quantities of grain are sold to nonfarm households for less than the government’s own purchase price; in the authoritative words of Kim Il-sung, “We should not think of making money by raising food prices. . . . True, we cannot set prices lower than their production costs or cause financial losses to the state in the production of foodstuffs” (On the Guidance and Management of the Socialist Economy, 224). According to defectors, a “black market” for grain also existed during those years, although restrictions were severe, and exchanges were executed typically through barter rather than with cash; as of the late 1970s, reported prices per mal (a volume measure equivalent to ten liters) were 15 won for rice, 7 won for corn, and 8 won for flour. Pukhan Charyochip [Source Materials on North Korea] (Seoul: National Unification Board, 1978), 982. 70. Choe Kwan Ik, representative of General Federation of Korean Residents in Japan, interview with author, September 28, 1984, Tokyo. A 1985 travelogue in a leading Soviet publication by a prominent Soviet writer (not, we should note, a Korea hand) strongly implies the existence of a “two-child norm” population policy for the city of Pyongyang but does not mention any specific measures utilized. Arkady Vaksberg, “From the Writer’s Notebook: The Colors of Korea,” Literaturnaya Gazeta, December 3, 1986, translated in JPRS, no. KAR 87 006 (February 6, 1987), 115. 71. Banister, China’s Changing Population, 165–67. 72. No mention of a general increase in wages has been noted in the North Korean media since the 1970 round. Pang’s discussion strongly implies that there were no increases during the late 1970s or 1980s. Pang, Korean Review, 152. A general wage increase was announced in 1992; this will be discussed later in the chapter. 73. For some details on this measure, as reported in the official Nodong Shinmun, see JPRS, Translations on North Korea, no. 22, JPRS 73427 (April 1979), 29. NOTES TO PAGES 48–49 215

74. For additional detail, see Kagan, Human Rights, 200; and Lee, Journey to North Korea, 44, 46. One Soviet account, however, indicates that suits of clothing were only provided every other year in Pyongyang, an enclave of privilege within the DPRK. Vaksberg, “From the Writer’s Notebook,” 114. In May 1990, in a meeting with officials from the Central Bureau of Statistics in Pyongyang, the author was told that one of the major uses of population statistics was in the planning and preparation of “gift distribution” on Kim Il-sung’s birthday. 75. Pang, Korean Review, 154. Also according to Pang, “The state is appropriating several billion won for carrying out such measures as compulsory free education, nursing and upbringing of children, universal free medical services, paid leave, recreation and recuperation, and food and fuel supply at state expense. In 1980 it spent 1.5 billion won on providing factory and office workers with food and fuel alone” (ibid). In 1981, Chae- Jin Lee’s guide in Pyongyang gave him “an approximate breakdown of the economic benefits that a five member urban household in Pyongyang received from the state during the year”; in this telling, food, housing, medical services, and clothing paid for or subsidized by the state supplemented the “typical” family’s cash income by an additional 75 percent. Tuition was another item for which households did not pay directly, but the costs imputed to it in this “reckoning” seemed questionably high. Lee, Journey to North Korea, 49–50. 76. If, for the sake of illustration, the 560 won subsidy is presumed to refer to a family of five consuming their rations entirely in rice—a presumption that minimizes the computed per capita caloric intake from rationed grain—and we presume further that the rice allocated is already husked and polished, we arrive at a figure of 215 kilograms of rice per capita per year, which, at 3.3 calories per gram, would amount to 2,360 calories per person per day. Even at considerably lower totals for rationed grain supplies, cereals distributed by the state could constitute the majority of the calories available for intake. 77. The author noted this in his visit to Pyongyang in May 1990. In 1987, a visitor had noted that “members of a North Korean ‘new class’ who possess the ‘red won,’ a special form of currency with a red stamp, are allowed to purchase foreign food and expensive items at special stores.” Kagan, Human Rights, 200. One Soviet analyst implied that the introduction and tolerance of a limited convertible currency sphere was related to the increased commercial activities of pro-Pyongyang Korean residents of Japan following the 1984 Joint Venture Law. See V. Mikheyev, “The DPRK’s Regional Economic Relations,” Far Eastern Affairs (Moscow), no. 2 (1989): 68. More details on this tripartite currency and pricing system may be found in Derek Hall, “Stalinism and Tourism: A Study of Albania and North Korea,” Annals of Tourism Research 17, no. 1 (1990): 46. 78. Cho Kun-Kyong, “Superiority of Our Socialist System,” Kulloja, no. 2 (1973), translated in JPRS no. 59888 (August 24, 1973), 55. 79. V. Andreyev and N. Beryozkin, “How the Democratic Republic of Korea Deals with Social Questions,” Far Eastern Affairs, no. 1 (1981): 59. The degree to which such 216 NOTES TO PAGES 49–50 claims were taken to speak unfavorably about North Korean conditions is indicated by the fact that the authors of the article were obliged to adopt pseudonyms. “V. Andreyev,” for example, was actually Valentin Moiseyev, an officer in the USSR Ministry of Foreign Affairs. Personal communication with V. Moiseyev, Seoul, October 2, 1991. 80. Chae-Jin Lee’s guide in 1981 illustrated his “breakdown” with the assumption that a typical family of five in Pyongyang—a privileged locale—would include two workers earning 100 won per month apiece; it seems unlikely that his estimates would understate the local average. In North Korea: A Country Study, published in 1981, Bunge states that monthly salaries in North Korea vary around “an overall average of 70–90 won” (150). In 1984, in Seoul, an interview with a then-recent defector (1982) from North Korea elicited the impression that the average wage in Pyongyang at the time of his defection was 40–70 won per month and 10–60 won per month in the countryside. “Mr. Kang,” interview with author, September 14, 1984, Seoul. Even if the “average” household in North Korea today included more than two compensated workers, it seems decidedly optimistic to imagine that the monthly total for salaries and wages in the 1980s would have reached an average level of 300 won per month. 81. Pang, Korea Review, 77–78. 82. According to Germany’s Federal Statistical Office, “The average level of wages and salaries (outside agricultural sector) was 43 won per month in 1960, reached 59 won with the raise in September 1970, and reached 80 won in 1979”; the figures presented, however, suggest that average nominal wages rose quite slowly between 1976 and 1980 (from 76 to 80 won). Bundesrepublik Deutschland, Statisches Bundesamt, Länderbericht: Korea, Demokratische Volksrepublik 1989 [Country Report: Korea, Peoples Democratic Republic, 1989] (Stuttgart: Metzler Poeschel Verlag, 1989), 63. Subsequently, a sympathetic visitor has written of “the average monthly salary of around 80 won.” Gary Klintworth, “Pyongyang Perestroika,” Far Eastern Economic Review, July 12, 1990, 21. Klintworth reported visiting Pyongyang in April 1990. 83. Derived from World Bank, China: Economic Structure in International Perspective, 7, and Paul Marer, “Alternative Estimates of the Dollar GNP and Growth Rates of CMEA Countries,” in U.S. Congress, Joint Economic Committee, East European Economies: Slow Growth in the 1980s, vol. 1, Economic Performance and Policy (Washington, D.C.: Government Printing Office, 1985), 144. 84. For an overview, see Chung, North Korean Economy, chap. 4. 85. According to Chung’s estimates, North Korea’s 1966 exports amounted to $244 million, in 1995 U.S. dollars. See Chung, North Korean Economy, 105. Perhaps the most comprehensive study of North Korean trade patterns for this period is Soo-young Choi, “Foreign Trade of North Korea, 1946–1988: Structure and Performance” (PhD diss., Northeastern University, 1991). Choi estimates 1996 DPRK exports at $230 million— not far from Chung’s earlier computation. 86. Total exports, in current dollars, amounted to a reported $248 million for South Korea in 1966. Krueger, Developmental Role, 133. NOTES TO PAGES 50–51 217

87. For 1970, in 1995 U.S. dollars, one U.S. source gives an estimate of North Korean exports of $365 million. Bunge, North Korea: A Country Study, 256. One Korean scholar arrived at a virtually identical figure, $366 million. Youn Soo Kim, “The Foreign Trade of the KPDR—Structure and Development,” in Youn-Soo Kim, ed., The Economy of the Korean People’s Democratic Republic, 1947–1977 (Kiel: German Studies Group, 1979), 116. Choi places the figure at $362 million. Choi, “Foreign Trade of North Korea,” 312. In 1970, South Korea’s exports were reported at $835 million. Krueger, Developmental Role, 133. By this comparison, South Korea’s exports would have been 2.3 times greater than North Korea’s. South Korea’s population, however, was also roughly 2.3 times as large as North Korea’s in 1970. By such estimates, per capita exports in the South did not measurably exceed those of the North until 1971. 88. Chung, North Korean Economy, 107, 147, at the official exchange rate of $1 = 2.57 won; “national income” refers to the Soviet conception of “net material product” rather than to its meaning in conventional national accounts. Of course, the comparison must be treated with the caution it deserves. 89. Some rough calculations can illustrate the comparison. On the basis of Chung’s dollar estimate of North Korea exports for 1965 and the CIA’s 1980 dollar estimate of 1965 GNP for North Korean GNP, deflated back to 1965 U.S. dollars, one arrives at a ratio of exports to estimated GNP of about 8 percent. Chung, North Korean Economy, 105; CIA, Handbook 1980, 24–25. By similar procedures, one arrives at a ratio for 1965 of less than 3 percent for the USSR, less than 3 percent for China, and about 4 percent for “communist countries” as a group. CIA, Handbook 1980, 24–25, 88, 90, 93. Such measures, of course, must be treated with extreme caution because of the differences in domestic and international resource costs for a socialist planned economy. For an exercise attempting to measure Soviet trade exposure in domestic resource costs, see Vladimir G. Treml and Barry L. Kostinsky, Domestic Value of Soviet Foreign Trade: Exports and Imports in the 1972 Input-Output Table (Washington, D.C.: U.S. Census Bureau, Center for International Research, 1982). 90. Kim, Economy of the Korean People’s Democratic Republic, 122. Bunge’s North Korea: A Country Study gives a similar estimate for the noncommunist share of total trade turnover for 1970 (22 percent), but a somewhat lower estimate for 1974 (52 percent) (derived from 255–56). Choi estimates a similar share for 1970 (21 percent) but a lower share for 1974 (48 percent) (derived from Choi, “Foreign Trade of North Korea,” 312–13). 91. Bunge, North Korea: A Country Study, 255; Kim, Economy of the Korean Democratic People’s Republic, 125, 129; Choi, “Foreign Trade of North Korea,” 313. Growth is in current dollars. 92. Kim, Economy of the Korean Democratic People’s Republic, 122; the estimate includes noncommunist, less-developed countries. Choi’s estimate is lower: for 1974, he places noncommunist imports at 53 percent of total DPRK imports. Choi, “Foreign Trade of North Korea,” 313. Even so, his numbers highlight the shift: only 218 NOTES TO PAGE 51 four years earlier, by his computations, noncommunist countries accounted for less than 14 percent of North Korean imports! 93. See Bunge, North Korea: A Country Study, 154–55, and Hiroko Kawai, “North Korean ‘Open Policies’ and Trade with Japan—The Effects and Functions of Japan DPRK Trade,” in Okonogi, North Korea at the Crossroads, and Kim, Economy of the Korean Democratic People’s Republic, 130–33. 94. Youn-Soo Kim estimates the decline, in current dollars, to have been about 46 percent; by contrast, the U.S. government places the drop at about 23 percent between 1974 and 1976. The CIA estimates a contraction of more than 22 percent, in current dollars, between 1975 and 1976 alone. CIA, Economic Race, 10. Choi estimates the contraction in trade turnover between 1974 and 1976 at 26 percent, an 18 percent drop in exports, and a 30 percent drop in imports. Choi, “Foreign Trade of North Korea,” 312–13. Perhaps the single most detailed and comprehensive contemporaneous analysis of North Korea’s trade problems, and their economic repercussions, may be found in Japan External Trade Organization (JETRO), Present State of the North Korean Economy, March 1979, translated in JPRS, no. 75438 (April 4, 1980). 95. Republic of Korea, National Unification Board, Economies of North and South, 77; Takashi Uehara, “The North Korean Economy,” JETRO China Newsletter, no. 65 (1986); Choi, “Foreign Trade of North Korea,” 312–13. A paper by the Korea Development Institute places North Korea’s total trade turnover in 1985 at about $3.3 billion in 1985 and about $4.7 billion in 1989. Korea Development Institute, “Taehan Minguk kwa Pukhan ui Kyongje Data Pikyo (1989/90)” [ROK-North Korea Economic Data: Comparisons (1989/90)] (unpublished paper, 1991), 17–19. Choi’s estimates are a bit lower for 1985 ($3.0 billion) and a bit higher for the late 1980s (almost $4.9 billion for 1988). Choi, “Foreign Trade of North Korea,” 312–13. The U.S. Defense Intelligence Agency (DIA) tends to have slightly higher estimates for DPRK exports for the 1980s than these other sources; it includes unreported military commerce in its figures. See U.S. Defense Intelligence Agency, North Korea: The Foundations for Military Strength (Washington, D.C.: DIA, October 1991), 24. 96. Mentioned, for example, in Bunge, North Korea: A Country Study, 157. The DIA estimates that arms sales accounted for more than 35 percent of North Korea’s exports in the years 1981, 1982, and 1984 and gives indications that arms sales may have accounted for more than one-fifth of North Korea’s exports for the 1981–89 period. U.S. Defense Intelligence Agency, North Korea: The Foundations for Military Strength, 24. 97. For one review of these factors, see Joseph S. Chung, “Foreign Trade of North Korea: Performance, Policy and Prospects,” in Robert A. Scalapino and Hongkoo Lee, eds., North Korea in a Regional and Global Context (Berkeley: University of California, Institute of East Asian Studies, 1986), 78–114. 98. For more details, see Chung, North Korean Economy, 109–29. For a more detailed outline of Soviet-DPRK trade arrangements, see V. Adrianov and V. Melnikov. “Fruitful Cooperation between the USSR and the DPRK.” Far Eastern NOTES TO PAGES 51–54 219

Affairs (Moscow), no. 2 (1984); and Mikheyev, “DPRK’s Regional Economic Relations.” 99. In 1984, in fact, two Soviet students of North Korean affairs made a startling comment to the effect that the DPRK had never repaid any loans from the Soviet Union— that these had always been renegotiated or rescheduled following North Korean nonperformance! See Adrianov and Melnikov, “Fruitful Cooperation,” 44. 100. For several years before this change, North Korean publications had indicated that the statistical system had become the focus of special party concern. See, for example, “Statistical Control Work Must Be Improved,” Nodong Sinmun, August 4, 1969, translated in JPRS, no. 48936 (September 30, 1969), and “Statistical Work Must Be Improved,” Kulloja, June 1970, translated in JPRS, no. 51257 (August 27, 1970). The policy implications of these articles, however, are not clear. Whether the emphasis on statistical efforts reflected an interest in assessing results for the “Seven” Year Plan that was to be completed in 1970, or spoke to more overarching objectives, cannot be determined from the context or available data. 101. The change was described to the author in Pyongyang in a meeting with officials from the Central Statistics Bureau, May 25, 1990; for more information, see Eberstadt and Banister, Population of North Korea, 86–90. 102. For more details, see Nicholas Eberstadt and Judith Banister, “Military Buildup in the DPRK: Some New Indications from North Korean Data,” Asian Survey 31, no. 11 (1991). 103. Scalapino and Lee, Communism in Korea, 2:919. 104. Institute for Strategic Studies, The Military Balance, 1970–71 (London: ISS, 1971), 64; the precise figure given was 413,000. 105. From the end of the Korean War onward, the Republic of Korea Armed Forces (ROKA) has generally had between 600,000 and 650,000 men under arms. Estimates of force size for given years in the 1960s and 1970s can be found in various editions of ISS’s Military Balance. 106. Kim Il-sung, Works, 31:76. The statement was from a speech titled “On Further Developing the Nursing and Upbringing of Children,” delivered on April 29, 1976. 107. For a concise account focusing on ramifications in the Korean peninsula, see Joo-hong Nam, America’s Commitment to South Korea: The First Decade of the Nixon Doctrine (Cambridge: Cambridge University Press, 1986). 108. North Korean expectations, in fact, were made explicit on at least one occasion. In April 1975—immediately after Vietnam’s reunification on communist terms—Kim Il-sung, then visiting Beijing, declared that “if a revolution takes place in South Korea we, as one and the same nation, will not just look at it with folded arms but will strongly support the South Korean people. If the enemy ignites war recklessly, we shall resolutely answer it with war and completely destroy the aggressors.” Analyzing these words, one observer has written, “Kim Il-sung’s strategy was unmistakable. To instigate a certain level of disorder in the South and on the pretext of ‘strongly supporting’ the South Korean revolution, he would plunge in full force.” Jung Ha Lee, “The Impact of 220 NOTES TO PAGES 54–57 the Nixon Doctrine on South Korea: A Critical Analysis of U.S.–South Korean Relations, 1969–1976” (PhD diss., Catholic University of America, 1980), 263–65. Perhaps equally significant, these remarks in Beijing were not reprinted in Kim’s Collected Works, which were published roughly ten years later. 109. The speech has been widely reported and discussed. For one assessment, see Henderson, Korea: The Politics of the Vortex, 151. As Henderson emphasizes, Acheson’s speech was not an event in isolation: to the contrary, congressional voices were ques- tioning, and even challenging, the official U.S. commitment to the Republic of Korea. Congress, moreover, had voted down the administration’s foreign aid request for South Korea in 1949. For another analysis of the impact of “the Speech,” see Cumings, Origins of the Korean War, 2:chap. 13. 110. For more detail, see Nam, America’s Commitment to South Korea, 78. 111. These are described in John Merrill, Korea: The Peninsular Origins of the War (Newark: University of Delaware Press, 1989), 172–80. 112. Bunge, North Korea: A Country Study, 250. 113. Chin-wee Chung, “Evolution of a Constitutional Structure in North Korea,” in Scalapino and Kim, North Korea Today, 25; the relevant passage is Article 149. 114. The phrase is from Ralph Clough, Embattled Korea: The Rivalry for International Support (Boulder, Colo.: Westview Press, 1987), 111. 115. Scalapino and Lee, Communism in Korea, 2:983, n. 74. 116. Koo, however, observes that “contrary to the report of the Central Statistics Bureau, Kim Il-sung, in his 1976 New Year address, confessed that in three key industrial areas the Six-Year Plan targets remained to be achieved: pig and granulated iron, steel, and cement.” Koo, Political Economy of Self Reliance, 148. 117. For more details, see Teruo Komaki, “Current Status and Prospects of the North Korean Economy,” in Okonogi, North Korea at the Crossroads. 118. Author’s meeting with officials from the DPRK Central Statistics Bureau, Pyongyang, May 25, 1990. These officials also stated that the DPRK’s reluctance to release statistics stemmed in part from the recognition that their figures and methods “did not meet international standards.” With technical assistance from abroad, they said, they hoped to improve the quality of their work and to begin releasing reliable data series within a few years. In retrospect it is all too clear that these hopes were unavailing. 119. One may note that North Korea’s only officially authorized critic, Kim Il-sung, has personally criticized North Korea’s statistical system. Rebuking the supervisory body responsible for Central Statistics Bureau activities, he remarked that “their estimates of manpower have been wrong, not only in making the long-term plan but in making short-term plans. . . . If you work in such a careless way, you cannot manage the socialist economy as you should.” Kim Il-sung, Works 29:261. Some other warnings have been even more emphatic. According to an article in Nodong Sinmun in 1969, “Kim Il-sung pointed out that . . . if we should carry out socialist construction without accurate computation, we might ruin the economy.” “Statistical Work and Control Must Be Improved,” 6. NOTES TO PAGES 57–63 221

120. The problem is illustrated by the great range of estimates concerning the magnitude of economic change in the USSR during the twelfth Five-Year Plan (1986–1990). Trained specialists at the CIA insisted at the time that the Soviet economy was witnessing a steady increase in both per capita output and per capita consumption. Cf. James Noren, “Recent Soviet Economic Trends,” Soviet Economy 5, no. 1 (1990). On the other hand, some Soviet economists were making the case that the absolute level of economic output was in fact declining during that same period. Cf. Andrei A. Nechaev, “The Industrial Depression of the USSR: A Mechanism of Development,” Communist Economies and Economic Transformation 3, no. 4 (1991). Western analyses of economic change in socialist systems may have been unnecessarily hampered by an inattention to monetary phenomena in those economies—including developments in personal “savings” and the state budget. See Igor Birman, “The Budget Gap, Excess Money and Reform,” Communist Economies 2, no. 1 (1990). 121. Kuznets, Modern Economic Growth, 366. 122. Ibid., 508. 123. Chenery and Syrquin, Patterns of Development. 124. United Nations, Yearbook of National Accounts 1972, vols. 1 and 2 (New York: UN, 1974). The countries or territories not listed in these volumes, but included in the Chenery-Syrquin exercise, were Afghanistan, Algeria, Angola, Cambodia, Guinea, Hong Kong, Mali, Mozambique, Papua, Puerto Rico, Senegal, and Somalia. Only two of eleven—Hong Kong and Puerto Rico—were producing national accounts data obtain- able through other sources at that time. 125. Chenery and Syrquin, Patterns of Development, 179. 126. One should note that the figures that might be utilized in a comparable exercise would not be fully trustworthy: one examination of African trade data, for example, concluded that at least through the early 1980s, it was impossible to determine the composition, volume, or trends in exports and imports for most sub-Saharan states with any confidence. See Alexander J. Yeats, “On the Accuracy of Economic Observations: Do Sub-Saharan Trade Statistics Mean Anything?” World Bank Economic Review 4, no. 2 (1990). 127. Earlier, Kuznets had explicitly recognized and dealt with this problem. See Kuznets, Modern Economic Growth, 374–99. 128. Put slightly differently, there is a negative correlation between the relative prices of tradable and nontradable goods and services with respect to per capita income in cross- sectional, international comparisons. 129. Rati Ram, “Conventional and ‘Real’ GDP Per Capita in Cross-Country Studies of Production Structure,” Journal of Development Economics 8, no. 2–3 (1985). 130. That price formation in colonial Korea was less than fully competitive is suggested by Suh’s finding that terms of trade between agriculture and industry moved against agriculture at a time when real product per worker was rising much more rapidly in the industrial sector. Suh, Growth and Structural Changes, 145–47. 131. Ibid. 222 NOTES TO PAGES 64–72

132. Perhaps the single best study on this topic is Pak Il-song, “A Comparative Analysis of the Key Concepts of ‘Grain Production’ in South and North Korea,” Tongil Chongchaek 5, no. 1 (1979), translated in JPRS, no. 75426 (April 2, 1980). 133. Chung, North Korean Economy, 45. 134. Trigubenko, “Agriculture in the DPRK,” 16. 135. Derived from Suh, Growth and Structural Changes, 51. 136. Eberstadt and Banister, Population of North Korea, 83, 104. A lower ratio of workers to total population might speak to two factors: the shift in age structure due to fertility increases and war losses, and the incapacitation of a portion of the population that survived the war. 137. For example, Pong S. Lee, “Overstatement of North Korean Industrial Growth, 1946–1963,” Journal of Korean Affairs 2, no. 2 (1971). 138. Fujio Goto, “Indexes of North Korean Industrial Output 1944–1975,” KSU Economic and Business Review (Kyoto), no. 9 (1982): 145–85. 139. Though the “Goto index” would measure value added, the “harvest index” tracks gross output, which would be rising more rapidly than net output due to the rise of intermediate inputs attendant on more modern farming techniques. Both indices could be affected by overstatements of results. 140. Exact figures on prepartition capital stock are not available for Korea. According to Suh, however, a study by the Seoul Chamber of Commerce in 1944 estimated the cumulative total of Japanese corporate investment in Korea between 1910 and 1941 at fewer than 4 billion yen (current prices). By way of comparison, Suh estimates Korea’s “net commodity product” for 1935–39 to have averaged 1.8 billion yen (current prices). Insofar as the great majority of Japanese corporate investment was in Korean industry, and less than 8 percent of the Korean workforce was reportedly employed in mining and manufacturing as of 1940, these numbers are suggestive of the factor proportions in Korean industry before “the Liberation.” Suh, Growth and Structural Changes, 129, 69, 51. 141. Ibid., 143–45. 142. For 1966, per capita “national income” in North Korea was said to be 510 won. Chung, North Korean Economy, 147. Adjusting this figure in accordance with the official index for national income growth, and with estimates of population growth, results in a figure of 465 won for 1964. Dividing that figure by the contemporary U.S. dollar-won “commercial” exchange rate (1 = 2.57) results at $181. If the output per worker in the “nonproductive sphere” were the same as that for the “productive sphere,” based on year-end 1963 distributions of labor force, per capita GNP would be calculated by this method at $218. 143. The other variable, population size, is subject to less imprecision and can be entered as Pyongyang officially reported it at year-end 1963. 144. Chenery and Syrquin, Patterns of Development, 20–21. 145. Thomas D’Elia, personal communication, July 31, 1991. 146. For an indication of such work, see Choe Chu-hwan, “An Estimate of the North Korean GNP—An Approach from the Expenditures,” Tongil Chongchaek 4, no. 1, 1978, NOTES TO PAGES 72–77 223 cited in Fujio Goto, Estimates of the North Korean Gross Domestic Product 1956–1959 (Kyoto: Kyoto Sangyo University Press, 1990), 8. 147. Ibid. 148. Ibid., 13. 149. Perhaps the most complete public explanation of the CIA’s factor cost approach is in John Pitzer, “Gross National Product of the USSR, 1950–1980,” in U.S. Congress, Joint Economic Committee, USSR: Measures of Economic Growth and Development, 1950–1980 (Washington, D.C.: Government Printing Office, 1982), 33–38. 150. Robert Michael Field, personal communication, January 3, 1992. 151. For example, Ta-chung Liu, “Quantitative Trends in the Economy,” in Eckstein, Galenson, and Liu, Economic Trends in Communist China, 108–9, 138, which critiques the level of Hollister’s estimate but offers similar estimates on the composition of final demand. 152. For an excellent overview of this and other tendencies, see Jan Winiecki, Distorted World. 153. Perkins, Market Control and Planning in Communist China, 111. 154. Goto, Estimates, 38. 155. One should note, however, that the studies in question, for the most part, separate “communal consumption” from personal consumption. If “communal services” were added to “consumption” in Goto’s factor cost estimates, the total would slightly exceed the share imputed to “investment.” 156. Kim Kwang-su, “An Analysis of the Budget Structure of North Korea’s Annual Revenues and Expenditures,” Pukhan, December 1981, translated in JPRS, no. 80421 (March 26, 1982), 51. 157. Eberstadt and Banister, Population of North Korea, 93. 158. Yu, “Arms Race,” 35. 159. For interesting analysis of the state budget’s validity, see ibid. and Kim, “Analysis of the Budget.” 160. Derived from Eberstadt and Banister, Population of North Korea, 104. 161. Kim, Works, 35:176, in which he states that “additional goodgrain of 50,000 tons a year will be enough to meet the needs of the present rate of population growth.” At Eberstadt and Banister’s estimates of the contemporary rate of natural increase, this would imply 154 kilograms per capita. On the basis of official figures for civilian population growth for 1975–80 and 1980–82, it would imply per capita totals of 191 kilograms or 210 kilograms, respectively. 162. Bunge, North Korea, 253. 163. Hy-sang Lee, “Supply and Demand for Grains in North Korea: A Historical Movement Model, 1966–1993,” Korea and World Affairs 18, no. 3 (1994): 565. 164. Hans Maretzki, Kimismus In Nordkorea: Analyse Des Letzten DDR- Botschafters In Pjöngjang [Kim-ism in North Korea: Analysis by the Last GDR Ambassador to Pyongyang] (Boeblingen, Germany: Anita Tykve Verlag, 1991), 155. 224 NOTES TO PAGES 77–84

