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Presented by: Dharun Prasad R Gaddu Sneha Vadivel Palaniappan Vignesh Nagarajan DMS, IIT Delhi batch of 2013

Centre planning of North Korea and Market economy of South Korea

South Korea and North Korea had been one nation before the Korean war of 1950-53 People speak same languages, ideologies after separation but having different

North and South Korea has had different economic systems since the Korean War. South Korea operates under a market economy system, in contrast, North Korea adapted central planning economy Market economy of South Korea has led to dramatical improvement of the economy from less developed nation with severe unemployment, negative savings and the lack of exports to rapidly developing country The gross national product (GNP) has been growing faster than the population as well as gross domestic product (GDP) during last 3 decades Meanwhile, the central planning system of North Korea, around the beginning of the 2 1960s, had faced delays and the economy growth has continued to be slowdown until 1980s.

Self Reliant North Korea

North Koreas economy policy was the self-reliant economy policy and this policy had led to their economic failure This serious economy failure of North Korea has resulted in a poor rate of exports, chronic trade deficits, and a sizable debt This deep slump of North Korean economy has been put far behind of the South Korea. Overall economy structure of North Korea can be characterized by State ownership of all production, command economy and completely closed economic system

This self-reliant economy system made country to imbalance in the distribution of resources and in the demand and supply of goods
Self-reliant economy in North Korea lead to reject the imports of foreign capital and 3 technology and they mostly use their own domestic resources to produce products. Therefore, this completely closed policy has made the country to more severe economic condition.

Why Economic Crisis in North Korea?

In North Korea, The private sector is not allowed to develop by the subsidization of the state owned enterprises and only 25 percent is engaged in agriculture State-owned manufacturing industries employ is more than 56 percent of the work force in the late 1980s This State owned industries produced 95 percent of manufactured goods. Economic growth was about 2%-3%, whereas output declined by 3%-5% annually during 1980s through the early of 1990s Their manufacturing is heavily concentrated on military industry. As a result, their national product real growth rate was 0 percent in 1994 The transition to make development of the private sector is hard because of heavily subsidized state owned enterprise sector and the inefficient labor market.

Workers with state-owned enterprise have no incentive and they use resources in inefficient way
Such economic conditions led North Korea to economic crises and it caused severe 4 problems such as food-shortage and many people die from mass starvation

Outward Looking South Korea

In South Korea, Over the period, the real gross national product expanded by an average of more than 8 percent per year from $2.3 billion in 1962 to $204 billion in 1989 Manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987 and the ratio of domestic savings to GNP grew from 3.3percent to 35.8 percent over this periods This big growth of economy has been possible because of the adoption of an outward-looking strategy in the early 1960 South Korea had the lack of natural resource endowments, low saving rates and poor domestic market, so the government promoted economic growth through labor-intensive manufactured exports The manufactured exports has had big role for the growth of Korean economy and, as a result, the peoples standard of living has enormously improved with rapid industrialization

Transformation of South Korea

While economy structure has been maintained under state-owned enterprises in North Korea, class structure of South Korean society has been changed by rapid economic growth, industrialization, and urbanization under market economy system New middle class, such as engineers, healthcare professionals, university professor, and journalists, has grown enormously from 6.6 percent in 1960 to 17.7 percent in 1980 The proportion of industrial workers grew from 8.9 percent to 22.6 percent of labor force during same period After forty years of market-based growth, real GDP per capita is now about 17.5 time higher in South Korea compared to its northern neighbor However, this rapid industrialization in South Korea has been heavily relied on urban areas, such as Seoul, so there exists inequalities between rural and urban area

For example, the population of rural lower class declined from 64 percent in 1960 to 31.3 percent in 1980
This heavy tendency of labor force in urban area made the inequality of income and 6 disparity in living standard between urban and rural area

GDP Comparison

Top 3 Chaebols of South Korea

1 2 3

Hyundai Samsung LG

Transformation of the economy

Has the transition in the former state socialist countries been a success? With hindsight, would a transformation of the economy, without a change in the political system, have secured economic prosperity?

