The Asia-Pacific Journal | Japan Focus Volume 5 | Issue 1 | Article ID 2341 | Jan 02, 2007

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Can Economic Theory Demystify North Korea?

Rüdiger Frank

Can Economic Theory Demystify NorthKorea?

By Ruediger Frank

The starting point of this paper is theassumption that North Korea is de facto a well-defined nation-state, home to a nationaleconomy and inhabited by individuals that bearthe same bas ic economic and soc ia lcharacteristics as individuals elsewhere.Despite the obvious specifics of the economicsystem and institutional structure of thecountry, standard economic theory should beapplicable to the question of North Koreaneconomic development. The article seeks toprove this as broadly as possible, showing thateconomic theory as diverse as classical andneoclassical, Marxist, Keynesian, institutional,developmentalist, neo-liberal or structuralist,dependency analysis-based and many others,including regionally centered approaches, canbe utilized to explain the North Korean casewith useful results, although the latter willinevitably vary depending on the chosenframework. Without arguing against or in favorof any of the available theoretical methods, thisarticle advocates further research on NorthKorea as another case of development in EastAsia, rather than as a mystical exception to therule. This is particularly important in light ofthe tendency to describe North Korea asunpredictable, bizarre, and incomprehensible.This is clearly not the case.

Street in Pyongyang

I N o r t h K o r e a : ( H o w ) C a n I t B eUnderstood?

North Korea is changing. While there seems tobe a certain consensus among academicobservers and political analysts on this basicissue, opinion differs strongly on the reasonsfor and the direction, scale, scope, andimplications of the changes. This article seeksto contribute to the debate by arguing thatNorth Korea is in fact just another case ofdevelopment and can be understood as such.

From the perspective of state- and aggregate-

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centred approaches, it is important to note thatthe Democratic People’s Republic of Korea(DPRK) has a permanent population, a definedterritory, a government, and the capacity toenter into relations with other states, andthereby meets the four criteria for statehood asset out by article 1 of the MontevideoConvention (Montevideo Convention, 2006).North Korea has been recognized by a largenumber of other states, including the People’sRepublic of China, and also “Western” partnerssuch as the European Union, Canada, andAustralia; since 1991, it is a member of theUnited Nations. At the most basic level, NorthKorea obviously is a state with a nationaleconomy, inhabited by individuals who sharethe same basic characteristics as peopleanywhere else. To analyze North Korea, itshould therefore be possible to utilize tools thathave been created as universally applicablemeta-theories and models of social science.This is a simple yet important analytical step tomake, since it demystifies North Korea byincluding it in a long chain of establishedresearch and provides observers with arelatively solid ground for their attempts tounderstand the specifics of this highlyinteresting case.

So far, most attempts at integrating NorthKorea into standard theoretical models havestopped at transition theory, which involvesanalysis of the relatively narrow qualitativechange from one regime to another. (Amongthe notable exceptions is Lee [2002] whoapplied the Big Push scenario to North Koreaneconomic development.) Whereas the transitionapproach is highly relevant for understandingNorth Korea’s politico-economic development,it covers only one historically narrow period.Moreover, it implies a qualitative change fromone economic or political order to another thatis difficult to prove in the DPRK; in fact, it isstill unclear whether such a major change hastaken place. By moving the analyticalframework one level up, i.e. by applying a

general approach first, analysis of North Koreabecomes more solidly founded and enablesresearch to return to deeper, more preciselevels—this time, however, firmly anchored instandard methodology. In other words, NorthKorea is, first and foremost, an economy and asociety. The second step should be toacknowledge that it is developing. The thirdstep would then be to ask this question: Alongwhat lines and in what direction is thisdevelopment taking place?

The purpose of this article is, very explicitly,not to find the one model that can mosteffectively be utilized to understand NorthKorean development, or to make the bestprescriptions. Neither is it the intention toexplain all aspects of North Korea through acombination of approaches. Rather, by applyinga large number of well-established economictheories to North Korea, it will be shown thatsuch an application is possible and appropriate.Naturally, the results will differ in qualitydepending on the models applied. The choice ofthe appropriate methodological framework is,as usual, left to the individual researcher andwill be determined by the concrete problem. Itis important, however, that the unique andspecific characteristics of North Korea, whichdoubtless exist, be examined in light of one ormore of the many avai lable standardframeworks of analysis.

What is Development, and Is North KoreaUnderdeveloped?

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Clothing factory in Pyongyang

Before contrasting the North Korean case witha number of economic theories, a briefd e f i n i t i o n o f d e v e l o p m e n t ( o runderdevelopment) is in order. Development isa relative, comparative concept. Based on anumber of indicators, a classification ofcountries is made according to the degree towhich they have reached the highest available(or imaginable) standard. With a focus oneconomics, underdeveloped or Less DevelopedCountries (LDCs) are typically characterized bythe following features: a low per capita income;a high population growth rate; large-scaleunemployment, underemployment, anddisguised employment; low productivity;extensive poverty; highly unequal incomedistribution; predominance of agriculture in thenational economy; and a low level of foreigntrade (Ghatak, 2003: 1-20). Dissatisfaction withthese indicators has led to the inclusion ofother, non-economic factors. The HumanDevelopment Index (HDI), created by theUNDP in 1990, is one answer to the demand fora more eclectic indicator of development. Itfocuses not only on GDP per capita, but also onlife expectancy, adult literacy rate, and schoolenrolment. However, GDP, and particularly percapita GDP, remains one of the most importantindicators, making the question of developmenta major concern of economists.

From this quantitative perspective, despite ageneral lack of reliable data, North Koreasends mixed signals. North Korea is not amongthe 177 countries listed in the 2004 HDI;however, the DPRK is classified by the UNDPas a developing country (UNDP, 2005: 281).While per capita income and productivity areindeed low, there is no high population growthrate and no predominance of agriculture in thenational economy (around 30%). We canfurther expect the obviously low productivity tohide a significant amount of disguisedunemployment. On the other hand, the level ofeducation is assumed to be high, and despite allshortcomings, the population appears to haveaccess to basic health services. The picture thatwould be created by following the UNDP’sindicators is therefore mixed: adult literacyrate (95-98%, source: UNDP) and schoolenrolment are high, whereas life expectancyhas reportedly been dropping [1] and GDP percapita is assumed to be low. [2]

Standard Economic Theory and itsApplication to North Korea

Farm workers

Interest in development is at least as old aseconomic theory. When Adam Smith started hisfamous inquiry into the Wealth of Nations “toexplain in what has consisted the revenue ofthe great body of the people” (Smith, 1776), he

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did more than lay the foundation for classicaleconomics. It is a small step from “revenue”and “wealth” to “output” and “development”.Classical economists imply that the state canlimit the scope of the individual’s actions, butnot their underlying motivations—which is animportant argument for those who emphasizethe need to establish a certain economic andpolitical order as a condition “sine qua non” fordevelopment. Neoclassical economists, buildingon this approach, enlarged Smith’s concept of“value” and assumed that firms maximize theirprofits, as individuals maximize their utility. [3]Choice is made rationally according to thosemotivations, but is usually constrained.Resources are scarce and distributed amongalternative ends (Caporaso and Levine, 1996:81). States or concepts of states (only) differ inso far as they allow or prevent an efficientresource allocation.

