- North and South Korea evolved into distinctly different countries after their shared history, with North Korea committing to self-reliance, nationalism, and central planning under a repressive government, while South Korea transformed into an economic powerhouse through opening up to trade and foreign investment. - Both countries struggled after the Korean War and division, but South Korea was able to successfully modify its systems to achieve economic growth through embracing market reforms and international trade, while North Korea developed its isolationist Juche ideology.

1. Despite having a shared history formany years, The Republic of Korea and Democratic People’s
Republic of Korea have evolved into twodistinctly different countries with relatively little in
common presently other than a shared language (whicheven still has evolveddifferently on either
side).
 On the north side of the 38th parallel, there is North Korea: a country committed to self-
reliance, nationalism and central planning. Other than some dots at Pyongyangand a few other
locations near the border withChina, the country turns nearly completely pitch blackwhen the
sun sets. Nearly all aspects of life are dictated by the government, with even the most minor of
infractions likely to inflict punishments the likes of which make human rights activists wince.
 On the other side, South Korea has become a bit of an economic powerhouse. Despite suffering
significant losses during the Korean War, the country managed to transform itself fromrelying
almost entirely on foreign aid after the Korean War to a market economy that has made it one
of the most successful countries in the region and the world. Its success is a testament to how
opening for trade can lead to many positive benefits.
While it may be convenient to cast off the economic differences between the twoKoreas as merely
being due to the adoption of the capitalist vs. Marxist streams of political/economic ideology (and
that is surely one of the main parts of the reason), the differences also have some philosophical
roots, too (especially within North Korea and its creation/adoption of its Juche ideology). While
neither country started with a completely perfectsystem followingthe war(in terms of resources,
structure, ideology, or a combination thereof),it is South Korea’s ability to modify and adapt its
systems that allowed it to not only attain economic growth but (relatively speaking) hold on to it as
well.
BEFORE THE RIFT:A BriefHistoryofthe Japanese ColonizationoftheKoreanPeninsula
Some of the inspiration forSouth Korea’s economic renaissance arguably came fromits time as a
colony of Japan from1910 to 1945. Governmental powerwas highly concentrated in the region,
with a governor-general whohad the right to issue laws and regulations and appoint officials
within the colony’s 200 counties and municipalities (Seth, 2011). The Government-General of
Korea grew in size from10,000 officialsin 1910 to 87,552 in 1937. In 1940, there were 708,418
Japanese residents of Korea, of whom 40% worked forthe government in some fashion. The first
decade was very politically repressive, with permits required for any non-political gathering (any
political activity or organization was illegal at the time). Korean resistance to occupation tookplace
around the time of the Versailles PeaceConference in 1919. An exile group went to Paris to argue
for Korean independence. In Japan, Korean students organized a Korean YouthIndependence
Self-Reliance versus Expansion
A comparison of the economic differencesbetween
North and South Korea in the 20th
century
Self-Reliance versus Expansion
A comparison of the economic
differences between
North and South Korea in the
20th
century
Researched and written by
Aaron Landis as part of a
Masters of Finance at Clark
University Graduate School of
Management.
A paper
researched
and written by
Aaron Landis
as part of his
Master of
Finance course
work while
attending
Clark
University’s
2013 Global
Business
Seminar in
Korea.

2. Corps, whichpassed a declaration calling forimmediate independence (268). The group then went
about Korea, recruiting people from Pyongyang,Seoul and other cities. Spurred by rumors of
Japanese involvement in former King Kojong’s death in early 1919, a group of citizens gathered to
hear a declaration written by various groups on March 1, 1919. The Japanese government
attempted to stifle resulting movements and demonstrations, which marked the beginning of
Korean nationalism.
