North Korea: Roll over Kim Il Sung

One wonders how advocates for centrally planned economies still gain a voice. The concept that a relative few on a committee of sorts should be given the power to effectively manage a country’s economy is seen by many as a good thing. The justification for this point of view is largely an emotional one, often delivered with a high moral tone. True, there are various theories propagated to support this view, but they are fairly easily dismissed due to their illogicality. That a relative few could be capable of amassing, interpreting and then acting upon the masses of information in a country that relates to its scarce resources and the needs, wants and desires of its citizens is logically and indeed morally flawed. It is morally flawed because it implicitly assumes that a relative few should and indeed only can determine what the masses need, want and desire. And it is logically flawed because these relative few are not omnipresent gods. What they cannot hope to know is what people need, want or desire, the amount of scarce resources available for the production of these final consumer goods or for intermediary producer goods (used in the production of consumer goods) and therefore how these scarce resources should be applied to their most valued ends (i.e. what people need, want or desire).

With millions of pieces of constantly changing information swirling around a country, it should be quite clear that a relative few cannot deal with this situation adequately or efficiently. What is needed then is a means of coordinating and matching up what people need, want or desire with said scarce resources in the most efficient way possible. As supplies of resources are not limitless and people’s needs, wants and desires are unique to each individual, the most efficient way of identifying and addressing these supplies and demands is through the price mechanism. Generally speaking, the more a good is demanded in relation to its supply, the higher the price that will be paid for the good. This acts as a signal to the suppliers of this particular good that more is desired. The more of a good that is subsequently provided the lower its price will be, as supply adjusts to the demand for a particular good. (It is important to reiterate that while we can generalise about the effect of demand and supply on prices, each individual will demand and supply goods in accordance with satisfying their own particular needs, desires or wants. The prices they are willing to pay or accept are dependent on their values and are constantly subject to change). The above-mentioned process can only be efficiently fulfilled in a market. The multitude of individual participants in a market (ultimately all consumers and producers), through voluntary and peaceful means and with mutual respect for private property, can ensure that they achieve their own aims as efficiently as possible. And in this way resources are applied to their most valued ends, the much derided profit-motive assisting increased innovation, technology and productivity that guides entrepreneurs to maximise output.

It follows that the less interference and use of force found in a market economy, the more efficiently a market economy will operate and therefore the greater its output shall be. This is so because whenever the government, through its legal monopoly of force, intervenes in the workings of the market, it misdirects resources and investment away from their most valued uses, as usually determined in the market. Conversely, the more centrally planned and controlled an economy inherently deficient in markets, the more arbitrary decisions shall be, resulting in inefficiencies and waste and ultimate disaster.

It is no accident that recent developments in North Korea are a reaction to these deficiencies in centrally planned economies. As it has recently been reported, the Stalinist North Korean regime has appointed Yang Bin, a highly successful 39-year old agricultural and manufacturing magnate from China, to run the newly-created “special administrative region” of Sinuiju, next to the border with China. The aim is to turn it into a “totally capitalist region” that “will have its own legislative, judicial and executive powers without any interference from central government.” The North Korean leader, Kim Jong-Il, handpicked Mr Yang for the job, apparently so that the world could see that North Korea is experimenting with change. The 50-square-mile zone, near the city of Sinuiju, will be free of communist ideology. Private capital will be sought from China, Japan, South Korea and the West, and foreigners will have open access to the “international financial, trade, commercial, industrial” zone, which will have no import or export tariffs and a fixed income tax rate of 14 percent. The zone will be free from government interference for a period of 50 years. However, a wall will be built to keep North Koreans out. Some 500,000 people currently living in the area will be removed over the next two years and 200,000 migrants brought in to work in the various industries expected to be set up.

This latest announcement follows on from a series of reforms of late: limited “market reforms” such as the scrapping of ration coupons and the freeing up of wage and price determination, allowing foreign investors to own more than 50% in North Korean companies, devaluation of the currency, weaning companies off subsidies, plans to build road and rail links with South Korea and sending a delegation of bankers to China to study financial reform. Quite simply, North Korea has had no other choice. Famines in the mid-1990s caused the deaths of an estimated two million people and Pyongyang was forced to accept food aid from old enemies South Korea, the United States and Japan, as well as accept the need for economic reforms.

So what is one to make of this latest announcement of this “experiment”? On the face of newspaper reports this particular new region sounds very encouraging. (North Korea had previously set up a special economic zone near the border with Russia and China in the early 1990s but it was a disaster, drawing limited investment and suffering massive government interference.) It will be free of communist ideology (presumably commencing after 500,000 residents have been forcefully removed) and be a “totally capitalist region.” One must be a little sceptical. For starters, there is no such thing as a “totally capitalist region” anywhere in the world. Politicians in power always find ways to be interventionist, whether granting special favours, printing money out of thin air or in other ways. While Pyongyang says that there will be no interference from their side, it is tough to imagine this from such an oppressive regime that attempts to control the lives of their citizens at every opportunity. And the very concept of an “experiment” implies that this is a test. But a test of what? That capitalism is superior than socialism or centrally controlled economies? North Korea is sufficient proof of that. No doubt Pyongyang sees this venture as showing the world that it is open to change. It also must see this as a money-spinner. It can use the proceeds to improve its shattered economy whilst mostly keeping silent to its people the source of this newly found wealth. No doubt its elite will continue to be pampered, its people lied to about the failings of the concept of Juche (self-reliance), more large monuments built in honour of their demented Dear Leader and his late father, all while people starve and die from malnutrition.

This is not to say that the whole of North Korea should be expected all of a sudden to transform itself into a “totally capitalist” country, let alone a functioning market economy. The experience of formerly communist countries is testament to this. Decades of extreme economic structural deficiencies and the accompanying degradation due to its centrally planned economy cannot magically be instantaneously fixed.

A functioning market economy requires effective private property rights, political strength, respect for the rule of law, a society relatively free from corruption, free labour markets, competitive tax rates, currency reform and so on. Political change is also paramount and must be accompanied by a respect for an individual’s rights. And importantly, the benefits of free markets must be conveyed to the public at large. The latter is hard enough to achieve even in the market economies of the West. There are so many misconceptions and outright lies told about the free market, whether at the hands of critics (who, for example, blame the free market for unemployment when a free labour market does not exist) or the hypocritical actions of supposed Capitalists, who call for free trade but practise Protectionism and attempt to manage trade through elite world economic organisations.

The supreme irony that can be drawn from this announcement is that the leadership of arguably the most closed and repressed society in the world and the last vestiges of hardline socialism in the world is willing to countenance capitalism and the market; albeit on a limited scale. This is what the apologists for socialism and centrally-planned economies, living very comfortably in the West, thanks in no small part to the market, still cannot bring themselves to do.

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