North Korea fits well into this picture. In NorthKorea, too, resources are scarce, individuals tryto maximize their utility, and an allocation ofresources takes place. The individual’s rationalchoice is influenced by a number of country-specific factors, hence the aggregate result ofindividual economic activity—or the aggregateoutput—is below optimal levels, and theresource allocation process is inefficient. Aneoclassical or liberal economist would startfrom here, looking for the limiting factors onthe micro level and trying to find ways toremove them. The debate would then focus onthe question of (quantitative) reform versus(qualitative) regime change, and on the detailso f both opt ions , lead ing d i rect ly totransitology/transformation theory.

Another classical economist, Karl Marx,attempted to transcend the limitations ofindividual- and state-centered approaches anddeveloped a class-based concept (Marx andEngels, 1983). Ownership or non-ownership ofthe means of production, and the broaderconcept of relations of production, determine

the individual’s position in society. Despite theprogressive role of the bourgeoisie in its earlystage of existence, in the long run developmentwould only be possible if the limits of classantagonism were overcome through revolutionin a society. Marx emphasized the existence ofa universal path of development that isgoverned by natural or “objective” laws, whichwe can at best ascertain, but by no meansaffect or alter through individual action (Hahn,1968).

Marx’s theory has been applied in socialistcountries such as North Korea as a rationalefor replacing existing—in fact, often justemerging—capitalist economic orders withautocratic political systems and centrallyplanned economies based on state ownership.

However, this approach neglects Marx’sbasically positive perspective on developmentas necessarily passing through stages. Heargued that capitalism was an important andnecessary stage in the development of asociety, one that cannot simply be skipped.Accordingly, even from a Marxist point of view,the underdevelopment of the North

Korean economy can be understood. First andimplicitly, in any country a mature capitalistmarket economy had to exist for a prolongedperiod before capitalism would itself create thevarious contradictions that finally would causeits collapse and result in transition to socialism.Lenin (1972) was the first to break this rule forpragmatic reasons by establishing a socialistorder in a country that had barely leftfeudalism behind. Others followed, includingMao Zedong and Kim Il-sung, arguing that themodel had to be altered to match the concreteconditions in their countries. In this view,revolution would make it possible to advancedirectly to socialism in the absence of maturecapitalist development. Interestingly, thisclearly runs counter to Marx’s claim of havingcreated a meta-theory based on the discoveryof objective, “natural” laws—although it is

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exactly this “scientific approach” that has beenconstantly cited in socialist countries as amajor source of system legitimization. Againstthis background, it could be argued that NorthKorea is underdeveloped not because itfollowed Marx’s model, but because it did notdo so. In fact, there is not much to “follow”;Marx mainly interpreted development andmade predictions, not normative prescriptions.

Keynesian economists emphasize aggregatesand argue that macroeconomic trends canoverride microeconomics; they focus on thedemand side rather that on output (Balaam andVeseth, 1996). Recognizing the heavy cost ofmarket failure and rejecting the idea of ageneral trend towards equilibrium, Keynesianeconomists suggest a targeted stateintervention in the process of resourceallocation through an active fiscal policy tobalance, via a counter-cyclical policy,amplitudes in demand. Development dependson the ability of the state to prevent a collapseof the economy. From this perspective, theNorth Korean state on one hand plays too big arole; it should give up direct control, utilizeindirect fiscal policy instead, and give theeconomy the necessary space to increase theaggregate demand and thereby fosterdevelopment. On the other hand, the NorthKorean state seems to lack the basic arsenal ofinformation and tools for efficient macro-management of the economy. Such a Keynesianapproach would therefore lead to suggestionson reforms to improve, among others, stateefficiency.

Other economists (Williamson, 1998; North,1992) emphasize the role of transaction or“institutional” costs, including expenses forgathering information, bargaining, policing andenforcement. The relevance of this concept isnot limited to capitalist economies. In a non-transparent, inefficient, centrally administeredbureaucratic socialist economy the costs of atransaction can be so restrictively high that the

transaction itself does not take place. Atransaction economist would suggest, amongother things, that to increase its output, NorthKorea would have to guarantee property rightsand reduce transaction costs by improvingaccess to information, cutting red tape,monetizing the economy, etc. A transformationof the economic institutions of North Koreawould be the logical consequence.

Olson (1965) points at the power of well-organized interest groups to capture the statethat regulates the economy, and to enforce aninefficient economic structure. Focusing onpolitical institutions, we would have to look forinfluential interest groups in North Korea, onthe role they play in economic development,and for ways to break their power monopoly.Establishing a pluralist political order would,from this perspective, change the operatingenvironment for dominant power groups andthereby help solve the problem of low output.

Principal-agent theory (Jensen and Meckling,1976) points to the asymmetric distribution ofinformation between the agent and theprincipal, limited rationality, and opportunism.The agent can pursue its own interests whilepretending to serve the principal. The solutionwould be the creation of cost-efficient controlmechanisms, i.e. the creation of a pluralistpolitical order, and the creation of incentivesthat link the agent’s interest with those of theprincipal. Understanding North Korea as atypical agency problem, we would regard thepeople as the principal and the leadership asthe agent; the latter utilizes its superiorinformation to pursue its own interests whileusing propaganda to create the impression thatit acts on behalf of the people. The moralhazard for the elite to disregard the majority’sinterests is particularly high if the asymmetryof information is big, control mechanisms areweak, and incentives to fulfill the contract—i.e.,to act in the majority’s interest—are low.Accordingly, reforms would focus on reducing

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the information asymmetry by increasingtransparency, on strengthening the people’scontrol over the state, and to more closelyconnecting the well-being of the elite with thatof the majority.

This brief overview of some major models ofeconomic thinking is incomplete, but sufficientto show how, with relatively little effort,application of each of these approaches toNorth Korea is possible. In most cases, it wouldlead to the demand for economic and politicalreforms towards a more liberal and morepluralistic order. This is also the consequenceof the application of a number of more specifictheories of economic development, as will beundertaken in the following section.

North Korea from the Perspective ofDevelopment Economics

Market in Pyongyang

If the standard theories of economics areindeed applicable to North Korea—and as

demonstrated above, there is no reason whythat should not be the case—what could bedone to support economic growth in thatcountry, and how are the recent economicmeasures to be interpreted normatively againstthat background? In other words, what candevelopment economics tell us about the futureof North Korea?

A clear answer is complicated, if not impossibleto give. Not only is there no single opinion onthe question of development; the empirical datathat are required as a precondition to applyingmost methodological approaches are absent orof dubious quality. However, once we agree onthe fact that North Korea is a national economyand North Koreans as individuals are ordinaryeconomic beings, we can at least refer to themany existing attempts at answering the verybasic question of development elsewhere in theworld.

