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Role models to avoid

Aug 02,2018
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Kim Byung-yeon
The author is a professor of economics at Seoul National University.

Hungary’s goulash is a stew of meat and vegetables. The postwar socialist experiment in Hungary was dubbed goulash communism, a hybrid of the Soviet model. The state owned enterprises and properties, but did not impose planning. In the 1980s, private ownership was partly allowed, paving the way for private spinoffs from state enterprises. For instance, shopkeepers were able to sell bread made by the state-owned bakery.

Russia’s economy is not a typical Western free market, as it features a lot of top-down control from the Kremlin. After the glasnost period, Russia’s capitalism ended up with some forms of state control made even stronger. After the Soviet Union’s collapse, Russia in the 1990s held a fire sale of assets that ended up in the hands of select businessmen who were quickly dubbed the oligarchs. They have a cozy relationship with the Kremlin. Vladimir Putin, the country’s second president after Boris Yeltsin, may stay on forever as a modern day czar. He has never been shy of exercising his power or extorting ownership of private enterprises.

Corruption is a given in these economic systems. I took a taxi in Budapest a few years back. It took 20 minutes to arrive at my destination. On the following day, I tried walking and got to the same place in 15 minutes. In a 2017 corruption perception index compiled by Transparency International, Hungary ranked 66 out of 180 surveyed countries, scoring 45 on a scale of 0 to 100, with 100 being the cleanest. Bulgaria is the only European Union member below Hungary on that scale. Russia came in 135th with a score of 29. No other country with a similar per capita income is as corrupt as Russia. Corruption feeds the so-called underground economy, which breeds more corruption. The underground economies in Russia and Hungary are both extensive.

North Korea’s economy mixes both the goulash and Kremlin models. It has lots of bad elements — a dictatorship, high level of corruption — but central planning no longer works, and privatization is happening in fits and starts. State enterprises earn incomes by leasing out their buses and trucks to individuals in the transportation business. The lease business is more or less based on ownership. A fisheries company owned by the military sells boats to fishermen. The fishermen earn livings by selling their catches from North Korean waters in the Yellow Sea to the Chinese and pay commissions to the military. The elite earn bigger kickbacks from external trade and foreign exchange transactions. State institutions are competing to earn foreign currencies.

North Korea’s underground economy (as a proportion of the entire economy) and corruption level far exceed those of Hungary and Russia. About 16 percent of Russian household income is generated from unreported economic activities, while that figure exceeds 70 percent for North Koreans. Even goulash communism is no match. In the late Soviet period, about 4 percent of household incomes were spent on bribes. That figure hovers at 10 percent for North Koreans. The bureaucrats build personal wealth by turning a blind eye to the people’s unlicensed business activities and receive bribes for issuing passports or giving permission to someone to live in Pyongyang. Huge money is exchanged for permits in mining and the fishing business. Transparency International says North Korea is the world’s most corrupt state.

An underground economy can prop up a nation for a while, but it can also end up being a deadly poison to the dictatorship. The more the economy falls out of the state’s control, the weaker the grip of the despot becomes. Bribes mean bureaucrats are defying the ruler’s orders. Money’s power grows bigger and bigger. Power cannot be stockpiled, but money can. In the long run, no dictator can prevail over the power of money.

Changes in North Korea have been pressing its third-generation leader, Kim Jong-un, to allow greater freedoms in economic activities. If an outright shift to a market economy is difficult, some compromises are going to be necessary. Taxes should be levied on market activities to generate revenue for the state and give decent paychecks to government officials. Such compromises can both reduce the underground economy and corruption, which would lessen the risk of a collapse of the regime. If market activities become legitimate and taxed, the economy can gain vitality for growth.

A spread of market-led mechanisms can fuel sustainable growth for the North Korean economy. The Chinese economy has become larger through opening and liberalization. The choice of future paths by North Korea and its elite — including its despot — should be closely watched.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Aug. 1, Page 31