Korea is divided into two separate countries, North and South Korea. Republic of Korea, which is called Daehan MinGuk in Korean, is situated about 120miles northwest of the Japanese islands of Honshu and Kyushu and Jeju Island located about 60mile south of the peninsula.
South Korea is bordered on the north by North Korea. South Korea is Republic country and it has a presidential system of government and president is elected directly by popular vote that the elected president serves for five-year term. However, the president cannot be reelected after serving five-year term. National assembly is consisted of 299 members and people, like president election, directly elect the majority of members. Reminder of members is appointed among the political parties. The Supreme Court heads the independent judiciary.
North Korea, which is called Buk-han in Korean, is bordered on south by South Korea. North Korea is communism compared to the capitalism of South Korea. Kim, il-sung was the first leader of North Korea who was supported by the Soviet Union on February 17,1947(www.koreascope.org). Thereby, these two countries have been separated into the South and the North since 1953.
North Korea’s the highest authority in the country, the front party, was ‘Party of North Korea’ and this party has been the establishment of socialism in North Korea. Their ruling ideology is “Juche ideology’ meaning self-reliant and the idea was improvised in the 1950’s for the purpose of cutting off the Soviet Union’s influence. The “Juche ideology has become the principal idea for all their action in North Korea. The current leader of North Korea is Kim, Jung-il, the son of the Kim, il-sung who died in 1998.
Both South and North Korea had been one nation before the Koran war of 1950-1953. People could go back and force from northern part to southern part before dividing into two separate countries. People speak same languages, but having different ideologies after separation. “Both Koreans share the same cognition of culture. However, the concept of culture is different from each other. “South Korean concept of literary art is that it emphasizes a certain level of expertise, while the cultural diversity is accepted”. In North Korea, whereas, “concerning literary art is conceptually part of culture, accepting literary art same as culture”(www.multicorea.org). The social roles of literary art are also different between North and South Korea: North Korea literary art has a role to justify ideology for people, but South Korean literary art focuses on “the tendency to prioritize individual level in creation and acceptance, and consider sociality or social role in additional matter. Moreover, people of North Korea who work in the field are considered as “Professional creators”, whereas, in South Korea, they are considered as “intellectuals” through certain procedures and one’s economic status can be different by “one’s social evaluation and positions (www.multicorea.org).
North and South Korea has had different economic systems since the Korean War (1950-1953). South Korea operates under a market economy system, in contrast, North Korea adapted central planning economy.
Market economy of South Korea has led to dramatical improvement of the economy from less developed nations with severe unemployment, negative savings and the lack of exports to rapidly developing country. The gross national product (GNP) has been growing faster than the population as well as gross domestic product (GDP) during last 3 decades. Meanwhile, the central planning system of North Korea, around the beginning of the 1960’s, had faced delays and the economy growth has continued to be slowdown until 1980’s. Their economy policy was the “self-reliant economy policy” and this policy had led to economic failure. This serious economy failure of North Korea has resulted in “a poor rate of exports, chronic trade deficits, and a sizable debt”(http://lcweb2.loc.gov). This deep slump of North Korean economy has been put far behind of the South Korea.
Overall economy structure of North Korea can be characterized by “State ownership of all production, command economy and completely closed economic system”. This self-reliant economy system made country “to imbalance in the distribution of resources and in the demand and supply of goods”(www.koreascope.org). Self-reliant economy in North Korea lead to reject the imports of foreign capital and technology and they mostly use their own domestic resources to produce products. Therefore, this completely closed policy has made the country to more severe economic condition.