Among developmentalist economists in the1950s and 1960s, there was a broad consensusthat development was a relatively easy task.They believed that industrialization wouldautomatically lead to prosperity. Thisindustrialization could be brought about bymassive, a l though not last ing, stateintervention. Markets were perceived as meansto realizing the end of economic development;they were not ends in themselves. Thedevelopmentalists further shared Keynes’opinion that economic problems arise from alack of aggregate demand, and not from a lackof resources (Cypher and Dietz, 2004: 129).

Based on these concepts, Paul Rosenstein-Rodan (1961) developed his theory of the BigPush. He believed that at times, there needs tobe a strong and targeted investment in coreareas such as social overhead capital (SOC) tokick-start growth, and to unearth the hiddenpotential which he believed existed in less-developed regions. This investment would

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trigger a synergetic chain reaction acrosssectors. However, the benefits of this processwould not be limited to the one who started it,but rather take on the character of positiveexternalities—a good for which consumersdon’t pay the producer. Accordingly, heexpected less of an incentive for privateinvestors to initiate the Big Push. In such asetting, the market would only lead to sub-optimal levels of investment. The economywould be caught in a low-level equilibrium trap,requiring the state to take the lead.

The application of these ideas to North Koreashows that the economy indeed had its BigPushes. The first one occurred during theJapanese colonial period; in the 1930s andearly 1940s, in particular, heavy and chemicalindustries and infrastructure such astransportation and communication facilitieswere constructed on a massive scale and thealready well-developed educational system wasfurther expanded (McNamara, 1990). The nextstage of massive investment came after theKorean War, when political considerations ledthe socialist camp to make considerablecontributions to North Korean reconstruction,including a significant enlargement of itsindustrial base (see Frank, 1996). The resultsof these state-directed investment waves wereindeed remarkable; although there are slightvariations concerning the exact period, thereseems to be a consensus in the literature thatNorth Korea was economically stronger thanSouth Korea at least until the late 1960s(Martin, 2004). The absence of markets inNorth Korea would have to be regarded as themain reason why the long-term results of theBig Pushes in both parts of Korea were sodifferent; while the effects of these giganticefforts abated in the North and resulted instagnation, they ignited a chain reaction in theSouth and created dynamic development.

An important question in the theoretical debatewas whether the Big Push should take place on

a broad scale or only in a few pioneeringsectors. Rosenstein-Rodan (1961) argued thatgiven low incomes and a low savings rate inLDCs, only a balanced investment in manysectors would create the market for the othersectors’ products, keeping the growth processalive. Albert Hirschman (1958) advocated thedeliberate unbalancing of the economy,creating disequilibrium situations; he arguedthat resources in LDCs were usually limited inscale and would not allow for a broad scope ofinvestment. He expected that emergingovercapacities coupled with higher revenue ina few sectors would speed up the developmentprocess in other sectors.

If interpreted from this perspective, NorthKorea has followed an unbalanced growthstrategy, focusing on a few sectors such asheavy and chemical industry—as did SouthKorea in the early 1970s. The results, however,have been very different. A major component inHirschman’s ideas, private investment, has sofar been missing in North Korea. The typicalvertical integration of a socialist economy (seeKornai, 1992) has prevented or limited thespill-over effects of growth impulses to othersectors.

Later in his career, Hirschman (1981) criticizedhis own work and developed the theory ofantagonistic growth: due to a scarcity ofresources, investing too heavily in one sectormight not only leave no new resources for othersectors, but even siphon off old resources fromother sectors, thereby leaving them worse offand inducing negative growth. This providesanother possible explanation for the economicdownturn in North Korea despite a relativelyhigh starting level after 1945 (see Woo, 1991)and subsequent massive investments in a fewindustries. An inquiry into North Koreandevelopment would start with the search forthe reasons why an unbalanced growthstrategy has worked in the South but did not inthe North, and conclusions for a reform process

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that creates favorable conditions for success.

Nurkse (1953) was concerned with the effectsof foreign trade. He cautioned that increasedincome through exports would not necessarilybe used for re-investment; rather, it couldinspire the import of new products, therebybleeding the country. He advocated stateintervention through fiscal policies andgovernment-operated development banks toprevent the outflow of funds and to supportimport-substitution. Nurkse’s “exportpessimism” provides an objective method tointerpret the effects of the North Korean elite’sspending on expensive and unproductiveimported consumer goods.

Nurkse’s concerns might indeed apply to theDPRK: scarce resources are unproductivelywasted for luxury goods and prestige projects,instead of finding their way into productiveinvestments. Whereas criticism of this behavioris frequent, it is often based on intuition andrarely connected to economic theory.

Similar to David Ricardo and extendingNurkse’s argument, Lewis (1954) in his studyof labor supply assumed that rich landownersand monopolists in LDCs would spend theirmoney on unproductive consumption.Accordingly, he suggested not only levying hightaxes on high incomes, but also supportingindustrialists who he expected to reinvest theirincome productively. The latter has been donevery successfully in South Korea, where theindustrial conglomerates (jaebeol) were utilizedas “private agencies of public purpose” (Woo,1991: 176). At first glance, it seems odd tocriticize the spending behavior of privatelandowners and monopolists in a socialistcountry where they don’t exist by definition;however, in reality, there are indeed individualswith far-reaching rights of disposal, such asparty or military leaders, and members of theKim family. Applying Lewis’s suggestioncoupled with the South Korean experience to

reality in North Korea, one could think of largeindustries that are de facto privatelymanaged—for example, in the context of theMilitary First Policy, by ranking militaryofficers (see Frank, 2003).

Despite the severe criticisms it faced, WaltRostow’s linear “stages of growth” theory had as ign i f i cant impact on the debate indevelopmental economics. Although heexplicitly distanced himself from Marx bycalling his own book a “non-Communistmanifesto” (Rostow, 1960), he, too, proposed auniversal interpretation of history and onepredicated on stages of growth, [4]

Based on h i s research on Europeandevelopment, Rostow suggested that allnational economies sooner or later passthrough the same stages, from traditionalsociety to the age of mass consumption. Thekey stage was the “take-off”. First, the pre-scientific and mainly agricultural traditionalsociety had to experience a sweepingdestruction and see the emergence of newp r o f e s s i o n s s u c h a s b a n k i n g a n dentrepreneurship, as well as investment ininfrastructure to “gather the forces” requiredfor take-off. This would be the case when thefollowing simultaneous conditions were met: arise in the rate of productive investment to over10 percent of national income; the developmentof one or more substantial manufacturingsectors with a high rate of growth; and theexistence or quick emergence of a political,social and institutional framework which“exploits the impulses to expansion” (Rostow,1960: 39) . The take-of f s tage wouldfurthermore witness a sweeping reallocation ofresources to build up or modernize whatRostow regarded as the “matrix for industrialgrowth”: social overhead capital, agriculture,and foreign-exchange-earning sectors.