165. Kim Chon-gun, “Pukhan ui Nongop Palchon kwa Saengsan Kaehwang” [Outline of North Korea’s Agricultural Development and Production], Pukhan Yongu (Seoul) 3, no. 1 (1992): 74. 166. Trigubenko puts her view succinctly: “The official reports falsify the real state of affairs.” Trigubenko, “Industry of the DPRK,” 2. Her paper provides alternate Soviet estimates, always lower than official claims, for a number of key industrial targets. 167. This assertion was made to the author on separate and independent occasions by Professor Marina Trigubenko and Ambassador Hans Maretzki, personal communications, October 1991 and May 1993. 168. For an exposition on this process, see C. Peter Timmer, “The Agricultural Transformation,” in Hollis Chenery and T. N. Srinivasan, eds., Handbook of Development Economics, vol. 1 (New York: Elsevier, 1988). 169. By one set of World Bank estimates, for example, the ratio of output per worker in industry and agriculture in 1980 was 5.7 to 1 in China, 3.3 to 1 in Poland, 3.2 to 1 in Bulgaria, 3.0 to 1 in Yugoslavia, 2.4 to 1 in Romania, 2.1 to 1 in Czechoslovakia, 1.6 to 1 in the German Democratic Republic, and 1.2 to 1 in the Soviet Union. World Bank, World Development Report 1982, 115, 147. The report stated that its estimates for output by sector were based on official data on net material product for the countries concerned—and thus, at least in theory, would mean these numbers should be comparable to the figures for the DPRK. 170. For 1980, according to one set of World Bank estimates, the ratio of output per worker in industry and agriculture was 2.5 to 1 for the countries classified as “other low-income economies” (a grouping of low-income economies excluding both China and India), and 5.3 to 1 for “middle income economies.” Ibid., 114, 146. 171. Eberstadt and Banister, “Military Buildup in the DPRK,” 1, 110–11. 172. By way of comparison, the ratio of men under arms to population in the United States in 1943 was at roughly the DPRK level in 1987. Ibid, 1, 111. Trigubenko claims that 30 percent of the DPRK’s “gross social product” goes to the military. Trigubenko, “Industry in the DPRK,” 6. However, she claims that only 8 percent of gross social product is allocated to defense in the USSR—a comment that should raise eyebrows in its own right, and might seem to beg the question of whether even her own 30 percent figure for military burden for the DPRK, though strikingly high on its face, might be an underestimate. 173. When the author visited the Sunchon cement factory in 1990, he was told that the plant’s chief engineer earned 200 won per month. In view of the fact that this was a showpiece plant (a “turn-key” operation imported from West Germany), one may presume the nation’s average monthly industrial wage would be below this level. 174. Goto, Estimates, 14, 31, 43. 175. Thus, Y. T. Kuark warned that “the alleged price stability over recent years is doubtful, because North Korea’s declining published retail price indices in the last several years seem not to be consistent with the marked increase in volume of retail commodity transactions and in the money supply and bank credit transactions.” Y. T. Kuark, NOTES TO PAGES 85–89 225

“A Comparative Study of Economic Development in North and South Korea during the Post-Korean War Period” (PhD diss., University of Minnesota, 1966). As Winiecki points out, however, in a Soviet-type economy, “excess demand may persist under stable, falling, or rising prices. . . . The official price index is irrelevant as a measure of excess demand (even if prices are allowed to fluctuate).” Winiecki, Distorted World, 8. 176. Kulloja, no. 14, 1964, translated in JPRS, no. 27213 (November 4, 1964), 2. 177. Eberstadt and Banister, Population of North Korea, 83. 178. Ibid., 8. 179. Nicholas Eberstadt and Judith Banister, “Challenges and Opportunities for Korean Unification” (unpublished paper), table 11. 180. Goto, Estimates, 14, 31, 311. 181. “Speed Battles” seem to have begun in 1973, coinciding with the “Three Revolutions” campaign. 182. Kim Il-sung, Works, 31:113. 183. Kim Il-Sung, Address to State Administrative Council, Pyongyang Domestic Service, August 11, 1977, translated in JPRS, no. 69725 (September 1, 1977), 40. 184. Minju Choson, September 28, 1978, translated in JPRS, no. 72475 (December 19, 1978), 6. 185. Sahoe Kuchak, no. 3, 1978, translated in JPRS, no. 71975 (March 10, 1978). 186. Kim, On the Guidance and Management of the Socialist Economy, 253. 187. For an eloquent explication, see Winiecki, Distorted World, chaps. 1–2. 188. For a lucid discussion of “inducement goods,” see P. T. Bauer, West Africa Markets (Cambridge: Cambridge University Press, 1954). 189. It may be, however, that the “militarization” of North Korea’s economy is to some extent a way of subjecting “problem projects” to greater control and discipline; if so, demobilization per se would not aid extensive growth so dramatically. 190. Nodong Sinmun, March 27, 1987, translated in JPRS, Korean Affairs Report 87 024 (April 14, 1987), 53. 191. Okonogi, North Korea at the Crossroads, 58–63. Some observers, however, read an active debate about “liberalization” in official statements and public pronouncements. See esp. Merrill, “North Korea’s Halting Efforts at Economic Reform,” and Hy-Sang Lee, “The August Third Program of North Korea: A Partial Rollback of Central Planning,” Korea Observer 21, no. 4 (1990). 192. For official details, see Foreign Trade (Pyongyang), nos. 10–12 (1986). 193. As John C. Perry observed, Pyongyang’s “refusal to follow accepted international business practices in quality control and in payments of accounts has severely handi- capped trade with the capitalist world. . . . Even the Soviets complain that North Korea fails to fulfill contracts and that its debts continue to pile up. As a result, almost all joint ventures are now conducted with the Koreans living presumably in Japan.” Perry, “Dateline North Korea,” Foreign Policy (Summer 1991): 173. 194. For more details, see Kawai, “North Korean ‘Open Policies’ and Trade with Japan,” in Okonogi, North Korea at the Crossroads. 226 NOTES TO PAGES 89–94

195. Very roughly, accounting for two-thirds of total turnover in 1985. For one set of estimates, see Uehara, “North Korean Economy.” 196. These figures were presented to the author in a meeting in Pyongyang with officials from the Central Bureau of Statistics, May 25, 1990. 197. Ibid. 198. Trigubenko, “Industry in the DPRK,” 8. 199. The following analysis draws heavily on Nicholas Eberstadt, Marc Rubin, and Albina Tretyakova, “The Collapse of Soviet Trade with the DPRK: Impact and Implications,” Korean Journal of Reunification (Seoul), 4 (1995). 200. For a translation of the complete text, see FBIS, “Communiqué Issues on Plenum,” Daily Report: East Asia, EAS 93 235, December 9, 1993, 12–19.

Chapter 3: Policy and Economic Performance in South Korea: 1945–1991

1. For the period between 1963 and 1992, contemporaneous estimates by the Bank of Korea indicate that the ROK’s real GNP increased by a factor of 11.1; its real GDP increased by a factor of 11.3. Derived from Bank of Korea, National Accounts 1994 (Seoul: BOK, 1994), 20–21, 24–26, 33, 37. Over those same years, South Korea’s population is estimated to have increased from 26.5 to 43.7 million, or by roughly 65 percent. Derived from United Nations, Demographic Yearbook (special issue) (New York: UN, 1979), 139, and United Nations, Demographic Yearbook, 1992 (New York: UN, 1994), 129. To go by these figures, per capita GNP would have risen by a factor of 6.8 between 1962 and 1992; per capita GDP would have risen by a factor of 6.9. Subsequent statistical revisions have not qualified this assessment to any appreciable degree. 2. By the criterion of exports of goods and services in current dollars, South Korea in 1965 ranked 67th among the 144 member-state countries (plus nonmember Taiwan) for which the International Monetary Fund (IMF) prepared time series estimates; by 1980, its ranking was 26th, and by 1992 it ranked 13th. For imports, the corresponding rankings for 1965, 1980, and 1992 were 51st, 19th, and 12th, respectively. According to these same series estimates, South Korea accounted for roughly 2 percent of the world’s trade turnover by 1992—up from 0.2 percent in 1965. Derived from IMF, International Financial Statistics Yearbook, vol. 48 (Washington, D.C.: International Monetary Fund, 1994), 10–17. While questions may be raised about particulars of these IMF time series, including their methodology in estimating trade turnover and the completeness of their global coverage, the broad and dramatic trends that these numbers depict with respect to South Korea’s participation in the world economy are clearly not artifactual. 3. By 1986, Pohang Iron and Steel Company (POSCO) had entered into a joint venture with U.S. Steel (USX) “for the purposes of modernizing USX’s Pittsburgh, California plant. At that time POSCO was supplying half the capital requirements . . . NOTES TO PAGE 94 227 for the modernization—providing the PittCal cold–rolled sheet facility with hot bend coil, undertaking the design of the facility’s modernization jointly with USX, and less than twenty years after its founding, POSCO was exporting technology.” Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization (New York: Oxford University Press, 1989), 291–92. 4. An anecdotal, “case study” approach to this rise of competitiveness is offered by Ira C. Magaziner and Mark Patinkin, “Fast Heat: How Korea Won the Microwave War,” Harvard Business Review 67, no. 1 (1989): 83–92. For a more general and quantitative assessment, see Yung Whee Rhee, Bruce Ross Larson, and Gary Pursell, Korea’s Competitive Edge: Managing the Entry into World Markets (Baltimore: Johns Hopkins University Press, 1984). But see Danny M. Leipziger and Peter A. Petri, “Korean Industrial Policy: Legacies of the Past and Directions for the Future,” World Bank Discussion Papers, no. 197 (1993), for cautionary distinctions between “competitiveness” and “productivity” in the South Korean context. 5. “Report to the President,” 1947, parts 1–5, as reprinted in Albert C. Wedemeyer, Wedemeyer Reports (New York: Henry Holt, 1958), 473–74, 477. 6. Memorandum of conversation by Mr. John Z. Williams, February 4, 1948, reprinted in U.S. Department of State, Foreign Relations of the United States, 1948 (Washington, D.C.: Government Printing Office, 1974), 6:1092. Williams’s interlocutor was Major General Charles G. Helmick. 7. Perhaps the most informed guess is Kwon Tae Hwan’s: “During the three years of war, deaths excluding those expected under normal civilian conditions are likely to have numbered 1,500,000 to 2,000,000”; his central estimate is slightly more than 1.6 million. Kwon Tae Hwan, Demography of Korea: Population Chancre and Its Components 1925–66 (Seoul: Seoul National University Press, 1977), 204–5. To put these losses in perspective: in its 1949 census, South Korea’s population was enumerated at just under twenty million persons. 8. David C. Cole and Princeton N. Lyman, Korean Development: The Interplay of Politics and Economics (Cambridge, Mass.: Harvard University Press, 1971), 22. The numerator for that fraction (5.5 million wartime refugees) is drawn from a study by the Korean Reconstruction Bank a few years after the armistice. Official American estimates were lower, thus President Eisenhower’s July 1953 appeal that “over 2 1/2 million have become homeless refugees” in South Korea “since the outbreak of war in 1950.” Message from the President to Congress, July 27, 1953, reprinted in Gene M. Lyons, Military Policy and Economic Aid: The Korean Case, 1950–1953 (Columbus: Ohio State University Press, 1961), 259. These are contradictions that may never be fully resolved. Wartime conditions are not ideal for the compilation of accurate social statistics. 9. Cole and Lyman put the property damage to South Korea from the war at US$2 billion, presumably in current dollars. Cole and Lyman, Korean Development, 22. President Eisenhower stated in July 1953 that “property destruction exceeds $1 billion.” Lyons, Military Policy and Economic Aid, 259. By contrast, a South Korean scholar—and one-time deputy prime minister—estimated that the “three years of war resulted in 228 NOTES TO PAGE 94 damage amounting to some 3 billion dollars.” Wan-son Tae, The Development of Korea: Past, Present and Future (Seoul: Samhwa Publishing Company, 1973), 31. Another South Korean scholar—who was also to serve as deputy prime minister for the Republic of Korea—framed the devastation in more local terms: “The total physical damage of the war was currently valued at 412 billion hwan—nearly double the current value of the annual gross national product of the [South] Korean economy.” Hahn-Been Lee, Korea: Time, Change, and Administration (Honolulu: East West Center Press, 1968), 57. 10. Thus the 1954 Nathan Report (a relatively optimistic assessment at the time): “Much additional capital equipment will be needed. . . . The nation’s farm, factories and mines, though in a depleted and damaged condition, can be rehabilitated and rounded out. . . . The resulting living standard will be low by Western criteria. . . . The Republic of Korea will long remain a dominantly agricultural country. . . . The FAO/UNKRA Mission points out, however, that it is improbable that yields in Korea could be raised to the level of those obtained in Japan [in 1951] during the next twenty years.” Robert R. Nathan Associates, Inc., An Economic Programme for Korean Reconstruction (New York: United Nations Reconstruction Agency, 1954), vii, 292. An AID official, who had served in Seoul in a variety of capacities in the 1950s and 1960s, later recalled the “development community’s” expectations: “In 1963 or 1964, [South] Korea was regarded as a ‘basket case.’. . . AID officials in that period talked about pouring money down the Korean rat hole.” David I. Steinberg, The Economic Development of Korea: Sui Generis or Generic? AID Special Evaluation Study, no. 6 (Washington, D.C.: USAID Office of Evaluation, January 1982), 42. According to a classified, official State Department history, moreover, “Many American officials were [still] predicting that [South] Korea would never get off the dole” in late 1963. See “Administrative History of the Department of State,” pt. 1, chap. 7, sec. F (declassified), cited in David H. Satterwhite, “The Politics of Economic Development: Coup, State, and the Republic of Korea’s First Five-Year Economic Development Plan (1962–1966)” (PhD diss., University of Washington, 1994), 55 n. 9. Not all readings of South Korea’s economic prospects, of course, were so gloomy. A small but influential circle of American policymakers during the Kennedy administration, for example, appears to have anticipated South Korea’s burst of rapid growth before its actual advent. In 1961, this circle included Robert Komer at the National Security Council and Walt W. Rostow at the State Department, who were then arguing that South Korea was positioned for “take-off”—pending appropriate policies. Jung-en Woo, Race to the Swift: State and Finance in Korean Industrialization (New York: Columbia University Press, 1991), 76–78. By 1963, this circle had extended to include some of the key personnel in the U.S. foreign aid apparatus—including, by some reports, the mission head in South Korea, James Killen. 11. Writing in 1968, for example, no less knowledgeable an observer than Gregory Henderson attributed South Korea’s contemporary boom mainly to “its profitable involvement in the Vietnam War,” a presumably transient phenomenon. Henderson, Korea: The Politics of the Vortex, 330, 373. NOTES TO PAGE 95 229

In 1973, Edward Mason and Robert Asher recalled, “The economic prospects of South Korea and Taiwan seemed highly suspect ten or twelve years ago, but their economic achievements since then have been spectacular.” Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods (Washington, D.C.: Brookings Institution, 1973), 736. It was not only Americans, we should stress, who questioned the sustainability of South Korea’s 1960s boom. Not surprisingly, this was an issue of tremendous concern to South Korea’s own analysts and policymakers as well. Indeed, in 1972 the first working paper released by the ROK’s new semi-independent official economic “think tank,” the Korea Development Institute, addressed the contribution to South Korea’s economic growth of the Vietnam War and recognition-related aid from Japan. Its conclusion: these once-only global events accounted for perhaps one-third of South Korea’s economic acceleration during the 1960s. See Hakchung Choo, “Effects of the Vietnam War and the Normalization of the Korean-Japanese Relations in the Korean Economic Development in the 1960s” (Korean Development Institute [hereafter referred to as KDI], Working Paper 7201, Seoul, 1972). 12. Gerschenkron’s essay “Economic Backwardness in Historical Perspective” was first published in 1952. It is reprinted as the first chapter of Gerschenkron’s Economic Backwardness in Historical Perspective (Cambridge, Mass.: Belknap Press for Harvard University Press, 1962). 13. Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement (New York: Harcourt, Brace, Jovanovich, 1980), 57. 14. For a quasi-official rendition, see Federation of Korean Industries, Korea’s Economic Policies: 1945–85 (Seoul: FKI, 1987). 15. Some of the noteworthy contributions to this literature would include, in chrono- logical order, the following: Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, Calif.: Stanford University Press, 1982); Peter B. Evans, Dietrich Rueschmeyer, and Evelyne Huber Stephens, eds., States Versus Markets in the World System (Beverly Hills, Calif.: Sage Publications, 1985); Frederic C. Deyo, ed., The Political Economy of the New Asian Industrialism (Ithaca, N.Y.: Cornell University Press, 1987); Chalmers Johnson, Laura D’Andrea Tyson, and John Zysman, eds., Politics and Productivity: Why Japan Really Works (Cambridge, Mass.: Ballinger, 1989); and Robert Wade, Governing the Market Economic Theory and the Role of Government in East Asian Industrialization (Princeton, N.J.: Princeton University Press, 1990). Publications generally representing this school of thought and focusing more specifically on the Korean experience would include Chalmers Johnson, “The Nonsocialist NICs: East Asia,” International Organization 40, no. 2 (1986): 557–65; Amsden, Asia’s Next Giant; Alice H. Amsden, “East Asia’s Challenge to Standard Economics,” American Prospect (Summer 1990): 71–77; Martin Hart Landsberg, Rush to Development: Economic Change and Political Struggle in South Korea (New York: Monthly Review Press, 1993); Ha-joon Chang, “The Political Economy of Industrial Policy in Korea,” Cambridge 230 NOTES TO PAGES 96–98

Journal of Economics 17, no. 2 (1993): 131–57; Ha-joon Chang, The Political Economy of Industrial Policy (New York: St. Martin’s Press, 1994); Peter B. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton, N.J.: Princeton University Press, 1995); and Mauricio Mesquita Moreira, Industrialization, Trade and Market Failures: The Role of Government Intervention in Brazil and South Korea (New York: St. Martin’s Press, 1995). Perhaps not surprisingly, a “latecomer” literature endorsing this interpretation of Korean development can be found in German. See, among other contributions, Sang- bin Bae, Die Schaffung komparativer Kostenvorteile als handelspolitische Strategie, dargestellt am Beispiel Südkorea [The Creation of Comparative Economic Advantage as a Trade Policy Strategy Illustrated through the Example of South Korea] (Frankfurt: P. Lang Verlag, 1992), and Jun seong Hwang, Politische Ökonomie der südkoreanischen Aussenwirtschaftspolitik: eine theoretische and wirtschaftspolitische Analyse der südkoreanis- chen Aussenwirtschaft [The Political Economy of South Korean Foreign Policy: A Theoretical and Economic Policy Analysis of the South Korean External Economy] (Frankfurt: P. Lang Verlag, 1993). 16. Hart-Landsberg, Rush to Development, 15. 17. Thus, the title of the crucial sixth chapter in Amsden, Asia’s Next Giant?: “Getting Prices Wrong.” 18. Bae, Die Schaffung komparativer Kostenvorteile. 19. I say “seemingly” because the perspective itself can be traced back, at least to the nineteenth century, to the theoretical writings of Friedrich List and the phenomena of “state-led modernization” in Europe, Russia, and Japan. For an indication of just how familiar these “new” arguments were to Japanese and German audiences some eighty years ago, see Kenneth B. Pyle, “Advantages of Followership: German Economics and Japanese Bureaucrats, 1890–1925,” Journal of Japanese History 1, no. 1 (1974): 127–64. 20. A variety of factors may account for this—not the least of them possibly being that the project of “bringing the state back in” (to borrow a phrase) is a broadly congenial one in many intellectual quarters. See Peter B. Evans, Dietrich Rueschmeyer, and Theda Skocpol, Bringing the State Back In (New York: Cambridge University Press, 1985). 21. Indicative of the volume of output are the references listed on various electronic databases. Dissertation Abstracts Ondisc, for example, catalogued 406 doctoral theses in political science and 486 doctoral theses in economics under the search terms “Korea” or “Korean” for the years 1982 to 1994 alone. Econlit, the electronic database for the economics literature, identified 1,440 items from 1980 to 1995 under the search terms “Korea” or “Korean.” PAIS International, the corresponding database for political science literature, listed some 1,874 items for “Korea or Korean” for just 1980 to 1995. Only a tiny fraction of these studies touched on North Korea. 22. The magnitude of the disruption is suggested by a few summary statistics: (a) According to the Bank of Chosun, the manufacturing output in South Korea in 1948 was at only 15 percent of its 1939 level. See Yoo Won-dong and Shim Sang-pil, Histoire Economique de la Corée (Seoul: Sook-myung University Press, 1986), 93. (b) Albert NOTES TO PAGE 98 231

Keidel estimates that farm output (in 1970 won) fell by about 15 percent in South Korea between 1937 and 1947. Korea Development Institute, Korean Regional Farm Product and Income: 1910–1975 (Seoul: Korea Development Institute, 1981), 184, 210. (c) The population of what was to become South Korea increased substantially between the late 1930s and the late 1940s. 23. According to the Bank of Korea, South Korea’s real GNP (1955 prices) fell by more than 20 percent between 1949 and 1951. Cited in Lee, Korea: Time, Change and Administration, 57. 24. These difficulties are mentioned in Kwang-suk Kim and Michael Roemer, Growth and Structural Transformation (Cambridge, Mass.: Harvard University Press, 1979), 34, 36; and Krueger, Developmental Role, chap. 1. 25. Derived from Kim and Roemer, Growth and Structural Transformation, 35; and Bank of Korea, National Accounts 1994 (Seoul: BOK, 1994), 14–17. For 1940–53, changes in output are estimated in 1953 constant won; for 1953–60, in 1975 constant won. For the period as a whole, net commodity product is estimated to have risen by less than 1 percent, initially dropping by nearly 27 percent between 1940 and 1953 and recovering thereafter. 26. Kwon, Demography of Korea, 284, 288. 27. Suh, for example, uses 25 percent as his minimum guess for the service sector’s share within the colonial Korean economy in the 1930s. Suh, Growth and Structural Changes, 120. 28. Mason et al., Economic and Social Modernization, 100. 29. A 1994 study of the Organisation for Economic Co-operation and Development offers an even more severe assessment: by its calculations, South Korea’s 1960 “real GDP per capita appears to have been only 70 percent of the 1938 level, despite an aid programme that averaged 7 percent of GDP between 1953 and 1960.” Organisation for Economic Co-operation and Development (hereafter OECD), OECD Country Surveys: Korea (Paris: OECD, 1994), 14. Although the sources for those calculations are not cited, OECD’s assessment appears to draw on the research of Dirk Pilat, who prepared time series estimates for South Korean GDP (constant 1985 won) for 1911–90. See Dirk Pilat, The Economics of Rapid Growth (Brookfield, Vt.: Edward Elgar, 1994). 30. Derived from Kwon, Demography of Korea, 284, 288. The “working ages” are here defined as fifteen to sixty-four, inclusive. 31. By Suh’s estimates, per capita net commodity product for Korea as a whole increased by about 22 percent between 1925 and 1940. Derived from Suh, Growth and Structural Changes, 40, 171. Over that period, of course, growth rates were different for what were to become North Korea and South Korea; moreover, the pace of growth for the service sector during those years remains unmeasured. For South Korea’s agricultural and industrial sectors, however, value added per member of the population could have been distinctly lower in 1960 than it had been in 1925. Pilat’s figures indicate a slightly lower per capita GDP for South Korea in 1960 than for southern Korea in 1925: 473,000 won vs. 489,000 won (1985 prices). Pilat, Economics of Rapid Growth, 294–95. 232 NOTES TO PAGES 98–99

In view of the assumptions required to construct that series, Pilat’s estimates can hardly be treated as precise. Nevertheless, they are illustrative. 32. Long-term growth estimates by Maddison may illustrate the point. In Argentina, per capita GDP is estimated to have risen by 29 percent between 1929 and 1960, in India by 7 percent, and in China by 15 percent. Among the countries devastated by major wars during this period, Maddison estimates per capita output in Japan to have risen by more than 100 percent between 1929 and 1960, West Germany by more than 120 percent, and the Soviet Union by more than 200 percent. Interpolations from Maddison’s numbers suggest that Spain’s per capita GDP increased by more than 50 percent between 1929 and 1960. Derived from Angus Maddison, The World Economy in the 20th Century (Paris: OECD, 1989), tables B-2, B-3, B-4, B-5, B-6, C-1, C-3, C-4, C-5. 33. See, for example, Woo, Race to the Swift, chap. 2; Suh, Growth and Structural Changes, chap. 9; Yoo and Shim, Histoire Economique de la Corée, chap. 5.1; and Yi Ki- Baek, New History of Korea, chap. 15. 34. Mason et al., Economic and Social Modernization, 104. 35. As an arithmetic proposition, using the data adduced and the assumptions stipulated in the preceding pages, per capita consumption in South Korea around 1960 could not have been higher than the southern Korean level circa 1939–40 unless consumption had accounted for less than 70 percent of domestic product at that time. This looks unlikely. Toshiyuki Mizoguchi, for example, estimates that private and government consumption totaled 82 percent of Korea’s gross domestic product in 1938. Mizoguchi, “Economic Growth of Korea under the Japanese Occupation,” 4. Even if all investment had been in the Korean south—and we know it was not—consumption, by these indications, would have accounted for 73 percent or more of southern Korea’s output in the late 1930s. 36. The distribution of consumption may well have been more even in the postcolo- nial period, as Economic and Social Modernization by Mason et al. concludes. If so, the median level of per capita consumption in South Korea might have risen between 1940 and 1960. Within the limits of available data, however, there is little reason to believe that mean per capita consumption rose during this period. 37. For 1960–62, exports and imports of merchandise equaled roughly 13 or 14 percent of South Korea’s GNP (1970 constant prices). Mason et al., Economic and Social Modernization, 104; Bank of Korea, National Accounts 1994, 17, 22. In 1935, by contrast, trade turnover for the Korean peninsula amounted to about 47 percent of its GDP, according to Mizoguchi’s calculations. Mizoguchi, “Economic Growth of Korea,” 4. By 1938–39, exports and imports may have been equivalent to 53–56 percent of the Korean peninsula’s GNP, in Suh’s estimate. Suh, Growth and Structural Changes, 120. 38. Kim and Roemer, Growth and Structural Transformation, 50, 52. Note that these estimates are for gross national savings; as the authors observe, “Gross saving was so low that net national saving was close to zero or, from 1959 to 1962, substantially negative (that is, depreciation was over 100 percent of gross saving),” 51. NOTES TO PAGES 99–101 233