State socialism is a form of economic organization which is set against markets and private property
The lack of freely functioning system made the measurements of relative scarcities and ranking of preferences very difficult, leading to both shortages and overstocking in different sectors Absence of transparent transactions led to corruption, and due to shortages, black markets would develop where goods could find their own price Socialism falsely assumed that planners would be altruistic The only countries to have stuck with such a system till now are Cuba and North Korea, both of which have had massive economic difficulties in 1990s, making clear 8 that market needs to be introduced


Poland Shift from Communism to Free Market Economy

Poland has made a significant progress in moving from a communist, state planned economy to a market economy It was a part of Eastern Bloc countries of Europe Drop in Performance: 1. By 1990, industrial production had fallen to 86% of the 1980 level, retail sales to 85.2%, and real wages to 75.8% 2. First free elections happened that year and lead to a new non communist government 3. Shock Therapy was used to speed up the transformation to market economy Shock Therapy: 1. Price controls were lifted for most of the products 2. Import restrictions removed

Transformation to Free Mixed Economy

The economic transformation of enterprises was performed in three ways: New private enterprises were established, usually in the form of partnerships and limited liability companies, with a majority of Polish ownership. These were mainly small but efficient enterprises such as factories, workshops, and trading and service companies.

Joint ventures were formed with foreign investors, often through wholly owned foreign subsidiaries. Such enterprises were established mostly by the restructuring of state-owned companies. There were more than 28,000 of these companies in 1998. After 1991, foreign corporations such as Citibank, General Motors, Daewoo, Volkswagen, Goodyear, Procter & Gamble, Coca-Cola, and Pepsi-Cola began forming wholly owned subsidiaries to do business in Poland. State enterprises were privatized, either by selling them completely (most frequently under long-term leases) to their employees or management teams (there are 1,040 such companies now) or by maintaining partial state ownership and making the employees responsible for financial results and removing governmental subsidies. This involved the transfer of 1015% of the shares to the employees (1,070 companies). Some of these newly commercialized enterprises were placed under control of national investment funds, whose shares were later sold for a nominal price to all citizens.

Improvements In Performance

Poland's gross domestic product increased by 26% from 1992 to 1996, the fastest growth in central Europe. In 1997 the GDP grew by 6.9%, and in 1998 by nearly 6.5%. The unemployment rate reached a high of 13.2% in 1996 before dropping to 10.5% in 1997, and then to 9.6% in October 1998. Inflation was 14.9% in 1997, decreasing to 9.9% in October 1998. The national debt totaled $40.5 billion in 1997, down from $48.5 billion in 1990. Foreign direct investment reached $20.6 billion by the end of 1997, compared to $17 billion in Hungary and $8.2 billion in the Czech Republic. U.S. investors have led the way, with almost $4 billion invested by the end of 1997. The largest investment ($505 million) comes from the Polish-American Fund created by Congress, followed by Pepsi-Cola, International Paper, and Philip Morris. Many Americans of Polish descent have established small enterprises in Poland.


Characteristics of Capitalism :
Free market forces

Private Property

It transforms itself into two forms: Leads to development of large-scale multinational organizations, Rationalizes values, attitudes &behaviors with corporate goals to make abnormal profit The crucial point here is whether the expanding capitalism and its rationale a positive or negative impact on the economy



Emerged in early 19th century in Western Europe and by the end of 20th century has become truly global due to its dynamic nature Though by the end of twentieth century almost all nations have adopted the basic framework of capitalism it continues to be considered as a system of exploitation rather than path to prosperity 1973 Overturning of left wing government led to market reforms 1991 India had a shortage of foreign exchange reserves

Sub-saharan countries IMF-World bank structural adjustment programmes

Trade liberalization, financial deregulation and advent of information technology set the ball rolling in developing countries like India and China

Capital Account Convertibility

Cross border capital flows The Asian currency crisis, Mexican peso crisis are cases in point that demonstrate how it can be a double edged sword

Hence this must be implemented only after market distortions are eliminated such as in the case of developed countries
Meagre domestic savings supplemented by global pool of saving
Financial institutions can borrow in times of economic downturn FDI by MNCs


