[OUTLOOK]The North's strange economy

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[OUTLOOK]The North's strange economy

Let's suppose that someone has one ton of coal, and a power station and briquette factory are bidding to buy it. If he sells it to the briquette factory for 600,000 won($502), instead of the power station, which will pay 500,000 won, he has a sensible idea. Market economists say that the efficient distribution of resources is impossible in a planned economy due to the lack of the concept of price and cost. But the supply of electricity can be more urgent than heating. In a planned economy, the government would ignore the price gap or raise the price of the coal to 700,000 won and send it to the power plant. Economists in planned economies insist that this kind of choice, in which the government absorbs the planned loss, is more efficient sometimes than the market. Leonid Kantorovich of the former Soviet Union calculated the reasonable price of a planned economy, using the concept of opportunity cost. He received the Nobel Prize in economics in 1975 for his work.

I have read that there have been some changes in the economy of North Korea. According to foreign news reports, the North has streamlined the distribution system, revised the exchange rate of the North Korean won and raised market prices and wages. I do not know if it is the first step toward real reform or just a makeshift answer to the crisis. But many experts on the North contend that the North needs its own relief effort in order to escape the aggravating food shortages. The distribution system is one of the means of socialist ideology to stabilize the state and promote the system's alleged superiority at home and abroad. The distribution system needs a guarantee on resources. In the North, I think, insufficient supplies hurt and changed the system a bit. In any case, if the distribution system went awry and gradually disappeared or was abruptly deserted, the market would be in charge of food supply and demand. Using the market instead of the distribution system is possible only if food has been stashed in villages or a black market is functioning and able to supply products for the legal market. But if villagers are hungry and the private economy is only $0.6 billion, or 3.3 percent of gross domestic product, the "market" option is too risky and we can hardly expect any meaniful positive effects from it.

In North Korea, the distribution price of one kilogram of rice is eight jeon, but it is sold in private markets for 50 won. A hundred jeon equals a won in the North. If the North Introduced price reforms, the distribution price would rise to the market price, not vice versa, so the pay for a North Korean worker, typically 100 to 200 won, reportedly has been hiked 20-fold. The North Korean government may lessen the distribution cost, expecting to gather more taxes from the new wages and market prices. On the other hand, villagers are expected to protest the changes, fearing mass unemployment and insufficient wages that would follow the reorganization of its distribution system. The dictum that the people who do not want to work cannot eat is right, But how about the people who cannot find a job and suffer from hunger? The insistence that the market spurs production, taking advantage of price, may be true. Prices should be set to bring the surplus outside market into the market. Prices don't work well in an economy with real deficiencies, but they do work in an economy with camouflaged deficiencies. The price reform only enables public officials to sell 8 jeon goods for 50 won with ease if they are corrupt. The North has real deficiency. Their escape is production reforms, not price changes.

Vyacheslav Mikhailovich Molotov, a former prime minister of the Soviet Union, said, "Prices are not an economic problem but a political thing." I admire his insight although the words may have originated from the unrest spawned by price reform in socialist economies. Politics is also the cause of trouble between South Korea and North Korea. The rice stock is estimated to be 1.9 million tons in South Korea, managed at a cost of 600 billion won. We have to deplete at least 600,000 tons before harvest season to facilitate price stabilization and cost reduction. The South Korean government recently decided to use stocked rice as animal feed instead of sending it to the North. The North needs more than 2 million tons of food this year but the negotiation for aid stopped after the Yellow Sea battle. Some people say we have so much rice for cows and pigs but do not have enough food for the North. This kind of sentiment may be more help for the North than the sunshine policy. It can solve the starvation and provoke an increase in the productive capacity of the North. Productive capacity, like price, is not only an economic problem. I miss the warm sentiment toward the North that has been disappearing gradually these days.


The writer is editorial writer in JoongAng Ilbo.

by Joseph. W. Chung

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