A one-on-one application of Rostow’s stage

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model to most countries, including NorthKorea, is problematic; however, there are someimportant points that deserve mention. Amongthem is the need to destroy what could becalled the traditional institutional structure(more details on institutionalism below); in fact,this would correspond with the concept of arevolution, or even the basic spirit of the SouthKorean saemaeul (New Village) Movementunder Park Chung-hee, who emphasized theneed for Korea to change its old habits—to“crack the shell of backwardness”—andcharacterized the movement as “the nationaltask symbolic of our modernization goals in the1970s” (Park, 1974: 175). This was repeatedover two decades later by the democratic SouthKorean President Kim Young-sam (1997: 129f.),who stated, “If we are to stand at the center ofthe world in an age of boundless competition,we must reform our backward systems, ways ofthinking and customs”. In 1973North Korealaunched its Three Revolutions (technical,cultural, and ideological) movement, which canbe interpreted as an analogous attempt toprovide the institutional foundation fordeveopment. The concrete content of thisprogram is country-specific; however, the factthat such an effort was made corresponds wellwith a number of models as well as with othercountry cases.

Like Marx, Rostow detected formative momentsin development, when transitions from onequalitative state to another occur very quickly,based on the accumulation of quantitativechanges. This concept could be helpful inunderstanding the often hesitant approach toreforms by the North Korean leadership:educated in Marxism, and having witnessed theprocesses in Eastern Europe, it is keenly awareo f t h e r i s k s o f t r i g g e r i n g a m a j o rtransformation through a relatively smallquantitative “adjustment”.

Positioning North Korea within the stage modelis difficult. One could argue that North Korea

already had its take-off (see Big Push), but thatthis process was stifled by an inappropriateinstitutional setting. Alternatively, North Koreacould be seen as still being in the second, pre-take-off stage of accumulating the necessaryforces. In the latter case, with the rightinstitutional setting and enough externalsupport, dynamic economic growth would beanticipated as part of the process of inter-Korean reconciliation and rapprochement. Ifcompared to the standard, i.e. predominantlyagricultural developing economy, North Koreastands out as already industrialized; improvedefficiency through modernization is needed.This is, however, hardly a new insight; theChinese discovered the same problem underDeng Xiaoping in 1979 (Four Modernizations).

An interesting detail in Rostow’s theory is that“reactive nationalism” (Cypher and Dietz, 2004:151) ignites modernization. This factor isclearly present in North Korea. As Harrison(2002: 8) argues, “The psychological cementthat holds North Korea together is nationalism .. .”, which he classifies as being “inspirationaland uplifting” (ibid.: 18). If juche, often viewedas a uniquely North Korean ideology, is seen inthis context, it could easily fit into concepts ofdevelopment—supported by Jorganson’s (1996)definition of juche as a “culture-specific ethnicnationalism”.

Furthermore, Rostow’s model, as Marx’s,carries an implication that has very powerfully(and controversially) been repeated by FrancisFukuyama (1992): The thesis that there is anend point in development. There is, naturally,disagreement over what this point is. Marxcalls it “communism”, Rostow “the age of massconsumption”, and Fukuyama “Western liberaldemocracy”. What all three authors have incommon is the idea of the existence of such afinal stage of development. Research on NorthKorea will inevitably be influenced by theindividual researcher’s stance on this issue. Asubscriber to Fukuyama’s theory will

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normatively categorize North Korea as being“wrong”, conclude that the country (includingthe regime) needs to be changed, and feelconfident in doing the right thing by activelyimporting the Western model. This perspectivewould introduce “forced regime change,” asadvocated by the Bush administration of theUnited States, as one option in the totalnumber of North Korea development theories.

Based on their observations in Latin America,structuralists such as Raúl Prebisch (1950)doubted that relatively small changes such asforeign aid or investment increases couldinitiate a Big Push or a take-off. They arguedthat without sweeping changes within theaffected societies, such impulses might evenstrengthen backward economic frameworks.The basic argument of structuralism is thestructural and institutional difference betweencentral developed countries and peripheraldeveloping countries, calling into questionAdam Smith’s “harmony of interests” as well asDavid Ricardo’s theory of comparativeadvantages and free trade. According to thisview, the world is divided into peripheral andcentral nations. The Prebisch-SingerHypothesis, based on

Engel’s Law [5], suggests that the export pricesfor primary products fall faster than exportprices for manufactured goods (Lutz, 1999). Asa consequence, the underdeveloped peripheryhas to produce more to import a stable quantityof industrial goods, while the industrializedcenter could, with the same amount of exports,finance the import of more primary goods.Without an active policy, center and peripherywould constantly drift apart, rather thanconverge.

Prebisch called for changes in the economicstructure of the developing country in order tosubstitute imports, starting with simple, lesscapital-intensive consumer goods, and tochange the economic structure of the

developing country by increasing exports ofmanufactured goods and reducing the export ofprimary goods. Import substitution wouldstabilize the national economy and lettechnology diffuse into the primary sector,thereby making it more eff icient andproductive. Such a policy demanded aprotection of the domestic market by tariffs etc.and called for an active role of the state inallocating public resources, including stateplanning and “guidance of private economicactivities” (Prebisch, 1984: 180). Structuralistslike Singer (1949) were strong supporters offoreign aid, in any form.

Fertilizer aid from South Korea

The latter has been the subject of a heateddebate with regard to North Korea. Haggardand Noland (2005) have argued that this aidshould be provided only on strict conditionality,while others such as myself (Frank 2005c) haveinsisted that the inflow of aid will, among otherthings, have the effect of strengtheningdomestic demand and thereby contribute tooverall development regardless of who theprimary beneficiaries are. In late October 2005,North Korea repeated its calls for developmentassistance (AFP, Oct. 31, 2005); from Singer’sperspective, a positive answer to theserequests would indeed support development.Critics of the structuralist perspective on trade

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have pointed out that exports of primaryproducts, too, can strengthen domestic demandand thereby posit ively contribute todevelopment (Lewis, 1950). Rather thancondemning the primary sector per se, anemphasis on the export of such products shouldbe avoided where international comptition ishigh and the income elasticity of demand islow. This often applies to primary products, butis neither limited to nor true for all of them.However, the structuralist demand toconcentrate on industry instead of primaryproducts corresponds well with the NorthKorean decision of late 2005 to give up theagriculture-centered reform policy and to shiftfocus to the generation of exports throughindustrial production (Hankook Ilbo,2005-11-30). With regard to the take-off or BigPush issue, the argument that withoutsweeping changes within the society, suchimpulses might even strengthen backwardeconomic frameworks provides an explanationfor the current underdevelopment of NorthKorea despite a number of industrializationpushes.

