Left Flank

DPRK and ROK are more than just two Cold War relics: one lately successful; the other, for too long failing. The two Koreas are states each with a trajectory The Economist plots with diplomatic skill - see how delicately the issue of Liancourt Rocks in the Sea of Japan is handled. In a special report, Dominic Ziegler manages to keep both separate. His effort justifies attention. Yet, given how catastrophic precipitous unification of the two Koreas would be for each, Ziegler is still too glowing in his regard for ROK.

Ziegler lays Seoul's problems squarely at its political immaturity.

In South Korea the average income per person is only half Japan's. If the country does not find new sources of economic growth, it will grow old before it grows rich. Throw in the prospect of paying for the integration of 23m North Koreans to the mix, and the case for a radical approach to growth—in essence, another miracle on the Han—starts to press itself forward. The only problem is the country's dismal politics.

Ziegler does well to bury ledes under colorful episodes, but a structural flaw in the South Korean state emerges.

With politicians more beholden to local interests than to their parties, discipline along party lines is weak and the level of policy debate is woeful. The parliament too often comes across as a circus for charlatans and third-raters. A good number of the National Assembly's members have convictions or are under investigation for wrongdoings.

Ultimately, though, the problem goes deeper into the entire economy of the nation.

South Korea's story to date has in big part been the story of what is sometimes called a «developmental state»—that is, one that uses formidable powers to direct and regulate the economy to achieve growth above all else. The first «Miracle on the Han» worked because the developmental state, after 1961, mostly got things right. Or, rather, it got them right until it got them very wrong, resulting in the 1997 financial crisis. By then, the economy and the way it was financed had become far too complex for traditional guidance, and the state's sense of omnipotence had blinded it to the need for structural reform. The recovery from crisis accomplished only half the structural reforms South Korea needs.

Ziegler lists what else needs fixing:
1. Prosecuting crooked chaebol (Korean holding companies) owners and their family members and retinues.

How do the chaebol families get away with it? Many of them grew from black markets, smuggling and other rackets that thrived after the Korean war in the early 1950s, thanks to vast amounts of American aid and military spending, and to the policies of import substitution favoured by South Korea's strongman, Syngman Rhee. When Park Chung-hee seized power in 1961, the junta marched many of the racketeers through Seoul wearing dunce caps and placards with slogans such as «I am a corrupt swine». As Mr Cumings recounts, it was Lee Gun-hee's father, Lee Byung-chol, who proposed to Park that the swine seek foreign capital and equipment to launch the South Korean economy. Park called in ten of the leading businessmen and agreed not to jail them if they invested their «fines» in new industries that would sell to foreign markets.

The rest is history. To this day chaebol families are more admired for their economic contribution than reviled for their criminal propensities, which are often viewed as the foibles of a ruling aristocracy. The chaebol families are the closest thing South Koreans have to royalty. The clans intermarry and their shenanigans fill the gossip pages, as well as providing much of the inspiration for the television soap operas of the «Korean wave»—yet another South Korean export hit.

2. Upholding minority shareholders' rights in the chaebol.
3. Improving energy efficiency.

Both the country's patterns of energy use and its attitude towards the environment point more towards the past than the future. Randall Jones, an economist at the OECD, notes that South Korea uses 1.5 times as much energy for every unit of GDP as does Japan. For a country that imports all its hydrocarbons, energy efficiency will, the government says, be pushed to the top of the agenda. As well as promoting a more efficient industry, that will mean weaning Koreans off their gas-guzzlers and improving mass transit.

4. Encouraging conservation and limiting construction.
5. Tempering ROK's unions.
Yet, looking only at the macroeconomic outlines of the ROK juggernaut nationally is like staring at the eight-ball; it obscures how South Koreans still view the corporations as national leaders while South Koreans are stuck with the culture of an ancient kingdom. All the talk about the «Miracle on the Han» distracts from the reality, that Seoul received, and still in many ways, squandered American and Japanese aid and business opportunities presented by the war in Vietnam (much as Japan did from the Korean War). The first miracle came with fat included, but the second spurt will have to be domestic and leaner.

