Keynes fails North Korea and Kim Jong-il

Peter Zhang
BrookesNews.Com
Monday 9 August 2004

Last year Kim Jong-il decided to take his cue from Maynard Keynes and attempted to inject some life into what is jokingly called the North Korean economy by ordering that money wages be increased significantly and funded through deficit spending.

The result was roaring inflation with reports that black market prices for rice jumped by 300 per cent. However, this really does not matter for most North Koreans because they could not even afford rice at the old black market prices, thanks to Kim Jong-il's crazy socialist policies

Although Kim Jong-il is not the brightest of men he cannot be entirely blamed for this economic fiasco. After all, he was doing no more than the majority of Western economists prescribe, in varying degrees, for their own governments.

It is still unclear from whom Kim Jong-il received his economic advice. (If it was a North Korean source, it is highly unlikely he will be able to give any further advice — ever).

What struck observers in particular was the speed at which bottlenecks appeared and extensive shortages emerged — not that shortages are new to Kim's socialist paradise.

Considering that the ramshackle state of North Korea's industrial base is so well known no one should have been surprised at the rate at which bottlenecks and shortages spread throughout the economy.

The Kim Jong-il Stalinist planning approach has so disjointed what there is of the country's capital structure that its stages of production are completely incapable of coordinating their output. This was the real source of the shortages and bottlenecks.

If his monetary policy had been left unchecked the result would have been hyperinflation. (A pretty meaningless concept in a country with such an abysmal standard of living). But why should Kim Jong-il have suddenly decided on a desperate "dash-for-growth" policy?

Reports clearly show that North Korea's economy is in ruins and the only thing preventing a complete social and political collapse is the army, which in turn is mainly maintained through foreign subsidies, most of which are intended for the civilian population.

That these subsidies had been significantly reduced must have had a bearing on his decision to try and inflate his way out of his economic dilemma.

The failure of Kim's economic policy could be portentous. With the population starving, industrial production virtually at a halt and supplies to the armed forces being cut back his position is becoming increasingly precarious. What is a Cognac-loving dictator to do in these circumstances?

One thing we do know, Kim Jong-il is not suicidal. Even if he wanted to launch an attack on the South Beijing would not let him. This is not June 1950 and both Stalin and Mao are long dead He can continue with his attempts at nuclear blackmail.

The problem for him is that he will never be able to extort enough money to keep North Korea afloat. The economy is dead and that is that. Furthermore, the state of economy will eventually undermine his weapons program and weaken his military machine.

The only kind of economic reform program that would help his hapless subjects is the one that would destroy his regime. Of course Kim Jong-il could always retire to a Beijing suburb and while away the time with yellow movies, Cognac and Russian women. The world would certainly be a safer place if he did.