Park, chung-hee government launched the First Five-year Economic Development in 1962 and this development plan has become a fundamental source for the growth of South Korean economy. Over the period, “the real gross national product expanded by an average of more than 8 percent per year from $2.3 billion in 1962 to $204 billion in 1989”. Moreover, “manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987 and the ratio of domestic savings to GNP grew from 3.3percent to 35.8 percent over this periods. This big growth of economy has been possible because of the adoption of an outward-looking strategy in the early 1960. South Korea had the lack of natural resource endowments, low saving rates and poor domestic market, so the government promoted economic growth through “labor-intensive manufactured exports” (lcweb2.loc.gov). The manufactured exports has had big role for the growth of Korean economy and, as a result, the people’s standard of living has enormously improved with rapid industrialization.
North Korea economic structure resembles the structure in Eastern Europe and the Formal Soviet Union. The private sector is not allowed to develop by the subsidization of the state owned enterprises and only 25 percent is engaged in agriculture. “This state-owned manufacturing industries employ is more than 56 percent of the work force in the late 1980’s” compared to the other former socialist economies. However, the statistic could not be 100 percent accurate because of completely closed, self-reliant, economy system of North Korea. Moreover, this state owned industry produces 95 percent of manufactured goods. Economic growth was about 2%-3%, whereas output declined by 3%-5% annually during 1980’s through the early of 1990’s. Indeed, “the leadership maintained high level of military outlays from a shrinking economy pie”(www.koreascope.org). Their manufacturing is heavily concentrated on military industry. As a result, their national product real growth rate was 0 percent in 1994. The transition to make development of the private sector is hard because of heavily subsidized state owned enterprise sector and the inefficient labor market. Indeed, extensive social welfare programs made hard to reform the economic structure in North Korea. Workers with state-owned enterprise have no incentive and they use resources in inefficient way. Therefore, such economic conditions led North Korea to economic crises and it caused severe problems such as food-shortage and many people die from mass starvation.
While economy structure has been maintained under state-owned enterprises in North Korea, class structure of South Korean society has been changed by rapid economic growth, industrialization, and urbanization under market economy system. The one of the big change emerged since the end of Korean war is that “new middle class”, such as engineers, healthcare professionals, university professor, and journalists, has grown enormously from 6.6 percent in 1960 to 17.7 percent in 1980. Moreover, “the proportion of industrial workers grew from 8.9 percent to 22.6 percent of labor force during same period. However, this rapid industrialization in South Korea has been heavily relied on urban areas, such as Seoul, so there exists inequalities between rural and urban area. Therefore, for example, “the population of rural lower class declined from 64 percent in 1960 to 31.3 percent in 1980”(hopia.net). This heavy tendency of labor force in urban area made the “inequality of income” and “disparity in living standard” between urban and rural area”(lcweb2.loc.gov).
Overall achievement, since Korean War in 1953, of the South Korea is acclaimed as ‘the economic miracle on the Han-gang River’ and the significant increase of gross national product from US$2.3 billion in 1962 to US$457.7 billion in 1995” was a result of “Growth strategy of experts with its limited domestic market”(lcweb2.loc.gov). The rapid expansion of the economy improved the living standard condition for many people, in 1980’s, in South Korea. Income distribution has risen over this periods and this higher income raised South Korean citizens’ purchasing power rapidly as well. For example, “the average household income had risen in average 14.8 percent per year between 1985 and 1988”(hopia.net). These significant shifts of average household income also led to change in consumption patterns and created many “new middle class”.
The GNP per capita of North Korea was $920 in 1996, whereas South Korea was $11,270 in the same year. (Killeenroos.com/6/ecochart.htm). As I indicated above, the standard of living in North Korea has been becoming worse over the periods. This poor standard of living emerged mainly by its closed economic system, resulting negative economic growth rates. After the death of Kim, il-sung, the North Korea (DPRK) regime under his son Kim, Jung-il has increased its offensive military capability with aiming the entire Korea to be communist and, thus, this negative growth undergoes the chronic shortage in energy, food, and foreign currency (www.worldbank.org).
Public finance in North Korea is similar to those of capitalist economies. However, centralized planned economy of North Korea has more extensive scope for public finance due to its state ownership system. “North Korean government has bolstered review by banks alone with financial inspection by controlling agencies. Factories and enterprises of grade II and above are subject to financial inspection at least once in every two to three years”(koreascope.org).