The OECD lists the problems succinctly. First, industrial and tax policies have long favoured manufacturers. Second, barriers to entry into service industries remain high, with foreign investment excluded from nearly every business except finance. Much has been made of a ground-breaking free-trade agreement (FTA) signed last year between South Korea and the United States, but the deal excludes American firms from education and health care. The benefits of foreign investment in services are clear: when the South Korean banking sector was opened after the financial crisis, post-tax profits nearly trebled in the four years to 2005, and the return on assets grew by almost two-thirds. Foreigners brought in know-how and transformed banks' risk management.

Lastly, low labour productivity in services is a consequence of a skewed employment structure. As in Japan, companies in South Korea tend to reward employees less on merit than on seniority, and dismissals are rare. So rather than be burdened with too many expensive older workers, companies impose a low mandatory retirement age. Employees tend to leave firms at around 50, and three-quarters of them become self-employed, mainly in services.

Economists agree about other shortcomings too. During decades of military dictatorship, growth at all costs took precedence over the interests of workers. Since then, successive democratic governments have attempted to strengthen workers' rights. For instance, the previous president, Roh Moo-hyun, attempted to protect temporary workers by obliging companies to offer them equal rights to those enjoyed by permanent employees after two years.

The unfortunate consequence has been an increase in sackings just before the two years are up and a big rise in the number of temporary workers, who now make up one-third of the entire workforce. This hurts not only the individuals concerned but also the economy as a whole: temporary workers are denied the kind of training which in the long run boosts economic performance.

Economists also point to a vast accretion of regulations, interventions, subsidies, special taxes or special tax exemptions, loan guarantees and countless other measures distorting or ensnaring nearly every economic activity in South Korea. This is a legacy of decades when the government—central and local—was directing development and economic growth.

Also, gender discrimination will cripple both Korean states

Today's birth rate is extraordinarily low, and heading lower. This is an Asia-wide trend, but South Korea's has fallen more than most. The total fertility rate of South Korean women (ie, the average number of births they can expect) has dropped to just 1.26 (see chart 1), down from 4.5 in 1970 and 1.5 in 2000. That is roughly half the rate at which a population replaces itself. In other words, the child-bearing generation 25 years from now will be roughly half the size of the current one. Even Japan, famous for its dearth of children, has a higher fertility rate, at 1.3.

For South Korean women, as for those elsewhere in Asia, this appears to be a good thing, offering them greater security and more autonomy than ever before within a Confucian family structure that has historically been hierarchical and male-dominated. Even better, South Korea's mortality rate has also fallen steeply, and people can now expect to live 30 years longer than they did at the start of the country's modernisation in 1960.

Yet the fall in the fertility rate may reflect dissatisfactions too: notably, over the difficulties faced by women who want both to work and to raise a family. Almost everyone still gets married in South Korea. In other words, the fertility rate is falling because more women are postponing marriage to nearer the end of their reproductive lives. That is partly because the burden of raising children still falls heavily on women, whereas men are consumed with work, which in South Korea, as in Japan, entails long hours and drinking sessions late into the night.

Also as in Japan, companies, despite some improvement, still discriminate heavily against women, especially those with children. Just one-third of South Korean women go back to work after having children, half the OECD average. The World Economic Forum's ranking of sex equality puts South Korea 97th out of 128 countries. This represents a huge economic and social waste, and not only because South Korean women are better educated, on average, than their men.

Either way, the profound consequences for the economy, the government's finances and the nation's social structure have barely begun to sink in; nor has the impact on families. Nicholas Eberstadt, a demographer at the American Enterprise Institute, puts it with only mild exaggeration: changing fertility patterns mean that «2,500 years of East Asian family tradition stand to come to an end with the region's rising generation.» What will it do to people if many, perhaps most, of them will no longer have brothers, sisters, uncles, aunts or even cousins? As Mr Eberstadt points out, when family structures atrophy—even in a country such as South Korea where children are treated as fondly as they are in Italy—sturdy institutional alternatives will quickly need to be found to take on the role now played by family networks.