39. Suh estimates the ratio of annual change in private deposits at savings institutions to net commodity product in Korea for 1936–39 to have been 21 percent. While the denominator is low in comparison with figures appropriate for GNP calculation, the numerator may also be low in comparison with actual total private savings. Suh, Growth and Structural Changes, 69. 40. For 1960–61, the Bank of Korea estimates the share of South Korea’s GNP generated by mining, quarrying, and manufacturing at 15.7 percent. Bank of Korea, National Accounts 1994, 17 (figures given in current prices). Suh estimates manufacturing to have accounted for 19 percent of the South’s total commodity product in 1939–40 and mining to have accounted for 3.5 percent. Suh, Growth and Structural Changes, 139. Using Suh’s alternative hypotheses of a 25 and 35 percent service sector share in the contemporary, colonial Korean economy, we derive 14.6–16.9 percent as a hypothetical range for the mining/manufacturing sector’s share of southern Korean output during those years. 41. Punctilious readers may point out that South Korea did actually experience an interlude of civilian-led government during this period: an interregnum, late in 1979, of roughly seven weeks in duration, between the assassination of Park Chung Hee and the Chun Doo Hwan coup d’etat. To examine the plight of Choi Kyu Hah’s brief and ill-fated administration, however, is to appreciate the complete dominance of military men in South Korean politics at the time. 42. For a summary and assessment of this record, see Nicholas Eberstadt, “Taiwan and South Korea: The ‘Democratization’ of Outlier States,” World Affairs 155 (1992): 80–89. 43. Mark Clifford, Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea (Armonk, N.Y.: M. E. Sharpe, 1994), 35. 44. Henderson, Korea: The Politics of the Vortex, 108. For more about these two institutions and their Korean matriculants, see ibid., 106–10. 45. Dal-choong Chang, Economic Control and Political Authoritarianism: The Role of Japanese Corporations in Korean Politics, 1965–1979 (Seoul: Sogang University Press, 1985), 7. Note that some other sources give Park’s Japanese name as Takagi Masao: see, for example, Don Oberdorfer, The Two Koreas: A Contemporary History (New York: Basic Books, 2001), 31. 46. For background, see Elizabeth B. Schumpeter, ed., The Industrialization of Japan and Manchukuo, 1930–1940 (New York: Macmillan, 1940); Jerome B. Cohen, Japan’s Economy in War and Reconstruction (Minneapolis: University of Minnesota Press, 1949); Ramon H. Myers, “The Japanese Economic Development of Manchuria, 1932–1945” (PhD diss., University of Washington, 1959), esp. chap. 3; Kungtu C. Sun with Ralph W. Huenemann, The Economic Development of Manchuria in the First Half of the Twentieth Century (Cambridge, Mass.: Harvard University Press, 1969); Johnson, MITI and the Japanese Miracle, chap. 4; Nakamura Takafusa, Economic Growth in Prewar Japan (New Haven, Conn.: Yale University Press, 1983), esp. chaps. 9 and 10; Satterwhite, “Politics of Economic Development,” chap. 2; and Nakamura Takafusa, Lectures on Modern 234 NOTES TO PAGES 101–103

Japanese History, 1926–1994 (Tokyo: LTCB International Library Foundation, 1994), lectures 2 and 3. For background on the policies in Korea, see Carter J. Eckert, Offspring of Empire: The Koch’ang Kims and the Colonial Origins of Korean Capitalism (Seattle: University of Washington Press, 1991), chaps. 4 and 5; and Woo, Race to the Swift, chap. 2. 47. See Ching chih-Chen, “Police and Community Control Systems in the Empire,” in Myers and Peattie, Japanese Colonial Empire. 48. On this latter score, see Germaine A. Hoston, Marxism and the Crisis of Development in Prewar Japan (Princeton, N.J.: Princeton University Press, 1987). 49. This distinction is drawn out in George Macklin Wilson, “A New Look at the Problem of ‘Japanese Fascism,’” Comparative Studies in Society and History 10, no. 4 (1968): 401–13. See also Michael A. Barnhart, Japan Prepares for Total War: The Search for Economic Security, 1919–1941 (Ithaca, N.Y.: Cornell University Press, 1987). 50. Details on Park’s service in the Japanese Kwangtung Army are sketchy, but see Clough, Embattled Korea, 41, and Jungwon A. Kim, Divided Korea: The Politics of Development, 1945–1972 (Cambridge, Mass.: Harvard University Press, 1975), 230. 51. Thus, Mark Clifford states: “Because of their training in the fascist corporate state of the wartime Japanese empire, the military men of Park’s generation had a clearer idea of how a state could organize capitalism than did either their senior or their juniors.” Clifford, Troubled Tiger, 37. 52. The KCIA was formed on June 10, 1961. Lee, Korea: Time, Change, and Administration, 155. 53. Kim, Divided Korea, 234. 54. Initially called the Economic Planning Council, it was established on July 22, 1961. Cole and Lyman, Korean Development, 205. For some background on the EPB, see Mason et al., Economic and Social Modernization, esp. chaps. 6 and 8; Jones and Sakong, Government, Business, and Entrepreneurship, 46–50; and Clifford, Troubled Tiger, chap. 4. 55. The analyst: Paul Kuznets; see his “Indicative Planning in Korea,” Journal of Comparative Economics 14, no. 4 (1990): 647–76, esp. 654–55. 56. Cole and Lyman, Korean Development, 203–4; Jones and Sakong, Government, Business, and Entrepreneurship, 44–47. 57. Clifford, Troubled Tiger, 48. 58. For some months after the coup, in fact, U.S. diplomatic opinion was divided as to whether the new junta was procommunist or anticommunist. Six weeks after the “May 16 Revolution,” for example, former Assistant Secretary of State Roger Hilsman Jr. reportedly wondered aloud whether the takeover might not be “the cleverest communist coup ever pulled off.” Woo, Race to the Swift, 218 n. 22. By November 1961, when Park was permitted a meeting with President Kennedy during a visit to Washington, the junta’s anticommunist bona fides had been ascertained to American satisfaction. 59. As Henderson remarked early on: “In essence, a modified version of the bureaucratic, economy-oriented, military-efficient, depoliticized, rigidly anti-communist rule that was once Japan’s formula for the progress of Chosen has been reimposed. Present planning functions NOTES TO PAGES 103–104 235 and 1961–1963 government-inspired national movements, like that for reconstruction, have resembled those of the 1930s.” Henderson, Politics of the Vortex, 190. 60. Suh estimates per capita commodity product to have grown by more than 3 percent per year in Korea between 1930 and 1940 and by about 2.2 percent a year between 1910 and 1940; Mizoguchi’s estimates of “gross domestic expenditure (GDE)” indicate per capita growth in real terms of about 2 percent per year between 1911 and 1938. Suh, Korean Economy, 1910–1940, 41, 43; Mizoguchi Toshiyuki, Taiwan Chosen No Keizai Seicho [Economic Growth of Taiwan and Korea] (Tokyo: Iwanami Shoten, 1975), cited in Mizoguchi and Yamamoto, “Capital Formation in Taiwan and Korea,” 413. 61. Nathan Associates, Economic Programmme for Korean Reconstruction, vii. 62. See Kim and Roemer for estimate that textiles and processed foods accounted for about 53 percent of South Korea’s meager manufacturing output in 1948. Kim and Roemer, Growth and Structural Transformation, 36. In northern Korea in 1939, by contrast, those two same items accounted for an estimated 18 percent of manufacturing output. Ibid., 24. 63. Derived from U.S. Agency for International Development, U.S. Overseas Loans and Grants and Assistance from International Organizations: Obligations and Loan Authorizations, July 1, 1945–September 30, 1979 (Washington, D.C.: USAID Office of Planning and Budgeting, n.d.), 76. 64. Kim and Roemer, Growth and Structural Transformation, 30–35. Kim and Roemer estimate the ROK’s 1953 GNP at $2.7 billion, in 1970 constant prices; deflating 1970 constant prices to 1953 constant prices by the U.S. PPI would make for a 1953 GNP of about $2 billion. Note that some contemporary assessments evidently estimated the ROK’s GNP to be considerably lower: the Nathan Associates study put South Korea’s average GNP for 1952 and 1953 at under $1.6 billion (at current prices and exchange rates). 65. National income data are not available for South Korea before 1953. The data for 1953–60, however, are probably suggestive for the period as a whole. As one authoritative study has noted, “From 1953 to 1960, American economic assistance averaged about 10 percent of [South] Korea GNP; it financed over three-quarters of imports; it accounted for nearly the whole of savings and investment; and it generated more than half the government’s revenues.” Mason et al., Economic and Social Modernization, 15. When one recalls that economic assistance accounted for only about two-thirds of total U.S. foreign aid outlays to South Korea during this period, one begins to appreciate the magnitude of these transfers for the recipient government. John Cathie has estimated that overall American aid—defense and economic assistance together—amounted to more than 21 percent of South Korea’s GNP for the five years between 1956 and 1960. Cathie, Food Aid and Industrialisation: The Development of the South Korean Economy (Alderbury, Vt.: Avebury, 1989), 121. By his calculations, the ratio of U.S. aid to South Korean GNP was much lower in the 1960s—but still averaged 13 percent for 1961–1965. 66. Two of the standard studies on the impact of aid, for example, neglect any possible impact of military aid on development patterns. See Robert Cassen and Associates, 236 NOTES TO PAGE 104

Does Aid Work?: Report to an Intergovernmental Task Force (New York: Oxford University Press, 1986); and Anne O. Krueger, Constantine Michalopoulos, and Vernon W. Ruttan, Aid and Development (Baltimore: Johns Hopkins University Press, 1989); both of these volumes include specific discussions of the impact of foreign aid on South Korea’s economic development but ignore military assistance flows altogether! 67. This is not the place for an exposition on the role of military aid in the process of economic development in general or of its role in the South Korean case in particular. It may nonetheless be worthwhile to identify three of the avenues through which allocations earmarked for security purposes may have had a “developmentalist” effect: (a) At the level of the northeast Asian regional economy, there is evidence that military assistance was instrumental in financing the postwar recovery by contributing to the revival of domestic Japanese output and reestablishing international flows of goods and services at a time when the “dollar shortage” would otherwise have been a serious constraint. See William S. Borden, The Pacific Alliance: United States Foreign Economic Policy and Japanese Trade Recovery, 1947–1955 (Madison: University of Wisconsin Press, 1984), for an elaboration of this argument. (b) In the domestic South Korean economy during the late 1940s and the 1950s, local procurements by U.S. military authorities served not only as a major source of stimulus but also as a vehicle for the transfer of skills and technology. It also made possible the development of local entrepreneurial skills, for example: “The great construction companies such as Hyundai and Daelim, which now compete with advanced countries in the international market, got their start in construction work for the [United States forces in South Korea].” Suk Bok Lee, The Impact of U.S. Forces in Korea (Washington, D.C.: National Defense University Press, 1987), 87. (c) In training and supporting a large field army and a professional officer corps, military assistance may have contributed to the socialization and education of the South Korean labor force and to the organizational, managerial, and administrative capabilities of those who were to command the ROK government in the 1960s, 1970s, and early 1980s. This argument is touched on in Norman A. Graham, “The Role of the Military in the Political and Economic Development of the Republic of Korea,” Journal of Asian and African Studies 26, nos. 1–2 (1991): 115–31. Summing up, one may agree with Mason et al.: “The military assistance programs [to South Korea] have made a significant contribution. . . . In addition to these direct effects, there were other indirect effects. . . . It is impossible to place a figure on the contribution of U.S. military assistance to [South] Korean development but, if we assume that the forces maintained in South Korea were no larger than necessary to deter attack from the North, the contribution was significant.” Mason et al., Social and Economic Modernization, 183–84. 68. For further discussion of this issue, see Nicholas Eberstadt, Foreign Aid and American Purpose (Washington, D.C.: American Enterprise Institute, 1989), chap. 4. 69. As Stephan Haggard put it much later: “Adopting a coherent development strategy would have reduced Syngman Rhee’s control over aid funds and policy instruments that were crucial to sustaining political support.” Stephan Haggard, Pathways from the NOTES TO PAGES 104–106 237

Periphery: The Politics of Growth in the Newly Industrializing Countries (Ithaca, N.Y.: Cornell University Press, 1990), 51. 70. Cole and Lyman, Korean Development, 170–72. 71. For an interesting and contrary interpretation, see Woo, Race to the Swift, chap. 3. Her reassessment of Syngman Rhee’s economic policies argues that there was “a method to his madness,” that he was determined not to see South Korea reintegrated into a reviving “Yen Bloc” and consequently strove to use aid to promote import substituting industrialization—in Woo’s view, rather successfully. 72. Krueger, Foreign Sector and Aid, 79–81; Woo, Race to the Swift, 68–72. In a National Security Council meeting in February 1956, for example, President Eisenhower personally stated that he “desperately wished . . . that there were some way for the United States to extri- cate itself from [the] swamp of spending [in South Korea].” “Memorandum of Discussion,” 276th NSC Meeting, February 9, 1956 (declassified), Eisenhower Papers, Eisenhower Library, 14, cited in Satterwhite, “Politics of Economic Development,” 55 n. 9. Describing the Eisenhower administration’s shift in foreign aid policies in 1957, Woo remarks that “[South] Korea was the most outstanding negative example in the mind of the architects and supporters of the [new approach], and when they thought about a new direction in aid, it was invariably in terms of avoiding the Korean type of quagmire: a situation whereby America was beefing up the military and the bureaucracy in Korea, pouring money into industrialization schemes that made a mockery of America’s goals in the East Asian region, yet hapless to change course” (Woo, Race to the Swift, 68–69). 73. Woo, Race to the Swift, 75–80. 74. Donald S. MacDonald, U.S. Korean Relations from Liberation to Self-Reliance: The Twenty Year Record (Boulder, Colo.: Westview Press, 1992), 29. 75. Henderson, Politics of the Vortex, 186; John P. Lovell, “Military and Politics in Postwar Korea,” in Edwards Reynolds Wright, ed., Korean Politics in Transition (Seattle: University of Washington Press, 1975), 182, 183; Mason et al., Economic and Social Modernization, 46. 76. For background, see MacDonald, U.S.–Korean Relations, 289–97; Cole and Lyman, Korean Development, chaps. 8 and 9; and Gilbert T. Brown, Korean Pricing Policies and Economic Development in the 1960s (Baltimore: Johns Hopkins University Press, 1973), 49–75. 77. Derived from Bank of Korea, National Accounts 1994, 14–39. Figures refer to estimated average rates of GDP growth for 1962–63 and 1953–61, calculated in constant 1975 prices. 78. For 1960–61, South Korea’s implicit GDP deflator averaged 13 percent; for 1962–63, the average was 24 percent. Il Sakong, Korea in the World Economy (Washington, D.C.: Institute for International Economics, 1994), 34. 79. According to the Bank of Korea, export growth (in 1975 prices) averaged 12 percent between 1953 and 1961; it averaged 11 percent in 1962–63. Bank of Korea, National Accounts 1994, 14–35. 80. Remarkably, this incident in U.S.–Korean relations seems to be discussed directly in none of the published accounts on modern South Korean development. Perhaps the 238 NOTES TO PAGES 106–108 closest indirect reference to it is to be found in Mason et al., Economic and Social Modernization, 196. Even so, Chung-yum Kim, a key economic policymaker under President Park, writes in his memoirs that “the U.S. aid authority was planning to terminate grants by 1965 because [South] Korea was considered hopeless in terms of economic development.” Chung-yum Kim, Policymaking on the Front Lines: Memoirs of a Korean Practitioner, 1945–79 (Washington, D.C.: World Bank, 1994), 30. Though Kim does not pinpoint the date of the decision, his text suggests that it took place in late 1962. 81. A. M. Rosenthal, “U.S. Will Cut Aid to South Koreans,” New York Times, April 4, 1963, 1. 82. Over the years 1960–62, government revenues are thought to have equaled roughly 17.5 percent of South Korea’s estimated GNP; U.S. economic assistance, by itself, is estimated to have exceeded 9 percent of the country’s GNP. Mason et al., Economic and Social Modernization, 207, 311. And these numbers still understate the importance of American economic assistance to the South Korean fisc, insofar as the won was seriously overvalued at the time. 83. As much seems to be acknowledged and implied in a study by the quasiofficial Korea Development Institute: “It became apparent in 1961 that under the [Foreign Assistance Act] grant aid was to be replaced by loan type aid of a much smaller size. . . . Without this additional foreign exchange, the large trade and savings gaps needed to be filled by a severe cutback in import demand, which in turn implied a reduction in the level of investment and in the growth rate of the economy. Given this adverse situation, the [South] Korean government had to make a choice. . . . [South] Korea’s choice of an outward-looking strategy through export promotion was a timely decision because of the changing aid policies of the U.S. government but was also the result of an interactive process by which the aid-giving authority influenced the policies of the aid receiving government.” Suk Tai Suh, “Foreign Aid, Foreign Capital Inflows and Industrialization in Korea: 1945–75” (KDI, Working Paper 7712, Seoul, 1977), VI–5, VI–6. 84. On this point, see Stephan Haggard, Byung-kook Kim, and Chung-in Moon, “The Transition to Export-Led Growth in South Korea, 1954–1966,” Journal of Asian Studies 50, no. 4 (1991): 850–73. 85. For details of this often neglected aspect of South Korea’s economic history, see Se-jin Kim, “South Korea’s Involvement in Vietnam and Its Economic and Political Impact,” Asian Survey 10, no. 6 (1970): 519–32; Choo, “Effects of the Vietnam War”; Sungjoo Han, “South Korea’s Participation in the Vietnam Conflict: An Analysis of the U.S.–Korean Alliance,” Orbis 21, no. 4 (1978): 893–912; and Woo, Race to the Swift, 85–106. 86. To adduce but one illustration of the enthusiasm for the newfound orthodoxy: the Park government in 1964 officially established an annual “Export Day” (“Export Day” was renamed “Trade Day” in 1986). Sakong, Korea in the World Economy, 38–39. 87. Unless otherwise indicated, the figures in the following paragraph were drawn from Bank of Korea, National Accounts 1994. NOTES TO PAGES 108–110 239

88. This measure of exports includes factor income from the rest of the world. The trends for merchandise exports were even more dramatic. In 1960, merchandise exports were estimated at less than 2 percent of GNP; by 1987, they were put at more than 35 percent of GNP. Bank of Korea, National Accounts 1994. 89. For a poignant reminder of those criticisms, see Pyong Choon Hahm, “Korea’s ‘Mendicant Mentality’? A Critique of U.S. Policy,” Foreign Affairs 43, no. 1 (1964): 165–74. 90. Sakong, Korea in the World Economy, 258–59. 91. Derived from Bank of Korea, National Accounts 1994, 36. 92. Fulfilling, at such a point, Siebert’s prediction that the ROK would move through what he termed the “full debt cycle.” See Horst Siebert, “The Half and the Full Debt Cycle,” Weltwirtschaftliches Archiv 125, no. 2 (1989): 217–29. 93. Three names closely associated with such reasoning are Armen Alchian, Ronald Coase, and Douglass North. See, for example, Armen A. Alchian, Economic Forces at Work (Indianapolis: Liberty Press, 1977); Ronald H. Coase, The Firm, the Market and the Law (Chicago: University of Chicago Press, 1988); and Douglass C. North, Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990). The seriousness with which these arguments have been taken in the profession is indicated by the award to Coase in 1991, and to North in 1993, of Nobel Prizes in Economics. 94. Perhaps the best exposition and analysis concerning the rule of law (or the lack of it) in the Republic of Korea during those years may be found in Dae-kyu Yoon, Law and Political Authority in South Korea (Boulder, Colo.: Westview Press, 1990). Brief but useful is Gregory Henderson, “Law and Judicial Practice in South Korea: A Korean- American Chance Missed,” in Wonmo Dong, ed., Korean American Relations at Crossroads (Princeton Junction, N.J.: Association of Korean Christian Scholars in America, 1982), 60–70. 95. Many sources could be cited here. Perhaps the most comprehensive treatment is William Shaw, ed., Human Rights in Korea: Historical and Policy Perspectives (Cambridge, Mass.: Harvard Law School, East Asian Legal Studies Program, 1991). 96. Again, the literature on this topic is voluminous. Two useful treatments, however, are Sung M. Pae, Testing Democratic Theories in Korea (Lanham, Md.: University Press of America, 1986); and Stephen A. Oxman, Otto Triffterer, and Francisco B. Cruz, South Korea: Human Rights and Emerging Politics (Geneva: International Commission of Jurists, 1987). 97. An early exception, however, was Gregory Henderson—a noneconomist. Writing in 1968, Henderson noted that “when legal codes and the agencies of their enforcement have meaning, one can transact business anywhere, confident of recourse. Since, however, the (South Korean) legal system offered the citizen no defense against political and economic pressures, all business came to depend on personal relationships and venue to the central bureaucracy. Such factors greatly increased during the last years of Liberal party dominance and were again fed in the 1961–63 period by the operations of the military government’s CIA.” Henderson, Politics of the Vortex, 198, 199. As we 240 NOTES TO PAGES 110–111 shall see, the tendency described continued to characterize the South Korean polity in later decades as well. 98. Ironically, South Korea’s regulatory tangle can be traced in part to the country’s colonial interlude. As Byung-nak Song notes: “Until the early 1970s, laws and regulations concerning trade and industry had largely been inherited from the Japanese colonial period. Regulations enacted during the Japanese period were mainly intended to control—not promote—business activities, especially by the native Korean population.” Byung-nak Song, The Rise of the Korean Economy (New York: Oxford University Press, 1990), 96. 99. Thus, Richard Luedde-Neurath, writing in 1986, states: “Uninitiated foreign firms . . . tend to assume that an agreement is final and binding once the contracting parties have signed it. It is not. The Korean government reserves for itself the right to alter the agreement wholly or in part, and it enjoys considerable discretion in the matter. As one source put it, ‘almost any individual at any level can object to any part of the agreement, and it is virtually impossible to have the objection overruled at a higher level.’ Such objections are not necessarily based upon interpretation of law or regulations, and can be only the opinion of the individual that the agreement is not good for Korea.” Richard Luedde Neurath, Import Control and Export-Oriented Development: A Reassessment of the South Korean Case (Boulder, Colo.: Westview Press, 1986), 110–11. According to the same author, “In 1982 for example [the government] ruled that 37.9 percent of [the foreign contracts it reviewed] would have to be revised in favor of domestic interests involved. Such attempts to renegotiate signed contracts occur not only during the pre-investment stage, but on occasion also once an agreement has been operating for some time. . . . Laws affecting foreign investors may be changed suddenly and in some cases applied retroactively.” Richard Luedde-Neurath, “State Intervention and Foreign Direct Investment in South Korea,” IDS Bulletin 15, no. 2 (1984): 22. 100. As late as 1987, a specialist on South Korea commercial law would observe that “the country has legislation concerning the protection of patents, utility model, copy- right and trademarks. . . . The [South] Korean government has acknowledged that protection is necessary but has not determined when such protection will be enacted.” Tae Hee Lee, “Laws Governing Business,” in Arthur M. Whitehill, ed., Doing Business in Korea (London: Groom Helm, 1987), 75–76. 101. This alleged aspect of Dow’s business woes in South Korea is difficult to confirm. Contemporary reportage in business journals—Asian Wall Street Journal, for example— does not allude to this alleged problem in the coverage of Dow Korea. On the other hand, this alleged incident has been described to the author by a number of independent sources familiar with the South Korean business scene at the time. Whatever the particulars may have been in the Dow case, we may note that the sudden cutoff of utilities to disfavored corporations was hardly an unfamiliar practice in South Korea at the time. Describing the official mechanisms for “Planning Implementation” in South Korea, Byung-nak Song writes: “There are basic infrastructure services such as electricity, water, roads and telephones without which most firms cannot function. The NOTES TO PAGES 111–113 241 government has used the denial of such services to punish firms that do not comply with the government economic policies. For example, the MTI (ROK Ministry of Trade and Industry) often disconnected electricity to firms that did not comply with the export targets set by the government!” Song, Rise of the Korean Economy, 144–45. 102. For one analysis of this incident, see Brian Levy, “The Perils of Partnership: Dow in Korea,” in Karl Moskowitz, ed., From Patron to Partner: The Development of U.S.– Korean Business and Trade Relations (Lexington, Mass.: D.C. Heath, 1984), 61–74. 103. As one analyst has argued, “Dow’s eventual decision to withdraw [from South Korea] was consistent with larger shifts in the company’s strategic orientation.” Levy, “Perils of Partnership,” 74. 104. For two initial assessments of the substantive significance of these changes, see Kun Yang, “Judicial Review and Social Change in the Korean Democratizing Process,” American Journal of Comparative Law, 41, no. 1 (1993): 1–8, and Dae-kyu Yoon, “Constitutionalism in South Korea,” Asian Affairs 81, pt. 2 (1994): 178–86. 105. To cite one noted case, in June 1993 seven representatives of Amway Corporation, an American direct-marketing merchandiser, were arrested in Seoul, according to news reports of the incident, “in connection with alleged pyramid schemes,” but these presumed suspects “weren’t formally charged, and their lawyers were never told specifically which laws their clients allegedly violated.” Steve Glain, “South Korea’s Cutting Edge Is Dulled,” Wall Street Journal, August 10, 1993, A10. For a more general account of the (often extralegal) regulatory problems faced by foreign businesses in South Korea in the early 1990s, see American Chamber of Commerce in Korea, Trade and Investment Issues: U.S. and Korea 1994 (Seoul: ACCIK, 1994). 106. American Chamber of Commerce in Korea, United States–Korean Trade Issues (Seoul: ACCIK, March 1991), 5. It should be noted that the membership of this organization includes companies of many different nationalities—not just American firms. 107. For more details, see Jones and Sakong, Government, Business, and Entrepre- neurship, 122–27. “Temporary” measures are to be distinguished from the more permanent mechanisms utilized by the South Korean government to set or influence the domestic prices of a wide range of consumer goods. 108. According to one World Bank source, South Korea’s implicit GDP price deflator was 17.4 percent per annum for 1960–70, 19.8 percent per annum for 1970–80. World Bank, World Development Report 1982, 111. Bank of Korea data indicate that country’s implicit GNP deflator increased by an annual average of 17.2 percent a year between 1960 and 1970 and by an annual average of 22.6 percent between 1970 and 1980. Derived from Bank of Korea, National Accounts 1994, 19, 25, 30–31. 109. Chough Soon [Cho Soon], “The Economics of Price Supervision,” Seoul National University Economic Review (December 1968), cited in Jones and Sakong, Government, Business, and Entrepreneurship, 124. 110. Yoon, Law and Political Authority in South Korea, 56. 111. Ibid., 67. Referring to the caseload from calendar year 1982, Yoon continued: “Although the state lost tens of thousands [of] cases in a year, only two decisions were 242 NOTES TO PAGE 113 carried out through compulsory execution (but how many are voluntarily performed by the administrative agencies is uncertain). Why such poor performance? A certain opposition assemblyman pointed out that this was because the investigative authorities harassed bailiffs who tried to enforce the decision.” 112. For details, see David C. Cole and Yung Chul Park, Financial Development in Korea, 1945–1978 (Cambridge, Mass.: Harvard University Press, 1983), 57–59. 113. For more information, see ibid., 158–68. 114. This continued to be true well into the 1980s. See, for example, the description of the Chun Doo Hwan regime’s liquidation of the Kukje Group and the Korean Shipping Corporation in Jong-chan Rhee, The State and Industry in South Korea: The Limits of the Authoritarian State (New York: Routledge, 1994), 214–19. 115. See, for example, Yoon, Law and Political Authority in South Korea, 189–93, and Mark Clifford, “Loans or Land: South Korean Chaebol Hesitate over Real Estate Sales,” Far Eastern Economic Review,” May 16, 1991, 73–74. See also Bertrand Renaud, “Compounding Financial Repression with Rigid Urban Regulations: Lesson of the South Korean Housing Market,” Review of Urban and Regional Development Studies 1, no. l (1989): 3–22. Perhaps the most detailed description of these practices can be found in Il Seong Yoon, Housing in a Newly Industrialized Economy: The Case of South Korea (Brookfield, Vt.: Avebury, 1994), 53–64, 102–17. A particularly vivid illustration of “eminent domain” in action is offered in Chung-yum Kim’s memoirs, describing President Park’s preparations for the envisioned Seoul Pusan expressway: “The president secretly worked on the purchase of the necessary land. As a former artillery officer he knew how to read maps. . . . [He] summoned the minister of construction, the mayor of Seoul, and the governor of Kyonggi-do province to the Blue House. He explained how the route was to be decided and directed the mayor to speed up the purchase of the land. He showed them the appraisal reports and explained the average price of land between Seoul and Suwon was around W170 to W180 per pyong. . . . After securing the land, the governor could use any funds left over on those projects he deemed necessary. . . . He added that they should at least secure permission to start construction from the landowners within a week and that the final details could be worked out later.” Kim, Policymaking on the Front Lines, 108–9. Within such operational parameters, the risk that landowners might be over- paid for their property would appear to be exceedingly low. 116. According to the OECD, “The bulk of land development has been undertaken by public sector entities. The Korea Land Development Corporation, the Korea Housing Corporation and the local governments accounted for about 60 percent of all land development in the period 1978 to 1992.” OECD, Country Surveys, 124–25. As Yoon has observed, most of the government’s land development efforts during this period involved what is called “public purchase and development [PPD]”: “In a PPD project, the public land development agency buys land in a project area from landowners at appraised prices, usually less than market prices. Land expropriation is allowed. . . . The new residential land developed in the PPD . . . is distributed, at low prices, to the house- NOTES TO PAGES 113–114 243 builders. . . . In short, financing the PPD is dependent on the difference between land purchase price and land sale price.” Yoon, Housing, 58. 117. See OECD: “Housing policy is to ensure that newly constructed houses and apartments are sold at controlled prices reflecting historic costs rather than market prices. In the event that a private developer cannot make a profit at the controlled price, land may be sold by the government corporation to the developer at less than market value.” OECD, Country Surveys, 124–25. And Yoon: “As far as housebuilders are concerned, almost all housebuilders interviewed said that they wanted publicly developed land. They want it because they buy it at much less than the market price.” Yoon, Housing, 115. 118. Leipziger et al., Distribution of Income and Wealth, 48; the figure cited refers to the BOK’s “middle estimate” of national wealth. 119. Yoon has offered the following description of the South Korean business environment during those years: “When a bureaucrat has developed a special relationship with an individual or a group of individuals he will show favoritism. In almost inverse proportion, the bureaucrat will treat an individual totally unknown to him perfunctorily or brusquely. It is therefore common practice to approach a bureaucrat through his friends or acquaintances. . . . The practice in [South] Korea has often been preferential treatment for certain kinds of individuals or corporations, or tax audits for particular corporations on no reasonable grounds, or applying different legal provisions to a similar act depending on the government’s relations with the individuals or corporations involved.” Yoon, Law and Political Authority in South Korea, 49, 58. 120. Writing in the early 1970s, one student of South Korean political affairs offered the following assessment of the situation: “There is no problem more serious than that of Pujonabup’ye, which can be literally translated as ‘irregularity and corruption,’ in the South Korean bureaucracy today. In point of fact, it is quite difficult to charge ‘irregularity’ or ‘corruption’ in a country where an informal or extralegal system has always been the basis for personal as well as official action.” Chang Hyun Cho, “Bureaucracy and Local Government in South Korea,” in Se-jin Kim and Chang Hyun Cho, eds., Government and Politics of Korea (Silver Spring, Md.: Research Institute on Korean Affairs, 1972), 102. Despite their ostensible power, large businesses could seldom avoid the pressure to “contribute” to official causes or personages. One news story in 1991, for example, included the following assertion: “‘We pay as much in extortion—legal, semilegal, and illegal extortion—as we do in legitimate taxes,’ complained the head of one of the country’s largest companies.” (Mark Clifford, “The Costs of Politics,” Far Eastern Economic Review, May 28, 1991, 54.) 121. In fact, “corruption” may even elude a single, unambiguous definition. For background, see James C. Scott, Comparative Political Corruption (Englewood Cliffs, N.J.: Prentice Hall, 1972), Arnold J. Heidenheimer, Political Corruption: Readings in Comparative Analysis (New York: Holt, Rinehart and Winston, 1970), Robert Klitgaard, Controlling Corruption (Berkeley and Los Angeles: University of California Press, 1988). Also informative are Peter M. Ward, ed., Corruption, Development and Inequality 244 NOTES TO PAGES 114–115

