Fri, Feb 20, 2004 page9

• North Korea: Symptom or cure?

  Analysts are split as to whether the best approach toward reforming the hermit kingdom is a gradual reform or a swift, sharp shock

  • By Christopher Lingle
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  There is no consensus over the best course for the appropriate transition for North Korea from authoritarian socialism to an open society and market economy. Most observers favor either a "Big Bang" or a gradualist approach. Those supporting the Big Bang point to rapid institutional changes (short, sharp shocks) to introduce welfare-maximizing incentives. Gradualists promote step-by-step sequencing. Either way, the bottom line is to establish the institutional framework to support markets and private property rights as the basis for economic growth.

  Supporters of gradualism conjure up nightmare scenarios of millions of refugees fleeing from a collapsing economy in North Korea or armed conflict triggered by internal chaos. But it is wrong to imagine reconstruction of communist economies as painless. Costs hidden in the seams of communist systems must be paid, whichever reform strategy is chosen.

  So, it is a myth to imagine gradual transformation as a way to avoid these costs that can only be delayed. But gradualism is like a weak dam holding back mounting pressures of a rising flood that will eventually burst. In this sense, China's success at gradualism will be eroded.

  

  ILLUSTRATION MOUNTAIN PEOPLE

  And so, China is a poor model for the modernization of North Korea. Moving gradually towards a market economy under ironclad Leninist-fascism with tight controls on economic matters extends misery and delays hope for an open society.

  Under the Chinese approach, economic development toward a market economy is seen to be impeded by democracy. North Koreans must not suffer indefinitely under the current regime.

  An important observation often missing in discussing transition policies is that many observed economic problems are residual effects of communism and are not caused by markets, per se. As it is, the institutional framework of communism is the source of observed inefficiencies and irrationalities that emerge clearly during the transition process. Thus, the examination of post-communist regimes often confuses symptoms with cures.

  As such, the selection and interpretation of actual transition policies may not clearly identify the nature of the systemic transition. Suggestions of a supposed "vicious cycle" of underdevelopment and chaos (shrinking output and rapidly rising prices) arises from choice of policies ignore the pre-conditions determined by communist institutions.

  The Big Bang strategy departs from a commitment to real and rapid transformation. Economic as well as political rationales provide support for this approach. The economic effects of rapid and sweeping implementation convey political payoffs. Bunching reforms at the outset can involve a sort of "economy of scale" upon the structural incentive adjustments within both the polity and the economy.

  In such situations, unavoidable costs of economic rationalization are offset by some immediate benefits. Implementing a rational pricing system and monetization of the economy is an important step. Hidden, non-price costs of socialism are exchanged for obvious costs that are mistakenly associated with the choice of the transition program. Slower transition will allow recollections and disadvantages of shortages to be more distant.

  The low quality and the lack of imports under communism likewise become relics of a forgotten past.

  The strategy of the gradualists is oriented towards tinkering, such that deep changes in institutions are put off for an uncertain and unspecified future. One major problem of this piecemeal approach is that the source of distortions is obscured. As suggested above, there is a tendency to confuse symptoms of the hangover with the prescription for the cure.

  A common argument set forward by gradualists is that conditioning under socialism leaves afflicted populations ill-prepared to confront the harsh realities of capitalism. A counterpoint to these claims is that Chinese peasants, despite their complete lack of experience with the market, adjusted with great alacrity to agricultural reforms begun in 1979.

  Even if the theoretical arguments are inconclusive, the actual results of transition provide interesting results. Beginning with an evaluation by region, experiences in Europe provide evidence in support of the "accelerationist" approach. Among Big Bang economies, Estonia and Poland shot out of the starting gate with high economic growth. The Czech Republic was among the economic growth leaders with low unemployment and Hungary attracted massive amounts of foreign capital.

  In the Asia-Pacific region, New Zealand had success with Big Bang policies by shaking off the interventionist stranglehold imposed by successive socialist governments.

  Among countries relying upon gradualism, Russia's economy remains a pre-modern construct of a Soviet-style system were murky private property rights and political corruption run rampant. Latvia and Lithuania soon found themselves in the grip of chronic "stagflation" common to countries that follow gradualist policies. While afflicted by civil war and ethnic conflict, Georgia and Yugoslavia are sad cases of gradualism and the Ukraine and Romania are also economic laggards.

  Proponents of gradualist reform seem unable to understand that high rates of unemployment and sagging production are elements of the residual failures of state socialism. While rapid transition forces "hidden unemployment" into the open, the gradualist approach continues the charade.

  Whereas most European transitions began with democratization, many Asian reformers operate authoritarian regimes. Democracies allow citizens to seek out the means for improving their own conditions. The democratization of socialist economies requires shedding the practice of the state hoarding labor.

  Success in transition in North Korea should involve rapid withdrawal of the "Communist" state sector from the economy, through privatization and restructuring. Reluctance to reduce state intervention will worsen future growth prospects by interfering with emergent private entrepreneurs that are the engine of economic growth while misusing the necessary fuel of private savings.

  Christopher Lingle is a professor of economics at Universidad Francisco Marroque in Guatemala.
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