Shortly after this, the new governor-general Saito Makoto quickly made a number of liberalized
changes, from civilofficialsdropping their military uniforms to the abolishment or modificationof
laws that interfered with traditional Korean customs. Koreans could now be elected to their city,
county and provincialcouncils. Business relations between Korea and Japan were opened up as
well withthe elimination of tariff barriers between the two. The ban on Korean newspapers was
removed, and the corresponding liberalization of organized activity invigorated the youthof the
country. Interestingly, this was coupled with an increased police presence throughout the country
and there were still bans on open speech related to Korean independence. Throughout the 1920s,
many groups sympathetic to communism colluded until April 17, 1925, when they formed the
Korean Communist Party,but the group members were arrested and reformed four times from
then until 1928 (277). When war broke out between China and Japan in 1937, some communists
joined the anti-Japanese movement withthe Chinese Communists, including a guerilla fighter
named Kim il-Sung whowould later become the leader of North Korea.
The economy of Korea was also going through transformations under Japanese rule. In the early
1920s, in light of the reduction in tariffswith Japan, a new entrepreneur class in Korea emerged.
This class workedwith the Japanese to obtain capital, permits and factories to workwith suppliers.
In 1915, the Seoul Chamber of Commerce faced an influx of Koreans when separate chambers of
commerce forKoreans were banned. Japan also created a series of railway systems that by 1945
made it one of the most extensive in Asia (Seth, 2011). On August 15, 1945, Korea was granted
independence, with a division between Soviet occupied North Korea and its Southern counterpart
occupied by the United States. Exactly three years later, the United States withdrew and the
Republic of Korea was proclaimed, with the North followinga month later on September 8
(309,317).
HUMBLE BEGINNINGS TOTRANSFORMATION:SouthKoreainthe1950s
While South Korea is now considered one of the major economic success stories of the 20th
century, the Korean War did not treat the country particularly well. Firstly, many of the heavy and
chemical industry (HCI) structures were in the north. Just prior to this, the area that would become
North Korea’s industrial output in 1940 provided 90% of Korea’s chemicals, 85% of its electricity
and gas, 80% of its coal, and 100% of its phosphate, magnesite, and pyrite. By the time the Korean
War ended in 1953, the destruction of property in South Korea was estimated to be approximately
$3 billion, or approximately $25.8 billion in today’s prices.1 Fifty-onepercent of the Social
1 All inflation calculations (unless done in the original source) provided by
http://www.davemanuel.com/inflation-calculator.php using an output of 2012 dollars

3. Overhead Capital (e.g. transportation, utilities, and other types of public works) in South Korea was
destroyed by the end of the war. Sixty-eight percent of all factories weredestroyed (Chung, 2007).
Aggregate output remained at a virtual standstill from 1940-1960 despite a population growth
from 15 million to 25 million within the same time period (Ebersadt, 2010). Clearly, the South was
not exactly in a position where economic superpowers usually start. In response to this, from
1946-1961 the United States gave South Korea (on top of its military presence) $5.2 billion in
grants, of which64% wentto economic assistance and 36% went to military assistance, whichwas
necessary for the state to survive in its early days. Such a surety was foreign aid that the policies of
Syngman Rhee (whowas in power from 1948-1960) appeared to be designed to require massive
amounts of foreign aid to take care of the country’s difficultfinancial straits after the end of the war,
much to the chagrin of the Eisenhower administration. From 1953-1961, GDP growth averaged
3.3%, witha 1% per capita growth rate (Chung, 2007).
