How North Korea Became the World’s Worst Economy

Nicholas Eberstadt writes in the Wall Street Journal:

Economic history is a story of progress and success, but also of retrogression and failure. Among the latter cases, the most gruesome is surely the Democratic People’s Republic of North Korea (DPRK). Its signature catastrophe, the Great North Korean Famine of the 1990s, was, so far as can be told, the only famine in all of human history to beset an urbanized and literate society during peacetime.

Pyongyang’s descent into penury is all the more tragic considering that from the 1950s on into the 1970s, intelligence from Washington and Seoul suggested that North Korea’s per capita output was higher than South Korea’s. An array of public data—on urbanization and energy consumption, for instance—appears to corroborate that judgment. How the once-developing DPRK went from a rapid ascent into a stall, and then into a dreadful downward spiral, is a cautionary tale with implications far beyond the Korean peninsula.

The ruling Kim regime suppresses data about the country’s performance, but sufficient hard evidence has seeped out to describe both the dimensions and the causes of its continuing economic calamity. The most meaningful quantitative measure available comes from “mirror statistics” on the country’s international trade—reports by its trading partners on their purchases from and sales to the DPRK of various commodities. These data provide indirect but powerful evidence about productivity, living standards and technological attainment.

Despite a recent China-supported upswing in trade, North Korean per capita merchandise exports last year were no higher, after adjusting for inflation, than in the mid-1970s. By my calculations, real per capita imports in 2014 were barely three-fifths of what they were in 1974. That year marked North Korea’s all-time peak trade.

North Korea’s decline was a continuing drama, not precipitated by any particular geopolitical shock. Neither the end of the Soviet bloc, nor the reportedly disastrous flooding of the mid-1990s, nor a succession of international non-proliferation sanctions imposed since 2006, nor any other external event explains the country’s long-term deterioration. Instead, North Korea’s economic troubles are the natural consequence of the Kims’ dogged insistence on destructive policies.

North Korea appears to have the very worst business climate of any fully functioning nation state. On the 2010 Index of Economic Freedom compiled by the Heritage Foundation and The Wall Street Journal, the DPRK earned one point out of 100, the lowest score of all 179 countries ranked. Zimbabwe, the state with the second-worst ranking that year, came in 20 points higher.

The DPRK has no rule of law; no established property rights; no possibility for private foreign trade; no reliable currency; virtually no official social and economic information; and no internal constraints whatever upon its monumentally ambitious government.

It is difficult to overstate how much this matters. At any point in the postwar era, 80% or more of the differences between countries in per capita GDP can be predicted by human resources plus business climate (i.e., institutions and policies). Statistical analysis of North Korean trade underscores the point. In 2010 the DPRK’s global trade was only 1/20th of what we would expect for a country with its estimated human resources profile. However, when business climate is considered, North Korea no longer looks like an outlier at all.

In 1970 North Korea apparently did a better job than China or Vietnam of converting human resources into economic output. But those two countries would pursue “reform socialist” policies, including freeing up agriculture, encouraging private enterprise and promoting international trade. North Korea went in the opposite direction, shifting to a permanent war-footing economy, systematically eradicating the consumer sector, and repeatedly confiscating any outstanding cash in private hands through “currency reforms.” Simply put: Any economy that embraced the same disastrous rules as the DPRK should be expected to trace out a similar trajectory of economic failure.

There is one final, and particularly bitter, piece in the puzzle: the role of foreign aid in financing and ultimately facilitating North Korea’s ruin. Mirror statistics reveal that the DPRK has never been self-supporting. To the contrary, it has relied on a perennial inflow of foreign resources to sustain itself. Since 1960, North Korea has reportedly received more than $60 billion (in today’s dollars) more merchandise from abroad than it has shipped overseas. Nearly $45 billion of that came from Beijing and Moscow—a figure we can treat as a rough approximation of total Chinese and Soviet/Russian financial support.

Why didn’t these massive transfers result in any appreciable measure of long-term economic advancement? The work of economists Craig Burnside, David Dollar and Lant Pritchett, published in the late 1990s under the aegis of the World Bank, suggests an answer: Aid can have a negative effect on growth when a recipient state has a bad business climate, because foreign subsidies allow the regime, in the short term, to escape the consequences of its misrule. In such cases, the greater the volume of aid, the bigger the harm.

Unfortunately, North Korea’s horrific economic performance was enabled in part by leaders abroad who sent billions of dollars to Pyongyang. Those resources allowed the Kim dynasty to continue policies so patently destructive that they would have been forced to cease, or at least to moderate, them absent subsidy from overseas.

International aid workers and humanitarian policy makers have always feared that foreign assistance, through cascading mishaps, might leave recipients poorer and worse off in the end. North Korea, bankrolled mainly by Moscow and Beijing, has gone further than any other modern state in turning this nightmare scenario into reality.

Read the full story here:
How North Korea Became the World’s Worst Economy
Nicholas Eberstadt
2015-12-29

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