North Korean’s budget system is divided into central and local budgets. A local budgeting system was expanded to provide “for the rights and obligations of the local authorities toward factories and enterprises in respective areas in 1978”(koreascope.org), whereas they reduced the burden on its central budget. The revenue of North Korea includes, transaction proceeds, state enterprise revenues, social cooperative revenues, service fee revenues and others (kreascope.org). Among these revenues, state enterprises revenues can be indicated ass “a kind of corporate income tax imposed in corporate profits” because it is the amount payable to the government. Transaction proceeds refer to extra income of state, which includes enterprises and manufacturing cooperatives. Extra income, which came from selling additional sale of goods has to be paid to the government, This is, in other words, net income that is equal to the rest of social net income subtracted from enterprises net income. Social cooperative revenue is “the return for various production means or management supervision from the state with the nature of fees”. However, one of the reasons that North Korea faces with a serious internal economic crisis would be that great portion of the military expenditure is budgeted to a part of the people’s economy costs.
“North Korean imports were $872 more than exports in 1989-1990”. They mostly imports machinery and equipment, crude oil, and arms from the Soviet Union; oil, petroleum, and coking coal from china; and consumer goods from the west and Japan (www.countries.com). Moreover, Pyongyang’s international financial standing has been very weakened and this worst rate of credit made North Korea hard to improve its international economy position from dismal performance.
The banking system of South Korea began to be liberalized in the mid-1980’s by the government. Government maintained strong managerial control over banks with denationalizing several banks. In the late 1980’s, “financial sector included a diversified commercial banking system and a wide range of secondary financial institution” with capital market system. Commercial banks of South Korea owned privately and local banks were found in every part of regions in South Korea. The central bank in the South Korea, called The Bank of Korea, which was established on June 12, 1950 regulate all commercial banking activities. Its major roles are also “issuance of all currency; the formulation and execution of monetary and credit policies; the conduct of the bulk of foreign exchange control business”(lcweb2.loc.gov).
The sixth Five-year Economic and Social Development Plan (1987-1991) supported South Korea’s economic development and growth rate. Its purpose was to exceed the gross domestic savings rate than that of domestic investment rate so that it can reduce foreign debt and cover financing of future economic development from domestic sources. Throughout the 1980’s, financing system in South Korea became liberalization and increased deregulation in financial market. Moreover, the South Korean stock exchange also grew rapidly in the late 1980’s. Private firms financed primarily through bank loans and pay them back with different interest rates.
Since the end of Korean War, South and North Korea adapted different economic system and the achievement of economic performance appeared in significantly opposite results. GDP (real growth rate) and GDP per capita in North Korea was 3 percent and $1000 in 2000 compared to GDO growth rate of South Korea was 8.8 percent in the same year. Export rate is also greater than imports in contrast to North Korea. For example, South Korea exported $175.8 billion such as manufactures, textiles, ships, automobiles, steel, computers, and footwear while the amount of imports was less than exports, which was $159.2 billion in the year 2000. (www.state.gov)
I think that the big gap of economic growth between North Korea and South Korea has been primarily affected by distinguishable economic structures. Completely closed centrally planned, self-reliant, economic system of North Korea would not be able to improve their economic growth unless they change their fundamental economic structure to opened economic system.
However, the market oriented economic structure of South Korea also have some problems to resolve so that the unemployment rate, inflation, and economic fluctuation can be more stable in the future. Therefore, South Korean economy would not face any further economic crisis.