Institutionalism is a theory that is ofparticularly high attractiveness for areastudies, because it attempts to incorporateculture, which is often treated as an exogenousvariable by economics, into an economic modelof explaining human behavior. Institutionalistsbelieve that the institutions of an economy, theregular behaviour of individuals which followscertain patterns (Hodgson, 1994), the rules ofthe game in a society (North, 1992), or “theforms of production, ownership, workprocesses, and ideologies which combine tocreate an economy and society” (Cypher andDietz, 2004: 171) are the proper subjects foreconomic analysis.

Clarence E. Ayres (1951) was looking for amega-theory of development that would beapplicable to both developed and developingeconomies alike. He placed a great emphasis

on technology; for Ayres, technologicalprogress (broadly defined) and economicdevelopment were virtually synonymous. Thedichotomous opposite of technologicaldynamism was “ceremonialism”, as he called it.Ceremonialism imposes a curb on humancreativity; in essence, it is any binding behavior(or traditional institution) that tends to thwartthe forward progress that technology imparts.In all societies, ceremonial and technologicalforces are at work and compete; the outcomedetermines the pace and direction ofdevelopment of that society, and economicdevelopment is the consequence of thesuccessful triumph of technology overceremonial behavior. Successful developmentstarts with the reconstruction of adverseinstitutional structures. Among the five ways inwhich ceremonialism intrudes on any society,Ayres (quoted in Cypher and Dietz, 2004:172-173) identified “a social system ofindoctrination which emotionally conditionsindividuals to accept the dominant ideology,mores and class and social stratification”.

The latter strikingly resembles North Korea’sheavy focus on ideological training. It is nocoincidence that Kim Jong- i l (1995)emphasized, “The most serious lesson of thecollapse of socialism in several countries is thatthe corruption of socialism begins withideological corruption, and that a breakdownon the ideological front results in the crumblingof all socialism’s fronts and ends in the totalruin of socialism . . . Giving priority toideological work is essential for accomplishingsocialism.” Ayres would argue that the explicitpriority on ideological work is essential forsupporting ceremonialism and thereby forpreventing development.

The view of ceremonialism as an integral partof the development equation corresponds wellwith other institutionalist mainstays such astransaction cost theory, the emphasis onproperty rights, and the idea that in reality,

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there are restrictions to the theoreticallyavailable number of behavioural options(Richter and Furubotn, 1999). Not everything ispossible everywhere; decisions are often madeaccording to rules dictated by ceremonialism,not necessarily by neoclassic economicrationality. This perspective would help toexplain why, despite underdevelopment andeven famine as well as strong externalpressure, North Korea still exists under analmost unchanged political system. Theabsence of a strong anti-state movement inNorth Korea appears to be highly irrational formany external observers, who explain it byinvoking heavy state suppression.

Distribution of rice

However, the actual reason is subtler and canbe approached with the terminology ofinstitutionalism: the state has obviously beenable to utilize traditional institutions as well asto create and strengthen new ones that stifledynamic elements in North Korean society andprovide legitimacy to a government that is notvery successful economically.

Inst i tut ional ism shows that f ightingceremonialism—i.e. transforming the valuestructure of North Korean society—is anenormously important, if not crucial, task forthe future. Such an institutional change needstime and cannot be triggered directly, but

rather has to be supported through indirectmeans such as a monetization of North Koreansociety. The institutionalist perspectiveprovides a rationale for a long-term perspectiveand is a methodological tool to integrate thehistorical experience, the cultural tradition anddecades of deliberate institution-building bystate propaganda into a concept of NorthKorean development.

Gunnar Myrdal (1957) agreed with thestructuralist argument that in the absence ofcounteracting policies, inequalities would tendto increase, both internationally and within acountry. He expected a global polarizationthrough one-sided growth, since economicsuccess tends to be cumulative. [6] Accordingto Myrdal, a great advantage of developedcountries was the strong state, which couldintervene and either redistribute wealth orengage in industrial targeting. In developingcountries, he argued, the state is oftencaptured by the elite. Myrdal concluded that tomake a positive change in developingcountries, radical reconstruction of attitudesand institutions was necessary, including landreform, anti-corruption campaigns, andpolitical reform. From this perspective, NorthKorea is doing well in terms of resisting full-fledged liberalization; however, the non-participatory, non-pluralist political systemmakes it easy for the elite to capture the stateand to turn it into an instrument of their owninterests, which from the viewpoint of thenational economy are inefficient.

Whereas most of the theories discussed aboveare based on liberal ideas, which naturallychallenge the current North Korean economicorder, we would expect dependency theorywith its embedded criticism of l iberalcapitalism to be less critical of the NorthKorean model. This is, however, not necessarilythe case. Dependency theory builds onPrebisch’s model of the center (the cause) andperiphery (the effect). Developing countries

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were seen as part of a global process, in whichthey merely provide the inputs for the wealth ofthe developed countries. They were often seenas stuck in stagnation, or what Andre GunderFrank (1969) called the “development ofunderdevelopment”. The reasons for thedifficulties of developing countries were not tobe sought domestically, but abroad. It appearsthat a similar approach has indeed beenutilized by the North Korean leadership toexpla in their country ’s obvious andindisputable economic hardships.

Lack of consumer goods was blamed on theembargo policy, and the concentration of theeconomy on unproductive military goods hasbeen justified by external threats to thenational sovereignty and independence. Thejuche ideology with its emphasis on self-sustainability is the expression of a deepmistrust in international partnership, inparticular with “big countries”, by which NorthKorea is surrounded. South Korea is oftendescribed in North Korean propaganda as atypical victim of neo-colonial international andeconomic relations.

Paul Baran (1957), a Marxist dependencyanalyst, argued that there was an “economicsurplus”, which he defined as the amount ofresources, actual or potential, which a societyhas at its disposal after the society’s basicneeds for food, shelter, clothing and humancompanionship have been met. Economicgrowth or development would depend on thesize and the efficiency of utilization of thissurplus. Similar to Myrdal, he argued that thestate in underdeveloped countries was not ableto ensure such efficiency, since it would becaptured by domestic capitalists or foreigninvestors, and regarded socialism as the onlyway out of poverty for developing countries.North Korea is obviously not able to managethe economic surplus efficiently, despite itsallegedly socialist economic order. Was Baranwrong? Probably; however, North Korea might

rather be interpreted as a case of a governmentcaptured by particular interests, although thelatter are neither domestic capitalists norforeign investors. This corresponds with thesuggestion made above that socialism has inreality never existed in North Korea. However,the strong emphasis on independence in NorthKorea shows a great sensibility with regard tothe question of cooperating with countries fromthe “center”. Instead of merely ridiculing juche,one could see it as a not very successfulattempt to ensure development while avoidingdependency.

Not all dependency analysts were Marxists.Fernando Henrique Cardoso, who later in hiscareer became president of Brazil (1995-2002),did not regard the situation of developingcountries as hopeless (Cardoso and Faletto,1979). He opposed the demands for arevolutionary change of the global political andeconomic system, and argued that a smartlyoperating state could extract enough inputsfrom the transnational companies to developthe country. Cardoso assumed that thegovernments of developing countries, oftenauthoritarian and not responsive to the needsof their population, nevertheless have somekind of negotiating power vis-à-vis thetransnational corporations which exploit thecountry, since the latter need the customers inthese countries to sell their products. Theresulting cooperation would translate into acertain growth and even raise the standards ofliving. He saw a chance for mutual benefit inthe relationship between center and periphery.