REVOLUTIONFROM THE TOP OUT: ParkChungHeeand the 1960sOnwards
In 1961, a former cadet in the TokyoMilitary Academy named ParkChung Hee took power in South
Korea via a coup d’etat. Shortly after, his Supreme Council forNational Reconstruction created the
Korean Central Intelligence Agency and the Economic Planning Board, whichtook over planning,
budgetary and statistical duties from other departments and sent mid-level representatives to
other bureaus (100-102). Despite the loftiness of the Five Year Plan unveiled in 1961, the growth
rate jumped to 5.6% per annum forthe followingtwoyears. In 1962 and 1963, the government
was told that the United States would continue to offermilitary assistance to the country,but South
Korea wouldno longer be receiving aid from them (106). This invigorated Parkand his associates
to open the country outwards. For the rest of the 1960s, the economic progress was nothing short
of stunning. From 1962-1971, the annual growth rate of South Korea’s GDP was 11.5%. By 1968,
South Korea’s per capita GDP exceeded its World War IIlevels and caught up with its neighbor to
the North (Chung, 2007). The economy grew at an average rate of 7.5% per year from 1972-1980,
by whichtime the country was ranked 27th in terms of GDP (15). In the late 1980s, after the 1988
Olympics,the country’s goods were more attractiveto worldwide buyers after the US dollar, a
currency the Korean Won was closely pegged to, was devalued. Thus, from 1985-1988 exports
doubled in the country to make it one of the top 12 trading nations.
WHAT’S THE COST?:SouthKoreanCronyismanditsConsequences
This growth was mostly spearheaded by a growing industrial sector. From 1953-1994, this sector
expanded at a rate double that of the entire South Korean economy (19). It wouldgo frommaking
up a tenth of the GDP in 1953 to a third in 1988. This increase was due to a combination of capital,
stock,and labor increases, as well as preferential treatment by the government due to their
representation within the Jaebeol businesses(22). Jaebeol are highly diversified conglomerate
businesses with a combined asset value of 400 billion won (35). These businesses wereable to
purchase government property at a rate below market value. The high inflation rate also spurred
large businesses to invest in hard assets and allowed products to be sold at higher prices, yielding a
healthy profit (180). Most intriguingly, these businesses also got themselves an interest rate
subsidy. This further encouraged investment since the cost of borrowing was cheaper for heavy
industries than it was forindividuals and other businesses that were not as wellfavored by the

4. government (176). The counterpoint of this was in order to obtain these favors these businesses
had to pay “quasi-taxes”-forcedpolitical contributions, bribes and other favors-to the South Korean
government (Ebersadt, 2010; Chung, 2007). The secretive nature of bribes makes an exact number
difficultto quantify, but the average bribe expense was at least 5% of the value of the favors
received.
One source of concernfor the economy was the issue of nonperforming loans (i.e. loans that were
burdened with significant amounts of noncollectableinterest charges, principal or a combination
thereof). There were 300 or so such loans in 1977, but by 1988 they amounted to 2.8 trillion won
or about 6.35% of all loans in total. The Jaebeol, spurred by the breaks they were getting from the
government in subsidies and privileges, borrowed money with a feverish passion (Chung, 2007).
The government wouldoften times take over businesses or otherwise bail them out if their default
would be a threat to the Korean economy (193). Due to excessive borrowing, in 1999 the interest
coverage ratio (i.e. operating income divided by interest expenses) was less than 1 for 9 out of 16
Jaebeol, with Hyundai’s at 0.91. This caused a financial crisis in 1997, whichmotivated the
government to make a variety of changes, including curtailing emergency loans, tightening limits on
large exposures by banks, and reducing cross-guarantees (201). The economy in South Korea has
improved since then, with a reduction in the banks’ bad loan ration from 12.9% in 1999 to 3.41% in
2001 and 1.9% in 2004 (200).