Export oriented industrialization cited as a result of capital accounts

The distortions caused are classified as: Policy ineffectiveness (Monetary policy) Capital flight (Absence of well defined property rights) Distortions due to financial fragility

Lessons from Sub Prime

Inadequate financial regulation due to liberalized and globalized economy Sub prime crisis Loans to borrowers with poor credit record due to which the real estate and consumption booms sustained Risk involved transferred to investors who bought the mortgage backed securities Conclusion Easy liquidity in a loosely controlled financial system increases the fragility

Surge of capital to developing countries is not due to financing needs but completely supply driven

MNCs seeking profit investing in the emerging markets Increases financial vulnerability Reduces fiscal and monetary autonomy of government

Global Capitalism

Global recession is off shoot of the concept of free-market global capitalism South east asian currency crisis South Korea, Thailand, Indonesia etc affected World striving towards progressive alternatives where is better corporate governance with corporate social responsibility Problems of Global Capitalism: Volatility More than 1.5 million flows across international waters everyday

Race to the bottom Cutting costs to attract mobile capital

Inequality The gap between rich and poor widening

Degradation of democracy Trade agreements restrict the governing of ones own economies

Developing Countries

Care to be taken by the developing countries:


Adopting sound macroeconomic policies

Better disclosure of information



Sound banking practices

Good corporate governance



Institute capital controls

USA Extensive coastline, lakes provide additional shipping access Strong emphasis on technical and vocational training Top down chain of command in organizations and reflects scientific management principles Features : Two thirds of the total economic output goes for personal use Of the opinion that some tasks are better performed by public enterprises such as education, road system, defense etc Govt role : Monitors the economic activity and plays the part of a facilitator Canada Vast deposits of natural gas and self sufficient in energy FTA, NAFTA increased the trade and economic integration with US (economic downturn hence had a negative impact) Taxation according to the income group Standard of living, literacy better than US Monetary policy above that of US

Types of Socialism


Coordinatin g mechanism


Planned socialist

Market Socialist

Public ownership

Cooperativ es

Common ownership

Based on coordinating mechanism:

Socialist economic systems can be subdivided by their coordinating mechanism (planning and markets) into planned socialist and market socialist systems. Difference is presence of market or not.


Socialism is an economic system characterized by social ownership and corporative management of the economy Difference between capitalism and socialism:
Capitalism Production carried out to maximize private profit Decisions regarding investments are taken by private business owners. Production takes place within the process of capital accumulation Means of production are owned primarily by private enterprise Socialism Production is carried out to directly satisfy economic demand by producing goods and service for use Decisions regarding investments are carried out through a mechanism of inclusive collective decision making Means of production are either publicly owned, or are owned by the workers cooperatively

A socialist economic system would consist of an organization of production to directly satisfy economic demands and human needs, so that goods and services would be produced directly for use instead of for private profit driven by the accumulation of capital 20 Distribution of output would be based on the principle of individual contribution.

Socialism based on coordinating mechanism

1. Planned socialist or economic planning: It refers to planning of economic activity outside the mechanism of markets. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism 2. Market socialism:

They are either publicly owned or cooperatively owned and operated for a profit in a market economy. This Socialist economic system that is based on the process of capital accumulation, but seeks to control or direct that process through state ownership or cooperative control to ensure stability, equality or expand decision-making power Theoretically, the fundamental difference between market socialism and a traditional socialist economy is the existence of a market for the means of production and capital goods. Capital Accumulation: 21 Gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth

Socialism based on ownership

1. Worker cooperative: Cooperative owned and democratically managed by its worker-owners All shares are held by the workforce with no outside or consumer owners, and each member has one voting share Two ways of worker cooperative are given below: 1. A cooperative enterprise may mean a firm where every worker-owner participates in decision making in a democratic fashion 2. Managers and administration is elected by every worker-owner, and finally it can refer to a situation in which managers are considered, and treated as, workers of the firm