With regard to North Korea, Cardoso’s viewsprovide an interesting perspective, in particularon the often surprisingly successful dealings ofthe state with foreigners, although the latterare, so far, usually state and not private actors.Furthermore, opening

North Korea for economic cooperation with theoutside world would, by this logic, increase

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Pyeongyang’s negotiating power rather thanweakening it. In addition to the already existingtools for political pressure, North Korea wouldthen possess means of economic pressure, too.The case of Hyundai Asan is particularly tellingin this regard.

The company has, since the year 1998, beenengaged in the Geumgang Mountain tourismproject, and aims at expanding the scope of thisbusiness to the newly created tourist zonearound Gaeseong. From the very outset, thetourism project appeared to be a money-losingbusiness for Hyundai—and a cash cow forNorth Korea. While Hyundai’s fixed investmentwas relatively small in the case of Mt.Geumgang, the situation is different withGaeseong, which includes a huge industrialzone. An attempt by North Korea to increase itsrelative power over Hyundai by inviting Lotte(Yonhap News, Oct. 13, 2005) to compete forthe tourism project failed in 2005, yet thismight have set the tone for the future of doingprivate business in North Korea.

Monetarism and neo-liberalism are relativelyrecent concepts for development. They firstgained prominence in the UK (Thatcher) andthe USA (Reagan) in the 1980s as anexpression of the dissatisfaction withKeynesianism. Neoliberals look for state failurerather than for ways to correct market failure(monopolies, externalities); they regard thestate as the source of inefficiency and themarket as the source of efficiency. Neo-liberalsdid not restrict their suggestions to moneysupply, as monetarists did (Friedman, 2002).Economists such as Bauer (1984) insisted thatSmith’s invisible hand did indeed function andrejected the necessity for active instrumentssuch as Big Push, SOC investments, etc. Bauermade culture, ethnicity, and race responsiblefor success or failure of development.Neoliberals criticized the state for threemistakes: the public sector has become over-extended in the economy; the public sector has

over-emphasized capital formation and mega-investment projects; and the public sector hascaused the proliferation of economicallydistorting controls in the economy that createincentives for inefficient production andineffective economic structures. Despite thisobvious distaste regarding state interferencewith market forces, Cypher and Dietz (2004:199) point at the fact that “Neoliberals typicallyregard foreign aid and technical assistance asextremely important instruments of influencewhich can be utilized to impose their policieson less-developed nations or risk foregoingsuch assistance.”

This corresponds well with a remark by NorthKorea’s leader Kim Jong-il, who in 1997 stated,“The so-called ‘prescriptions’ that theimperialists are propagating around the worldare neither good for the development of othernations nor ‘ingenious plans’ to activate theeconomy of other countries and ensure nationalreconciliation; these are the schemes toembellish themselves and gain their profit inthis process.” (Kim, 1997)

Kim Jong-il is not alone in opposing theapplication of neoliberal prescriptions todeveloping countries. Friedrich List (1922), aGerman economist, criticized a similarapproach already in the early 19th century. Heregarded free trade as the veil behind whichthe British state ruthlessly pursued its ownnational interests and exploited its particularadvantages. Shapiro and Taylor (1990: 866) usethe same argument with regard to the UnitedStates, where they discovered a significantdegree of protectionism and dirigisme in earlierstages of the economy’s development. Chomsky(1991) expressed it even more bluntly: “theeconomic doctrines preached by the powerfulare intended for others, so they can be moreefficiently robbed and exploited”. Accordingly,many developing countries “tend to see freetrade as a weapon used by dominant players toopen up their societies to resource exploitation,

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foreign investment, access to raw materials andthe repatriation of profits (Burchill, 2001: 54).

Neoclassical attacks against dirigismeprompted a number of works with particularreference to Asia, such as Johnson (1982) onJapan, Amsden (1989) on Korea, and Wade( 1 9 9 0 ) o n T a i w a n . T h e s e a u t h o r s ,acknowledging successful cases of economicdevelopment , shared the neol iberaldissatisfaction with dependency theory, but onthe other hand argued that the state hadindeed p layed an impor tant ro le indevelopment.

This “developmental state” (Wade, 1990)implemented land reform, controlled thefinancial system, pursued macroeconomicstability to attract long-term investment,engaged in industrial policy with importsubstitution and export promotion, had a focuson agriculture and the living conditions in ruralareas, and supported growing incomes andstandards of living while simultaneouslysuppressing social organizations.

While the Asian Crisis of 1997 has raiseddoubts about the sustainability of thedevelopmental state, the remarkable results ofcountries such as Taiwan and South Korea areundisputed. For North Korea, this means firstof all that development is possible.

Moreover, a democratic political order is notnecessarily a precondition for development,although it might well be among its long-termconsequences.

Is North Korea Different Because It Is InAsia?

There are theories that indeed suggest adistinct Asian model of economic development,characterized by abundant human resources,organizational capital, and a smaller emphasison capital- and resource-intensive industries ifcompared to European economic development(see Pomeranz, 2005; quoting Sugihara, 2000).Culture, values, or institutions—defined as “therules of the game in a society” (North,1992)—have been seen as an importantvariable; in fact, a country’s development hasbeen regarded as a function of its institutions.The fact that politicians enthusiasticallysupported this view suggests that theunderlying motivation for these claims waspolitical, and a response by Asian leaders to theperceived neo-colonial attempt by the West, ledby the USA, to impose its system upon theircountries. The discussion thereby reminds oneof Friedrich List’s argument: “It [the culture ofAmerica, RF] makes the hopeful assumptionthat all men are equal, that people all over theworld are the same. They are not . . .” (LeeKuan Yew, quoted in Zakaria, 1994). He latersoftened this statement, but still insisted on thedifference in the institutional setting: “I don’tthink there is an Asian model as such. But

Asian societies are unlike Western ones.”(ibid.). This view has been supported by leaders

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from Malaysia and Japan (Mahathir andIshihara, 1995): “For Westerners to think wecannot make progress unless we become likethem is absurd . . . In short, basic modes ofthought—the outlook that shapes the individualand society—in the East are dissimilar to thosein the West”.

