Comparative Analysis ofNorth Korea, South Korea and IndonesiaBy Brad Miller and Joshua Maxwell

Background North Korea

Formed out of WWII Population: 24 million Communist government

South Korea Formed out of WWII Population: 48 million Republic form of government

Indonesia Declared itself independent from Japan & Dutch

after WWII Geography: composed of nearly 17,000 islands Population: 240 million Largest Muslim population in the world Independent republic government

6 Institutional Frameworks

Allocation Mechanism Forms of Ownership of Land and

Capital Role of Planning Types of Incentives Income Redistribution Role of Politics

Allocation Mechanism North Korea

Command (Primary focus)▪ N. Korean leader Kim Il Sung adopted a strong central planning policy without a free market,

Stalinism▪ Production and pricing controlled by central government▪ Country considered to have foremost command economy in the world

Traditional▪ Follows idea of “juche,” which means self-reliance▪ Concept has led to political, economic, and social self-reliance and no influence by foreign actors▪ Cult of Personality devoted to Kim Il Sung▪ Country is considered one of the most secretive in the world as a result

South Korea Free Market Economy (Primary focus)

▪ Some indicative planning that places restrictions on companies▪ Promotes exports, industrialization, innovation, and technology

Traditional▪ “Chaebol,” allows for many companies to be connected through family ties

Indonesia Market economy w/ similarities to command

▪ Govt. decides prices on products such as fuel (oil), rice, and electricity▪ Companies allowed to sell products in a free market economy once prices are set▪ Member of the G-20

Forms of Ownership of Land and Capital

North Korea Socialism Central govt. own companies and industries

South Korea Capitalism Foreigners have the same property rights that citizens do

Indonesia State capitalism: capitalistic economy under state control, owns

139 enterprises 2011 Economic Freedom Index (Business Freedom)

South Korea: 91.6 Indonesia: 54.9 North Korea: 0

Role of Planning

North Korea Done by Central People’s Committee (CPC) Has resulted in forced labor, food rationing, and media

restrictions South Korea

Indicative planning Has lessened recently; country focusing heavily on exports and

trade relations Indonesia

Indicative planning Most is done by State Ministry of National Development

Planning Current plan focuses on economic growth and innovation

through a reformed tax structure

Types of Incentives

North Korea Moral Incentives

▪ Follows Confucianism and Maoism▪ Ran moral incentive campaigns to encourage production, including military

production▪ Filial piety: respect for family and elders

South Korea Material incentives

▪ Believes in strong market orientations and profit maximization▪ Does not believe in isolationism▪ Has one of the longest work weeks in the world, average 49.3 hours

Indonesia Mix of Moral and Material incentives

▪ Muslim influence provides moral incentives▪ No price fixing or hoarding, everyone should have free information on supply

and demand▪ Material incentives include economic growth and free market capitalism

Income Redistribution

North Korea Government has no tax system Government plans and operates all parts of economy Decides peoples’ income based upon need Universal welfare coverage

South Korea Follows Austrian school of thought Little redistribution Highest Income Tax = 38.5% Highest Corporate Tax= 24.2%

Gov. Exp. As % of GDP = 29.3% Well-defined property rights and equal opportunities

Indonesia Follows Austrian school of thought as well Highest Income Tax = 30% Highest Corporate Tax= 25% Gov.

Exp. As % of GDP = 19.2% Lower income tax rates than South Korea Does very little to redistribute income

Role of Politics

North Korea One political party, Korean Worker’s Party No free elections, only one candidate to select, Kim Jong Ill

99.9% of vote South Korea

Legislative, Executive, and Judicial Branch Numerous political parties all play a role in indicative planning

Indonesia Similar govt. system as South Korea, but govt. owns many

enterprisesCountry

Political Freedom Index

(Scale 1-7)(1-Complete Freedom, 7-No

Freedom)

Civil Liberty Index

(Scale 1-7)(1-Complete Freedom, 7- No

Freedom)

Freedom From Corruption

(Scale 0-100)(0-No Freedom, 100-Complete

Freedom)

North Korea 7 7 5.0

South Korea 1 2 55.0

Indonesia 2 3 28.0

9 Criterion

Level of Output GDP Growth Composition of Output Degree of Static Efficiency Degree of Dynamic Efficiency Macroeconomic Stability Economic Security of an Individual Degree of Economic Equality Degree of Economic Freedom

Level of Output

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

22000

24000

26000

28000

GDP per Capita (PPP)

North KoreaSouth KoreaIndonesia

U.S

. D

ollars

GDP Growth

1999 2001 2003 2005 2007 2009

-10

-5

0

5

10

15

20

25

30

35

GDP per capita growth

North KoreaSouth KoreaIndonesia

% C

hange

North Korea experienced abnormal growth from 2004-2005, Why? South Korea and Indonesia have had consistent growth overt time

North Korea’s Black Market

In 2003, North Korea allowed private farmers markets so people could buy produce and other items locally.

GDP per capita went up by 30% for two consecutive years

Farmers markets created a huge black market where people would sell items such as electronics, drugs, and other luxury items.