2. Common Ownership:
Common ownership differs from collective ownership. The former means property open for access to anyone, and the latter means22 property owned jointly by agreement Example of common ownership is like public park available to everyone

Socialism based on ownership

3. Public ownership: Also called as state ownership, government ownership or state property Properties that are vested in the state, rather than individual or communities Public ownership may refer to state ownership or control of any asset, industry, or enterprise Control can be at any level national, regional or local Government owns and controls the stake of the shares Government owned corporation is sometimes called as SOE(state owned enterprise)

SOE may resemble a not-for-profit organization as it may not be required to generate profit



Communism is articulated by Marx as "second stage Socialism" whereby economic output is distributed based on need and not simply on the basis of labor contribution. Work in order to receive goods would allow people to pursue their own interests and develop their own talents without being coerced into performing labor for others The primary concern for socialist planned economies is to coordinate production to directly satisfy human needs/economic demand (as opposed to generate profit and satisfy needs as a byproduct of pursuing profit)

Kinds Marxism Marxism leninism Maoism Stalinism 24

Marxism and leninism:
Marxism-leninism is the Bolshevik leader Vladimir Lenins variant of marxism Marx established the general philosophy and Lenin attempted to apply the philosophy in Russia. Lenin adapted Marxism to a pre-industrial society in which the peasants formed the main class of workers. Marx's main appeal was his ability to express the frustrations of workers enslaved in mines and factories, and Marx called for the workers (proletariat) to overthrow the industrial capitalist owners. Lenin agreed with Marx's call to violent revolution, but some communists (the revisionists) claimed that communism could be achieved through peaceful means Chief difference between earlier Marxism and Lenin's views was that Lenin believed socialism could be established in a country which had not passed through the full development of industrial capitalism. Marx viewed the socialist revolution as arising out of the industrial proletariat. Yet Russia at the time of the Bolshevik Revolution was not primarily an industrial country; its common 25 populace were primarily agricultural peasants, not industrial workers


Maoism is a variant of marxism-leninism derived from the teachings of chinese communist leader Mao zedong


Maoist groups outside China have usually called themselves "Marxist-Leninist" rather than Maoist, a reflection of Mao's view that he did not change, but only developed, Marxism-Leninism Maoism talks of a protracted peasantry revolution by eliminating the class enemies by guerrilla warfare Maoism believes in extreme violence as the only weapon to seize power

Communism and Marxism:

Communism was Marx theories. Communism is a political theory derived from Karl Marx Marxism is an updated version of communism, updated by Karl Marx's followers Later there were different variant of communism according to lenin, stalin, Mao,26 etc


Stalinism - Totalitarian communism based on the political methods of Joseph Stalin

Power is exclusively in the hands of the Communist Party, which is organized on rigidly hierarchical lines

The leader is presented, by state propaganda, as the selfless and benevolent parent of the nation.
The general population is controlled by a vast bureaucracy and all opposition and internal debate is ruthlessly repressed by the secret police

It is said that Stalin changed marxism to suit his evil objective

Totalitarianism (or totalitarian rule) is a political system where the state recognizes no limits to its authority and strives to regulate every aspect of public and private life wherever feasible


Socialist countries

These countries are known as communist states, because their ruling parties generally use the name "Communist Party of [country]. Follows the ideology of marxism-leninism and says all power belongs to working class
1) 2) 3) 4) 5) China ( since 1949) Vietnam (since 1954) Albania (1946-92) Peoples republic of Korea (1948-92) Poland (1945 89)

Non Marxist-Leninist: These countries make reference to socialism but do not follow marxism-leninism ideology 1) 2) 3) 4) 5) India (since 1947) Korea (since 1992) Bangladesh (since 1971) Egypt (1952-78) Kenya (1963-92)


Production carried out to maximize profit Investment decisions by business owners Mercantilism -> Capitalism Adam smith, David Ricardo opposed the Mercantilists





Capitalism the tinted view

Japan Cartels & Keiretsu USA Proactive and promotional role of state

India Democracy before capitalism, Politics over economics


Source: US Capitalism Richard Whitley

The Elephant Paradigm Gurucharan Das