Skin in the Game: South Korea & the Cheonan Response (BhTV)

"It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong."

- Thomas Sowell

Earlier this week, the South Korean government finally acknowledged what most observers had long suspected: that a North Korean torpedo sank the ROK Navy corvette Cheonan in late March. In a televised address to the nation, President Lee Myung-bak outlined the South's response to the sinking, promising, among other things, to take the matter to the UN security council, to cut almost all economic aid to North Korea, and to bolster the ROK's military posture against future North Korean incursions. While a few people in Seoul have grumbled that the response is not firm enough (i.e. that there should have been retaliatory strikes against the North), most South Koreans seem to believe that, as abominable as the North's actions may be, South Korea simply cannot afford to risk an all-out war with its northern neighbor.

And there you have it: the reason the two Koreas have been separated for sixty-plus years, despite the fact that South Korea has for some time been the stronger military power and, what's more, has been backed up by the U.S. military, the strongest the world has ever seen. As South Korea has become wealthier and more stable, the South Korean appetite for stirring up the North Korean beehive - and, as a result, likely absorbing 25 million raggedy-ass North Korean refugees - has declined. And that scenario presumes that all goes according to the best laid plans. Northeast Asia, however, is an historically rough neighborhood, so one can understand why South Koreans would be nervous about launching a war that could provoke the involvement of China, Russia, and Japan, in addition to the United States. The South Koreans have the most skin in this game, as it were, and if they're nervous about a war, it might be wise to follow their lead.

And yet, here we have, in the Bloggingheads video above, Professor Charli Carpenter suggesting that a "quick and decisive" war would be the most "humane" solution to the long-running Korean stalemate (as though Asian wars have historically been "quick and decisive"). Easy for her to say, esconced as she is in the bucolic serenity of Amherst, Massachusetts. After all, the North Korean artillery presently trained on Seoul doesn't threaten her family, her job, or her life. But, claims Carpenter, "we" just need to find a way to evacuate everyone in Seoul. Clearly, she's never tried to get out of Seoul, with its legendary traffic jams, on a normal Friday evening, let alone while being chased by the NorKs.

Carpenter, in this instance at least, exemplifies that which irritates me most about academia: there is seldom any consequence for being wrong. If enacted, her proposal would throw the Northeast Asian economy - presently one of the most vibrant in the world - into chaos, while potentially killing millions of people, yet she herself would still have a cozy professorship at UMass.

Surely, a special place in heaven awaits Daniel Drezner for enduring this episode over at BhTV.

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Eberstadt on Capitalism, Communism, and Korea

Last month, in an event that I somehow missed in my podcast queue, the American Enterprise Institute hosted a book forum to discuss Nicholas Eberstadt's new book Policy and Economic Performance in Divided Korea during the Cold War Era: 1945-91. Joining Eberstadt for the conversation are Marcus Noland and Anne Krueger, both of whom are always worth hearing.

AEI's description of the event:

The Korean peninsula, during the four-plus decades of the cold war, provides a historically unparalleled real-world "experiment" in the relationship between a country's form of government and its economic performance. In 1945, an ethnically and culturally homogenous nation was suddenly divided by an arbitrary boundary line and subjected to two radically different and adversarial political economies for successive decades. In Policy and Economic Performance in Divided Korea during the Cold War Era: 1945-91 (AEI Press, 2010), Nicholas Eberstadt argues that the story line is not quite as simple as the now-prevailing narrative suggests (that centrally planned economies are doomed to fail against market-oriented alternatives). Rather, the race for material progress was just that: a race, the results of which were far from preordained at the outset.

Did North Korea in fact outperform the South in the decades immediately following partition? What impact did government policies have on the course of growth for both economies? And what does this rivalry entail for North-South relations today and the possible reunification of the Korean peninsula? Please join us as AEI political economist Nicholas Eberstadt, Anne Krueger of the Johns Hopkins School of Advanced International Studies, and Marcus Noland of the Peterson Institute for International Economics engage in a lively discussion about these and other issues. AEI's Philip I. Levy will moderate.

As you'll notice, I've posted the streaming video above, but you can also download the audio version at the link above. Additionally, you can subscribe to AEI's "Foreign and Defense Policy Studies" podcast here.

