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By Brad Miller and Joshua Maxwell Comparative Analysis ofNorth Korea, South Korea and Indonesia
Background • North Korea • Formed out of WWII • Population: 24 million • Communist government • South Korea • Formed out of WWII • Population: 48 million • Republic form of government • Indonesia • Declared itself independent from Japan & Dutch after WWII • Geography: composed of nearly 17,000 islands • Population: 240 million • Largest Muslim population in the world • Independent republic government
6 Institutional Frameworks • Allocation Mechanism • Forms of Ownership of Land and Capital • Role of Planning • Types of Incentives • Income Redistribution • Role of Politics
Allocation Mechanism • North Korea • Command (Primary focus) • N. Korean leader Kim Il Sung adopted a strong central planning policy without a free market, Stalinism • Production and pricing controlled by central government • Country considered to have foremost command economy in the world • Traditional • Follows idea of “juche,” which means self-reliance • Concept has led to political, economic, and social self-reliance and no influence by foreign actors • Cult of Personality devoted to Kim Il Sung • Country is considered one of the most secretive in the world as a result • South Korea • Free Market Economy (Primary focus) • Some indicative planning that places restrictions on companies • Promotes exports, industrialization, innovation, and technology • Traditional • “Chaebol,” allows for many companies to be connected through family ties • Indonesia • Market economy w/ similarities to command • Govt. decides prices on products such as fuel (oil), rice, and electricity • Companies allowed to sell products in a free market economy once prices are set • Member of the G-20
Forms of Ownership of Land and Capital • North Korea • Socialism • Central govt. own companies and industries • South Korea • Capitalism • Foreigners have the same property rights that citizens do • Indonesia • State capitalism: capitalistic economy under state control, owns 139 enterprises • 2011 Economic Freedom Index (Business Freedom) • South Korea: 91.6 • Indonesia: 54.9 • North Korea: 0
Role of Planning • North Korea • Done by Central People’s Committee (CPC) • Has resulted in forced labor, food rationing, and media restrictions • South Korea • Indicative planning • Has lessened recently; country focusing heavily on exports and trade relations • Indonesia • Indicative planning • Most is done by State Ministry of National Development Planning • Current plan focuses on economic growth and innovation through a reformed tax structure
Types of Incentives • North Korea • Moral Incentives • Follows Confucianism and Maoism • Ran moral incentive campaigns to encourage production, including military production • Filial piety: respect for family and elders • South Korea • Material incentives • Believes in strong market orientations and profit maximization • Does not believe in isolationism • Has one of the longest work weeks in the world, average 49.3 hours • Indonesia • Mix of Moral and Material incentives • Muslim influence provides moral incentives • No price fixing or hoarding, everyone should have free information on supply and demand • Material incentives include economic growth and free market capitalism
Income Redistribution • North Korea • Government has no tax system • Government plans and operates all parts of economy • Decides peoples’ income based upon need • Universal welfare coverage • South Korea • Follows Austrian school of thought • Little redistribution • Highest Income Tax = 38.5% Highest Corporate Tax= 24.2% Gov. Exp. As % of GDP = 29.3% • Well-defined property rights and equal opportunities • Indonesia • Follows Austrian school of thought as well • Highest Income Tax = 30% Highest Corporate Tax= 25% Gov. Exp. As % of GDP = 19.2% • Lower income tax rates than South Korea • Does very little to redistribute income
Role of Politics • North Korea • One political party, Korean Worker’s Party • No free elections, only one candidate to select, Kim Jong Ill 99.9% of vote • South Korea • Legislative, Executive, and Judicial Branch • Numerous political parties all play a role in indicative planning • Indonesia • Similar govt. system as South Korea, but govt. owns many enterprises
9 Criterion • Level of Output • GDP Growth • Composition of Output • Degree of Static Efficiency • Degree of Dynamic Efficiency • Macroeconomic Stability • Economic Security of an Individual • Degree of Economic Equality • Degree of Economic Freedom
GDP Growth • North Korea experienced abnormal growth from 2004-2005, Why? • South Korea and Indonesia have had consistent growth overt time
North Korea’s Black Market • In 2003, North Korea allowed private farmers markets so people could buy produce and other items locally. • GDP per capita went up by 30% for two consecutive years • Farmers markets created a huge black market where people would sell items such as electronics, drugs, and other luxury items. • North Korean government decided to destroy black markets and hamper economic growth by redenomination of currency: 100 won – 1 won • Only allowed a small amount of money to be turned in for new currency, so black market and many other people’s money became worthless http://www.youtube.com/watch?v=99VlXc5fwxA