CARRYING OUT THE WILL OF THE NATION:Juchein NorthKoreaand its Implications
In order to understand any of the motivations behind North Korea’s economic,political or social
decisions, there has to be a clear understanding of what Juche is and how it manifests itself. Juche is
the central system of philosophy (and ultimately economics) forthe government and citizens of the
Democratic Peoples Republic of Korea pioneered by Kim il-Sung and his successor, Kim Jong-il. The
most salient point stressed in this ideology (and the one that will be most relevant to our analysis)
is nationalism to the point of constantly being on guard against foreign influences, especially
colonialist Japan and the “imperialist” United States (Park, 1996). In light of economic issues
arising from North Korea’s being too self-reliant, this concept has shifted slightly to a view that
“man is the master of nature and society and the main factorthat decides everything…Both social
wealth and social relations are created by man and serve him.” As such, enslavement by economics,
governments or people is not approved of under Juche. (This conclusionis somewhat ironic given
some of the North’s quasi-secret imprisonment camps scattered about the country,but the
inconsistencies and hypocrisy within Juche and the North’s atrocious human rights record is the
subject of another paper). Along similar lines, technologicaldevelopment is encouraged in the
country as a means of liberating man from nature and society to make workeasier, and thus more
easily able to engage in a rich and cultural life. It is creativity,or Changuisong,whichhasinspired
the self-reliance of North Korea. Kim il-Sung defined creativity as “a quality of man who transforms
the world in keeping with his independent aspirations and requirements.” The ideas of Marxism
were adapted to the distinct character of the North Koreans. Under Juche, blindly copyingother
ideologies without creativeadjustments will create irregularities and inconsistencies (14).

5. Human behavior is viewedas being guided by “thebrain” in this school of thought. This is not
meant entirely in the biological sense, but rather as a metaphor for the structuring of the political
system. The Great Leader Kim il-Sung (as well as his next of kin, Kim Jong-il,and his successor in
turn Kim Jong-Un)performs the function of making decisions as the brain; the political party is the
nervous system that disseminates that message to the people, whocarry out the message and send
feedbackback up to the leader. It is this Uisiksong (or “consciousness”) that makes men different
from animals in the sense that they can engage in “amental activity,a special function of the brain
whichdirects man’s independent and creativeactivities in a unified way” (13).
THE HEART OFDARKNESS:NorthKorea’sEconomicPoliciesandConsequences
The economic development story in the Democratic People’s Republic of Korea is a little less
illustrious than its neighbor to the south, and offersa cautionary tale about governmental rigidness.
One of the most striking differences is its near complete adherence to socialism. This will
ultimately be seen as North Korea’s downfall. As explained above in the analysis of South Korea,
the economic situation in the North in the early 1940s was very favorable, withan abundance of
resources that made it the most industrially developed country in the region (Trigubenko, 1996).
This was soon halted because of North Korea’s orientation within the frameworkof the world
socialist economy that was isolated from the global economy. In this economy,the country was to
become the source of raw materials and labor for the other socialist countries to use.
Unfortunately for it, the country’s resources foreconomic development were well exhausted by the
1960s. Nonetheless, the government of Kim il-Sung flat out refused to modify the political and
economic model from the Juche Marxism already in place then and now (Fendler, 1996). This
situation was also exacerbated by a simultaneous development of heavy industry, light industry
and agriculturally based economies as opposed to the specialization that tookplace in South Korea
(Trigubenko, 1996). In addition, the budget of North Korea was heavily focusedon defense, with
expenditures making up 1/3 of its 1962 budget and a personnel level of 1 million. Since the 1960s,
the DPRK’s target growth rates have been consistently lower than the goals suggested in their 7 and
6 year economic plans, including a target figure of 9.6% growth from 1978-1984 met with a growth
rate of only 4.5%. In 1989, the GNP actually decreased at a rate of -5.3%.
In order to survive,North Korea has had to rely on aid even more severely than South Korea did in
the 1950s. The Soviet Union provided a majority of loans and aid to the socialist country. It
provided 225 million rubles to North Korea forpostwar constructionand, in August 1953, cancelled
half of the debt on prewar loans and postponed the other half (Fendler, 1996). The Soviet Union
then provided 67.5 million more rubles three years later. The Soviet assistance funded, amongst a
smorgasbord of other projects, 40% of the Bong Un Chemical IIplant, 32% of the Sungin refinery,
and 100% of the PyongyangReinforced Cement Bricks, Pyongyang Silk and Madong Cement Plant
projects. The Soviet government also contributed technical knowledge, allowing North Korea to
launch products in metallurgy, transportation and chemical engineering (Fendler, 1996). Despite
these attempts at modernization, the North Koreans could not pay backtheir debts and as such had
171 million rubles of debt to the Soviet Union written off with rescheduling 31.5 million in July

6. 1960. In 1989, the DPRK reported a debt of 2,234.1billion rubles, or about a year’s worth of
exports.