The “Asian values” approach has far-reachingconsequences. In essence, it suggests that noneof the theories and models briefly identifiedabove (and many others that have not beenmentioned here) are universally valid, sincethat they apply only to selected cases.Accordingly, there have been many critics ofthe “Asian Model”, including Asian leaderssuch as Kim Dae-jung, who in 1997 becameSouth Korea’s president. He strongly opposedthe particularist view and emphasized theuniversal nature of certain basic values:“Culture is not necessarily our destiny.Democracy is” (Kim, 1994). One of the mostprominent critics among economists was PaulKrugman (1994), who insisted that the AsianMiracle—built on the notion of the “otherness”of Asia—was in fact a myth. Moreover, hepointed to the surprising similarities betweenthe “slick exuberance” of the Asian boom andthe less shiny Soviet Union of the 1950s.Growth, Krugman argued, was in both casesachieved through an astonishing mobilizationof resources, i.e., through extensive rather thanintensive growth. He further doubted that therewas an “Asian system” at all, pointing at thegreat differences between the cases of Japanand Singapore. He went so far as to suggestthat eventually and inevitably, Asian growthwould face the reality of the law of diminishingreturns. He concluded: “If there is a secret toAs ian growth , i t i s s imply de ferredgratification, the willingness to sacrificecurrent satisfaction for future gain” (Krugman,1994).

This debate was, however, neither new norlimited to Asian nations that had chosen the

“capitalist” way of development. It is indeedremarkable that a similar discussion hasalready been led, decades ago, by communistleaders in East Asia, although based ondifferent motivations. Following Lenin’sattempt at justifying a deviation from Marx’sorthodoxy by hinting at the specific conditionsin his country, Mao Zedong emphasized theChinese road to socialism (Yechury, 1999),which, for very pragmatic reasons, focused onthe peasants and not on the workers. His ideaof a specific Chinese way has been repeated,refined and expanded by leaders such as DengXiaoping (1979), who emphasized that “China’ssocialism had its own characteristics ever sincethe founding of the People’s Republic”, andJiang Zemin (2002), who urged that “Animportant objective . . . is to develop socialistdemocracy with Chinese characteristics . . . inpushing forward reform of the political system,China must proceed from its own conditionsand unswervingly stick to its own political road. . . China will never copy the Western politicalsystems.” These ideas are reflected in thepreamble of the current Chinese constitution:“The basic task of the nation is to concentrateits efforts on socialist modernization along theroad of Chinese-style socialism.”

North Korea has been part of that discussionsince early on. In a speech in December 1955,later much publicized, Kim Il-sung stated,“Some people say, either the Soviet or theChinese way is the best. But isn’t it time thatwe create our own method?” (Kim,1973). Thebackground was the attempt to distancehimself from the dangerous developments inthe Soviet Union after the 20th Party Congresswhile avoiding an explicit break of the vitalalliance with Moscow. Kim Jong-il (1990)repeated the argument to disconnect hiscountry from the reforms that were shakingEastern Europe: “Our socialism is differentfrom the socialism of the European countries”.The underlying rationale of all these statementsis not of a philosophical or theoretical nature; it

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is highly pragmatic. It reflects the effort by acountry to proceed along a flexible and in manyrespects reactive path to development while forpolitical and ideological reasons claiming tofollow the safe road of orthodoxy. This becomesobvious when Kim Jong-il urges,

“Things are not what they used to be in the1960s. So no one should follow the way peopleused to do things in the past . . . We shouldmake constant efforts to renew the landscapeto replace the one which was formed in thepast, to meet the requirements of the new era”(Kim Jong-il, 2001).

There are other examples of such flexibility.While in 1990, Kim Jong-il firmly held to thetraditional principle that “the market economyis incompatible with socialism” (Kim Jong-il,1990), twelve years later, with the reforms ofJuly 2002, he sanctioned the introduction of aChinese-style dual economy (see Frank, 2005b).The semi-official People’s Korea (2002) wrote:“Kim Jong-il . . . points to the fact that foreigntrade should be conducted in accordance withthe mechanism and principles of capitalism”.Eventually, North Korea even seems preparedto give up its working-class based concept ofsociety: “In the past, it was recognized as anunbreakable formula in socialist politics to putforth the working class. However, the theoryand formula that was generated one and a halfcenturies ago cannot be applicable to today’sreality . . . Nation is [positioned] over class andstratum, and the fatherland is over idea andideology.” (Rodong Sinmun, 2003). The lattersentence could be interpreted as officiallybringing North Korea back to what it alwayshas been: A nation-state with a nationaleconomy, national interests, and the desire toacquire as much power as possible to pursuethis interest. This is not “North Korean” or“Asian”: according to neorealist or structuralisttheories of International Relations, it is justuniversal (Burchill et al., 2001). The variousattempts by North Korea to extract aid from its

friends and enemies can be interpreted as signsof its “normalness”: the desire by the regime tosecure its stability, and by the elite to expandits power and wealth. This strong and, as theneoclassics claim, universal desire to maximizeutility finds its reflection in a very pragmaticapproach to South Korea, which for decadeswas supposed to be North Korea’s mainadversary: “It is most important now for allKoreans to love the country and nation, lead agenuine life as members of the Korean nationand devote their all to the common aim of thenation, transcending the different systemscreated temporarily owing to national division,as well as different ideas and ideals, differentpolitical views and religions and differentclasses and strata” (Kim Jong-il, 1997).

In many respects, North Korea, although notdirect ly , shares the posit ion of suchconservative and anti-Communist voices asMahathir of Malaysia, Ishihara of Japan, andLee of Singapore. In addition to the “our style”paradigm as mentioned above, there are moresimilarities concerning their views of society.Lee Kuan Yew (1994) explained, “Thefundamental difference between Westernconcepts of society and government and EastAsian concepts is that Eastern societies believethat the individual exists in the context of hisfamily. He is not pristine and separate”. Fouryears before, Kim Jong-il had emphasized howimportant the collectivist idea was in hiscountry: “Collectivism constitutes the basiccondition for strengthening the might of thesocial community. Man can play his creativerole to the full only within the social collective.His creative ability to transform nature andsociety is brought into full play only whenpeople form a single social community anddevelop collective cooperation” (Kim, 1990).

One notable difference between North Koreaand many former allies from Eastern Europe isthat it still officially exists as a socialist countrywith a one-party dictatorship. However, even in

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this respect, it is far from alone. China, Cuba,Vietnam, and Laos are also among those whohave so far survived the wave of collapses ofthe early 1990s (for Eastern Europeantransformation, see Segert, 2002 and Kern,1992; for Vietnam, see McCargo, 2004; forChina, see Heberer, 2003). Even a superficialanalysis of the many different cases in EasternEurope and Asia shows that there is not justone single way to proceed, and so far wecannot be sure if there is any way to succeed.From the perspective of socialist one-partystates, it appears that gradual reform, althoughwith different speeds, was the choice of most(see Blanchart, 1998). A “big bang” in the truesense of the word has in fact only taken placein Eastern Germany, where its effects werebolstered by the West German social securitysystem (see Klinger, 1998). However, there aredistinguishable stages and policy measures inthe context of generally gradual approaches totransformation, which we could call “littlebangs” or “small shocks”. The changes inVietnam, in particular the reforms inagriculture in December 1987 and thecomprehensive reform package after 1989 (doimoi) with its sharp increase in interest rates,stabilized money supply, currency devaluation,foreign trade liberalization and deregulation ofthe domestic economy, were such a limitedmacroeconomic shock therapy (Ronnas, 2001:2). The reforms in China involved a sequence ofbold approaches, too, but taken by stages. Inlate 1978 the contract responsibility system inagriculture was introduced (farmers werethereafter responsible for family farms, andthey could sell their crops on the open marketafter fulfilling quotas set by the village);township and village enterprises wereestablished to spearhead expansive ruralindustry; and Special Economic Zones werecreated to expand exports. Another far-reaching decision was price reform in 1988,which ended up as a great failure that led rightto the Tiananmen massacre of 1989 (see Kane,1989; Lardy, 1993; Zhang, 2000).