As the South Korean population ages, the country's high savings rate is almost bound to decline, which will have an effect on both what the economy can invest and what the government can raise in taxes. As it is, the country's national pension scheme and a long-term-care scheme for the old are only two decades old, and their funding structure is not geared to South Korea's expected demographic transformation over the coming quarter-century, which will involve a rapidly ageing society, a shrinking workforce and a population in absolute decline.

When addressing DPRK, Ziegler's conclusion is not really that differentt: «In the meantime, the policy of outsiders should be neither to prop it up nor shatter it to pieces, but to use a mix of hard and soft power to guide it to a soft landing.» Both states are really variations on a common problem: two developmental states stripping their stock with two distinct flawed models.

Surveys among these North Koreans in China's border provinces offer the best insights to date about ordinary life in North Korea. Ground-breaking work by three scholars, Yoonok Chang, Stephan Haggard and Marcus Noland, published this year by the Peterson Institute for International Economics (IIE), offers a psychological as much as a material portrait of North Korea. It is clear that the famine and the government's brutal mismanagement of it (both in denying food to those who most needed it and in criminalising people's response to hunger) cast a long shadow.

In their survey of 1,300 North Koreans, the authors draw a harrowing picture. Some 23% of men and 37% of women say family members died of hunger. More than a quarter report being arrested, and of those who were held in political detention (about a tenth of the survey sample), 90% witnessed forced starvation, 60% saw deaths due to beating or torture and 27% said they had witnessed executions.

The findings underscore earlier clinical reports of psychological distress akin to post-traumatic stress disorder: doctors working with North Korean refugees put rates of distress at 30-45%. Clearly, some of the stress is associated simply with getting to China. But beyond that, the IIE authors find that certain groups of refugees are particularly disturbed. These include those imprisoned by the regime, and those who lost family members to hunger or illness.

Strikingly, the psychological effect is as great or greater among the group of interviewees who were aware of international aid programmes for the starving but who did not believe that they themselves had been beneficiaries. At its peak, the humanitarian programme was supposedly feeding more than a third of the population, yet a large minority of those interviewed had never heard of the programme. Of the majority who had, 96% believed they had not benefited from it; they assumed that the armed forces had appropriated the aid. This group, the authors find, was «profoundly embittered». Modelling conservatively, they estimate that 35% of the North Korean population were in a famine area, knew of the aid but thought they were not receiving any of it. That makes it hard to argue that Mr Kim, even as his public appearances are greeted with mass displays of emotion, still commands the people's loyalty. It seems that the regime itself does not think so: it has long classified more than half the population as hostile or at best wavering in their loyalties. Possibly this assessment is no longer paranoid.

Ziegler also discusses a rise in marketization as a result of coping with famine. Finally, video from the southern side does permeate the borders, and North Koreans are evaluating their southern cousins - not always favorably. Ziegler supports flooding the markets and airwaves with more culture, as well as improving refugee services in ROK and sponsoring visits between the two rivals.

ROK and DPRK, are still each mountain-torn federations of provinces, each with lively linguistic flourishes and petty political squabbles among them all. Instead of at least three or four (northern Korea is historically just as fractured geographically and linguistically) peninsula-wide statelets, the two Koreas have consolidated through brutality two fledgling national entities. Ironically, South Korean identity is possibly weaker, except perhaps in the southeast, than in the North. Future generations might be more pragmatic. The vision of a unified Korea is a shared, yet alienating fixation. And when, paraphrasing Adrian Buzo, the ripples from these rocks tossed in the pond crash against one another, the successes and failures of each states' Cold War competition will be a dream many shared as children, and then became men. «Two steps forward, one step back» is how South Koreans refer to progress. Both DPRK and ROK should prepare for the step backwards all the way to the nineteenth-century past before embarking for the future.

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