China also provided 800 million yuang to the North Koreans in November 1953, and provided coal,
grain, textiles and other supplies over the followingfouryears. In 1958, China provided a $10
million loan forthe constructionof a hydroelectric power station along with $42.5 million for
various other projects, including a bearing plant, silk factory,and the Haesan Paper mill.
Unsurprisingly, North Korea also had difficulty paying off its debts to China as wellas the various
eastern European countries that also lent money to the hermit kingdom (Fendler, 1996).
The DPRK has shown a steadfast refusal to change its ways from the Juche model. It should have
been able to take advantage of the wealth of not just economic assistance, as the South received, but
also a variety of technical assistance as well. It was passed economically by South Korea by the late
1960s, and has not been able to catchup since then (Trigubenko, 1996). The North Korean
economy appears to have lockeditself in a stalemate foryears to come. The only glimmer of a hope
for economic recovery is the addition of new foreign aid and an overthrow of the Kim family
leadership as well as the Marxist model of economics that they created.
WHAT IS POSSIBLE BETWEENTHE TWOKOREAS?
It is readily apparent that, despite sharing most of their history, the twoKoreas have taken vastly
different paths towards government and economics. Although the South Koreans may have started
at a deficitin terms of resource allocation,and some of the policies implemented under Park Chung-
Hee were ethically questionable, there is no doubt that the story of South Korea’s economy is one of
the most inspiring rags to riches stories within the realm of macroeconomics. Some of the
investment decisions in the Jaebeol did place it in dire straits, but the economy has continued to be
a force to be reckoned with. North Korea, on the other hand, continues to live out its existence as a
hermit kingdom committed to its failed socialist policies. Even in modern times, the goals of its
international economic policies focuson little more than frightening South Korea, the United States
and the rest of the worldwith its nuclear program to send more food and other foreign aid to
Pyongyang. While the vast political and philosophical differences make the prospect of
reunification appear vastly unlikely as of right now, only time will tell if the two Koreas can reunite,
once again able to share a common history as they did forhundreds of years.
AaronLandis
Global BusinessSeminar–Korea
ClarkUniversityGraduate School of Management
March 20, 2013

7. WORKS CITED
 Chung,Young-Iob. SouthKorea in theFastLane: EconomicDevelopmentand Capital
Formation. NewYork,NewYork:OxfordUP,2007. Print.
 Ebersadt,Nicholas. Policy and EconomicPerformancein Divided Korea during the Cold War
Era: 1945-91. Washington,DC:AEI,2010. Print.
 Fendler,Karoly."EconomicAssistancefromSocialistCountriestoNorthKoreainthe Postwar Years:
1953-1963." North Korea:Ideology,Politics,Economy.Ed.Han S.Park. EnglewoodCliffs,NJ:Prentice
Hall,1996. 161-75. Print.
 Park,Han S."The Nature andEvolutionof Juche Ideology."Ed.Han S.Park. North Korea:
Ideology,Politics,Economy.EnglewoodCliffs,New Jersey:Prentice-Hall,1996. 10-18. Print.
 Seth,Michael J. A History of Korea.Plymouth,UK:Rowman& Littlefield,2011. Print.
 Trigubenko,MarinaY. "EconomicCharacteristicsandProspectforDevelopment."Ed.HanS.
Park. NorthKorea:Ideology,Politics,Economy.EnglewoodCliffs,NJ:Prentice Hall,1996.141-61.
Print.