North Korean government decided to destroy black markets and hamper economic growth by redenomination of currency: 100 won – 1 won

Only allowed a small amount of money to be turned in for new currency, so black market and many other people’s money became worthless

http://www.youtube.com/watch?v=99VlXc5fwxA

Composition of Output

CountryMilitary

(% of GDP)Education(% of GDP)

Agriculture(% of GDP)

Imports(% of GDP)

Exports(% of GDP)

North Korea20%(2009) NA

29.2%(1997-2005)

9%(2009)

7%(2009)

South Korea2.6%

(2000-2009)

4.2%(2008)

3.6%(1999-2008)

49.2%(2009)

55.3%(2009)

Indonesia1.1%

(2000-2009)

1.2%(2008)

15.6%(1999-2008)

20.5%(2009)

27.4%(2009)

Degree of Static Efficiency

Unemployment Rate (2008) Indonesia: 8% South Korea: 3% North Korea: not published

Time Required to Start a Business Indonesia: 60 days South Korea: 14 days North Korea: N/A (private citizens cannot start businesses)

Corporate Taxes Indonesia: 25% South Korea: 24.2% North Korea: no taxes

Rankings: South Korea, Indonesia, North Korea

Degree of Dynamic Efficiency North Korea - Most volatile GDP per capita growth over time

South Korea - Consistent unemployment rates except for 1998-1999

Asian Financial Crisis

Indonesia - Cyclical Unemployment over time, also Structural Unemployment

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

2

4

6

8

10

12

Unemployment Rate

South KoreaIndonesia

% o

f Labor

Forc

e U

n-

em

plo

yed

Macroeconomic Stability

GDP per capita growth (2000-2009) North Korea - 80% growth, but extremely volatile and low GDP per capita South Korea - 73% growth, highest GDP per capita Indonesia - 60% growth

Inflation Rate South Korea – stable inflation kept below 5% Indonesia – unstable inflation, high economic growth and low interest rates

1998 2000 2002 2004 2006 2008 2010-5

0

5

10

15

20

25

Inflation Rate, GDP Deflator

South KoreaIndonesia

% I

nfl

ati

on

Economic Security of an Individual

GDP per capita (PPP)▪ South Korea: $27,168▪ Indonesia: 4,199▪ North Korea: $1,800

Life Expectancy▪ South Korea 80yrs▪ Indonesia: 71 yrs▪ North Korea: 67yrs

Mortality Rate▪ South Korea: 7.4%▪ Indonesia: 14.1%▪ North Korea: 14.6%

Healthcare costs covered by govt.▪ South Korea: 54.9%▪ Indonesia: 54.5%▪ North Korea: not published

Rankings: South Korea, Indonesia, North Korea

Degree of Economic Equality

Gini Coefficient (0 = perfect equality, 100 = perfect inequality) Indonesia: 37.0 South Korea: 31.5 North Korea: 31.2

Quintile Ratios (1 = perfect equality) Indonesia: 6.17 South Korea: 4.73

Degree of Economic Freedom

1999 2001 2003 2005 2007 2009 2011 20130

15

30

45

60

75

Index of Economic Freedom

North KoreaSouth KoreaIndonesia

Score

out

of

100

Future Predictions

North Korea Low output and no freedom for decades Dictatorship = Less Freedom Will continue to have low economic growth if current government is

in place, government will not allow prosperity. Example: 2004-2005 farmers markets

South Korea Becoming one of the biggest economies in the world Increased trade with United States and Japan All available information shows nothing stopping South

Korea from becoming even more economically prosperous

Indonesia High inflation and high unemployment, yet has seen great economic

growth Either increased economic growth or financial crisis Could become member of the BRIC’s (Brazil, Russia, India, China)

Lessons Learned

All three countries had connections to Japan in WWII

North Korea - Command South Korea - Free Market Indonesia - State Capitalism

South Korea and Indonesia have indicative planning

North Korea – Moral Incentives South Korea and Indonesia – Material Incentives

North Korea has experienced underground economy problems

South Korea focuses on international trade while North Korea follows “juche”

South Korea has a much higher GDP per capita output than North Korea or Indonesia

South Korea has highest score in Economic Freedom Index

South Korea established economic power, Indonesia emerging economy, and North Korea has little to no economic success.

Policy Recommendations

North Korea Should allow more private farmers markets, it worked in 2004-2005 Should allow more international trade and ignore their “juche” policy Allow more political freedom, free elections Only problem is that the current government does not care about economic

prosperity, only power.

South Korea Few problems, but loosening indicative planning even more would help Improve upon corruption problems

Indonesia Limit price controls on fuel and energy Privatize more companies, currently 139 state owned enterprises Get inflation under control, could create future problems, raise interest rates To solve unemployment problems, more spending on education and lower

minimum wage rate in country.

Works Cited

"2011 Index of Economic Freedom." The Heritage Foundation. Web. 03 Apr. 2011.   “Background Notes By Country” U.S. Department of State. Web. 02 Apr. 2011.   "Corporate Tax Rates." Trading Economics. Web. 10 Apr. 2011.   "Country Facts: North Korea." Index Mundi. Web. 09 Apr. 2011.   "Education Spending (% of GDP)." Nation Master. Web. 10 Apr. 2011.   "Freedom in the World Comparative and Historical Data." Freedom House. Web. 9 Apr. 2011.   Ihlwan, Moon. "North Korea Takes Aim at the Black Market." Bloomberg Businessweek. 1 Dec. 2009. Web.

09 Apr. 2011.   “Indonesian War of Independence.” New World Encyclopedia. Web. 02 Apr. 2011.   “Kim Wins Re-election with 99.9% of the Vote." The New York Times. 2009. Web. 9 Apr. 2011.   "North Korea - Economic Planning." Country Studies. Web. 03 Apr. 2011.   Rosser, Jr., John Barkley, and Marina V. Rosser. Comparative Economics In A Transforming World Economy.

Cambridge, MA: MIT, 2004. Print. "Share of Agriculture GDP." Food and Fertilizer Technology Center for Asian and Pacific

Region. Web. 10 Apr. 2011.   "South Korea Business Indicators - Property Rights / Contract Law." Financial Standards

Foundation. Web. 03 Apr. 2011.   "South Korea World Factbook." Central Intelligence Agency. Web. 03 Apr. 2011.

Funny Video

http://www.youtube.com/watch?v=gKH1PymutJQ