Avoiding the Apocalypse: The Future of the Two Koreas

448 Pages·2000·3.82 MB·English

by  Marcus Noland

AVOIDING THE
APOCALYPSE
The fuTure of The
Two koreas
InstItute for InternatIonal economIcs
WashIngton, Dc
June 2000
AVOIDING THE
APOCALYPSE
The fuTure of The
Two koreas
mArCuS NOLAND
InstItute for InternatIonal economIcs
WashIngton, Dc
June 2000
MarcusNoland,seniorfellow,wasthe Copyright©2000bytheInstitutefor
senioreconomistforinternational InternationalEconomics.Allrights
economicsattheCouncilofEconomic reserved.Nopartofthisbookmaybe
Advisers(1993-94).Hehasbeenavisiting reproducedorutilizedinanyformorby
professoratJohnsHopkinsUniversity,the anymeans,electronicormechanical,
UniversityofSouthernCalifornia,Tokyo includingphotocopying,recording,orby
University,SaitamaUniversity,the informationstorageorretrievalsystem,
UniversityofGhana,andavisitingscholar withoutpermissionfromtheInstitute.
attheKoreaDevelopmentInstitute.He
haswrittenmanyarticlesoninternational Forreprints/permissiontophotocopy
economicsandistheauthorofPacific pleasecontacttheAPScustomerservice
BasinDevelopingCountries:Prospectsforthe departmentatCCCAcademicPermissions
Future(1990).HeiscoauthorofGlobal Service,27CongressStreet,Salem,MA
EconomicEffectsoftheAsianCurrency 01970.
Devaluations(1998),ReconcilableDifferences?
UnitedStates-JapanEconomicConflictwith PrintedintheUnitedStatesofAmerica
C.FredBergsten(1993),andJapaninthe 020100 54321
WorldEconomywithBelaBalassa(1988),
coeditorofPacificDynamismandthe LibraryofCongressCataloging-in-
InternationalEconomicSystem(1993),and PublicationData
editorofEconomicIntegrationoftheKorean
Peninsula(1998). Noland,Marcus,1959-
AvoidingtheApocalypse:thefutureof
INSTITUTEFORINTERNATIONAL thetwoKoreas/MarcusNoland.
ECONOMICS p.cm.
11DupontCircle,NW Includesbibliographicalreferencesand
Washington,DC20036-1207 index.
[phone] FAX:[phone] ISBN0-88132-278-4
http://www.iie.com 1.Korea(South)—Economicpolicy—
1960- 2.Korea(North)—Foreign
C.FredBergsten,Director economicrelations. 3.Korea—
BrigitteCoulton,DirectorofPublications Economicconditions—1945-
andWebDevelopment 4.Korea—Economicpolicy. I.Title:
BrettKitchen,MarketingDirector EconomicturmoilontheKorean
Peninsula. II.Title.
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AutomatedGraphicSystems HC467.N6582000
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Theimageonthecoverofthisbookisthatofa
Buddhistguardianfigureasportrayedona
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source:IndexStockImagery.
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Contents
Preface xi
Acknowledgments xv
1 Introduction 1
DivergentPaths 3
ThreeCrises 4
ProspectsfortheFuture 7
TourdeHorizon 11
2 The South Korean Economy until 1997 15
EconomicPolicyinthe1960s 16
EconomicPolicyinthe1970s 19
EconomicPolicyunderPresidentChun 22
TheDemocracyPledgeandTwenty-fiveYearsofDevelopment 24
Pre-CrisisEconomicPolicy,1987to1997 29
Conclusions 57
3 The North Korean Economy 59
OrganizationoftheNorthKoreanEconomy 61
StatisticalComparisonoftheNorthandSouthKoreanEconomies 73
CrisisResponse 82
InternationalEconomicRelations 87
CurrentReforms 133
Conclusions 140
4 The Nuclear Confrontation 143
TheEnergySituation 143
v
TheNuclearProgram 145
TheAgreedFramework 151
TheSuspectSiteandtheMissileTest 158
Evaluation 166
5 The Slow-Motion Famine in the North 171
TheFoodBalance 180
FoodforPeace 182
ThePeople’sRepublicofMisery 191
6 The Financial Crisis in the South 195
FinancialFrugality 199
TheBubbleStory 203
TheCrisis 208
Post-CrisisDevelopments 221
Recovery 247
Conclusions 249
7 The Prospect of Successful Reform in the North 251
ReformintheNorth 252
AGeneralEquilibriumPerspectiveonReform 266
TheLikelihoodofReform 281
8 The Implications of North Korean Collapse 285
TheGermanExperience 286
RelevancetoKorea 295
AGeneralEquilibriumPerspectiveonCollapseandAbsorption 301
ConceptualizingtheCostsandBenefitsofUnification 307
DynamicResults 310
PolicyLessonsoftheGermanExperienceforSouthKorea 318
ThinkingBeyondtheGermanCase 320