(London: Routledge, 1989), and Robin Theobald, Corruption, Development and Underdevelopment (Durham, N.C.: Duke University Press, 1990). 122. Thus, Jones and Sakong conclude that “the earlier academic-journalistic indict- ment [of political corruption and business bribery in South Korea] is somewhat overdrawn” and that “zero-sum activities were substantially reduced relative to positive sum efforts” between the Rhee and the Park regimes, and Clifford asserts that “the reality of the Park years was the construction of an elaborate edifice of corruption. . . . Park presided over a country in which the art of corruption was refined to a breath- taking extent.” Jones and Sakong, Government, Business, and Entrepreneurship, 276–77; Clifford, Troubled Tiger, 90. 123. Clifford, Troubled Tiger, 208–9, 213, 217. Clifford points out that “the FKI’s estimates do not include the most politically sensitive contributions or outright bribes” (ibid., 217); it would also exclude all “quasi taxes” or “outright bribes” paid by smaller businesses and households. 124. For more than two decades, in fact, South Korea has been offered as an exemplar of “growth with equity” to development economists. For an early presentation along these lines, see Chenery et al., Redistribution with Growth. 125. Yong-duck Jung, “Income Redistribution in Korea: Causes for the Growing Concern,” Journal of East and West Studies 9, no. 1 (1982): 29–48; poll results cited on p. 30. 126. Korea Herald, September 24, 1994, 8, reprinted as “Survey: Improved Income Distribution Structure,” FBIS, Daily Report, East Asia, September 27, 1994, 57. 127. Gary S. Fields, “Changing Labor Market Conditions and Economic Development in Hong Kong, the Republic of Korea, Singapore, and Taiwan, China,” World Bank Economic Review 8, no. 3 (1994): 395–414, citation at p. 401. 128. For critiques of the official South Korean income distribution data, see Yoo, “Income Distribution in Korea,” 373–91; Soonwon Kim, “Korea: Income and Wealth Distribution and Government Initiatives to Reduce Disparities” (KDI, Working Paper 9008, Seoul, 1990); Jong-goo Yoo and Seong-lin Na, “An Estimation of the Incomes of Self-Employed Urban Households in Korea,” International Economic Journal 5, no. 3 (1991): 83–105; Leipziger et al., Distribution of Income and Wealth; and Wontack Hong, “Export-Oriented Growth and Equity in Korea: A Possible Path to Advanced Economy,” in Hong, Trade and Growth, esp. 54–57. 129. For a more formal presentation of such an argument, see Albert O. Hirschman, “The Changing Tolerance for Income Inequality in the Course of Economic Development: With a Mathematical Appendix,” Quarterly Journal of Economics 87, no. 4 (1973): 544–66. 130. A poll of more than six thousand South Korean adults conducted in 1981, for example, produced these reported results: (a) “Koreans in general still think that ‘you can only lose by abiding by law and order.’ They also believe that ‘the way of the world is swayed by people with money and in power’”; (b) “On an item which read, ‘In Korea, one can succeed in life only when he has good connections and strong backers,’ 71 percent of the respondents said, ‘Yes.’ And the number of respondents who gave a negative NOTES TO PAGES 115–118 245 answer barely accounted for 22.1 percent of the total;” and (c) “The sense that you can do anything if you are in power leads to another consciousness that ‘in our society, anyone with power can be better off, with a clear conscience, even after having violated the law.’ On this question, 56 percent said, ‘Yes.’” Choson Ilbo, November 24, 1981, 10; translated as “Study on Korean ‘Awareness Structure’ Reported,” JPRS, Korean Affairs Report, December 15, 1981, 71. 131. Ibid. 132. Yonhap, January 3, 1995, reprinted as “Poll on Corruption, Unification, Economic Issues,” FBIS, Daily Report, East Asia, January 5, 1995, 40. 133. See, for example, Young Jong Kim, “Preventing Corruption in Korea: A Compara- tive Perspective among Korea, Singapore, and Hong Kong,” in Kim, Bureaucratic Corruption: The Case of Korea (Seoul: Chomyung Press, 1994), 215–35. 134. For a few representatives of this literature, see Joe S. Bain, Barriers to New Competition (Cambridge, Mass.: Harvard University Press, 1956); Frederic M. Scherer, Industrial Market Structure and Economic Performance (Chicago: Rand McNally, 1970); William J. Baumol, John C. Panzar, and Robert D. Willig, Contestable Markets and the Theory of Industrial Structure (New York: Harcourt Brace Jovanovich, 1988); Oliver E. Williamson, ed., Industrial Organization (Brookfield, Vt.: Edward Elgar Publishing, 1990); and Richard E. Caves et al., Industrial Efficiency in Six Nations (Cambridge, Mass.: MIT Press, 1992). 135. See, for example, Michael Roemer and Christine Jones, eds., Markets in Developing Countries: Parallel, Fragmented, and Black (San Francisco: ICS Press, 1991), and Dwight H. Perkins and Michael Roemer, Reforming Economic Systems in Developing Countries (Cambridge, Mass.: Harvard University Press, 1991). These themes are also prominent in the World Bank’s World Development Report: 1991 (New York: Oxford University Press, 1991). 136. This hostility may not have received widespread attention in the economic literature, but neither does an observation of the South Korean economy dispute it. As Amsden has observed, “Since the end of the Japanese occupation, direct foreign investment in the form of equity ownership by foreigners of production facilities in Korea has been minimal. . . . In the late 1970s, direct foreign investment as a percentage of gross domestic product was lower by almost half in Korea than in Argentina, Brazil and Mexico—countries whose approach to foreign direct investment was hardly friendly.” Amsden, Asia’s Next Giant, 74, 76. In the 1970s, according to a UN Center on Transnational Corporations study, “out of 27 countries [considered], only Korea and 2 others considered all investment areas closed unless otherwise specified.” Richard Luedde-Neurath, “State Intervention and Export-Oriented Development in South Korea,” in Gordon White, ed., Developmental States in East Asia (New York: St. Martin’s Press, 1988), 84. For some further particulars on government practices in the 1970s, see T. Jefferson Coolidge Jr., “The Realities of Korean Foreign Investment Policy,” Asian Affairs 7, no. 6 (1980). 137. Thus Chong-hoon Park and Chang-Soon Yoo, each of whom served as deputy prime minister during the years in question: “Though not specified explicitly in any laws, it was a general guideline of the government that, in the screening process, 246 NOTES TO PAGE 118

100 percent domestic control of management be given priority over foreigners’ direct investment, unless some critical element—mostly technology—could be acquired through foreigners’ direct investment.” Seok Ki Kim, “Business Concentration and Government Policy: A Study of the Phenomenon of Business Groups in Korea, 1945–1985” (DBA thesis, Harvard Graduate School of Business Administration, 1987), 103. 138. Acknowledging and explaining this situation, a former minister of finance has written, “[South] Korean policies throughout most of the period were not accommodating enough for foreign management to gain control or exercise autonomy over firms in which they invested. The general fear of foreign domination of Korean industries was too widespread for the government to be accommodating on this matter.” Sakong, Korea in the World Economy, 119. 139. Foreign investors were able to participate in the Seoul exchange beginning in 1984 through the Korea Fund’s overseas depositary reserve arrangement; in 1990, they were permitted actually to purchase shares of South Korean companies directly, within certain limits. 140. For more detail, see David C. Cole and Yung Chul Park, Financial Development in Korea, 1945–1978 (Cambridge, Mass.: Harvard University Press, 1983), 60–61; Amsden, Asia’s Next Giant, chap. 4; Richard N. Cooper, “Korea’s Balance of International Payments,” in Stephen Haggard et al., Macroeconomic Policy and Adjustment in Korea, 1970–1990 (Cambridge, Mass.: Harvard University Press, 1994); Yung Chul Park, “Korea: Development and Structural Change of the Financial System,” in Hugh T. Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea, and Taiwan (New York: Oxford University Press, 1994); and Yoon Je Cho and Joon Kyung Kim, “Credit Policies and the Industrialization of Korea,” World Bank Discussion Papers, no. 286 (1995). 141. In the years 1981–84, when South Korea’s net borrowings from abroad were approaching their peak, about five-sixths of the country’s total foreign debt was guaranteed debt. World Bank, Korea: Managing the Industrial Transition (Washington, D.C.: World Bank, 1987), 1:21. 142. South Korea’s data on direct foreign investment are compiled on an arrival basis; by contrast, the OECD’s are calculated on a net basis. In theory, this discrepancy could lead to either overestimation or underestimation of the share of FDI in overall capital flows. In the South Korean context, it appears to have resulted in significant overestimations. Whereas, for example, the ROK Economic Planning Board placed foreign direct investment in South Korea during the period 1977–81 at $1.666 billion, the OECD’s estimate of net FDI for the same years was $265 million—that is to say, less than one- sixth as much. Derived from Sakong, Korea in the World Economy, 117; and OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris: OECD), various editions. World Bank figures also appear to be at odds with official South Korean data. Whereas, for example, those official figures suggested that FDI accounted for as much as 8 percent of South Korea’s total capital inflows for the period 1982–86, the bank’s NOTES TO PAGES 119–121 247

Debtor Reporting Survey estimated that debt issues accounted for all but 3 percent of the ROK’s total capital inflow between 1981 and 1985. Derived from World Bank, Korea: Managing the Industrial Transition, 21. The discrepancy cannot be reconciled by differences in years of coverage because South Korean official statistics do not count 1986 as a year of especially heavy FDI. 143. International debt management, in turn, required more stringent, and more skill- fully executed, adjustment policies from government economic policymakers than would have been necessary with lower levels of exposure. In the event, South Korea’s economic policymakers were able to meet these challenges. For details, see Haggard et al., Macroeconomic Policy and Adjustment in Korea. 144. Indications of the effects are offered in one study that examined the impact of FDI on total factor productivity in South Korean and Taiwanese industry. It concluded that changes in FDI stocks were strongly associated with improvements in total factor productivity in both countries. See Jung Taik Hyun, “The Impact of Foreign Direct Investment on the Manufacturing Total Factor Productivity of Developing Countries: A Case Study of Korea and Taiwan” (PhD diss., George Washington University, 1993). Because FDI has played a less prominent role in South Korea’s manufacturing sector than it has in Taiwan’s, the scope for attendant gains in productivity was presumably more limited as well. During the 1980s, the South Korean government became increasingly concerned with technological constraints on the country’s development; it attempted to relax these constraints through liberalized licensing arrangements rather than liberalizing investment laws. For details, see OECD, Country Surveys, 30–32. 145. For details see Cole and Park, Financial Development of Korea; Woo, Race to the Swift, chaps. 4–6; Yung Chul Park, “The Developmental Role of Financial Institutions and the Role of Government in Credit Allocation,” in Lee Jay Cho and Yoon Hyung Kim, eds., Economic Development in the Republic of Korea: A Policy Perspective (Honolulu: University of Hawaii Press, 1991); and Cho, Dynamics of Korean Development, chap. 6. 146. Thus, Mason et al.: “Although the relations of government and business were probably closer in export promotion than in other areas, the government’s hand has been felt in all activities of large scale enterprise. The most potent instruments for implementing economic policy have undoubtedly been control of bank credit and access to foreign borrowers.” Mason et al., Economic and Social Modernization, 267. In the words of former deputy prime minister Lee Hahn Been: “You name the one hundred, or even two or three hundred, largest or most conspicuous projects or plants in the Sixties and Seventies. Whatever they may be, the final decisions were made at the top of the regime. Although there were guidelines governing the approval (selection) process, they were purely indicative and there were always more qualified applicants than the number of license recipients.” Kim, “Business Concentration and Government Policy,” 109. 147. Whether the reforms embraced actually qualify as “liberalizations” has been disputed. Amsden and Yoon, for example, argue that “it would be misleading to characterize such change as a move toward freer markets.” Alice H. Amsden and Dae-Euh Yoon, “South Korea’s 1980s Financial Reforms: Good-bye Financial Repression (Maybe), Hello New 248 NOTES TO PAGE 121

Institutional Restraints,” World Development 21, no. 3 (1993): 379–90, citation at p. 379. In OECD’s assessment, “At the beginning of the 1980s, financial markets were deregulated to a limited extent,” but “wide-ranging controls . . . have only partially been dismantled over the past decade.” OECD, Country Surveys, 91, 87. For a more sanguine interpretation, however, see Park, “Korea: Development and Structural Change,” 129–87, esp. 147–54. 148. Assessing the “liberalizations” within South Korea’s banking sector in 1987, for example, the same World Bank country study cited earlier noted that “rates are still not freely determined nor are they properly risk-adjusted. In terms of the autonomy of bank credit allocation procedures, moreover, there has been labored progress.” World Bank, Korea: Managing the Industrial Transition, 1:95–96. In 1993, another World Bank study would comment that “despite several rounds of liberalization since 1974, credit based [government] interventions have remained important in the 1980s and the early 1990s.” Leipziger and Petri, “Korean Industrial Policy,” 24. 149. The far-reaching nature of this system was captured by the comment of a Japanese student of international banking: “Except in times of war, only a few nations have used polices of selective credit control as widely and thoroughly as has [South] Korea.” Kazuhisa Ito, “Development Finance and Commercial Banks in Korea,” Developing Economies 22, no. 4 (1984): 453. 150. One World Bank study, for example, reports that the real interest rate in South Korea between 1970 and 1980 for all “directed credit” for industry averaged –2.7 percent per year; for export loans, the average was calculated at –6.7 percent per year. World Bank, The East Asian Miracle: Economic Growth and Public Policy (Washington, D.C.: World Bank, 1993), 285. Another observer has noted that, between 1962 and 1981, the real rate at the central bank for export loans was positive only once—for the year 1972. Akira Kohsaka, “High Interest Rate Policy under Financial Repression,” Developing Economies 22, no. 4 (1984): 448. 151. As Cho has noted, “The ‘policy loan’ concept is unclear. . . . In the late 1970s, it seems most bank loans could be classified as policy loans, in the sense that there was little room for autonomous lending.” Cho, Dynamics of Korean Economic Development, 117–18. For further elaboration, see Cho and Kim, “Credit Policies and the Industrialization of Korea,” 40–41. 152. Another reason for the difficulty in producing precise estimates here was the government’s extreme political sensitivity about this information. As Leroy Jones once commented about the Bank of Korea’s statistics on credit allocation to the chaebol, “Where such data do exist, they are treated with a secrecy equivalent to that accorded the muni- tions industry or the KCIA budget.” Leroy P. Jones, “Jaebul and the Concentration of Economic Power in Korean Development,” in Il Sakong, ed., Macroeconomic Policy and Development Issues (Seoul: Korea Development Institute, 1987), 88. 153. Sakong, Korea in the World Economy, 35. 154. Cho and Kim, “Credit Policies and the Industrialization of Korea,” 42. By these estimates, “policy loans” accounted for about 49 percent of South Korea’s domestic credit over the 1973–81 period. NOTES TO PAGES 121–123 249

155. See, for example, Yoo Jung-ho, “The Industrial Policy of the 1970s and the Evolution of the Manufacturing Sector in Korea” (KDI, Working Paper 9017, Seoul, 1990). By Yoo’s estimates, “policy loans” already accounted for about 48 percent of domestic credit in 1970 and rose to 53 percent in 1975 and 59 percent in 1978 before dropping to “only” 51 percent in 1980. An even higher estimate comes from Joseph Stern et al., “Industrialization and the State: The Korean Heavy and Chemical Industry Drive” (unpublished paper, cited in World Bank, East Asian Miracle, 309). By these estimates, “policy loans” accounted in 1980 for nearly 60 percent of the outstanding loans of all financial institutions and for nearly 53 percent as late as 1985. 156. According to one set of calculations, the difference in borrowing costs (the interest rate spread) between large-scale and small-scale enterprises exceeded 20 percent a year in five of the nine years between 1974 and 1984 and exceeded 11 percent in all years but one. Boo-chun Su, “Capital Market Distortions and Development of Small- Scale Enterprises in Korea with Reference to Taiwan” (PhD diss., Michigan State University, 1988), app. A. 157. Mason et al., Economic and Social Modernization, 272. 158. Paul Kuznets in fact states that “it is impossible to calculate accurately the size of [South] Korea’s public sector. . . . One reason is that public and quasi public enterprises, such as the tobacco monopoly and KEPCO . . . are included with the private sector, not—as is the practice elsewhere—with the public sector.” Paul W. Kuznets, “Government and Economic Strategy in Contemporary Korea,” Pacific Affairs 58, no. 1 (1985): 47. 159. Jones and Sakong, Government, Business, and Entrepreneurship, 149; the estimate is for the years 1962–73. According to Kwang-suk Kim’s estimates, total public investment as a share of gross domestic investment was even higher than this. By his estimates, the totals were about 41 percent in 1962, 33 percent in 1966, 40 percent in 1971, 37 percent in 1976, and 36 percent in 1979. Kwang Suk Kim, “Korea’s Experience in Managing Development through Planning, Policymaking, and Budgeting,” in Miyohei Shinohara, Toru Yanagihara, and Kwang Suk Kim, “The Japanese and Korean Experiences in Managing Development” (World Bank, Staff Working Paper 574, Washington, D.C., 1983), 58. 160. Bae Ki Song, “New Korean Public Enterprise Policy and Efficiency Improvement” (KDI, Working Paper 8811, Seoul, 1988), 7. For an update, see In-Chul Kim, Mahn- kee Kim, and William W. Boyer, “Privatization of South Korea’s Public Enterprises,” Journal of Developing Areas 28, no. 2 (1994): 157–66. 161. Thus Mason et al.: “Although it is a matter of common belief that public enterprise must inevitably be inefficient, we are prepared to argue that, at least in comparison with public enterprise in other less developed countries, Korean public enterprises are relatively efficient. At the crudest level, this follows from the fact that, when an economy is growing at a real rate of 10 percent annually, a sector that absorbs 30 percent of investment cannot be using its resources too inefficiently.” Mason et al., Economic and Social Modernization, 274. Thus Richard Cooper: “In contrast to many 250 NOTES TO PAGES 123–125 other developing countries, Korea’s state-owned enterprises as a group ran operating surpluses throughout the late 1970s and 1980s, including the recession year of 1980. . . . The rate of return on [the Korea Electric Power Company’s and the Korea Telecommunications Authority’s] activities, crudely calculated, seems to be in the range of 20 to 30 percent a year. Richard N. Cooper, “Fiscal Policy in Korea,” in Haggard et al., Macroeconomic Policy and Adjustment in Korea, 117–18. 162. Song, New Korean Public Enterprise Policy, 9. 163. Sakong, Korea in the World Economy, 34. 164. Jones and Sakong, Government, Business, and Entrepreneurship; Amsden, Asia’s Next Giant; Woo, Race to the Swift; Rhee, State and Industry in South Korea; Chang, Political Economy of Industrial Policy; Karl J. Fields, Enterprise and the State in Korea and Taiwan (Ithaca, N.Y.: Cornell University Press, 1995). 165. Amsden, Asia’s Next Giant, 15, provides a number of examples. See also World Bank, Korea: Managing the Industrial Transition, 1:50. After describing a number of these major interventions, the report comments, “It is clear from these cases that Government has bypassed competitive solutions in most of its restructuring operations.” One should not infer from these accounts that restructurings represent a post-Park innovation in South Korean industrial policy. Although the government’s restructuring initiatives were noticed by the international business press in the 1980s, state interventions to reconfigure what it officially calls “ill-managed companies” commenced over a decade earlier—in the late 1960s. Kim, “Business Concentration and Government Policy,” 126. 166. Sakong, Korea in the World Economy, 247. 167. Ibid. 168. Bank of Korea, National Accounts 1994, puts manufacturing at 24.9 percent of GDP in 1973 and 29.9 percent in 1984. Taken together, these figures suggest that the share of GDP generated by the top ten business groups in South Korea more than doubled between 1973 and 1984. 169. World Bank, Korea: Managing the Industrial Transition, 2:31. 170. Leipziger and Petri, “Korean Industrial Policy,” 30–33; Sakong, Korea in the World Economy, 247–50; OECD, Country Surveys, 57–59; Somi Seong, “Economic Development and Policy for Small and Medium-Sized Enterprises in Korea,” Korea Development Institute, Policy Monograph 93–06, Seoul, 1993), 11–12. For a discussion of the evidence, see Leroy P. Jones, who concludes that “the rapid growth of the [big business groups] relative to the Korean economy was halted somewhere between 1981 and 1984; thereafter, they grew at the same rate as the economy, or slightly more slowly.” Jones, “Big Business Groups in Korea: Causation, Growth, and Policies,” in Lee- Jay Cho and Yoon Hyung Kim, eds., Korea’s Political Economy: An Institutional Perspective (Boulder, Colo.: Westview Press, 1994), 523. 171. For background, see Jones and Sakong, Government, Business and Entrepreneur- ship; Kim, “Business Concentration and Government Policy”; Dennis L. McNamara, The Colonial Origins of Korean Enterprise, 1910–1945 (New York: Cambridge University NOTES TO PAGES 125–126 251

Press, 1990); and Carter J. Eckert, Offspring of Empire: The Koch’ang Kims and the Colonial Origins of Korean Capitalism, 1878–1945 (Seattle: University of Washington Press, 1991). 172. South Korea’s legal and regulatory tangle, for example, was a factor implicitly conducive to business concentration. In the words of Byung-nak Song: “Large firms may be able to handle complicated red tape involving many government departments with more facility than small firms. The Federation of Korean Industries (FKI), known as the spokesman for conglomerates, used to complain as late as 1985 that one needed to process 312 documents in order to establish a firm. Small firms may not be able to compete with large firms in handling such red tape.” Bong Shik Shin of the FKI stated that, as of December 1987, there were 55 laws related to the manufacturing industries, and the number of approvals by the government associated with these laws was as many as 310. Song, Rise of the Korean Economy, 91. 173. Two students of South Korea’s industrial structure, for example, have commented, “[During the 1970s and early 1980s] the government had virtually no antitrust policy. Rather, it had more of a protrust policy.” Kap-Young Jeong and Robert T. Masson, “Entry during Explosive Growth: Korea during Take-off,” in P. A. Geroski and J. Schwalbach, Entry and Market Contestability (Cambridge, Mass.: Basil Blackwell, 1991), 143–44. Seok Ki Kim, on the other hand, offers a more nuanced interpretation: “Some (approximately one-quarter) former high ranking government officials whom I interviewed were explicit on the point that the government intentionally encouraged large business groups to participate in important projects specifically in the government’s economic development plans. Other interviewees believed that the business groups were given much of the government support primarily based upon their superior capability, and thus that it was not an a priori decision of the government to use the business group as a policy instrument.” Kim, “Business Concentration and Government Policy,” 41. Whichever assessment is closer to the mark, one may note that concentration of ownership makes the task of the dirigisme all the more manageable. 174. World Bank, Korea: Managing the Industrial Transition, 2:30; OECD, Country Surveys, 58. 175. Most important is Luedde-Neurath, Import Controls and Export-Oriented Development. 176. Ibid., 136–57. 177. Under its “diversification” program, for example, “imports from Japan of 258 items, including automobiles and electronic appliances, [were] banned” as of 1992. OECD, Country Surveys, 66. 178. As an OECD country economic survey on South Korea noted, “Nontariff barriers appear to result in significant differences between world prices and domestic prices net of tariff. . . . The differences are particularly marked in electric machinery, transport equipment, professional and scientific equipment and certain chemical industries.” OECD, Country Surveys, 66. 179. Amsden, Asia’s Next Giant, 17. 252 NOTES TO PAGES 126–128