Psychology or other biological studies have used twins for studying a symptom. Because the best way to analyze the cause and effect of a problem is to compare the most identical two things which one is infected and the other is not. However, in economics it is hard to find the identical twin except one symptom. Therefore, it will be very interesting in making a comparison between South Korea and North Korea like a twin to observe effects on them by different developing processes of two opposite idealism, capitalism and socialism. Located in the end of the Asia continent, Korea is a very small country, which its area is slightly larger than Indiana’s is. The country is with a 5000-year long history, having conserved a unitary race. After the WWII under chaotic international circumstances, Korean that had not established its own political colors yet seemed to be split into democracy and communism, supported by the United States and former Soviet Union respectively. After all in June 25, 1950, conflicts between two ideologies appeared on the surface as the Korean War. The civil war ended up with deciding the Armistice Agreement in 1953, and the country was divided into two countries at the 38th parallel. By this war, most of its lands were ruined, and the industrial factors were destroyed. In addition, there were enormous casualties. Both sides were like babies who just were born with nearly nothing and no thought. In this desperate situation, the people in each country started their new lives by absorbing different economic idealism; capitalism in South Korea; socialism in North Korea. After the end of the Cold War, the international relationships have changed a lot; particularly the Socialistic countries, or the former Soviet Union and eastern European countries have given up their economical main thoughts and turned their notion toward the Capitalism. Today insomuch calling people as cosmopolitans, most of national boundaries in economic relations are disappeared. In coming June, South Korea and North Korea meet the exact 50-year partition after the armistice in 1953. Last five decades, the comparative economical idealism that they selected respectively have produced significantly different results.
One of special features to distinguish between South Korea and North Korea is the difference in their political ideologies. On the hand, the political notion in South Korea is democracy. A definition of democracy in a dictionary is government by the people in which the supreme power is retained and directly exercised by the people or indirectly by elective representatives of the people under a free electoral system (Longman 272). Like the phrase of Abraham Lincoln, “of the people, by the people, and for the people.” South Korean government has respected the dignity and freedom of people above all things by Clause I, Article I in constitution. On the other hand, North Korea’s national ideology is communism. Its goal is equalization in the social conditions of life, especially in the possession of property by distributing all wealth equally to all, or by holding all wealth in common for the equal use and advantage of all. North Korea’s communism is based on Marxism-Leninism; it is modern communism made by Lenin, considering the special condition in Russia in the early 20 century. However, the uniqueness of North Korea’s is the accomplishment of brainwashing politics by apotheosizing Il-Sung Kim, the former leader of North Korea. He added his Juche idealism to Marxism-Leninism, which intended to establish the independence on a political purpose. The proposition of his theory is that human is the master of everything and decides all. In 1970, he provided at the fifth meeting in the Workers’ Party that the main concepts of his idea pursued independent acts as master and creative activities. The hidden meaning of his speech was that North Korea would adhere to the closed-door system externally and justify its dictatorship and hereditary power succession plan internally. In December 1962, his thoughts propelled four military lines under the slogan of national self-defense: the armament of the entire populace, the fortification of all the nation, the conversion of all servicemen into cadre for the People’s Army, and the modernization of the People’s Army. These steps created the most significant problem between South Korea and North Korea, the different unification policy. South Korea has sought for the solution in peace and liberal democracy, while North Korea has stuck to unify by violence means. These conflicts on the political ideologies have hindered economic performances of two countries very much by means of increasing wasteful cost for each national defense or setting up territorial boundaries in national and international trade etc.
For the past 50 years, South Korea has achieved dramaical economic growth called “the miracle of Han River” and has been recognized as one of the four Dragon in East Asia. GDP per capita was estimated to be 13 times larger than that of North Korea in 1999 and 16 times larger in 2000.
North Korea’s GDP Growth rate (%)
Comparing 2.2% of the economic growth rate and $79 of the GNP per capita in early 1960’s to 10.7% increase in the economic growth rate and $9,628’s GNP per capita in late 1990’s, it can say that it is really rapid economic development within 30 years. On the contrary, North Korea was –6.3% GDP per capita in 1997 and has decreased continuously during past 8 years. In 1999, at first GDP showed plus growth of 6.2%. This, however, happened because of other countries’ treasury aid, not because of real economic growth in NK. GNP per capita was estimated about $741 in 1997.