Degree of Static Efficiency • Unemployment Rate (2008) • Indonesia: 8% • South Korea: 3% • North Korea: not published • Time Required to Start a Business • Indonesia: 60 days • South Korea: 14 days • North Korea: N/A (private citizens cannot start businesses) • Corporate Taxes • Indonesia: 25% • South Korea: 24.2% • North Korea: no taxes Rankings: South Korea, Indonesia, North Korea
Degree of Dynamic Efficiency • North Korea - Most volatile GDP per capita growth over time • South Korea - Consistent unemployment rates except for 1998-1999 Asian Financial Crisis • Indonesia - Cyclical Unemployment over time, also Structural Unemployment
Macroeconomic Stability • GDP per capita growth (2000-2009) • North Korea - 80% growth, but extremely volatile and low GDP per capita • South Korea - 73% growth, highest GDP per capita • Indonesia - 60% growth • Inflation Rate • South Korea – stable inflation kept below 5% • Indonesia – unstable inflation, high economic growth and low interest rates
Economic Security of an Individual • GDP per capita (PPP) • South Korea: $27,168 • Indonesia: 4,199 • North Korea: $1,800 • Life Expectancy • South Korea 80yrs • Indonesia: 71 yrs • North Korea: 67yrs • Mortality Rate • South Korea: 7.4% • Indonesia: 14.1% • North Korea: 14.6% • Healthcare costs covered by govt. • South Korea: 54.9% • Indonesia: 54.5% • North Korea: not published Rankings: South Korea, Indonesia, North Korea
Degree of Economic Equality • Gini Coefficient (0 = perfect equality, 100 = perfect inequality) • Indonesia: 37.0 • South Korea: 31.5 • North Korea: 31.2 • Quintile Ratios (1 = perfect equality) • Indonesia: 6.17 • South Korea: 4.73
Future Predictions • North Korea • Low output and no freedom for decades • Dictatorship = Less Freedom • Will continue to have low economic growth if current government is in place, government will not allow prosperity. Example: 2004-2005 farmers markets • South Korea • Becoming one of the biggest economies in the world • Increased trade with United States and Japan • All available information shows nothing stopping South Korea from becoming even more economically prosperous • Indonesia • High inflation and high unemployment, yet has seen great economic growth • Either increased economic growth or financial crisis • Could become member of the BRIC’s (Brazil, Russia, India, China)
Lessons Learned • All three countries had connections to Japan in WWII • North Korea - Command South Korea - Free Market Indonesia - State Capitalism • South Korea and Indonesia have indicative planning • North Korea – Moral Incentives South Korea and Indonesia – Material Incentives • North Korea has experienced underground economy problems • South Korea focuses on international trade while North Korea follows “juche” • South Korea has a much higher GDP per capita output than North Korea or Indonesia • South Korea has highest score in Economic Freedom Index • South Korea established economic power, Indonesia emerging economy, and North Korea has little to no economic success.
Policy Recommendations • North Korea • Should allow more private farmers markets, it worked in 2004-2005 • Should allow more international trade and ignore their “juche” policy • Allow more political freedom, free elections • Only problem is that the current government does not care about economic prosperity, only power. • South Korea • Few problems, but loosening indicative planning even more would help • Improve upon corruption problems • Indonesia • Limit price controls on fuel and energy • Privatize more companies, currently 139 state owned enterprises • Get inflation under control, could create future problems, raise interest rates • To solve unemployment problems, more spending on education and lower minimum wage rate in country.
Works Cited • "2011 Index of Economic Freedom." The Heritage Foundation. Web. 03 Apr. 2011. • “Background Notes By Country” U.S. Department of State. Web. 02 Apr. 2011. • "Corporate Tax Rates." Trading Economics. Web. 10 Apr. 2011. • "Country Facts: North Korea." Index Mundi. Web. 09 Apr. 2011. • "Education Spending (% of GDP)." Nation Master. Web. 10 Apr. 2011. • "Freedom in the World Comparative and Historical Data." Freedom House. Web. 9 Apr. 2011. • Ihlwan, Moon. "North Korea Takes Aim at the Black Market." Bloomberg Businessweek. 1 Dec. 2009. Web. 09 Apr. 2011. • “Indonesian War of Independence.” New World Encyclopedia. Web. 02 Apr. 2011. • “Kim Wins Re-election with 99.9% of the Vote." The New York Times. 2009. Web. 9 Apr. 2011. • "North Korea - Economic Planning." Country Studies. Web. 03 Apr. 2011. • Rosser, Jr., John Barkley, and Marina V. Rosser. Comparative Economics In A Transforming World Economy. Cambridge, MA: MIT, 2004. Print. • "Share of Agriculture GDP." Food and Fertilizer Technology Center for Asian and Pacific Region. Web. 10 Apr. 2011. • "South Korea Business Indicators - Property Rights / Contract Law." Financial Standards Foundation. Web. 03 Apr. 2011. • "South Korea World Factbook." Central Intelligence Agency. Web. 03 Apr. 2011.
Funny Video • http://www.youtube.com/watch?v=gKH1PymutJQ