A wealth of advice for Kim

North Korean leader Kim Jong-un must be very disappointed by the recent vice-ministerial inter-Korean talks that produced no outcome.

Talks came to abrupt end because Seoul refused to resume a tourism program in Mount Kumgang unless Pyongyang ensures the safety of tourists, after a South Korean tourist was fatally shot by a North Korean soldier there.

North Korea is eager or even desperate to draw tourists from the other side of the border to earn hard foreign currency due to declining earnings from trade with China and overseas laborers. Kim, who has repeatedly promised better living conditions for the populace, calling the people “great” and “beloved” during the military parade celebrating the 70th anniversary of the founding of the Workers’ Party, knows he cannot deliver his promise without foreign exchange earnings.

I’d like to recommend a book for Kim - “The Wealth of Nations”, the magnum opus of Adam Smith who earned the title as the father of economist by theorizing free market principles. The ruler of the world’s most rigidly-controlled state system based on Juche (self-reliance) ideology may think the choice is unthinkable.

North Korea aspires to be a “strong” country, and the book teaches a government exactly how to get there. If it takes the book’s advice, North Korea will be able to revive its economy without pleading for a Mount Kumgang tourism program or collecting money from overseas laborers.

The core of Smith’s thesis is that the wealth of nations hinges not on the hoard of gold and money, but on the quality of its productivity. This simple wisdom helped to end the age of mercantilism that held that wealth was fixed and finite. Per capita average income of the world that remained stationary for centuries until the 17th and 18th century flourished under Smith’s free market formula coupled with the Industrial Revolution.

North Korea is the only country that keeps to that dead mercantilism principle. Its economic policy is entirely oriented on bringing home foreign-currency earnings. It aims to draw tourists from South Korea and China, export underground resources and dispatch laborers overseas. But what drives the economy and makes it grow sustainably is the manufacturing activity to sell goods abroad. If North Korean-made products sell well, the country will naturally earn foreign currencies. Kim appears to have gotten the cause and effect wrong. North Korea’s fundamental problem is that its systematic control and regulations hamper manufacturing activity. It would be on the path of growth if it simply removes the stumbling blocks.

Under Smith’s advice, Pyongyang should push ahead with these changes.

First, it must liberalize market activities. Smith began his book by stating that the greatest improvements in the productive power of labor lies in the division of labor. Division of labor would increase the people involved in the production of each and every manufactured good, therefore expanding the market. People will focus on one task or labor that they do best and exchange their excess outcome in the market. Division of labor would boost dexterity and innovations to develop and increase output, which would make the market grow and increase division of labor further to generate a benign cycle in production activity.

North Korea has long oppressed individual market activity. It stuck to a path that takes it to the opposite direction of growth. Pyongyang regime now appears to be condoning market activities. If it formally liberalizes market activities, the North Korean economy could gallop away at a pace faster than South Korea’s.

His second advice is on the ways of increasing supplies of products. Private enterprises should be promoted and allowed to compete with state counterparts on fair grounds. Privatization in a small and unofficial scale is sprouting in North Korea. For example a state bus company rents out buses and trucks to individual businesses for revenue. The rent is more like a license to ownership. Restaurants, beauty parlors and public bath houses are run in the same way. The liberalization is mostly restricted to the service sector that cannot be sold abroad. If private enterprises are allowed in the manufacturing field, the economy could grow more than 4 percent annually. When individual farming is promoted more, the economy has the potential to run at 6 percent a year.

Smith’s final advice is that no other formula than free-market capitalism can effectively make an economy wealthy. His theories have been tested and proven over the span of more than 200 years. A socialist economy that does not tolerate free market and enterprise activities cannot last. Post socialist states like the Soviet Union, East European states, China, Vietnam and Cuba all shifted to adopt a free-market system. Kim may be frustrated at the impasse with South Korea and China, but there is a better and more effective way to rebuild the economy. He should read the book and take Smith’s advice.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Dec. 17, Page 39

The author is an economics professor at Seoul National University.

by Kim Byung-yeon