Vietnam and China are interesting casesbecause the changes were not induced as aresult of state failure. In both countries, theywere implemented and carried through by asystem that still functioned effectively. Thesame is true for North Korea, although thesignals being sent by the leadership are mixedand seem to be subject to a certain evolution.On September 9, 1998, the Rodong Sinmundeclared, “It is a foolish daydream to try torevive the economy by introducing foreigncapital, not relying on one’s own strength”. Thesame editorial went on: “We have nothing toreform and open”. Six years later, I was invitedto Pyongyang to give a presentation entitled“How to Attract and Retain Foreign DirectInvestment” at the Workshop on EconomicReform and the Development of EconomicRelations between the EU and the DPRK.China, too, for many years had insisted onundertaking only “adjustments”, a mere“supplementary role of the market”, andpreserving “the principles of socialism” (Zhou,1992). Such claims have played an importantrole in stabilizing the domestic politicalenvironment; the fact that the North Koreanleadership does not enthusiastically embracethe idea of rapid and massive qualitativechange does not necessarily mean that such adevelopment is impossible.

The absence of a spectacular transition doesnot imply that no development has taken place.On the contrary, North Korea in 2006 is not thesame as it was in 1990, with respect to itsideology, its leadership, or its economy (seeFrank, 2005b). The monetization of theeconomy is proceeding quickly; privateinitiative is increasingly sanctioned, although itis still limited. Foreign direct investment isallowed and promoted, and exchanges withforeigners are rising. The volume of foreigntrade grows, and projects are underway torehabilitate North Korea’s SOC, includingtransportation, communication, and highereducation.

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The Alleged “Otherness” of North Korea: AMyth

Internet cafe in Pyongyang

The country is obviously developing, much asany other. The specific institutional setting inNorth Korea, defined by its natural conditionsand historic experience, influences thedirection, the pace, and the scope of thatdevelopment, and provides it with a uniqueshape. Sustainability can be questioned, as wellas the efficiency of the chosen path. However,the basic laws which shape that developmentare universal, they are known, and have beendiscussed among academics and policy makersfor decades. There is nothing mystical aboutNorth Korea; it is just a highly untransparentcase of ordinary development—as easy or ashard to understand as any other. It can beexpected that the closer the institutionalstructure in North Korea comes to theinternational mainstream, the easier it will getto integrate this case into standard theoreticalmodels and to compare it with other examples.

With a strong military leadership, a welleducated and disciplined workforce, a low GDP

and nationalism as the overarching force ofintegration, North Korea reminds one in manyways of South Korea at the beginning of the1960s (for an excellent description, see Woo,1991). Seoul had, under Syngman Rhee,implemented an often-overlooked institutionalbuild-up and import substituting strategy,before shifting to export promotion and later aBig Push scenario under Park Chung-hee. Thetime may not yet have come to describe NorthKorea as a developmental state. However,there were two decisive factors behind Park’ssuccess that could well be of relevance to theDPRK: External inputs of significant amounts ofcapital at crucial points of economicdevelopment (normalization with Japan in 1965,the Vietnam War around 1967-1972, and theFirst Oi l Shock af ter 1973) , and thecombination of state-directed economicplanning and guidance with the vigour andenergy of private entrepreneurship (jaebeol). Itwould be a short step from the seongun(Military First) policy to the creation of largeindustrial conglomerates, owned and managedby military officers but responsible to thecentral planning authorities in Pyongyang. Thetalks with Japan about normalization arestalled, but not canceled; a solution of thenuclear issue will very likely involve significantamounts of development assistance; and SouthKorea is ready to lend a helping hand. Theexternal political environment will be as crucialas markets and sources of finance andtechnology. A diplomatic normalization withWashington could obviously have importantimplications for North Korea’s development.

This article has raised more questions than itcould answer. The intention was to show that,with little effort, many well known and widelytaught economic theories can fruitfully beapplied to a country that, mainly because of itslack of transparency, easily leads observersinto the trap of treating it as extraordinary andabnormal.

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China will most likely continue to stand out asthe great example of development viatransformation from socialism to the marketeconomy, as Japan will remain the primarytextbook case of the post-1945 developmentalstate. However, South Korea, too, has played aprominent role in the debate between opposingtheories of development. Both liberalneoclassical economists (Balassa, 1981;Krueger, 1983; World Bank, 1993) andsupporters of a stronger role for the state (suchas Amsden, 1989) have seen the South Koreancase as a proof of their theoretical convictions.It is not hard to imagine that after the mostdynamic and yet only roughly understoodstages of the process are over, North Korea’scase, too, will attract great internationalacademic interest—as an integral part of thedebate on development, not as the greatexception.

The author would like to thank the KoreaFoundation and the Graduate School ofInternational Studies of Korea University for itsvital support of the research that led to thispaper, as well as anonymous reviewers for theirhelpful comments.

Ruediger Frank is a Korea specialist whoteaches East Asian economy and society at theUniversity of Vienna. He can be reached atruediger.frank@univie.ac.at. Posted at JapanFocus on January 31, 2007.

Notes

[1] The CIA World Factbook gives 71.3 yearsfor average North Korean life expectancy; theUNDP’s 2004 Human Development Reportprovides 63.1 years (UNDP, 2004).

[2] Again, the CIA World Factbook and theUNDP provide different numbers; the former

provides a GDP per capita of US$1,800, whilethe Human Development Report 2004 listsNorth Korea among the countries with US$735or less GNI per capita.

[3] Remarkably, “profits” are explicitly, andpositively, mentioned in the 1998 DPRKConstitution (Article 33).

[4] Rostow’s image of the final stage ofdevelopment strikingly recalls a Communistutopia: “A subsequent period where theproduction is largely for the purpose ofconsumption, with relatively little concern forthe need to further bui ld productioncapabilities. Society is now devoted to thepleasures of consumer choice, the pursuit ofsecurity, and the enjoyments of art and leisure”(Cypher and Dietz, 2004: 153).

[5] With a given set of tastes and preferences,as income rises, the proportion of income spenton food falls, even if actual expenditure on foodrises. In other words, the income elasticity ofdemand for food is less than 1.

[6] Koreans, like members of many othercultures, have a proverb to express this: bu-ik-bu, bin-ik-bin (the rich get richer, the poor getpoorer).

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