Deep Korean Kimchee

How did Korea get to this impasse?

North Korean military parade, 2015. Photo: Uwe Brodrecht. Source: Wikipedia

After the Korean War, North Korea was far more developed than the south. They had most of the chemical and power plants, and they received a lot of financial aid from the Soviets. In 1960 South Korean per capita income was about $70 per year. A quarter of their economy came from the sex industry servicing the US military presence.

In 1961 Park Chung-Hee seized power in a military coup and ruled as a strongman until his assassination in 1979. He engaged in a series of industrialization initiatives, paving roads and providing electricity to the countryside. He also created industrial zones that favored certain export-oriented industries. Exports were a powerful source of economic development, because you can’t use politics to convince distant foreigners that your goods provide superior value. They actually have to be competitive.

The North had a series of dictators, but they emphasized self-reliance and collectivized their industries. The Kim dynasty provided incentives to agriculture, despite the North’s cold climate and mountainous terrain. They focused on the military, financing this through borrowing against mineral sales rather than producing consumer goods. But when mineral prices fell in the late ‘70s, North Korea defaulted and couldn’t keep pace technologically with other countries.

By the mid-‘80s, South Korea was creating new industries around computers and electronics. Samsung and LG were founded during this time. North Korea received pledges of support from Mikhail Gorbachev and other Eastern Bloc nations, but the collapse of communism left China as their only major ally, while the South Korea struggled to establish a democratic government following Park’s assassination. The South opened themselves to foreign investment while the North was isolated, just as the information economy boomed.

South Korean GDP in 1990 dollars. Source: Angus Maddison, Wikipedia.

The South is now a modern, industrialized democracy, with the 11th largest economy in the world and a per-capita GDP of $30,000 – growing over 10% per year for the past six decades, an incredible accomplishment. It is one of the Next Eleven countries that are expected to lead the global economy over the next several decades. The North, on the other hand, struggles with famine and backward industries. Their lack of economic ties with the rest of the world encourage them to become militarily bellicose.

North Korea’s military development and geographical location now allow it to threaten South Korea and demand economic support from the rest of the world. But extortion is not a productive industry. Elsewhere, world leaders have learned that it’s cheaper to purchase resources than to take via military conquest. Let’s hope our leaders can figure out how to engage the North economically and avoid a military confrontation. As the Chinese strategist Sun Tzu once wrote, winning without fighting is the supreme accomplishment.

Douglas R. Tengdin, CFA

By |2018-01-08T07:46:30+00:00January 8th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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