180. Price Waterhouse, Doing Business in Korea (Seoul: Price Waterhouse, 1991), 48. 181. The consequences of such an embarkation, however, were anticipated, and clearly outlined, by some observers at the time—not only for South Korea. See, in particular, Donald B. Keesing, “Outward Looking Policies and Economic Development,” Economic Journal 77, no. 306 (1967): 303–20. 182. For a more detailed treatment of the economic logic, dynamics, and consequences of outward orientation, see Bela Balassa, “The Lessons of East Asian Development: An Overview,” Economic Development and Cultural Change 36, no. 3 (1988): S273–90. 183. Ibid.; and Bela Balassa, “Outward Orientation,” in Hollis B. Chenery and T. N. Srinivasan, eds., Handbook of Development Economics, vol. 2 (Amsterdam: North Holland, 1984). 184. For more details, see Cole and Park, Financial Development in Korea, 64–65, 198–211. 185. For more on the microeconomics of “learning by doing,” see Robert E. Lucas Jr., “Making a Miracle,” Econometrica 61, no. 2 (1993): 251–72. 186. For detailed description and analysis of those interventions, see Sakong, Korea in the World Economy, and Haggard et al., Macroeconomic Policy and Adjustment in Korea. 187. Theodore W. Schultz, “The Value of the Ability to Deal with Disequilibria,” Journal of Economic Literature 13, no. 3 (1975). 188. The dynamic effects of these aspects of international trade have been more formally expounded in currently received economic growth theory in a number of essays, including Paul Romer, “Increasing Returns and Long Run Growth,” Journal of Political Economy 95, no. 5 (1986): 1002–37; and Robert E. Lucas Jr., “On the Mechanics of Economic Development,” Journal of Monetary Economics 22, no. 1 (1988): 3–42. 189. Wontack Hong offers a parallel, and in some important respects congruent, interpretation of the significance of outward-orientation for South Korea’s economic development: “We contend that the outward-oriented growth strategy is more than a simple unbiased trade regime with minimal or neutral government interventions. . . . [South] Korea instituted a controlled but competitive market system that maximized the energy and effort of individual citizens and implemented policies and regulations that channeled the individual energy into the most productive activities for the nation’s economy: in other words, outward-looking, export-oriented activities. As a result, the [South] Korean economy integrated itself into the world economy, taking full advantage of its abundant human resources. With a tolerably correct system and a tolerably correct set of policies, [South] Korea captured a significant portion of international markets. . . . Most importantly, there were tremendous dynamic learning effects arising from international competition.” Wontack Hong, “Export-Oriented Growth of Korea,” 48–49. 190. This is not to say that the “hard state” cannot evolve toward a more liberal polity under economic pressures and influences—we know that it can. Such an evolution, however, typically tends to be inadvertent and piecemeal, for precisely the reasons just mentioned. NOTES TO PAGES 129–132 253

191. Isaiah Berlin, The Hedgehog and the Fox: An Essay on Tolstoy’s View of History (New York: Simon and Schuster, 1986). One may recall that Sir Isaiah’s own sympathies were distinctly with the fox, “who knows many things,” instead. 192. The literature on interaction between agricultural and industrial productivity improvements is extensive. For a classic exposition, see Bruce F. Johnston and Peter Kilby, Agriculture and Structural Transformation: Economic Strategies in Late-Developing Countries (New York: Oxford University Press, 1975). See also C. Peter Timmer, “Agricultural Employment and Poverty Alleviation in Asia,” in C. Peter Timmer, ed., Agriculture and the State: Growth, Employment, and Poverty in Developing Countries (Ithaca, N.Y.: Cornell University Press, 1991), 123–55. 193. One indication of the relative neglect of rural infrastructure may be seen in South Korea’s statistics on paved roads. According to Ministry of Construction figures, paved roads as a fraction of total road mileage was 14.9 percent in 1963; by 1969, it had risen, but only to 17.6 percent. Sung-Hwan Ban, Pal-Yong Moon, and Dwight H. Perkins, Rural Development (Cambridge, Mass.: Harvard University Press, 1980), 149. 194. For details, see Cathie, Food Aid and Industrialisation, chaps. 6 and 7. 195. Dong-Hi Kim and Yong-Jae Joo, The Food Situation and Policies in the Republic of Korea (Paris: OECD, 1982), 65. 196. Larry E. Westphal and Kwang Suk Kim, “Industrial Policy and Development in Korea” (World Bank, Staff Working Paper no. 263, Washington, D.C., 1977). 197. Kim and Joo, Food Situation, 32, traces the shift back as far as 1968; extremely high nominal rates of protection, however, did not occur until 1971. 198. Ibid., 65. 199. Derived from ROK, National Bureau of Statistics, Korea Statistical Yearbook 1989, 277, 437; IMF, International Financial Statistics Yearbook, vol. 43 (Washington, D.C.: IMF, 1990), 84. Korean prices are for polished rice, average quality; world market prices are for Thailand, white milled 5 percent, broken, free on board. 200. OECD, Country Surveys, 69. 201. Data drawn from World Bank, World Development Report 1995 (New York: Oxford University Press, 1995), 223, 147. 202. According to the World Bank, the Netherlands had a population density for mid-1993 of 414 persons per square kilometer, as against 445 per square kilometer for South Korea. Ibid., 163. In 1980, according to the report’s data on population growth rates (p. 211), South Korea would have had a density of approximately 386 persons per square kilometer; the Netherlands, 383 per square kilometer. 203. Based on purchasing power parities calculated with respect to the “international dollar.” See United Nations and Commission of the European Communities, World Comparisons of Purchasing Power and Real Product for 1980 (New York: UN, 1987), table 6. 204. These included such important products as wheat, corn, soybean, and beef. 205. GATT, Trade Policy Review: Korea (Geneva: GATT, 1992), cited in OECD, Country Surveys, 70–71. 206. Bank of Korea, National Accounts 1994, 35. 254 NOTES TO PAGES 132–133

207. Ibid.; Kym Anderson, “Korea: A Case of Agricultural Protection,” in Terry Sicular, ed., Food Price Policy in Asia: A Comparative Study (Ithaca, N.Y.: Cornell University Press, 1989), 140. 208. Ban, Moon, and Perkins, Rural Development, 277. For further details, see Hans U. Luther, “Saemaul Undong: The ‘Modernization’ of Rural Poverty,” in Internationales Asienforum 10, no. 3–4 (1979): 310–49; David I. Steinberg et al., Korean Agricultural Services: The Invisible Hand in the Iron Glove (Washington, D.C.: USAID, 1984); and Mick Moore, “Mobilisation and Disillusion in Rural Korea: The Saemaul Movement in Retrospect,” Pacific Affairs 57, no. 4 (1985): 577–98. 209. The third Five-Year Plan (1972–76), however, was more “agriculture-oriented” than the previous two. Ban, Moon, and Perkins, Rural Development, 77, 188–91. Even so: “During the 1970s [South] Korea spent only two-thirds as much on agricultural research per dollar of agricultural output (valued at constant 1961–65 prices) as other middle-income countries.” Anderson, “Korea: A Case of Agricultural Protection,” 140. Relative neglect of rural infrastructure may have continued through the 1970s and into the 1980s. According to World Bank figures, for example, about 54 percent of South Korea’s roads were paved as of 1986. World Bank, East Asian Miracle, 222. That would have been only somewhat higher than India’s reported 48 percent and somewhat less than Indonesia’s reported 62 percent—even though by 1986 India and Indonesia had much lower per capita incomes than South Korea. According to the World Bank’s World Development Report 1994, moreover, South Korea had a curiously low level of infrastructural development by the indicator of kilometers of paved roads per million population. According to the bank’s numbers, South Korea had 236 kilometers of paved roads per million population in 1988—compared with 513 for Thailand, 536 for Sri Lanka, and 893 for India (pp. 224–25). Such figures, of course, are far from exact, false precision of presentation notwithstanding. Even so, no other “upper-middle income” country, according to the bank, had numbers nearly so low. 210. Derived from ROK, Bureau of Statistics, Korea Statistical Yearbook 1989, 222–23, 126, 437. At world market prices, South Korean farmers would have received roughly $7 billion less for the rice and barley they produced in 1988 than was actually paid to them. This calculation omits the subsidy for fertilizer and agricultural chemicals that South Korean farmers enjoy. Although such rough estimates do not provide a “general equilibrium” figure for the implied magnitude of transfers, they are illustrative nonetheless. 211. Ban, Moon, and Perkins, Rural Development, app. C. 212. Ibid., chap. 12, esp. 337. 213. Derived from United Nations, National Accounts Statistics 1987, vol. 1 (New York: UN, 1990), 840. 214. Ibid., 841. 215. Derived from Bank of Korea, National Accounts 1994, 26–37. 216. Derived from Edward F. Denison and William K. Chung, How Japan’s Economy Grew So Fast (Washington, D.C.: Brookings Institution, 1976), 19. NOTES TO PAGES 134–135 255

217. According to one study, for example, “The anticipated effects [of liberalizing agricultural trade] on land demonstrate that a slight shift away from the current protection policy would alleviate the most serious problem of shortage in the land space for dwelling and industrial areas.” In Do Kim, “An Empirical Study of Welfare Costs and Inefficiency in Resource Allocation: The Case of South Korean Agriculture” (PhD diss., Northern Illinois University, 1991), 123. 218. Harry T. Oshima, Economic Growth in Monsoon Asia: A Comparative Survey (Tokyo: University of Tokyo Press, 1987), 150–52. 219. Ibid., 148. 220. Summers and Heston, for example, estimated per capita GDP, in international 1980 dollars, to have been 3,056 for South Korea in 1985 and 2,921 for Taiwan in 1980. Robert Summers and Alan Heston, “A New Set of International Comparisons of Real Product and Prices: Estimates for 130 Countries, 1950–1985,” Review of Income and Wealth 34, no. 2 (1988): 15, 19. Subsequent revisions of their Penn World Tables maintain roughly similar ratios. See Robert Summers and Alan Heston, “The Penn World Table (Mark V): An Expanded Set of International Comparisons, 1950–1988,” Quarterly Journal of Economics 106, no. 2 (1991): 327–68. 221. For details, see Vijaya Ramachandran, “Agricultural Development: The Case of Korea, 1910–1970” (unpublished paper, Duke University Center for International Development Research, July 1994). 222. One proponent of this view in fact argues that “by the time [postwar] industrial expansion began, the [South] Korean agricultural sector had reached maturity.” Ibid., 18. 223. In this interpretation, governments throughout East Asia were prompted to action by the dramatic drop in real-world market cereal prices in the early 1980s and after. To shield their farmers from (presumably transitory) border price shocks, these governments enacted nominal (though, typically, not real) domestic price supports. For a forceful exposition of this version of this argument, see C. Peter Timmer, “Rural Bias in the East and South East Asian Rice Economy: Indonesia in Comparative Perspective,” Journal of Development Studies 29, no. 4 (1993): 148–76. 224. By this logic, the possibility that North Korea might unexpectedly opt for conflict, and the South’s obvious nutritional vulnerability under a more liberal agricultural order to any interruption of its international food supplies, would convince responsible policymakers in the Republic of Korea to favor food self-sufficiency despite its obvious expense and would correspondingly lead prudent policymakers to treat some part of the budgetary and economic costs of agricultural protection as a sort of national pre- mium on an “insurance policy” against catastrophic contingencies. 225. For background on this concept, see C. Peter Timmer, “The Agricultural Transformation,” in Chenery and Srinivasan, Handbook of Development Economics 1:275–331. 226. Between 1972 and 1991, according to official data, the share of the South Korean labor force classified as employed in the primary sector (agriculture, forestry, and fishing) declined by nearly two-thirds: from about 51 percent of the workforce to about 256 NOTES TO PAGES 135–136

17 percent, a drop of nearly thirty-five points. Sakong, Korea in the World Economy, 8. For some historical comparisons, see Kuznets, Modern Economic Growth, 106–7; for some more contemporary benchmarks, see Yujiro Hayami and Vernon W. Ruttan, Agricultural Development: An International Perspective, rev. ed. (Baltimore: Johns Hopkins University Press, 1985), 464—although the ratios in the latter source cover only the male labor force. Note that the data here pertain to the distribution of persons employed, rather than hours worked, in the primary sector. 227. Possibly the most subtle and compelling of these four points is the second. Yet even proponents of the feasibility and propriety of “price stabilization” through import restrictions and farm price supports do not argue that South Korea exemplifies their argument. Surveying the Asian scene, for example, Timmer avers, “A more substantial case of pure protection can be seen in the South Korean data. . . . From the mid-1950s to the early 1970s, the rising pattern of pure protection is similar to Japan’s. But South Korea then continued to provide more pure protection to rice farmers, whereas Japan’s stabilization policy, in the context of the appreciating yen, seemed sufficient to keep its farmers happy. . . . Complaints from agricultural exporting countries that South Korea has imitated the protectionist policies of Japan . . . can see clear evidence . . . that for rice, the imitation has taken the form of leadership!” Timmer, “Rural Bias,” 165–66. Leaving aside for the moment the particular question of whether South Korea actually implemented a program of “price stabilization” or “pure protection,” we may note that the general feasibility of efficiency-enhancing and welfare-enhancing price stabilization policies for domestically produced commodities is not self-evident. The central, theoretical problem here would seem to lie in the difficulty of distinguishing transient short term price movements from secular long-term price trends. For elaboration, see P. T. Bauer and B. S. Yamey, Markets, Market Control, and Marketing Reform (London: Weidenfeld and Nicholson, 1968), esp. chaps. 6, 7, and 9; and P. T. Bauer, “Costs and Risks of Commodity Stabilization,” in P. T. Bauer, Equality, the Third World, and Economic Delusion (Cambridge, Mass.: Harvard University Press, 1981), 156–62. This is not to say that exceptional practitioners cannot make price stabilization policies “work.” By analogy, particular investors have amassed great fortunes through their shrewd analysis of commodity markets, currency markets, bond markets, and equities markets—but their numbers are not legion, and this skill (or gift) is clearly not transferrable. 228. And the pace of that transformation, while exceptional, was not completely unprecedented. Between 1955 and 1975, the share of Japan’s primary-sector labor force fell by two-thirds, from about 39 percent to under 13 percent. In Taiwan, the proportion of the workforce employed in the primary sector declined from about 50 percent in 1964 to under 18 percent in 1984—almost exactly South Korea’s trajectory a few years later. Derived from Government of Japan Bureau of Statistics, Statistical Handbook of Japan 1965 (Tokyo: Office of the Prime Minister, 1965), 102; Government of Japan Bureau of Statistics, Japan Statistical Yearbook 1995 (Tokyo: Management and NOTES TO PAGE 136 257

Coordination Agency, 1995), 89; and Republic of China, Taiwan Statistical Data Book 1987 (Taipei: Council for Economic Planning and Development, 1987), 16. 229. Fujita and James offer specific quantitative evidence to this effect. In a decomposition of sources of output and employment growth for South Korea and Taiwan over the decade 1973–74 and 1983–84, they calculated that technical change had exerted a strongly positive influence on employment in South Korea’s primary sector! This anomalous result contrasts sharply with their findings for Taiwan, where the contribution of technological change to primary-sector employment was computed to be strongly negative (as would be ordinarily expected in an economy with a rapidly modernizing agricultural sector). Since the study in question relied on input-output analysis, the “technological change” identified, in fact, referred to intertemporal changes in interindustry coefficients—shifts affected not only by changing production possibilities but also by changing relative prices. Although the study did not specifically examine the impact of South Korea’s farm policies on overall agricultural employment (and could not have done so by its very design), agricultural policies are nevertheless the simplest, most obvious, and most plausible explanation for that striking result. See Natsuki Fujita and William E. James, “Export-Oriented Growth of Output and Employment in Taiwan and Korea, 1973–74 and 1983–84,” Weltwirtschaftliches Archiv 126, no. 4 (1990): 737–53, esp. 748–50. 230. In W. A. Lewis, “Economic Development with Unlimited Supplies of Labor,” Manchester School of Economic and Social Studies 22, no. 2 (1954): 139–91. 231. See Moo-ki Bai, “The Turning Point in the Korean Economy,” Developing Economies 20, no. 2 (1982): 117–40. We may note that some studies (including Mason et al., Economic and Social Modernization) place it a few years earlier, while others (including Song, Rise of the Korean Economy) argue that the “turning point” was not reached until the later 1970s. 232. Thus, some fifteen years later, the judgment of Ban, Moon, and Perkins still seems apt: “Rural [South] Korea’s role in overall development . . . differs markedly from that of many other developing countries. A Korean agricultural revolution did not precede or lead development in the other sectors of the economy. . . . For the most part, it was agriculture that benefitted from the industrial and export boom rather than the reverse.” Ban, Moon, and Perkins, Rural Development, 5. In their subsequent study, Leipziger and Petri came to a very similar conclusion: “The evidence suggests that the sectoral transition was driven by the industrial sector, with little direct support from agriculture. . . . Capital and other resources for industrial growth were initially obtained from the urban sector and from foreign resources. Aside from low food prices—due to the plentiful availability of food aid—there is no evidence of significant fiscal or financial transfers from agriculture to industry in the early stages of [South] Korea’s industrial take-off. . . . Once industrial growth was solidly established. . . agriculture’s ability to respond to rapidly growing food demand was severely limited, and much of the new demand spilled into agricultural imports.” Danny M. Leipziger and Peter A. Petri, “Korean Incentive Policies towards Industry and 258 NOTES TO PAGES 136–137

Agriculture,” in Jeffrey G. Williamson and Vidiraj R. Panchamkhi, eds., The Balance between Industry and Agriculture in Economic Development, vol. 2, Sector Proportions (London: Macmillan Press, 1989), 185–86. 233. For an elaboration of this line of argumentation, see James Cotton, “Understanding the State in South Korea: Bureaucratic Authoritarian or State Autonomy Theory?” Comparative Political Studies 24, no. 4 (1992): 512–31. South Korea’s top decision makers, like all political actors, faced immutable constraints during the Third, Fourth, and Fifth Republics—but they also enjoyed considerable freedom to maneuver. To posit that South Korea’s drift toward ever-higher real agricultural price supports over the course of nearly two decades (say, 1969–87), and under a succession of military- installed regimes, was compelled by circumstance is to present an inconsistent portrait of an otherwise “developmentalist” state. More mundanely, such a posture also implicitly denies South Korea’s leaders the possibility of any major errors in judgment in their formulations of the national development strategy. 234. Politics, it is sometimes observed, tends to judge winners kindly. The same indul- gence should not be expected from students of economic history or political economy. 235. “Until the mid-1960s, there was virtually no defense industry in South Korea. However, in the wake of a North Korean commando attack on the presidential mansion in January 1968, the South Korean government decided to develop more self- reliant military forces. . . . Because the ROK government had doubts whether Washington would honor its defense commitments, President Park started to develop a broad range of defense industries, under the direction of the Agency for Defense Development created in 1970. . . . The main objective of the first Force Implementation Plan [launched in 1971] was to possess within four to five years a self-defense capability through an indigenous industry. . . . In 1973, the government enacted the Provisional Law for the Promotion of Military Supply.” Young Sun Ha, “South Korea,” in James E. Katz, ed., Arms Production in Developing Countries (Lexington, Mass.: Lexington Books, 1984), 225–26. For more information on South Korea’s defense industrialization policies, see Janne E. Nolan, Military Industry in Taiwan and South Korea (New York: St. Martin’s Press, 1986), and Chung-in Moon, “The Political Economy of Defense Industrialization in South Korea: Constraints, Opportunities, and Prospects,” Journal of East Asian Affairs 5, no. 2 (1991): 438–65. 236. The so-called HCI Drive is conventionally dated from January 12, 1973, when it was formally announced in a speech by President Park. See, for example, World Bank, Korea: Managing the Industrial Transition 1:38. In actuality, it began several years earlier. Chung-yum Kim, for example, tells of detailed discussions of the HCI plan with President Park in November 1971; interestingly, he refers to the plan as one for developing “the defense industry.” Kim, Policymaking on the Front Lines, 83–87. Woo (Race to the Swift, 129) traces the plan even earlier: to July 1970, when a hastily drawn up aid request for development of South Korean heavy industries was proposed to, and rejected by, Japan. Jeong-woo Kil concurs with Woo on this score: “If we examine the public speeches made by President Park since the middle of the sixties we NOTES TO PAGES 137–138 259 can easily find that his concern with heavy and chemical industries was gradually growing. . . . But it was around 1970 when the construction of the Pohang steel factory was completed that the concern with heavy and chemical industries increased sharply.” Jeong-woo Kil, “The Development of Authoritarian Capitalism: A Case Study of South Korea” (PhD diss., Yale University, 1986), 96. The timing is noteworthy. See the details in the previous note—considerations often overlooked in the literature on Korean economic development. The summer of 1970 also marked a visit to Seoul by U.S. vice president Spiro Agnew, who had been delegated to inform President Park about the new Nixon Doctrine for Asia’s defense and of its ramifications for the Republic of Korea. 237. In 1981, for example, the effective corporate tax rate for companies in the HCI areas was an estimated 20.6 percent, whereas the effective rate for non HCI corporations was an estimated 51.1 percent. Jung-ho Yoo, “The Industrial Policy of the 1970s and the Evolution of the Manufacturing Sector in Korea” (KDI, Working Paper 9017, Seoul, 1990), 35. 238. Thus Wontack Hong, writing in 1988: “[During the 1966–85 period] we could observe increasing disparities in the physical capital intensities of manufacturing sectors and manufactured exports in Korea. This polarization phenomenon is consistent not only with the commodity market distortions but also with the double-factor market distortion model, i.e. relatively low wages paid in the labor-intensive sectors together with a subsidized credit rationing in favor of capital-intensive sectors. . . . Furthermore, we observed a significant positive relation between the capital intensity of a sector and the rate of effective protection accorded to the sector.” Wontack Hong, “Market Distortions and Trade Patterns of Korea: 1960–85” (KDI, Working Paper 8807, Seoul, 1988), 90. 239. See, for example, World Bank, Korea: Managing the Industrial Transition, vol. 2; Ji Hong Kim, “Korean Industrial Policy in the 1970’s: The Heavy and Chemical Industry Drive” (KDI, Working Paper 9015, Seoul, 1990); Yoo, “Industrial Policy of the 1970s”; Woo, Race to the Swift, chap. 5; Choi Byung-sun, Economic Policymaking in South Korea (Seoul: Chomyung Press, 1991), chap. 3; and Rhee, State and Industry in South Korea, chap. 3. 240. World Bank, Korea: Managing the Industrial Transition, 2:20. Comparisons based on current domestic prices. 241. Fujita and James, “Export-Oriented Growth.” 242. Perhaps not surprisingly, Japanese researchers seem to be much more alert to these divergences than American or European students of development. One of the most per- ceptive expositions of this induced divergence, and some of its consequences, can be found in Koichi Ohna and Hideki Imeda, “The Experience of Dual Industrial Growth: Korea and Taiwan” Developing Economies 25, no. 4 (1987): 310–24. 243. But see Natsuki Fujita and William E. James, who argue that South Korea’s heavy industrialization was nonetheless largely an import substitution program and that the export-promotion policies for South Korea’s heavy industries appear to have had adverse consequences for exports from light industries. “Export Promotion and the 260 NOTES TO PAGES 138–140

‘Heavy Industrialization’ of Korea, 1973–1983,” Developing Economies 27, no. 3 (1989): 236–50. 244. World Bank, Korea: Managing the Industrial Transition: 1, 47. 245. Amsden reports that the rate of return on investment was higher in light industry than in heavy industry for eleven of the thirteen years between 1972 and 1984, inclusive. Amsden, Asia’s Next Giant, 89. 246. For more details, see World Bank, Korea: Managing the Industrial Transition, 2:chaps. 4.C and 6; Choi, Economic Policymaking in South Korea, 126–33; and Rhee, State and Industry in South Korea, 148–61. 247. See, for example, World Bank, East Asian Miracle, 309, which estimated for 1977 that 45 percent of South Korea’s total domestic credit was channeled into the HCI drive and that the drive’s interest subsidies alone amounted to as much as 3 percent of GNP that year. 248. Yoo, “Industrial Policy of the 1970s,” 75; these calculations are based on value added at international prices. 249. Jene Kwon, “The East Asia Challenge to Neoclassical Orthodoxy,” World Development 22, no. 4 (1994): 635–44. But see our discussion later in this chapter for some cautionary words about TFP calculations. 250. For a cautionary assessment of the capabilities and limits of computable general equilibrium models, see Clive Bell and T. N. Srinivasan, “On the Uses and Abuses of Economywide Models in Development Policy Analysis,” in Moises Syrquin, Lance Taylor, and Larry E. Westphal, eds., Economic Structure and Performance: Essays in Honor of Hollis B. Chenery (New York: Academic Press, 1984), 451–76. They conclude: “The questions that can be profitably addressed by extant CGEs are, in our view, restricted in important ways by the nature of their theoretical foundations, though there are prospective improvements. . . . What they can say about income distribution is limited, and their treatment of factor employment is not wholly convincing. . . . More important, they are ill-suited to analyze processes involving real time, such as accumulation and inflation” (Ibid., 474). For slightly more recent (and slightly more sanguine) evaluations, see P. Capros, P. Karadeloglou, and G. Mentzas, “An Empirical Assessment of Macroeconometric and CGE Approaches in Policy Modeling,” Journal of Policy Modeling 12, no. 3 (1990): 557–85, and Jayatilleke S. Bandara, “Computable General Equilibrium Models for Development Policy Analysis in LDCs,” Journal of Economic Surveys 5, no. 1 (1991): 3–69. 251. Although it may be noted that observers are not unanimous on this point. In the view of at least one analyst, the HCI Drive’s contribution to South Korea’s economic difficulties in the late 1970s has been exaggerated in much of the literature and its contribution to the resumption of rapid growth in the 1980s correspondingly underappreciated. See R. M. Auty, “Macro Impacts of Korea’s Heavy Industry Drive Re-evaluated,” Journal of Development Studies 29, no. 1 (1992): 24–48. Auty’s main arguments, however, were anticipated, and empirically tested, in Yoo, “Industrial Policy of the 1970s,” 87–102. His results are broadly inconsistent with Auty’s thesis. NOTES TO PAGES 141–145 261