South Korea’s GNP per capita
One of the reasons to accomplish this rapid economic growth in SK is the appropriate application of capitalism and economic policies to recover disastrous economic situations after the Korean War. Planned Capitalism is that the government plans the allocation of resources but give individual the private owner ship of capital. It is the mix between centrally planned economy and free market economy. Based on this idealism, SK (South Korea) has promoted systems of close government and business ties, directed credit, import restrictions, sponsorship of specific industries and a strong labor effort. The country has encouraged the import of raw materials and technology and has induced savings and investment over consumption. In addition to boost the economic growth, SK created its own economic policies: the Construction of Pyramid type Export Oriented Industries (CEOI), Export First Policy and Export Oriented Industrialization. The idea of CEOI comes from the Construction of Pyramid Type (EOI), which economy of a underdevelopment country will be developed at the head of the industries by pulling capacity called export if it only uses a policy to promote export industries to require intensive labor force. However, the difference between two policies are SK’s CEOI is based on development of technology by the lead of SK’s government with the insufficient foundation of industries, while EOI merely expects the natural development without the concept of time. These three policies aforementioned arose in 1960’s and accomplished the industrial revolution in SK under the President Jung Hui Park’s Administration.
The economical idealism of North Korea is planned socialism. It means that every economic activity is leaded by the only order from the government’s plans. By planned socialism, NK accomplished the groundwork for the socialism economy, agricultural reform and collective farming, and state and public ownership. NK has developed three foundational economic policies for the above goals: the construction of independent native economy, the heavy and munitions industries first policy, the advance of military and economy side by side. The concept of the first policy is to fulfill gross national demand and to solve the technological progress and expanding equilibrium by self-sufficient economy. However, as confronting to the limitation of economic development by merely inner mobilization, NK starts to show practical attitudes toward the international trade and economic cooperation in these days. However, the country still supports the closed economy for retaining its political ideology. The second one has put relatively importance on the development of the heavy and munitions industries, insisting that these are the foundation of the people’s economy. However, unbalanced promotion with a relative negligence of agriculture and an excessive spending on military products caused the significant food shortage. Moreover, the third policy has made NK’s industries undistinguishable between civilian and military ones. Demand to accomplish the economic development and to build up the military force in the same time with the limited resources pushed NK to be impossible to recover with the current policies. In addition, a closed, collective and controlled life called socialist mode of life cased additional inefficiency in production.
In the ruins of Korean War plus lack of natural resources and industries, the only plentiful factor left to SK was population. With human capital, SK performed these policies and started investing in export industries, which requires the mass population. SK has not only put the importance on the development of economy by increasing productions and exports, but also has recognized the leading role of prominent human capital in economy. Therefore, SK has made a huge amount of investment on education and welfare programs. These days, SK keeps a high standard of education with widespread high-level educational institutions. The improved human capital has encouraged achieving the rapid economic growth in spite of the poor natural resources. Currently labor force estimates 22 million and SK spends 21% of the budget, 3.3% of the GNP on the educational sector. In addition, the investment rate on this sector expects to increase by 5% of the GNP in the future. Improved human capital makes SK possible to catch up rapid movements of the world economic environments. The distribution of the workers in various industries are changed; 20% of the labor in manufacturing and mining industries and 68% in services and high-tech industries in 1999. This intelligent elevation in labor force has brought better efficient in economy by creating specialties, reducing learning times and increasing quick learners.
The education on human capitol is very important factor for North Korea to protect its communism. From age 2, children go to kindergarten and are brought up by learning about Il-Sung Kim and worshipping him. This system of education is mandatory in lifetime. However, the education in NK seems just for the political purpose to produce new communist men, not for the economical one to use them as a human capital. NK states that it promotes free educational system, but in reality, the parents are required various expensive and children are mobilized periodically in various forms of unpaid labor. In addition, students who have poor family background especially including in the hostile group about 27% of total population cannot get the higher level of education.