9 Can the North Muddle Through? 323
SocialisminOneFamily 324
MuddlingThroughinOurOwnStyle 333
Sustainability 342
10 Conclusions 347
NorthKorea 348
SouthKorea 352
OtherActors 367
FinalThoughts 375
vi
References 377
Appendix 401
Index 405
Tables
Table2.1 SouthKoreantariffrates 40
Table2.2 Estimateoftariff-equivalentsofKorean
agriculturalNTBs,1992 41
Table2.3 Producersubsidyequivalents,1997 43
Table2.4 Effectiveandnominalratesofprotection,
selectedsectors,1990 44
Table3.1 NorthKorea’scentralplans 66
Table3.2 Compositionofoutput,1992-96 69
Table3.3 Governmentbudgetbalance 70
Table3.4 Generalgovernmentrevenues,1996 71
Table3.5 Socioeconomicindicators,1992 74
Table3.6 Educationalattainmentrates 75
Table3.7 Distributionoflaborforceattimeofreform 76
Table3.8 CapitalstockandGDPregressions 77
Table3.9 Internationalincomeandcapitalstockcomparisons,1990 78
Table3.10 RatioofSouthKoreantoNorthKoreanGDPper
capitaincome,1990 79
Table3.11 NorthKoreantradingpartners,1997 91
Table3.12a NorthKoreanexportsbylargestcommoditygroups,1997 92
Table3.12b NorthKoreanimportsbylargestcommoditygroups,1997 92
Table3.13 AidfromtheUSSR 96
Table3.14 Aidbalancesheet 122
Table3.15 Estimatedremittances 132
Table4.1 KEDOcontributions 155
Table5.1 Foodbalanceestimates 173
Table5.2 Riceandcornpercapitadailyrations 179
Table5.3 Foodfortalks 188
Table6.1 Volatilityofmacroeconomicindicatorsandbanking
aggregates 200
Table6.2 SouthKoreanbanks 224
Table7.1 Alternativereformscenarios 260
Table7.2 Actualand‘‘natural’’NorthKoreantradeshares,1990 262
Table7.3 Prospectivesectorsofcomparativeadvantage 263
Table7.4 Prospectivesectorsofcomparativeadvantage 264
Table7.5 Prospectivesectorsofcomparativeadvantage 265
vii
Table8.1 Westerngoodspenetration 289
Table8.2 EastGermanrelativeprice 290
Table8.3 Inter-Germanandinter-Koreanexchange 298
Table8.4 Estimatedcostsofunification 308
Table9.1 Romanianmacroeconomicindicators 328
Figures
Figure2.1 Financialdevelopment 18
Figure2.2 Realinterestrates 20
Figure2.3 ShareofGDPduetotop10 chaebol 21
Figure2.4 PurchasingpoweradjustedrealGDPpercapita 25
Figure2.5 Structureofoutput 26
Figure2.6 ExportsandimportsasashareofnominalGDP 26
Figure2.7 Unionizedworkersandlabordisputes 37
Figure2.8 Numberofdaysrequiredforcustomsclearanceof
agriculturalproducts 45
Figure2.9 Foreigndirectinvestment 51
Figure3.1 EstimatesofNorthKoreanGDP 80
Figure3.2 NorthKoreantrade 89
Figure3.3 NorthKoranarmstrade 93
Figure3.4 NorthKoreandebtanddebtservice-exportratio 94
Figure3.5 NorthKoreandebtpricesinthesecondarymarket 96
Figure3.6 NumberofSouthKoreanswhovisitedtheNorth 116
Figure6.1 Saving,investment,andthecurrentaccount 196
Figure6.2 Capitalinflowsbytype 197
Figure6.3 UnitpriceofelectronicsandDRAMS 198
Figure6.4 SouthKorea’snominalexchangerateandstock
marketchanges 210
Figure6.5 SouthKorea’srealGDPgrowthforecastandexpected
realexchangeratechange 212
Figure7.1 Modelsimulationresults 274
Figure7.2 Foodavailability 275
Figure7.3 Outputbysector 278
Figure7.4 Relativepriceofoutputbysector 279
Figure7.5 Percentchangeinaveragefactorprice 279
Figure8.1 Capitalinflowandexchangerateappreciation 306
Figure8.2 Externalcapitalflow:compositionofoutputchange
inSouthKorea 306
Figure8.3 Externalcapitalflow:compositionofoutputchange
inNorthKorea 307
Figure8.4 Rateofconvergenceandcapitalinvestmentrequirement 313
viii
Figure8.5 NorthKorea:GDPandGNP 314
Figure8.6 SouthKorea:GDPandGNP 315
Figure8.7 Factorreturnequalization 317
Figure8.8 SouthKoreandistributionofincome 317
Figure9.1 NorthKoreanandRomaniangrowthrates 327
Boxes
Box2.1 TheStrangeCaseofSausages 47
Box3.1 JucheasTheology 62
Box3.2 ATaleofJucheAgriculture 64
Box3.3 Black,Brown,andBlueWon 69
Box3.4 DeadbeatDebtor 95
Box3.5 TheNarco-state 120
Box5.1 CryingWolf? 176
Box5.2 TheIssueofMilitaryStockpiling 178
Box5.3 ‘‘9/27Camps’’ 183
Box5.4 Refugees 189
Box6.1 MoralHazard,theDomesticDimension 205
Box6.2 Contagion 209
Box6.3 MoralHazard,theInternationalDimension 211
Box6.4 ShareholderActivism 230
Box6.5 The10-11Crisis:TheShoeThatDidn’tDrop 242
ix