252. This judgment echoes the conclusion of, among others, Hugh Patrick: “Compared to most developing countries . . . Japan, [South] Korea, and Taiwan have been only moderately repressed. . . . [South] Korea has been the most repressed of the three. . . . Taiwan has been somewhat less repressed. . . . The degree of repression was substantially less in Japan [than in Taiwan or South Korea].” Patrick, “Comparisons, Contrasts and Implications,” in Hugh Patrick and Yung Chul Park, eds., The Financial Development of Japan, Korea, and Taiwan (New York: Oxford University Press, 1994), 334–35. 253. Jeffrey G. Williamson, “Why Do Koreans Save ‘So Little’?” Journal of Developmental Economics 6, no. 3 (1979): 343–62. 254. Tibor Scitovsky, for instance, finds it odd that more of his colleagues do not share in his curiosity: “The personal savings rate . . . averaged 7.6 percent in [South] Korea, 17.6 percent in Taiwan. That difference is tremendous; but surprisingly enough, no one seems to have tried to explain it. The voluminous literature on [South] Korea’s economic performance is full of discussion and explanations of why [South] Korea’s savings rate has been so very high in recent years; there is no word anywhere to explain why it has been so low—yet low it seems when contrasted to the savings rate of Taiwan.” Scitovsky, “Economic Development in Taiwan and South Korea, 1965–1981,” in Lawrence J. Lau, ed., Models of Development: A Comparative Study of Economic Growth in South Korea and Taiwan (San Francisco: ICS Press, 1990), 158. 255. For a succinct survey of research on the determinants of savings rates in developing countries, identifying many of the areas of continuing uncertainty or dispute within the literature, see Mark Gersovitz, “Savings and Development,” in Chenery and Srinivasan, eds., Handbook of Development Economics, 381–424. 256. For breakdowns, see the following studies in Patrick and Park, Financial Development: Juro Teranishi, “Japan: Development and Structural Change of the Financial System,” 27–80, esp. 54; Yung Chul Park, “Korea: Development and Structural Change of the Financial System,” 129–87, esp. 181; and Jia-Dong Shea, “Taiwan: Development and Structural Change of the Financial System,” 222–87, esp. 281. 257. Data for Japan and the other OECD countries drawn from the OECD, Historical Statistics: 1960–1993 (Paris: OECD, 1995), 78. According to this source, the only OECD members in the late 1980s to maintain net household savings ratios higher than South Korea’s were Greece and Portugal. 258. Interpretations along these lines are offered by (among others), Sang-Woo Nam, “A Sectoral Accounting Approach to National Savings Applied to Korea,” Journal of Development Economics 33, no. 1 (1990): 31–52; and Susan M. Collins, “Saving, Invest- ment, and External Balance in South Korea,” in Haggard et al., Macroeconomic Policy and Adjustment, 231–59. 259. See, for example, Kenneth H. Kang, “Why Did Koreans Save ‘So Little’ and Why Do They Now Save ‘So Much’?” International Economic Journal 8, no. 4 (1994): 99–111. 260. Kang, for example, proposes to explain all changes in personal savings rates in South Korea in terms of changes in dependency ratios; in his estimate, even the 1965 interest rate reform had no strong effect on savings behavior! Kang, “Why Did Koreans 262 NOTES TO PAGES 145–146

Save,” 106–7. Although the conclusion may be consistent with a particular econometric modeling exercise, it is extreme and implausible nonetheless. Collins (“Savings, Investment and External Balance”) does not analyze the impact of real interest rates on household savings rates in South Korea. Instead, she pools household and corporate savings together and finds that the interest elasticity for private sector savings with respect to real interest rates in the formal banking sector is positive but low. This begs the question of the relationship between household savings rates and banking sector interest rates per se. Nam (“Sectoral Accounting”) uses multivariate analysis to examine the savings behavior of the South Korean household and includes a variable to reflect the impact of real interest rates—but the variable is for rates in the curb market rather than the regulated financial sector. 261. Dornbusch and Park’s evaluation is probably as close to a “consensus” view as one will find: “The relationship between savings and interest rates remains unresolved in [South] Korea, just as everywhere else. . . . Overall, the [South] Korean experience suggests there is no need for high positive real interest rates to mobilize saving through the financial system; as long as large negative real interest rates are avoided, the real interest rate is relatively insignificant.” Rudiger Dornbusch and Yung Chul Park, “Korean Growth Policy,” Brookings Papers on Economic Activity, no. 2 (1987): 418. 262. For a description of what the authors describe as the government’s 1972 “assault” on curb market, see Cole and Park, Financial Development in Korea, 162–68. 263. The relationship between changes in household savings rates and changes in South Korean external debt stocks appears to be direct and strong. As Collins noted in an analysis of savings and debt in South Korea over 1965 to 1984, “[South] Korea’s current account difficulties coincide with drops in household savings. Most of [South] Korea’s external debts were accumulated during these periods.” Susan M. Collins, “Savings and Growth Experiences of Korea and Japan,” Journal of the Japanese and International Economies 2, no. 3 (1988): 342. 264. Sakong, Korea in the World Economy, 259. 265. In 1980, according to World Bank figures, about 38 percent of South Korea’s total stock of foreign debt consisted of short-term loans or IMF credits. In Brazil, by contrast, short-term debt and IMF credits accounted for only 19 percent of the country’s foreign debts in 1980; in Mexico, 28 percent; in Chile, 21 percent. For Latin America and the Caribbean as a whole, the corresponding figure was reported to be 30 percent; for “middle-income countries,” 29 percent; for all developing countries, 27 percent. Derived from World Bank, World Debt Tables 1994–95: External Finance for Developing Countries, vols. 1 and 2 (Washington, D.C.: World Bank, 1994). 266. In 1980, for example, Euromoney magazine’s country risk assessment survey placed South Korea thirty-fifth out of sixty-five countries ranked—well below Mexico, Brazil, and the Philippines. Woo, Race to the Swift, 181. The following year, Euromoney’s ranking for South Korea dropped still further, to forty-fifth out of the sixty- nine countries assessed. South Korea was deemed “riskier” than such countries as NOTES TO PAGES 146–148 263

Mexico, Argentina, Chile, and Ecuador—and also Nigeria and Romania. “The State of Country Risk,” Euromoney, February 1982, 47–51. From a vantage point in the 1990s, such rankings may surprise. But ex post memories of ex ante expectations tend to be sensitive to intervening events. 267. For details, see Woo, Race to the Swift, 185–87; Chong-sik Lee, Japan and Korea: The Political Dimension (Stanford, Calif.: Hoover Institution Press, 1985), chap. 5; and Hosup Kim, “Policymaking of Japanese Official Development Assistance to the Republic of Korea, 1965–1983” (PhD diss., University of Michigan, 1987), esp. chap. 4. In January 1983, the Japanese government agreed to a $4 billion official loan and credit package for Seoul. President Chun Doo-Hwan solicited President Reagan’s general approval for such an aid package before the protracted Japan–South Korea negotiations began in earnest. As structured, the package of loans and trade credits offered unusual room for financial maneuver to the Republic of Korea. Breaking with established tradition—and departing from its practices in other countries—Tokyo extended unrestricted bilateral soft loans to South Korea, circumventing the ordinary requirement that such foreign aid lending be project- related. The 1983 Japanese loan package provided more than enough resources for South Korea to surmount its incipient liquidity problems; for all of 1983, the net increase in South Korea’s foreign debt stock totaled $3 billion—less, in other words, than had been guaranteed to Seoul by the agreement at the start of the year. 268. See, for example, Alwyn Young, “Lesson of the East Asian NICs: A Contrarian View,” European Economic Review 38, nos. 3–4 (1994): 964–73; Young, “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics 110, no. 3 (1995): 641–80; and Paul Krugman, “The Myth of the East Asian ‘Miracle,’” Foreign Affairs 73, no. 6 (1994): 62–78. Young does not examine or comment on the Japanese growth experience, but Krugman does. 269. In Alwyn Young, “Lesson of the East Asian NICs: A Contrarian View,” European Economic Review 38, nos. 3–4 (1994), for example, Young offers what he terms “back of the envelope” computations; though they are more than that, they do not constitute a systematic examination of the sources of growth in the economies in question. In “Tyranny of Numbers,” Young provides a more formal and careful accounting of growth and productivity change in the four “little tigers”; this study, however, still does not attempt to adjust for, or measure, the impact of some basic factors bearing on long-term economic growth (including changes in hours worked and improvements in education of the workforce). For their intended purposes, these expositions may well be detailed enough. But it would surely be possible—and desirable—to go a bit further. 270. For an early and succinct survey of some of these differences, see Hywel G. Jones, An Introduction to Modern Theories of Economic Growth (New York: McGraw Hill, 1976), esp. chaps. 7 and 8. 271. This point is made more formally in the note by Richard R. Nelson, “Recent Exercises in Growth Accounting: New Understanding or Dead End?” American Economic Review 63, no. 3 (1973): 462–68. For a more extended exposition, see Nelson, 264 NOTES TO PAGES 148–150

“Research on Growth and Productivity Differences: Dead Ends and New Departures,” Journal of Economic Literature 19, no. 3 (1981): 1029–64. A thoughtful reflection on attendant methodological problems can be found in Moses Abramovitz, “The Search for the Sources of Growth: Areas of Ignorance, Old and New,” Journal of Economic History 53, no. 2 (1993): 217–43. 272. Namely, that its calculated elasticity coefficients for labor and capital happen also to be the weights for the factor shares in the economy. 273. This point is nicely developed in Mark Blaug, An Introduction to the Economics of Education (London: Penguin Press, 1970), 69–100. 274. The “meta production function” approach, for example, allows for diminishing or increasing returns to scale but is easiest to model when it treats technical progress as a phenomenon embodied in capital—yet this may introduce systematic biases regarding the contribution to growth process of labor and nonfactor effects. 275. This point is suggested in J. R. Norsworthy, “Growth Accounting and Productivity Measurement,” Review of Income and Wealth 30, no. 3 (1984): 309–29. 276. For formal exposition of some of these problems, see Charles R. Hulten, “Productivity Change, Capacity Utilization, and the Sources of Efficiency Growth,” Journal of Econometrics 33, nos. 1–2 (1986): 31–50, and Margaret E. Slade, “Value- Added Total-Factor Productivity Measurement: A Monte Carlo Assessment,” in Wolfgang E. Eichhorn, ed., Measurement in Economics: Theory and Applications of Economic Indices (Heidelberg: Physica, 1988), 809–30. 277. See Charles R. Hulten, “Growth Accounting with Intermediate Inputs,” Review of Economic Studies 45, no. 3 (1978): 511–18, and Hulten, “Growth Accounting When Technical Change Is Embodied in Capital,” American Economic Review 82, no. 4 (1992): 964–80. 278. For an argument to this effect, see Edward F. Denison, Estimates of Productivity Change by Industry: A Critique and an Alternative (Washington, D.C.: Brookings Institution, 1989). Alternative arguments are presented in Martin Neil Baily and Robert J. Gordon, “The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power,” Brookings Papers on Economic Activity, no. 2 (1988): 347–420, and Stephen D. Oliner and Daniel E. Sichel, “Computers and Output Growth Revisited: How Big Is the Puzzle?” Brookings Papers on Economic Activity, no. 2 (1994): 273–317. This practical problem returns us to the conundrum of identifying a preferred theory for explaining the dynamics of economic growth. The controversy between the “Cambridge, Massachusetts, school” and the “Cambridge, England, school” of capital theory, for example, is delineated by precisely such questions. For one careful, but spir- ited, view of that dispute (from the “English” side), see T. K. Rymes, “The Measurement of Capital and Total Factor Productivity in the Context of the Cambridge Theory of Capital,” Review of Income and Wealth 18, no. 1 (1972): 79–108. 279. Oli Havrylyshyn, “Trade Policy and Productivity Gains in Developing Countries: A Survey of the Literature,” World Bank Research Observer 5, no. 1 (1990): 1–24, citation at p. 7. Havrylyshyn notes that Henry Bruton and Victor Elias, two respected NOTES TO PAGES 150–151 265 economists, each estimated TFP for Argentina for the years 1955–65, but whereas Elias calculated it to average 1.7 percent per year, Bruton derived an annual rate of negative 0.6 percent. Havrylyshyn further comments that “wide differences in . . . the share of the residual, and even inconsistency in the direction of change from one period to the next, are also found for other countries and periods of the studies” (Ibid., 7). 280. A particularly curious set of TFP calculations for South Korean manufacturing industries may be found in World Bank, East Asian Miracle, 307. According to these estimates, the authors obtained a rate of increase in TFP of nearly 9 percent per annum for the period 1966–88 (using a traditional neoclassical production function to specify their model). Independent attempts to replicate those findings resulted in a TFP estimate of 2 percent a year for the same period! See Kwon, East Asia Challenge, 636–37. 281. A trend toward shorter workweeks appears to have commenced in the mid- or late 1980s. According to the 1994 edition of the International Labour Organization, Yearbook of Labour Statistics (Geneva: ILO, 1995), 662, for example, the average workweek in South Korea’s nonagricultural sector declined steadily and substantially between 1986 and 1993, falling by a total of five hours a week. 282. This has been noted before. As Dornbusch and Park put it, “The simple fact is that [South] Koreans work longer. The [South] Korean work week, which has actually increased since the 1970s, is 35 percent longer than that in industrialized countries and 17 percent longer than that in Mexico.” Dornbusch and Park, “Korean Growth Policy,” 398. 283. For a classic presentation of the change in the workweek over the course of industrialization in the Western economies, see Kuznets, Modern Economic Growth, chap. 3. 284. Jaewhan Sung, “Determinants and Efficiency Aspects of Voluntary Labor Mobility: A Study of the Korean Labor Market” (Ph.D. diss., Cornell University, 1989), 3; Japanese and South Korean data are for 1986. 285. Coverage of the workforce in South Korean labor statistics, for example, is generally believed to have improved over the past decades; if so, the trends reported in figure 3 may be biased downward, making the anomaly even more pronounced. The phenomenon of working hours in the manufacturing sector cannot be dismissed as atypical of the economy as a whole, insofar as manufacturing employed about one-third of South Korea’s nonfarm workforce as of 1990 (OECD, Country Surveys, 77)— more than any other major sector of the economy. As it happens, the workweek in South Korea’s nonagricultural sector as a whole was also unusually high: in 1985, according to ILO statistics, it was more than eleven hours longer than Japan’s, more than seven hours longer than Singapore’s, and more than four hours longer than Hong Kong’s. ILO, Yearbook of Labour Statistics 1994, 622–23. As for data on the workweek by firm size, there is no a priori reason to expect these to be less reliable for South Korea in the late 1980s than in the many other developing countries where positive correla- tions are not evident. 286. Sung’s analysis concurs: “Our empirical findings show that a typical worker prefers more overtime hours. . . . This implies that utility gains due to higher earnings 266 NOTES TO PAGES 152–153 dominate the disutility resulting from longer working hours. . . . It is not true that large firms offer above market wages in order to reduce quit rates. . . . Instead, workers in large firms are offered longer working hours than those in small firms. . . . Our empirical results show that workers do not move from low productivity sectors to higher ones. . . . It was shown empirically that workers move from a firm offering low total earnings to a firm offering higher earnings. . . . It can easily be deduced that workers move from a sector offering shorter working hours to a sector offering longer working hours.” Sung, “Determinants and Efficiency,” 134, 136, 137. 287. Consistent as well with Szirmai and Pilat’s observations about productivity in South Korea: “The conclusion in regard to South Korea is that even after a decade of rapid productivity growth, labor productivity was surprisingly low in 1985. That South Korea is nevertheless able to compete in international markets is due to extremely low levels of labor remuneration. For instance, the average level of labor remuneration in South Korean manufacturing in 1975 was only 8.5% of the US level. . . . The combination of a large manufacturing labor force, low labor productivity and low levels of labor remuneration reflects the labor intensive character of Korean industrialization.” Adam Szirmai and Dirk Pilat, “Comparisons of Purchasing Power, Real Output, and Labor Productivity in Manufacturing in Japan, South Korea, and the U.S.A., 1978–85,” Review of Income and Wealth 36, no. 1 (1990): 27. 288. Hak-kil Pyo, “Estimates of Capital Stock and Capital Coefficients by Industries for the Republic of Korea (1953–1986)” (KDI, Working Paper 8810, Seoul, 1988), 49–50. 289. Capital-output ratios also appear to be higher in South Korea’s manufacturing industries than in Taiwan’s, even though per capita income was measured as being somewhat higher in Taiwan. Ohno and Imaoka, “Experience of Dual Industrial Growth.” 290. Park and Kwon’s model was specified using a cost function and a production function that did not assume the economy to be in long-run competitive equilibrium. Most other TFP estimates for South Korea’s manufacturing sector have to date been based on variants of the neoclassical approach, which implicitly assumes competitive long-run equilibrium in the economy. 291. To offer a sense of the range: Pyo et al. estimate an average annual increase in manufacturing TFP of 1.1 percent for 1970–90; Kim and Hong estimate 1.5 percent a year for the same period; Kang and Kwon estimate an annual increase of 1.7 percent for 1963–83; Young estimates 3.0 percent for 1966–90; Nishimizu and Robinson estimate an annual increase of 3.7 percent for 1960–77; and Moon et al. estimate an annual increase of 3.7 percent for 1971–89. Each study’s method differs in some respects from the others. For more details, see Hak-kil Pyo et al., An Analysis of the Causes of Growth and Productivity by Industry for the Republic of Korea (Seoul: Korean Economics Research Institute, 1993), cited in Young, “Tyranny,” 679; Kwang- suk Kim and Sung-duck Hong, Jejoeop ui Chongyoso Saengsanseong Donghyang Gwa Keu Kyuljeong Yoin [Trends of Total Factor Productivity in the Manufacturing Sector and Its Determinant Factors] (Seoul: Korea Development Institute, 1992); Jung M. Kang and Jene K. Kwon, “The Role of Returns to Scale and Capital Utilization in NOTES TO PAGES 153–157 267

Productivity Changes: The Case of Korean Manufacturing,” International Economic Journal 7, no. 1 (1993): 95-109; Young, “Tyranny,” 666; Mieko Nishimizu and Sherman Robinson, “Trade Policies and Productivity Change in Semi-Industrialized Countries,” Journal of Development Economics 16, nos. 1–2 (1984): 177–206; and Hee-wha Moon et al., Total Factor Productivity in Korea: An Analysis of 27 Manufacturing Industries (Seoul: Korea Productivity Center, 1991), cited in Young, “Tyranny,” 679. 292. Derived from Pilat, Economics of Rapid Growth, 296. 293. Leipziger and Petri, “Korean Industrial Policy,” 11, for example, offer calculations suggesting that the rate of increase in total factor productivity in South Korean manufacturing averaged 2.7 percent per year between 1972 and 1985, as against 3.8 percent per year for manufacturing in Japan between 1973 and 1986, or 4.0 percent per year for the U.S. machinery/equipment industries between 1972 and 1985. 294. See, for example, the OECD conference convened to assess the Denison method: John H. Vaizey, ed., The Residual Factor in Economic Growth (Paris: OECD, 1964). See also Richard Layard, “Denison and the Contribution of Education to National Income Growth: A Comment,” Journal of Political Economy 81, no. 4 (1971): 1013–16; Richard Stone, “Whittling Away at the Residual: Some Thoughts on Denison’s Growth Accounting,” Journal of Economic Literature 18, no. 4 (1980): 1539–43; Edward M. Miller, “On the Importance of the Embodiment of Technology Effect: A Comment on Denison’s Growth Accounting Methodology,” Journal of Macroeconomics 7, no. 1 (1985): 85–99; and Robert J. Gordon, “On the Concept of Capital: A Reply,” Review of Income and Wealth 39, no. 1 (1993): 103–10. 295. Pilat, Economics of Rapid Growth. 296. Kwang-suk Kim and Joon-kyung Park, Sources of Economic Growth in Korea: 1963–1982 (Seoul: Korea Development Institute, 1985). 297. Gross domestic product equals national income at factor cost plus fixed capital consumption (i.e., depreciation), plus net indirect taxes (minus subsidies), minus net factor income from the rest of the world. 298. Divergences between the two series could also involve their very different treatment of net factor income from the rest of the world and indirect taxes (minus subsidies). As a practical matter, the influence of these two elements would have been minor for South Korea during the years under consideration. 299. Kim and Park used the Bank of Korea’s 1982 national accounts series; Pilat used its 1990 series. Kim and Park based their capital stock computations on a 1977 study by Hakchung Choo Pilat instead used Hak-kil Pyo’s 1988 and 1992 studies. 300. Pilat warns that existing estimates of capital stock for South Korea exhibit “very different growth patterns. The output data themselves have also changed considerably over time. The South Korean growth accounts are therefore not as standardized as the Japanese.” Pilat, Economics of Rapid Growth, 86. Once again in the South Korean development experience, we encounter problems of interpretation born of problems with the data. 268 NOTES TO PAGES 158–163

301. In addition to the methodological differences already noted above, the Denison- type calculations in table 3-13 make adjustments to “standardize” national income growth against “irregular factors.” See Denison and Chung, How Japan’s Economy Grew So Fast, 39–45. Pilat makes no such adjustments. 302. Maddison, World Economy, provides illustrative comparisons. 303. Oshima, Economic Growth in Monsoon Asia, 140, 142; the estimates are for 1952–80 (Taiwan) and 1953–80 (South Korea) and are based on simple Cobb-Douglas production functions. 304. Hiroki Kawai, “International Comparative Analysis of Economic Growth: Trade Liberalization and Productivity,” Developing Economies 32, no. 4 (1994): 373–97. 305. Byung Ok Lim, Economic Development Patterns, Inflations and Distribution: With an Application to Korea (ROK) and Taiwan (ROC) (New York: Garland Publishing, 1991). 306. Young, “Tyranny”; Jong-Il Kim and Lawrence J. Lau, “The Sources of Economic Growth of the East Asian Newly Industrialized Countries,” Journal of the Japanese and International Economies 8, no. 3 (1994): 235–71. Young uses a simple translog production function; Kim and Lau devise a more complex meta production function for nine countries (the East Asian “tigers” plus the OECD G 5). 307. Howard Pack, “New Perspectives on Industrial Growth in Taiwan,” in Gustav Ranis, ed., Taiwan: From Developing to Mature Economy (Boulder, Colo.: Westview Press, 1992), 73–120. 308. Shirley W. Y. Kuo, The Taiwan Economy in Transition (Boulder, Colo.: Westview Press, 1983), 226. 309. See footnote 292. 310. Maddison’s estimates of per capita GNP around 1950 are illustrative: according to his figures, per capita GDP (in constant 1980 dollars, at international prices) would have been $359 for India, $484 for Indonesia, and $564 for South Korea. Maddison, World Economy, 19. In subsequent revisions of this series, Maddison concluded that South Korea’s per capita GDP in 1950 was actually somewhat lower than Indonesia’s. Angus Maddison, The World Economy: Historical Statistics (Paris: Organisation for Economic Co-operation and Development, 2003), 184. 311. The utility of those admonitions, of course, is another matter altogether. As Robert Lucas has pointed out, “Simply advising a society to ‘follow the [South] Korean model’ is a little like advising an aspiring basketball player to ‘follow the Michael Jordan model.’” Lucas, “Making a Miracle,” 252. 312. Robert J. Barro and Jong-wha Lee, “Winners and Losers in Economic Growth,” Supplement, World Bank Economic Review (1993): 267–315. See also Robert J. Barro, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics 106, no. 3 (1991): 407–43. 313. William Easterly, “Explaining Miracles: Growth Regressions Meet the Gang of Four,” in Takatoshi Ito and Anne Krueger, Growth Theories in Light of the East Asian Experience (Chicago: University of Chicago Press, 1995), 267–90. NOTES TO PAGES 163–181 269

314. In Easterly’s study, the “probability of a ‘miracle’” was defined as the probability that a growth rate of 5 percent per capita per year for the years 1960 to 1985 could be reached through the fitted growth rate predicted by his regressions plus an error term. South Korea’s probability of attaining such a rate was calculated to be less than 9 percent. By way of comparison, Taiwan’s was 17 percent; Hong Kong’s, 23 percent; Singapore’s, 35 percent; and Japan’s, 60 percent. Twenty-seven of the 110 countries in the sample were predicted to be more likely than South Korea to achieve 5 percent growth! Ibid., 270–71. 315. According to its official economic figures, Japan achieved near-double digit GDP growth for two decades, not three. Hong Kong’s growth rate has been extraordinary, yet according to national accounts data it was 1.5 percentage points a year lower than the ROK’s between the early 1960s and the early 1990s. Only Taiwan, Singapore and possibly Botswana recorded thirty-year bursts of growth that rank with that of South Korea’s between the early 1960s and the early 1990s. 316. Moses Abramovitz, “Resource and Output Trends in the United States since 1870,” American Economic Review 46, no. 2 (1956): 5–23, citation at 11. 317. Victor J. Elias, Sources of Growth: A Study of Seven Latin American Economies (San Francisco: ICS Press, 1992). 318. Between 1960 and 1985, aggregate GDP growth for the OECD is now estimated to have averaged 3.5 percent per year. Per capita GDP, however, is estimated to have averaged 2.5 percent per annum—somewhat faster than in Elias’s Latin American sample. Derived from OECD, Historical Statistics 1960–1993, 50. 319. How much credence should be lent to these numbers, we should emphasize, is by no means obvious. It has been argued elsewhere that the World Bank and some other international development organizations have a tendency to manufacture the basic data by which they subsequently evaluate their own policies when such numbers are initially lacking. See, for example, Nicholas Eberstadt, The Tyranny of Numbers: Mismeasurement and Misrule (Washington, D.C.: AEI Press, 1995), chap. 10. 320. Derived from World Bank, World Development Report 1995, 165, 177, 211. 321. Hong, Trade and Growth, 48–49 (emphasis added). 322. For more on this notion, see Julian Lider, Correlation of Forces: An Analysis of Marxist-Leninist Concepts (New York: St. Martin’s Press, 1986).

