August 17 – North Korea
Common Sense Economics
On August 17, 1945, Korea was officially divided by the victorious powers of World War II, namely the Soviet Union and the United States. The dividing line was the 38th Parallel.
This has led to an incredible “natural” experiment. North Korea has been government by a command economy, built around a collectivist, communist ideology. South Korea has incorporated many institutions of a free economy, including private property and markets.
No other major differences, apart from political and economic institutions, separate the two. They have the same people, language, customs, climate, and natural resources. In 1945, North Korea was wealthier than the South. Yet their economic trajectory, symbolized by the nighttime satellite phone above, has been remarkable different. South Korea is all lit up. North Korea is completely dark. This tells us something about the institutions necessary for prosperity.
Think about several reasons why North Koreans produce so much less than South Koreans. What would have to change, for this to be different? Why doesn’t it?