With human resources, at first SK captured the light industrial market like textile. With increasing export, the government planned two major economic plans: from 1962 to 1966, and from 1967 to 1971. These plans put relative importance on developing the heavy and chemical industrial fields like electronics, automobiles, chemicals, shipbuilding and steel etc. which would be the basis of other businesses. After completing two economic plans, the GNP per capita became $278 and the economic growth was from 2.2% in 1962 to 13.8% in 1969. It goes without saying that these two economic plans make SK’s current economic position. Similarly NK had the economic plan: the short-term economic plan from 1947 to 1961, and the long-term economic plan from 1961 to 1993. However, these two economic plans were deficient to fulfill the goal to solve the problems in living condition and to complete the foundation for industries.
SK showed the surplus $12.1 billion in trade balance in 2000 with $172.6 billion of export and $160.5 billion in import and 72.8% in degree of dependence upon foreign trade. Heavy and chemical products take 70% in export and the main partners are US, Japan and China.
SK extends the international position by becoming a member of international economic organizations. The country joined OECD and WTO. In contrast, NK retains the closed position in international trade. The degree of dependence upon foreign trade of NK is 12.3%. This percentage is better than 9.3% last year, but still shows significant lowness than 70% of SK’s. $520 million of export and $960 million of import was traded in 1999. Export products were minerals, metallurgical products, manufactures including armaments and agricultural and fishery products. Import products were petroleum, coking coal, machinery and equipment and grain. Trading partners were Japan, SK, China and Russia. In addition, it is presumed that NK have had the annual deficit between $0.3-0.8 billion in 1990’s. The total trade amount is getting bigger between two countries; in 1990, the total trade amount of SK was 29 times of NK’s; in 1998, 157 times; and in 1999, 178 times. That is, SK’s total trade amount increased by 96.3% and NK’s decreased by 68.6% in 1999, comparing in 1990. Especially, the degree of dependence upon foreign trade of NK dropped by 20.4% in 1999 than in 1990.
While primary industry’s relative importance is getting
SK’s industrial structure composes of 51.3% in service, 25.9% in mining and manufacturing, and 14.6& in construction. Decreasing in the primary industry and increasing the third industry indicates SK’s industrial structure is reforming toward the system of developed countries. On the contrary, NK’s industrial distribution shows 32.3% in service, 29% in agriculture and fisheries and 28% in mining and manufacturing industries in 1997. The reason why NK has shown high rate in service parts in spite of the low percentage in distribution industry is the increase of the labor force in military and administrative management. The lack of investment, intelligent human capital, energy and supply of raw materials and the declination of incentives to work in labor force have reduced most industrial growth rate in NK, including manufacturing. The relative importance of agriculture and fisheries field and mining part has been indicating almost the same rate since 1960.
In comparison, SK had higher percentage
We cannot say which economic idealism between capitalism or socialism is superior. By watching suffers, surrender and changes in economic notion of the countries which represent socialism in economy, we can merely assume that idealistic socialism is harder to perform in real world than capitalism. Comparing South Korea and North Korea, the significant gaps by choosing opposite political and economical idealism is observed. In addition, major problems have appeared in both countries after operating each system for 50 years. In 1997-1999, the financial crisis in Asia affected in South Korea. The problems in high debt and equity ratios and massive foreign borrowing and an undisciplined financial process appeared as the South Korea’s weaknesses. Until 1999, these factors press the development of South Korea. By swapping the subsidiaries of largest business group in order to specialize production and promoting debt-workout programs with creditor banks, this country could get out of the IMF and recover financial stability. However, economists point out that fundamental problems from systematic errors are not cured yet. 50- year closed economy leaves North Korea fell behind greatly. In these days, though it shows a little open mind in communicating with South Korea, still North Korea refuses the trade with capitalistic countries. In addition, its armed force, the trial for terrors, and carelessness of the people’s welfare makes harder the economic development of North Korea.