Chapter 4: Summation and Concluding Observations

1. For information and analysis of the economic (and humanitarian) catastrophe that befell North Korea after the end of the Cold War era, see Nicholas Eberstadt, The North Korean Economy between Crisis And Catastrophe (New Brunswick, N.J.: Transaction Books, 2007), and Stephan Haggard and Marcus Noland, Famine in North Korea: Markets, Aid and Reform (Washington, D.C.: Peterson Institute for International Economics, 2007). 2. To recall Gertrude Himmelfarb’s contemplations on the “Frenchness of France,” see her critique of Fernand Braudel’s work on the French identity in The New History 270 NOTES TO PAGES 183–192 and the Old: Critical Essays and Reappraisals (Cambridge, Mass.: Harvard University Press, 1989). 3. For a masterful presentation and critique of such methodological errors, see David H. Fischer, Historical Fallacies (New York: Harper and Row, 1970). 4. Friedrich A. Hayek, The Fatal Conceit (Chicago: University of Chicago Press, 1989). 5. Simon Kuznets, Economic Growth of Nations: Output and Composition (Cambridge, Mass.: Harvard University Press, 1971), 20–21. 6. Samuel P. S. Ho, Economic Development of Taiwan, 1860–1970 (New Haven, Conn.: Yale University Press, 1978), 248. 7. Sometimes it truly seems as if nothing is new under the sun. Even the “distinctively Korean” Saemaul Undong program for rural development, for example, evokes an echo of earlier policies: “The Government General has shown itself aware of the plight of the Korean farmers. But . . . it could not invest vast amounts of capital in Korean agriculture. . . . It could find money for steel mills, because these were important for the prosecution of the war. But there was no money for reclamation, for agricultural improvements, or for construction of dwellings. What could the Administration do under the circumstances? Under General Ugaki [Ugaki Kuzushige, Governor General for Chosen in the late 1930s] it organized the Movement of Rural Revival with emphasis on self-help, self-reliance, and spiritual mobilization. . . . Some model villages were selected and in these a concrete plan was worked out for each family showing how, in five years, it might raise itself materially and spiritually through self- awakening, self-effort, and spiritual mobilization.” Andrew J. Grajdanzev, Modern Korea (New York: John Day Company, 1944), 120–21. Saemaul Undong, incidentally, translates as “the new spirit movement.” 8. For example, see Mary Kaldor, “Military Expenditures and Economic Growth,” Cambridge Journal of Economics 5, no. 2 (1980). 9. For one such study of the World War II period, see Alan S. Milward, War, Economy, and Society (Berkeley and Los Angeles: University of California Press, 1977). 10. As late as 1980, for example, male life expectancy at age thirty was estimated to be roughly equal in South Korea and Bangladesh—a fact seldom mentioned, or apparently even recognized, by students of modern economic development. See Eberstadt, Korea Approaches Reunification, esp. ch. 3. 11. Eberstadt and Banister, The Population of North Korea; Eberstadt, Korea Approaches Reunification; Eberstadt, The North Korean Economy between Crisis and Catastrophe. 12. Robert W. Fogel, “Economic Growth, Population Theory, and Physiology: The Bearing of Long-Term Processes on the Making of Economic Policy,” American Economic Review 84, no. 3 (1994): 369–95; and Fogel, The Escape from Hunger and Premature Death 1700–2100: Europe, America, and the Third World (New York: Cambridge University Press, 2004). 13. Cf. Niccolo Machiavelli, The Prince (New York: Bantam Books, 1966), esp. chapter XXV. References

Articles and Book Chapters in English

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Yoo, Jung-ho. “The Industrial Policy of the 1970s and the Evolution of the Manufacturing Sector in Korea.” KDI Working Paper 9017, Korea Development Institute (1990). Yoon, Dae-kyu. “Constitutionalism in South Korea.” Asian Affairs 81, pt. 2 (1994). Yoon, Je Cho, and Joon-Kyung Kim. “Credit Policies and the Industrialization of Korea.” World Bank Discussion Papers, no. 286 (1995). Young, Alwyn. “Lesson of the East Asian NICs: A Contrarian View.” European Economic Review 38, nos. 3–4 (1994). ———. “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience.” Quarterly Journal of Economics 110, no. 3 (1995). Young, Koo Cha, and Tae Ho Kim. “The Emerging World Order and Korea’s Changing Climate in Northeast Asia.” Korea and World Affairs 17, no. 1 (1993). Yu, Han-song. “The Arms Race Elbows Aside National Welfare.” Wolgan Choson, December 1989. Translated by Foreign Broadcast Information Service, FBIS: Daily Report, East Asia (90-050), March 14, 1990.

Articles in Other Languages

Cornelson, Doris, and Wolfgang Kirner. “Zum Produckivitätsvergleich Budesrespublik-DDR” [The comparison of productivity in the federal republic and the GDR]. DIW Wochenberichte 57 (1990). Kim Chon-gun, “Pukhan ui Nongop Palchon kwa Saengsan Kaehwang” [Outline of North Korea’s agricultural development and production], Pukhan Yongu (Seoul) 3, no. 1 (1992): 74. Korea Development Institute. “Taehan Minhuk kwa Pukhanui Kyongje Data Pikyo (1989/90)” [ROK-North Korea’s economic data: Comparisons (1989/90)]. Korea Development Institute, Tokyo, 1991. Photocopy. Lee, Sang-Woo. “Die Probleme der amtlichen Statistik in Entwicklungsländer dargestellt am Beispiel Korea” [The problems of official statistics in developing countries, as represented in the example of Korea]. Angewandte Statistik und Ökonometrie 21 (1982).

Books in English

Acemoglu, Daron and James Robinson. Economic Origins of Dictatorship and Democracy. New York: Cambridge University Press, 2006. Alchian, Armen A. Economic Forces at Work. Indianapolis: Liberty Press, 1977. American Chamber of Commerce in Korea. Trade and Investment Issues: U.S. and Korea 1994. Seoul: American Chamber of Commerce in Korea, 1994. REFERENCES 285

———. United States-Korean Trade Issues. Seoul: American Chamber of Commerce in Korea, 1991. Amsden, Alice H. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press, 1989. Asian Development Bank. Key Indicators of Developing Asian and Pacific Countries 1993. Hong Kong: Oxford University Press, 1993. Asia Watch. Assessing Reforms in South Korea. Washington, D.C.: Asia Watch, 1988. ———. Human Rights in the Democratic People’s Republic of Korea. Washington, D.C.: Asia Watch, 1988. Bain, Joe S. Barriers to New Competition. Cambridge, Mass.: Harvard University Press, 1956. Balassa, Bela, and John Williamson. Adjusting to Success: Balance of Payments Policy in the East Asian NICs. Washington, D.C.: Institute for International Economics, 1987. Ban, Sung Hwan, Pal Yong Moon, and Dwight H. Perkins. Rural Development. Cambridge, Mass.: Harvard University Press, 1980. Banister, Judith. China’s Changing Population. Stanford, Calif.: Stanford University Press, 1987. ———. Vietnam: Population Dynamics and Prospects. Washington, D.C.: U.S. Bureau of the Census, Center for International Research, 1991. Bank of Korea. National Accounts 1994. Seoul: Bank of Korea, 1994. Barnhart, Michael A. Japan Prepares for Total War: The Search for Economic Security, 1919–1941. Ithaca, N.Y.: Cornell University Press, 1987. Barro, Robert J. Determinants of Economic Growth: A Cross-Country Empirical Study. Cambridge, Mass.: MIT Press, 1997. Bauer, P. T. West Africa Markets. Cambridge: Cambridge University Press, 1954. Bauer, P. T., and B. S. Yamey. Markets, Market Control, and Marketing Reform. London: Weidenfeld and Nicholson, 1968. Baumol, William J., Richard R. Nelson, and Edward N. Wolff. Convergence of Productivity: Cross-National Studies and Historical Evidence. New York: Oxford University Press, 1994. Baumol, William J., John C. Panzar, and Robert D. Willig. Contestable Markets and the Theory of Industrial Structure. New York: Harcourt Brace Jovanovich, 1988. Bawden, C. R. The Modern History of Mongolia. New York: Frederick A. Praeger, 1968. Bergson, Abram. The Real National Income of Soviet Russia since 1928. Cambridge, Mass.: Harvard University Press, 1961. Berlin, Isaiah. The Hedgehog and the Fox: An Essay on Tolstoy’s View of History. New York: Simon and Schuster, 1986. Birman, Igor. Personal Consumption in the USSR and the USA. New York: St. Martin’s Press, 1988. Blaug, Mark. An Introduction to the Economics of Education. London: Penguin Press, 1970. Borden, William S. The Pacific Alliance: United States Foreign Economic Policy and Japanese Trade Recovery, 1947–1955. Madison: University of Wisconsin Press, 1984. 286 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Brown, Gilbert T. Korean Pricing Policies and Economic Development in the 1960s. Baltimore: Johns Hopkins University Press, 1973. Bunge, Frederica M., ed. North Korea: A Country Study. Washington, D.C.: Government Printing Office, 1981. Cathie, John. Food Aid and Industrialisation: The Development of the South Korean Economy. Alderbury, Vt.: Avebury, 1989. Caves, Richard E., et al. Industrial Efficiency in Six Nations. Cambridge, Mass.: MIT Press, 1992. Chang, Dal-Joong. Economic Control and Political Authoritarianism: The Role of Japanese Corporations in Korean Politics, 1965–1979. Seoul: Sogang University Press, 1985. Chang, Ha-Joon. The Political Economy of Industrial Policy. New York: St. Martin’s Press, 1994. Chenery, Hollis B., Sherman Robinson, and Moshe Syrquin. Industrialization and Growth. New York: Oxford University Press, 1986. Chenery, Hollis B., and Moises Syrquin. Patterns of Development: 1950–1970. New York: Oxford University Press, 1975. Chenery, Hollis B., et al. Redistribution with Growth: Policies to Improve Income Distribution in Developing Countries in the Context of Economic Growth. London: Oxford University Press, 1974. Chenery, Hollis B., and T. N. Srinivasan, eds. Handbook of Development Economics. Amsterdam: North-Holland, 1988. Cho, Soon. The Dynamics of Korean Development. Washington, D.C.: Institute for International Economics, 1994. Choi, Byung-sun. Economic Policymaking in South Korea. Seoul: Chomyung Press, 1991. Chung, Joseph Sang-Hoon. The North Korean Economy. Stanford, Calif.: Hoover Institution Press, 1974. Clifford, Mark. Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea. Armonk, N.Y.: M. E. Sharpe, 1994. Clough, Ralph. Embattled Korea: The Rivalry for International Support. Boulder, Colo.: Westview Press, 1987. Coase, Ronald H. The Firm, the Market, and the Law. Chicago: University of Chicago Press, 1988. Cohen, Jerome B. Japan’s Economy in War and Reconstruction. Minneapolis: University of Minnesota Press, 1949. Cole, David C., and Princeton N. Lyman. Korean Development: The Interplay of Politics and Economics. Cambridge, Mass.: Harvard University Press, 1971. Cole, David C., and Yung Chul Park. Financial Development in Korea, 1945–1978. Cambridge, Mass.: Harvard University Press, 1983. Conquest, Robert. The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine. New York: Oxford University Press, 1986. Cumings, Bruce. Origins of the Korean War. Vol. 1, Liberation and the Emergence of Separate Regimes, 1945–1947. Princeton, N.J.: Princeton University Press, 1981. REFERENCES 287

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Klitgaard, Robert. Controlling Corruption. Berkeley and Los Angeles: University of California Press, 1988. Koo, Bon-hak. Political Economy of Self-Reliance: Juche and Economic Development in North Korea, 1961–1990. Seoul: Research Center for Peace and Unification of Korea, 1992. Korea Development Institute. Korea Year 2000: Prospects and Issues for Long-Term Development, Summary Report. Seoul: Korea Development Institute, 1986. Krueger, Anne O. The Developmental Role of the Foreign Sector and Aid. Cambridge, Mass.: Harvard University Press, 1982. Krueger, Anne O., Constantine Michalopoulos, and Vernon W. Ruttan. Aid and Development. Baltimore: Johns Hopkins University Press, 1989. Kuo, Shirley W. Y. The Taiwan Economy in Transition. Boulder, Colo.: Westview Press, 1983. Kuznets, Simon. Economic Growth of Nations: Output and Composition. Cambridge, Mass.: Harvard University Press, 1971. ———. Modern Economic Growth: Rate, Structure and Spread. New Haven, Conn.: Yale University Press, 1966. ———. Six Lectures on Economic Growth. New York: Free Press, 1959. Kwon, Jene K. Korean Economic Development. New York: Greenwood Press, 1990. Kwon, Tai-Hwan. Demography of Korea: Population Change and Its Components, 1925–66. Seoul: Seoul National University Press, 1977. Kwon, Tai-Hwan, et al. The Population of Korea. Seoul: Seoul National University, Population and Development Studies Center, 1975. Lall, Sanjay. Building Industrial Competitiveness in Developing Countries. Paris: Organisation for Economic Co-operation and Development, 1990. Layard, Richard. Happiness: Lessons from a New Science. New York: Penguin Books, 2005. Lee, Chong-sik. Japan and Korea: The Political Dimension. Stanford, Calif.: Hoover Institution Press, 1985. Lee, Hahm-Been. Korea: Time, Change, and Administration. Honolulu: East-West Center Press, 1968. Lee, Ki-Baik. A New History of Korea. Translated by Edward W. Wagner with Edward J. Shultz. Cambridge, Mass.: Harvard University Press, 1984. Lee, Suk Bok. The Impact of U.S. Forces in Korea. Washington, D.C.: National Defense University Press, 1987. Leipziger, Danny M., et al. The Distribution of Income and Wealth in Korea. Washington, D.C.: World Bank, 1992. Lider, Julian. Correlation of Forces: An Analysis of Marxist-Leninist Concepts. New York: St. Martin’s Press, 1986. Lim, Byung Ok. Economic Development Patterns, Inflations and Distribution: With an Application to Korea (ROK) and Taiwan (ROC). New York: Garland Publishing, 1991. Luedde-Neurath, Richard. Import Control and Export-Oriented Development: A Reassessment of the South Korean Case. Boulder, Colo.: Westview Press, 1986. REFERENCES 291

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Books and Pamphlets in Other Languages

Bae, Sang-bin. Die Schaffung komparativer Kostenvorteile als handelspolitische Strategie, dargestellt am Beispiel Südkorea [The Creation of Comparative Economic Advantage as a Trade Policy Strategy Illustrated through the Example of South Korea]. Frankfurt: P. Lang Verlag, 1992. Bundesrepublik Deutschland. Statistiches Bundesamt. Länderbericht: Korea, Demokratische Volksrepublik 1989 [Country Report: Korea, People’s Democratic Republic, 1989]. Stuttgart: Metzler-Poeschel Verlag, 1989. ———. Rückrechnungen Gesamtwirtschaftlicher Daten Für Die Ehemalige DDR: Beiträge Zu Einer Statistiktagung In Berlin [Retrospective Calculations of Macroeconomic Data for the Former GDR: Contributions to a Statistical Conference in Berlin]. Stuttgart: Metzler-Poeschel Verlag, 1993. Görzig, Bernd. Produktion Und Produckionsfaktoren Für Ostdeutschland: Kennziffern [Production and Factors of Production in East Germany: Reference Numbers]. Berlin: Duncker Verlag, 1992. Griaznov, G. V. Stroitel’stvo Material’no-Tekhnichestkoi Bazy Sotsialisma v KNDR [Construction of the Material and Technical Basis of Socialism in the DPRK]. Moscow: Nauka, 1979. Hwang, Jun-seong. Politische Ökonomie der südkoreanischen Aussenwirtschaftspolitik: eine theoretische und wirtschaftspolitische Analyse der südkoreanischen Aussenwirtschaft [The Political Economy of South Korean Foreign Economic Policy: A Theoretical and Economic Policy Analysis of the South Korean External Economy]. Frankfurt: P. Lang Verlag, 1993. Kim, Kwang-suk, and Sung-duck Hong. Je-joeop ui Chongyoso Saengsansyong Donghyang Gwa Keu Kyuljeong Yoin [Trends of Total Factor Productivity in the Manufacturing Sector and Its Determinant Factors]. Seoul: Korea Development Institute, 1992. REFERENCES 297

Maretzki, Hans. Kim-isimus In Nord Korea: Analyse Des Letzten DDR-Bostschafters In Pjöngjang [Kim-ism in North Korea: Analysis of the Last GDR Ambassador to Pyongyang]. Boblingen, Germany: Anita Tykve Verlag, 1991. Ministerstvo Vneshnikh Ekonomicheskikh Svyazey SSSR. Vneshnaya Torgovlya SSSR. [Foreign Trade of the USSR]. Moscow: Ministry of Foreign Economic Relations of the USSR, 1971–87. Ministerstvo Vneshnikh Ekonomicheskikh Svyazeii SSSR and Goskomsat SSSR. Vneshniye Ekonomicheskiye Svyazi SSSR [Foreign Economic Relations of the USSR]. Moscow: Ministry of Foreign Economic Relations of the USSR,1988–91. Mizoguchi, Toshiyuki. Taiwan Chosen No Keizai Seicho [Economic Growth of Taiwan and Korea]. Tokyo: Iwanami Shoten, 1975. Pews, Hans-Ulrich. Korea—Land der Morgenfrische [Korea—Land of the Morning Calm]. Gotha, Germany: Geographisch Kartographische Anstalt, 1987. Republic of Korea, National Unification Board. Pukhan Charyochip [Source Materials on North Korea] Seoul: National Unification Board, 1978, ———. Pukhan Ichilhwa Siltae Chosa [Survey of the Heterogenization of North Korea]. Seoul: National Unification Board, 1978. Tongas, Gerard. L’ Enfer Communist au Nord-Vietnam. [North Vietnam, Communist Hell]. Paris: Nouvelles Editions Debresse, 1961. Trigubenko, M. E. Koreiskaya Narodno-Demokraticheskava Respublika. [The Democratic People’s Republic of Korea]. Moscow: Nauka, 1985. Yoo, Won-dong, and Shim Sang-pil. Histoire Économique de la Corée [Economic History of Korea]. Seoul: Sook-myung University Press, 1986.

Unpublished Sources Choi, Soo-young. “Foreign Trade of North Korea, 1946–1988: Structure and Performance.” PhD diss., Northeastern University, 1991. Chung, Hongtack. “Estimating North Korea’s GNP by the Physical Indicators Approach.” Paper presented at the Korea Development Institute International Symposium on the North Korean Economy, Sept. 30–Oct. 1, 1991. Democratic People’s Republic of Korea. Various economic and demographic statistical data. Central Bureau of Statistics, Pyongyang, May 1990. Photocopy. Ello, Paul Stephen. “The Commissar and the Peasant: A Comparative Analysis of Land Reform and Collectivization in North Korea and North Vietnam.” PhD diss. University of Iowa, 1967. Han, Kyun Hyung. “Estimation of Major City Population in Korea Using Landsat Imagery.” Ph.D. diss., University of Utah, 1985. Henderson, Gregory. “Trip Notes,” 1981. Photocopy. Hyun, Jung Taik. “The Impact of Foreign Direct Investment on the Manufacturing Total Factor Productivity of Developing Countries: A Case Study of Korea and Taiwan.” Ph.D. diss., George Washington University, 1993. 298 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Jang, Young-Sik. “North Korea’s Energy Supply and Demand: 1971–1989.” Paper presented at the Korean Development Institute International Symposium on the North Korean Economy, Sept. 30–Oct. 1, 1991. Kil, Jeong-woo. “The Development of Authoritarian Capitalism: A Case Study of South Korea.” Ph.D. diss., Yale University, 1986. Kim, In Do. “An Empirical Study of Welfare Costs and Inefficiency in Resource Allocation: The Case of South Korean Agriculture.” Ph.D. diss., Northern Illinois University, 1991. Kim, Hosup. “Policymaking of Japanese Official Development Assistance to the Republic of Korea, 1965–1983.” Ph.D. diss., University of Michigan, 1987. Kim, Seok Ki. “Business Concentration and Government Policy: A Study of the Phenomenon of Business Groups in Korea, 1945–1985.” DBA thesis, Harvard Graduate School of Business Administration, 1987. Korea Development Institute. “Taehan Minguk Kwa Pukhan ui Kyonge Data Pikyo (1989/90).” [ROK-North Korea Economic Data: Comparisons (1989/90).] 1991. Kuark, Y. T. “A Comparative Study of Economic Development in North and South Korea during the Post-Korean War Period.” Ph.D. diss., University of Minnesota, 1966. Lee, Jung Ha. “The Impact of the Nixon Doctrine on South Korea: A Critical Analysis of U.S.-South Korean Relations, 1969–1976.” Ph.D. diss., Catholic University of America, 1976. Myers, Ramon H. “The Japanese Economic Development of Manchuria, 1932–1945.” Ph.D. diss., University of Washington, 1959. Nam, Duk-woo, Deputy Prime Minister, Republic of Korea. Interview by author. Seoul, Korea, Sept. 18, 1984. National Security Council. “Memorandum of Discussion.” 276th NSC Meeting, February 9, 1956 (declassified). Paik, Hak Soon. “North Korean State Formation, 1945–1990.” Ph.D. diss., University of Pennsylvania, 1993. Pritchett, Lant H. “Divergence, Big-Time.” World Bank, Washington, D.C., 1995. Photocopy. Ramachandran, Vijaya. “Agricultural Development: The Case of Korea, 1910–1970.” Duke University Center for International Development Research, Durham, N.C., July 1994. Photocopy. Satterwhite, David H. “The Politics of Economic Development: Coup, State, and the Republic of Korea’s First Five-Year Economic Development Plan (1962–1966).” Ph.D. diss., University of Washington, 1994. Su, Boo-chun. “Capital Market Distortions and Development of Small-Scale Enterprises in Korea with Reference to Taiwan.” Ph.D. diss., Michigan State University, 1988. Sung, Jaewhan. “Determinants and Efficiency Aspects of Voluntary Labor Mobility: A Study of the Korean Labor Market.” Ph.D. diss., Cornell University, 1989. Trigubenko, M. E. “Industry of the DPRK: Specific Features of the Industrial Policy, Sectoral Structure, and Prospects.” Paper presented at the International Symposium on the North Korean Economy, Seoul, September 30–October 1, 1991. Index

Abramovitz, Moses, 164 state-enforced labor discipline, 87 Accounting systems subsidies, government, 130, 132, in DPRK, 38–39 133t, 213–14n69 “growth accounting” framework, See also Grain production; 148–50, 153–54, 165–66, Industrialization; Urbanization 180–81 trends Acheson, Dean, 54 Albania, 37t “Actual income,” 6, 83 American Chamber of Commerce in Adjusted factor cost approach, 65, 72, Korea, 241n106 74, 75, 199n14 Amsden, Alice H., 245n136, Aerial surveillance, 18 247–48n147 Africa, 166–67 Amway Corporation, 241n105 Agency for Defense Development, Andropov, Yuri, 91 258n235 Antinatalism policy, 46, 47 Agnew, Spiro, 54, 258–59n236 Argentina, 165t “Agricultural transformation,” See Arms Control and Disarmament Agency Industrialization (ACDA), U.S., 14 Agriculture Asher, Robert, 229n11 collectivization period, 36–37, 42 and dirigiste distortions in ROK Ban, Sung Hwan, 257n232 economy, 129–36 Banking issues (ROK) grain production comparison, 37t credit allocation control, 121–22, growth data, 15t 124 labor force comparison, 21–22, interest rates, 121, 128, 141, 142–46 38, 39t nationalization program of SCNR, per capita output data (ROK), 113, 121 132–33 privatization, 121 productivity increases (DPRK), 61t, See also Currency; Loans 64, 67 Barro, Robert J., 163 state pricing strategies (DPRK), Belgium, 159t, 167t 213–14n69 Bell, Clive, 260n250

299 300 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Bergson, Abraham, 74, 199n14 trade policy of DPRK, influence Berlin, Isaiah, 129 on, 89 Brazil, 120t, 165t turnover tax in, 75 Bretton Woods system, 10 Cho, Chang Hyun, 243n120 Bribery and corruption (ROK), 114 Cho, Soon, 248n151 Bulgaria, 37t, 73t, 86t Choi Kwang, 206n17 Choi Kyu Hah, 223n41 Cambodia, 36 Chollima movement, 37 Canada, 158, 159t, 167t “Chongsan-ri method” for agriculture, Capital gains data, underreporting of 38 (ROK), 6 Choo, Hakchung, 196–97n23, Capital-output ratio (ROK), 138–39, 201–2n26 152 Chun Doo Hwan, 100, 263n267 Casualties, Korean War, 42, 60, 94, Clifford, Mark, 234n51, 244nn122–123 187–88 Cobb-Douglas production function, 161 Cathie, John, 235n65 Collectivization period, 36–37, 42 Central Intelligence Agency (CIA), 9–11, Collins, Susan M., 262n260, 262n263 18, 32, 35t, 72 Colombia, 165t Central People’s Committee (DPRK), 87 Command planning economies, See Central Statistics Bureau, 56 Centrally planned economies Centrally planned economies “The Committee to Edit National accuracy of data for planning, 77 History,” 5, 195n11 allocation of resources in, 9 Commodity output comparability issues, 57, 173 comparison of ROK and DPRK, DPRK economic structure, 72–75 18–20 price setting in, 9 pre- and postpartition comparisons, and war economy, 45 40, 41t, 60–68 See also Market-oriented vs. centrally and price controls (ROK), 126–27 planned economies and protection from imports, 130 Cereal production, See Grain production target and result comparison Chaebols, 113, 122, 124, 125 (DPRK), 78t, 79t Chemical industry (ROK), 41t, 111, Communist economies, See Centrally 136–40, 154, 189t planned economies Chenery, Hollis, 58 Competitive market economy Chenery-Syrquin exercise, 58, 68–70 barriers to (ROK), 116–17, 121–22, Chile, 165t 125–27 China DPRK, 38–39 assistance to DPRK, 36, 44 Kim Il-sung on, 207–8n26 comparisons to DPRK, 36–39 “Comprehensive Stabilization Plan,” GDP end use comparison, 73t, 74 137 labor force participation rates, 86t Computable general equilibrium (CGE), population control in, 47–48 140, 260n250 INDEX 301

Construction industry growth data, 15t Defectors, data from, 39, 46, 47, Consumer market issues 214n69, 216n80 DPRK, 45–50, 85, 88 Defense industry Consumption expenditures in DPRK, 44, 76 DPRK suppression of, 85, 88, 177–78 GDP end use comparison, 73t in early DPRK, 67 militarization drive of DPRK, 44–45, Japanese colonial suppression of, 99 52–55, 83 and material deprivation, 188–91 Nixon Doctrine impact on, 54, 137 ratio to GDP, 73t, 75, 83 Deflators, budget, 31–32, 80, 84 ROK 1940–60, 99 Demarcation of Korea, 193n3 in Soviet Union, 10 Democratic People’s Republic of Korea Contracted lending, 118 (DPRK) “Contrarian” assessment of growth in consumer market issues, 45–50 East Asia, 147–48 economic growth, limits to, 84–89 Cooper, Richard, 249–50n161 economic performance 1930s Corruption in ROK government, 112–16 through 1950s, 40–43 Council for Mutual Economic Assistance economic performance 1960s, (CMEA), 77, 91 43–45 Credit issues economic performance overview, allocation control in ROK, 121–22, 34–40, 175–78 124 economic reform, limits to, 89–90 creditor status of ROK, 108 economic structure in communist interest rates in ROK, 121, 128, 141, perspective, 72–75 142–46 economic structure in and trade in DPRK, 51, 89 noncommunist perspective, See also Loans 68–72 Cuba, 86t economical assessment pre-and Cuban missile crisis, 211–12n53 postpartition, 60–68 Cumings, Bruce, 208–9n28 militarization drive, 52–55, 176–77 “Curb” sector interest rates, 141, 145 national budget of, 25–27, 79–80 Currency quantitative assessment overview, control of, 48–49, 209–10n37 56–60 exchange rate issues, 50, 59, 68–69, trade strategies of, 50–52, 89–90, 128 91–92 Czechoslovakia, 37t, 73t, 86t Warsaw Pact, collapse of, 55–56, 91, 176 Data, reliability of, See Records, Democratic Republic of Vietnam, 36 reliability of; Records, reluctance Denison, Edward F., 153–54, 156, to release (DPRK) 158–59 Deadweight efficiency loss, 132, 140 Denison-style “growth accounting,” 153, Debt, foreign (ROK), 108, 109t, 134, 158, 161 145–46 Denmark, 159t 302 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Dirigiste policy and ROK economy Eisenhower, Dwight, 105 and agriculture, economic distortions Elections, 100, 130 in, 129–36 Electricity industry and finance, economic distortions in, overstated data from DPRK, 77–78 141–46 physical production comparison, 19t and heavy industry, economic postpartition, 42 distortions in, 136–40 Elias, Victor, 165–66 and liberal development, 128, 171 Ello, Paul Steven, 206n17 overview, 96–97, 164, 170–71, “Eminent domain” takings, 113 179–80 Energy consumption, as performance Discretionary consumer expenditure, indicator, 27–30 impact of, 47, 48 European Community, farm protection Disequilibria in international economy, in, 131, 133t 128, 140, 149, 171, 192 Exogenous shocks in world economy, Dislocations, economic, 45, 50 See Disequilibria in international Dornbusch, Rudiger, 262n261 economy Double-counting of output, 27, 82 Experiment design, 1–8 Dow Chemical Company, 111 Exports DPRK, See Democratic People’s Republic DPRK 1970s, 50–51, 91 of Korea (DPRK) export-oriented strategy of ROK, “Dualism” between industry and 107–8, 127–29, 138, 168–69, agriculture, 67, 132 180

Easterly, William, 163, 269n314 Fabrics, See Textile industry Eastern European economies, 10–11 Factor cost approach, adjusted, 65, 72, Economic assistance, See Foreign aid 74, 75 Economic growth Factor mobilization in ROK, 146–47, DPRK performance estimates 150, 165, 166 1963–87, 12 Factor productivity, See Total factor hypothetical findings, 31–32 productivity (TFP) in ROK and policy, 93 Famine, 2–3, 36, 90 predicted vs. actual analyses, 163–64 Farm protection policies, 130–34, ROK overview, 94–95, 162–69 135–36 ROK vs. DPRK overview, 12, 172–81 “The fatal conceit,” 183–84 role of chance in, 192 Federation of Korean Industries (FKI), TFP analyses of for ROK, 150–62 114, 251n172 and urbanization, 23 Final demand (aggregate demand) Economic management approaches, 38 (DPRK), 72–73 See also Accounting systems “First Republic” (ROK), 104–5 Economic Planning Board (EPB), 6, See also Syngman Rhee 102–3, 178–79 Five-Year Plan (1957–61) DPRK, 42 Education and human capital, 190–91 Five-Year Plan (1962–66) ROK, 129 INDEX 303

Five-Year Plan (1972-76) ROK, 137 grain production in, 37t Fogel, Robert W., 191 labor force participation rates, 86t Food per capita growth in, 185 domestic prices (ROK), 130–32 post-reunification economy, 11 famine, 2–3, 36, 90 total factor productivity in, 158–59 pricing of, 214n69 Gerschenkron, Alexander, 95 processing industry, 41t, 189t Gini coefficient, 6, 115, 196n18 rationing, 46, 47, 48 Goskomstat (Soviet State Statistical shortages, 90 Committee), 10 urban demand, 46 Goto, Fujio, 65 See also Agriculture Goto index for industrial output, 35t, Force Implementation Plan, 258n235 61t, 65–66 Foreign aid Goto study estimating DPRK figures, to DPRK by Soviet Union, 44, 91, 72–75 92, 211n46 Government General of Chosen, 179 DPRK repayment difficulties, 51–52 Grain production to ROK by United States, 103–7, and agricultural output mix, 134 179, 228n10 DPRK 1970s, 45, 47 shortfalls of in DPRK, 44 overstated data from DPRK, 76–77 socialist aid to DPRK, 43, 211n45 postpartition, 42 Foreign debt (ROK), 108, 109t, 134, pre- and postpartition comparison 145–46 (DPRK), 63–64 Foreign direct investment (FDI) (ROK), price comparisons, 131t 117–20 and protection from imports, 130 Foreign investment (DPRK), 89–90 See also Food Foreign loans, 51, 146, 211n51 Great Leap Forward (China), 37 Forestry/fishery industries, 21t, 41t, 64, Gross domestic product (GDP) 132, 133, 187t comparison of DPRK in communist France, 158–59, 167t perspective, 72–75 Fujita, Natsuki, 257n229 comparison of ROK and DPRK, 13t definition, 267n297 Gender and farm subsidies (ROK), 132 labor force ratios, 86t, 155t, 157t of Hungary, 10–11 life expectancy differences, 188–89, long-term development comparison, 191t 185, 187t population ratios, 42, 86t and ROK’s export-oriented strategy, women in workforce, 46 108–9 General Agreement on Trade and Tariffs sectoral production over time (ROK), (GATT), 131–32 139 Germany in Sub-Sahara, 166 energy consumption data, 28t, 29 and TFP economic growth analyses, GDP end use comparison, 73t, 75 154–56 304 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Gross industrial output, See Hollister, William W., 74 Industrial output Hong, Wontack, 168–69, 196–97n23, Gross material product (GMP), sectoral 252n189, 259n238 distribution (DPRK), 61t Hong Kong, 86t, 120t, 130–31, 150 See also Net material product (NMP) “Human capital,” 99, 189–91 Gross national product (GNP) Human rights, 110, 194n8 comparison of ROK and DPRK, Hungary, 10–11, 37t, 73t, 74, 86t 14–15, 16t, 30–31, 35 currency unit issues, 68–69 Imports and foreign debt ratio (ROK), 145 comparison by country, 187t of Hungary, 10 controls on (ROK), 126, 130, and net material product, 49–50 135–36 and “outlier” status of DPRK, 70 DPRK, 51–52, 91 and ROK’s export-oriented strategy, oil, 78t 108–9 tariffs on, 126, 131–32 of Soviet Union, 9–10 “Imposed development,” 67–68, 75 “Growth accounting” framework, Income distribution (ROK), 5–7, 148–50, 153–54, 165–66, 114–15, 132 180–81 India, 120t, 123 Industrial concentration (ROK), 124–27 Ha, Young-Sun, 258n235 Industrial output Haggard, Stephan, 236–37n69 commodity breakdown (DPRK), 78t, Han, Kyun Hyung, 202n31 79t “Hard state” economics, 98–100, 103, DPRK, 42, 43, 186 128, 136, 170–71 sectoral composition comparisons, “Harvest index,” 65–66, 222n139 60–68, 190t Havrylyshyn, Oli, 149–50, 264–65n279 See also Gross domestic product HCI (heavy and chemical industries) (GDP) drive of ROK, 136–40, 154 Industrialization Health and human capital, 190–91 agricultural vs. industrial labor force, Heavy industry 80–83, 136 HCI (heavy and chemical industries) growth of in postwar DPRK, 40, 41t, drive of ROK, 136–40, 154 42, 43, 61t Japanese colonial legacy of, 40, 101, HCI drive in ROK, 136–40 186, 189t reduction of in postpartition ROK, production comparison of DPRK and 99–100 ROK, 18–20 ROK policies “developmentalist” era, and TFP in ROK, 152–53 123–27 Henderson, Gregory, 228n11, See also Heavy industry; 234–35n59, 239–40n97 Manufacturing industry Hilsman, Roger, Jr., 234n58 Inflationary conditions, 106, 112, 140 Ho, Samuel P. S., 185 Initial conditions, 1–2 INDEX 305

Interest rates (ROK), 121, 128, 141, legacy of, 180t, 184, 186t, 187t, 188t, 142–46 189t Interindustry linkages, 138 rural development policy, 135 International Development, U.S. Agency suppression of consumption in, 99 for (USAID), 106, 228n10 trends and structure in north, Investment rates 60–63, 186 FDI policy (ROK), 117–20 urbanization in, 23 GDP end use comparison, 74 Japanese Government-General of Korea, ROK “developmentalist” era, 108, 60, 63 141 Japanese Imperial Army, 101 Soviet vs. American, 10 Japanese Manchukuo Academy, 101 underreporting of (ROK), 6 Japanese Military Academy (Tokyo), 101 See also Savings rates Jeong, Kap-Young, 251n173 Isolationism, 181 Joint venture law, 89 Italy, 159t, 167t Jones, Leroy P., 244n122, 248n152, Ito, Kazuhisa, 248n149 250n170 Juche (national self-reliance), 34, 38 James, William E., 257n229 Jang, Young-Sik, 204n42 Kawai, Hiroki, 161 Japan Kempei Tai, 179 agriculture prices in, 131t Kennedy, John, 105 capital-output ratio, 152 Kenya, 120t farm protection in, 133t Key economic indicators, 78t, 79t hours worked per week, 150, 186, Kil, Jeong-woo, 258–59n236 188t Killen, James, 228n10 industrialization in, 256–57n228 Kim, Chung-yum, 237–38n80, interest rates in, 143t, 144 242n115 investment in ROK, 222n140 Kim, Il-sung labor force participation rates, 86t and allocation of goods, 48 loans to ROK, 146, 211n51 on competitive market economy, manufacturing output in, 138 207–8n26 per capita growth in, 185, 186t criticism of statistical system, ROK, relations with, 44 220n119 rural development policy in, 134 on defense allocation, 44, 45, 53 savings rates in, 141–42 on grain consumption, 76 total factor productivity in, on instability in ROK, 55 158–59 on labor performance, 87 Japanese colonial era Korea national philosophy of, 34 agricultural holdings in, 209n35 on pricing of food, 214n69 industrialization in, 40, 101 on state procurement of grain, influence of on ROK, 101–3, 125, 213n66 185–86 Kim, In Do, 255n217 306 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

Kim, Jong-il, 34, 161, 207n21 participation rates, 86t Kim, Kwang-suk, 156–57 as performance indicator, 20–23 Kim, Seok Ki, 245n137, 250n165, productivity (DPRK), 80–82, 84, 251n173 88–89 Komer, Robert, 228n10 sectoral distribution comparison Korea Development Institute, 157, (DPRK), 38, 39t, 60, 61t, 63, 229n11, 238n83 69–70 Korea Housing Corporation, 242n116 state enforced discipline (DPRK), Korea Land Development Corporation, 87–88 242n116 Sub-Saharan, 166 Korea: The Economic Race between North See also Work hours per week and South (CIA report), 72 Land Korean Academy of Sciences, 5 agricultural collectivization, 36–37, Korean Central Intelligence Agency 42 (KCIA), 102, 179 Land Law (DPRK), 87 Korean War ROK policies, 113, 134, 135 attack of 1950, 54–55 Latin America casualties of, 42, 60, 94, 187–88 economic growth analysis of, effect on economy of DPRK, 42 165–66 effect on economy of ROK, 94, 98 foreign debt in, 145 refugees, 94, 194n5, 227n8 foreign direct investment in, 118 Korean Workers’ Party (KWP), 85, Lau, Laurence J., 161 87, 91 Lee, Chae-Jin, 214n69 Kuark, Y. T., 205n7 Lee, Jong-wha, 163 Kuksa Pyongchan Wiwonhoe, 195n11 Lee, Sang-Woo, 196n23 Kulloja (journal), 49 Lee, Tae Hee, 240n100 Kuo, Shirley, 161 Lee Hahn-Been, 247n143 Kuznets, Paul, 249n158 Legal issues, legal system (ROK)110–16 Kuznets, Simon, 57 Legitimacy issue, postpartition, 4 Kuznets’s labor force distribution Leipziger, Danny M., 257–58n232 findings, 70–72 Lending, See Loans Kwon, Jene K., 152 Liberalism, market, 96, 169–71 Liberalization efforts, 121, 126, 170, L. W. International Financial Research, 178 74 Life expectancy data, 2, 5, 188–89, Labor force 191t, 194n8 agricultural vs. industrial, 80–83, Light industry, 140, 152–53, 178, 189t 136 Lim, Byung Ok, 161 growth of (DPRK), 80–82 Loans mobilizations of (DPRK), 85, 87 foreign, 51, 146, 211n51 and noncommunist countries interest rates (ROK), 121, 128, 141, 1940–1960, 70–73 142–46 INDEX 307

“policy loans,” 118, 121–22, 123–24 See also Urbanization trends Lucas, Robert, 268n311 Militarization drive of DPRK, 44–45, Luedde-Neurath, Richard, 240n99 52–55, 83 Military assistance Maddison, Angus, 197n25, 268n310 to DPRK, 43, 211n46 Malaysia, 120t to ROK, 104 Manchukuo Academy, Japanese, 101 Military burden data Manufacturing industry comparison of ROK and DPRK, 13t, labor force comparison, 21t, 23 14–15, 17t, 175, 186–88 prepartition comparison, 41t range of estimates for (DPRK), 12 ROK in “developmentalist” era, Military capacity 137–38 size of force, 21, 52–53, 76, 80 sectoral breakdown, 189t surveillance data for, 18 and total factor production analysis, Military factors in material advance of 152–53 ROK, 100–103 See also Industrialization Military materiel, imported, 91–92 Marginal rate of substitution, 151 Military policy in Japanese colonial era, Market economy, See Competitive 101–2 market economy Military production, See Defense “Market governance” view, 95–96, 97, industry; Military burden data 169–71 Mining industry, 21t, 23, 40, 41t, 99, “Market liberalism” view, 96, 169–71 187t Market power, See Industrial Ministry of Trade and Industry (MTI), concentration (ROK) 196–97n23 Market segmentation, 116, 119, 121 Modern Economic Growth, 57 Market-oriented vs. centrally planned Modernization, forced-pace, 21–22 economies Mongolia, 36, 37t energy usage of, 28–29 Moon, Pal Yong, 257n232 and expected outcomes, 174 Moroney, John R., 203 overview, 9–11, 33, 182–84 Mortality rates, 188 and postpartition ROK, 95–97 Movement of Rural Revival, 270n7 Mason, Edward, 229n11, 236n67, 247n146, 249n161 National budget of DPRK, 25–27 Mass mobilization movements, 37–38 “The National History Compilation Masson, Robert T., 251n173 Center,” 195n11 Material progress, See Economic growth National income data May 16, 1961 revolution, 102, 178–79 in calculated budget growth levels, Merill, John, 207n23 25–26, 79–80 “Meta production function” approach, DPRK 1970s, 49 264n274 and economic growth analyses, 154, Mexico, 120t, 146, 165t 156, 159t Migrations, 24–25, 60 estimating for DPRK, 72–73, 80 308 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

inaccuracy of (ROK), 6 Pack Howard, 161 lack of from DPRK, 4, 43 Pang, Hwan Ju, 214n69 vs. net material product, 217n88 Paper/printing industry, 41t, 79t, 189t as performance indicator, 27 Park, Chong-hoon, 245–45n137 National security issues Park, Chung Hee and import policy in ROK, 136 economic leadership of, 100–103, and industrialization in ROK, 137, 105–7 139, 171 and eminent domain, 242n115 militarization drive of DPRK, 44–45, and HCI drive, 137 52–55, 83 May 16, 1961 revolution, 102, National Unification Board (NUB), 32, 178–79 35t, 36, 77 Park, Joon-kyung, 156–57 Nationalization and socialist economy, Park, Seung Rok, 152 42 Park, Yung Chul, 262n261 Net material product (NMP) Particularism, 181 agricultural to industrial ratio, 63, Patrick, Hugh, 261n252 66, 80–83 Patterns of Development: 1950–70, 58 in Chenery-Syrquin exercise, People’s Republic of China (PRC), 68–69 See China DPRK 1970s, 49–50 Per capita output data growth of DPRK, 80–82, 84 for China, 38 lack of data for (DPRK), 12 comparison of ROK and DPRK, 12, vs. national income, 217n88 13t, 31–33 ROK 1940–60, 98 comparison prepartition, 40, 41t Netherlands, 131, 159t and DPRK budget growth, 80 New York Times, 106 and labor force comparison, 22–23 Newcomb, William, 203n33 post-industrialization levels, 151 Nixon Doctrine, impact of, 54, 137, postwar DPRK, 42 258–59n236 ROK 1940–60, 98 Norway, 159t ROK long term analysis, 184–86 and urbanization, 24–25 On the Guidance and Management of See also Gross domestic product the Socialist Economy (Kim Il- (GDP) sung), 87, 207–8n26 Performance indicators “Openness” and international trade, 50, commodity output, 78t, 79t 126 energy consumption, 27–30 Organisation for Economic Co-operation labor force trends, 20–23 and Development (OECD), 3 national budget of DPRK, 25–27 Oshima, Harry, 134, 161 national income, 27 “Outlier” status net material product (DPRK), 80–82 of DPRK, 69, 74 per capita GNP, 30–31 of ROK, 98, 131, 163 physical output indices, 18–20 INDEX 309

urbanization trends, 23–25 Price level data Perkins, Dwight H., 75, 201n21, agricultural vs. industrial (DPRK), 66 257n232 lack of from DPRK, 25 Peru, 165t Privatization campaigns, 121, 123 Petri, Peter A., 257–58n232 Producer goods to consumer goods Physical output indices, 18–20 ratios Pilat, Dirk, 154–56, 158, 170, 266n287, in early DPRK, 65, 67 267n300 “Product cycle,” 128 Pohang Iron and Steel Company Property seizure, 113 (POSCO), 226–27n3 Provisional Law for the Promotion of Poland, 10, 37t, 73t, 74, 86t Military Supply, 258n235 Policy effect on material performance Public consumption funds, 49 DPRK overview, 175–78 Public enterprise, 122–24 ROK overview, 95–97, 178–81 Public purchase and development (PPD) “Policy loans,” 121–22, 123–24 project, 242–43n116 “Political economy” approach, 96–97 Public/state-owned enterprise policy Population data (ROK), 122–23 antinatalism, 46, 47 Pujonabup’ye (corruption), 243n120 growth comparison, 27 Purchasing power growth in DPRK, 47–48, 60, 61t, adjustments for, 59 80–82 parity in, 131t, 199nn14–15 growth in ROK, 98 relation to material deprivation, 188 Korean War losses, 42, 60, 94, 187–88 of Soviet ruble, 10 lack of from DPRK, 4 military forces, 52–53, 76 “Quasi-taxes,” 114 sex ratios, 42, 86t, 210n38 See also Urbanization trends Rate of return on capital, 123, 139 “Presidential Decree for Economic Rationing Stability and Growth,” 113 of food, 46, 47, 48 Price controls of personal good, 48–49 and adjusted factor cost approach, Reagan, Ronald, 236n267 75 Real economic growth data arbitrary “temporary” (ROK), 112 comparison of ROK and DPRK, and dirigiste policy in agriculture 12–14, 15t (ROK), 129–34, 135–36 and DPRK budget growth, 26–27 and “duality” in socialist economy, See also Gross domestic product 67 (GDP) procurement prices vs. consumer Real estate prices, 213–14n69 farm size laws (ROK), 135 ROK “developmentalist” era, 126–27 Land Law (DPRK), 87 through market pressure, 63, and ROK policy, 113, 134 208n26 Records, reliability of 310 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

DPRK, 56, 75–78 macroeconomic issues and international comparison issues, “developmentalist” era, 116–27, 58–59 179–80 and record revisions in ROK, market structure overview 157–58 “developmentalist” era, 116–17 ROK, 173 microeconomic issues Records, reluctance to release (DPRK) “developmentalist” era, 109–16, 1960s, 43 179 military expenditures, disguising of, national income of, 27 54 policy effect overview, 95–97 overview, 11–12, 56 price controls, 126–27 “Red won,” 215n77 product market policies, 123–27 Refugees, Korean War, 94, 194n5, See also Total factor productivity 227n8 (TFP) in ROK Repression in ROK, 141 “Residual” in industrial growth, 148, Republic of Korea (ROK) 149, 153, 156, 159t, 164 business climate, “developmentalist” Retail/wholesale growth data, 15t era (domestic), 111–16 “Revolutions of 1989,” 91 business climate, “developmentalist” Rhee, Syngman, 104–5 era (foreign), 110–11 Rice capital market policies, 117–23 prices for in DPRK, 47 creditor status of, 108 prices for in ROK, 130 “developmentalist” era overview, production data, 18–20 126–27, 169–71 See also Grain production and dirigiste distortions in Robert R. Nathan Associates, Inc., agriculture, 129–36 228n10 and dirigiste distortions in finance, Robinson, Joan, 43, 213–14n69 141–46 Roh Tae Woo, 100 and dirigiste distortions in industry, ROK, See Republic of Korea (ROK) 136–40 Romania, 37t, 73t, 86t economic performance 1945–60, Rowtow, Walt W., 228n10 98–100 “Rubber statistics,” 57 economic performance overview, Rule of law under ROK, 110 94–95, 162–69, 178–81 Rural infrastructure development export-oriented strategy of, 107–8, (ROK), 129–30, 132, 134 127–29, 138, 168–69, 180 Rural vs. urban areas, problems and foreign aid, dependence on, 179 defining, 23–24, 56–57, 60, 69 import controls, 126 Russia, See Soviet Union income distribution in “developmentalist” era, 114–15 Saemaul Undong (New Community legal system “developmentalist” era, Development), 132, 270n7 110–11 Sakong, Il, 244n122, 246n138 INDEX 311

Satellite surveillance, 18, 202n31 “Speed Battle,” 87 Savings rates Srinivasan, T. N., 260n250 in early DPRK, 67 Stagnation, economic, 2, 84–85, 90, ROK 1940–60, 67, 99, 106 98, 99 ROK “developmentalist” era, 108–9, Standard of living, 45, 188 117, 134, 141–46 State Administrative Council (DPRK), 87 Schultz, Theodore W., 128 State Department, U.S., 14 Scitovsky, Tibor, 261n254 Statistical blackouts, enforced (DPRK), Seizures of property, 113 4, 173 Seoul Pusan expressway, 242n115 Steel production data, 19t Service sector data, 21t, 23, 70–73 Steinberg, David, 7 Seven-Year Plan (1961–67), 43 Stern, Joseph, 249n155 Seven-Year Plan (1987–93), 92 Su, Boo-chun, 249n156 Shin, Bong Shik, 251n172 Sub-Saharan Africa, 166–67 Showpiece projects (DPRK), 89–90 Subsidies, government, 130, 132, 133t, Singapore, 86t, 120t, 150 213–14n69 Sino-Soviet relations, effect of, 44 Suh, Sang-chul, 63, 65, 66, 67, 68 Sixth Republic (ROK), 111 Sung, Jaewhan, 265–66n286 Six-Year Plan (1971–76), 45, 55 Supreme Council for National Six-Year Plan (1978–84), 55 Reconstruction (SCNR), 102, Six-Year Plan (1987–93), 55 105, 106, 113 Skills transfer, 89, 119, 236n67 Supreme People’s Assembly (SPA), Sloboda, John, 196n18 202n32 “Socialist construction” period, 42 Surveillance, data gathered through, 18, Song, Byung-nak, 240–41n101, 202n31 240n98, 251n172 Sweden, 86t, 185 South Korean Criminal Code, 5 Syngman Rhee, 104–5, 107 Soviet State Statistical Committee Syrquin, Moises, 59 (Goskomstat), 10 Szirmai, Adam, 266n287 Soviet Union aid to DPRK, 44, 91, 92, 211n46 “Taean system” for industry, 38 as basis for economic estimates for Taiwan DPRK, 72 development comparison to ROK, collapse of, 11, 90–92 134, 138 DPRK trade with, 91–92 hours worked per week, 150 and economic comparability issues, industrialization in, 57 256–57nn228–229 economic performance of, 9–10 interest rates in, 143t, 144 and establishment of DPRK, 3 investment rates in, 120t GDP end use comparison, 73t, 75 output comparison to Korea, 187t, on overstated data from DPRK, 77 189t Sino-Soviet relations, 44 per capita growth in, 185, 186t 312 POLICY AND ECONOMIC PERFORMANCE IN DIVIDED KOREA

savings rates in, 141–42 imports, protection from (ROK), total factor productivity comparison 130, 135–36 to ROK, 161–62 Ministry of Trade and Industry Tariffs, 126, 131–32 (MTI), 196–97n23 Taxes in ROK, 99, 106 and adjusted factor cost approach, Transportation industry, 15t, 19t 75 Trigubenko, Marina E., 79t, 211n46 forced political contributions, 114 Truman, Harry S., 94 import tariffs, 126, 131–32 Turnover taxes, 75 Technological innovation, 36, 149, 191 Technology transfer, 89, 119, 236n67 Ugaki Kuzushige, 270n7 “Terror as enforcement,” 206n17 Ukase, 111 Textile industry, 41t, 78t, 79t, 189t UN Center on Transnational Thailand, 120t Corporations, 245n136 “Third Republic” (ROK), 107 UN Fund for Population Activities See also Park, Chung Hee (UNFPA), 20 “Thirteenth World Youth Festival,” 90 Unemployment data “Three Revolutions” management underreporting of (ROK), 20–21 approach, 38, 207n22 Unification proposals, 44, 54 Three-Year Plan (DPRK), 42 United Kingdom, 158–59 Tikhonov, Vladimir, 201n23 United States Timmer, Peter, 256n227 aid to ROK, 103–7, 179 Tokyo Military Academy, 101 and establishment of ROK, 3 Total factor productivity (TFP) in ROK labor force participation rates, and agricultural transformation, 82 86t capital-output ratio, 152 total factor productivity in, “contrarian” assessment of, 147–48 159t and “dualism” in partitioned Korea, Urbanization trends 67 DPRK 1970s, 48 in economic growth analyses, force-paced in DPRK, 69 153–62 as performance indicator, 23–25 vs. factor mobilization, 146–47 pre- and postpartition (DPRK), 60, “growth accounting” approach to, 61t, 63 148–50, 180–81 prepartition, 40 manufacturing sector analysis, ROK, 132 152–53 satellite imaging for measuring, 18, work hours per week, 150–52 202n31 Totalitarianism, 34 U.S. Agency for International Trade Development (USAID or AID), DPRK strategies, 50–52, 89–90, 106, 228n10 91–92 U.S. Steel (USX), 226–27n3 import tariffs, 126, 131–32 USSR, 34 INDEX 313

Venezuela, 165t Winiecki, Jan, 75 Vietnam, 36, 37t, 86t Women in workforce, 46 Vietnam War, influence of, 44, 54, 107, Woo, Jung-en, 237nn71–72 137, 228–29n11 Woo, Roh Tae, 100 Violence Wood/wood products industry, 41t, in DPRK, 34 189t in ROK, 55 Work hours per week, 150–52, 167t, Voluntarism, 208–9n28 186, 188t World Bank “Waaler surfaces” map, 191 Hungarian economic data, 10–11 Wages national income data (ROK), 6 and consumption suppression World Health Organization (WHO), (DPRK), 48–50, 83–84, 88 27–28 increases in (DPRK), 46 World Military Expenditures and War-mobilization policy in Japanese Arms Transfers, 14 colonial era, 101–2 Warsaw pact economies, 73–75 Yearbook of National Accounts, 58 Warsaw pact system, collapse of, 55–56, Yoo, Chang-Soon, 245–45n137 91, 176 Yoo, Jong-goo, 196n19 Weapons Yoo, Jung-ho, 249n155 importing of (DPRK), 91–92 Yoon, Dae-Euh, 247–48n147 Western Sea Lock Gate, 90 Yoon, Dae-kyu, 241–42n111, Western Standard International Trade 242–43n116, 243n117, Classification (SITC), 91 243n119 Wholesale/retail growth data, 15t Young, Alwyn, 161, 263n269 Williamson, Jeffrey, 141 Yugoslavia, 37t

About the Author

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at the American Enterprise Institute (AEI) and is senior adviser to the National Bureau of Asian Research (NBR). He has served on the Board of Scientific Counselors for the U.S. National Center for Health Statistics and is on the President’s Council on Bioethics. He is also a longtime student of Korean affairs: he is one of the founding members of the U.S. Committee for Human Rights in North Korea and also a member of the Academic Advisory Board for the Korea Economic Institute of America. Mr. Eberstadt’s previous books include Poverty in China (Indiana University, 1979), The Population of North Korea (RoutledgeCurzon, 1995), The End of North Korea (AEI Press, 1999), Korea’s Future and the Great Powers (University of Washington Press, 2001), and The North Korean Economy: Between Crisis and Catastrophe (Transaction Publishers, 2007). Mr. Eberstadt earned his AB, MPA, and Ph.D. from Harvard University and his MSc from the London School of Economics.

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