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Cato & the NYT on the Perils of European Social Welfare Systems

"You have to ask: how did [Greece] get into this death spiral? It's a classic death spiral, we've seen many of them in the past, and it just follows a script right down the line: entitlements, entitlements, entitlements. Unfunded entitlements."

Steve Hanke, in the video above

For years now, I've had a long-running debate with my European and Canadian friends about the long-term viability of state-run social welfare programs. My main contention is that such expansive entitlement programs are hampered by the demographic realities facing the West, as well as by the programs' effects on the incentive structures necessary to fuel the economic growth which pays for such programs. After all, we must first create wealth before we can redistribute it. Yet, as birth rates decline and retiree rolls expand, European states will have to generate more wealth with fewer workers than ever before and under policy regimes inimical to high rates of economic growth. Such thoughts, as you might imagine, mean that I stand alone at a lot of parties.

Today, however, I seem to have found an unlikely companion in these views: The New York Times. As part of its "Payback Time" series on the current troubles of the Euro zone, the paper highlights the imminent reckoning facing The Continent's social safety nets:

With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.



“We’re now in rescue mode,” said Carl Bildt, Sweden’s foreign minister. “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change.



The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

In combination with the Cato Events video above - which features economists Simeon Djankov and Steve Hanke - the NYT article shows how cheap it is to make (political) promises and just how expensive it can be to keep them.

As a sidenote, the article points out that Europe has been able to finance its extensive welfare systems thanks, in part, to the U.S. (and NATO) security umbrella. In other words, U.S. taxpayers have been subsidizing those cushy retirements and expansive national health care programs on The Continent. I suspect (though I don't have figures at hand to prove it) that the same has been true in Japan and South Korea, as the protection afforded by a U.S. military presence allowed those states to shift resources to other domestic concerns. Of course, such arrangements may benefit the U.S. as well, in that the presence of the global hegemon may prevent the Europeans and East Asians from once again busting into all-out war with their neighbors. Do the benefits to U.S. citizens, however, outweigh the costs of such massive military expenditures? I'm skeptical.

Speaking of South Korea, I'll be interested to see how the country handles its own population decline (about which I wrote recently) in the coming years. Compared to the U.S., Canada, and Europe, South Korea has a relatively small state social welfare system, but even these programs will come under financial pressure as the ratio of workers to retirees shrinks. Furthermore, as older citizens become a larger voting bloc, will they clamour for increased social benefits? Let's hope that South Korean policymakers and scholars have their eyes on the fiscal woes of Europe and the U.S. right now.


Further Material:

* Subscribe to the Cato Events podcast here
* A World Bank Institute paper describing South Korea's national pension scheme

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Older Workers & Korea's Demographic Dilemma

The JoongAng Daily today ran a seemingly-frivolous, feel-good story about Kiswire, a local auto parts manufacturer which has assembled a Korean workforce entirely of former retirees. In fact, the average age of the Kiswire workers is 59.7 years. It's a nice, heart-warming story about grandpa getting a job, but it may also be a sign of change in the Korean economy.

As most people who've spent any time in the country know, South Korea currently has one of the lowest fertility rates in the world, with the average woman giving birth to 1.2 children in her lifetime. If held constant, this rate of fertility will eventually lead to a marked decrease in South Korea’s overall population, from 49.5 million people today to approximately 42 million people in the 2050.

At the same time, life expectancy for the average South Korean is now 78.2 years. Unfortunately, many Korean companies mandate that employees retire at the age of 55, an age at which most people remain in good health nowadays. While this might help to alleviate the unemployment rate among recent college graduates, such age-related work limits hurt the economy by exiling some of its most knowledgeable and skilled members. Furthermore, as the working-age population shrinks (see image), one must ask who is going to pay for the retirement benefits of all these "old" folks who now spend between a third and a quarter of their lives collecting a pension. To judge by those population pyramids, taxes are going to skyrocket if the labor base does not expand.¹

In the discussions of low fertility and aging populations, the mood is typically one of fretful hand-wringing as commentators ponder the looming extinction of whole societies. Yet, while a low birth rate poses challenges for a society, there is no clear consensus that it necessarily invites calamity. There are, in short, measures which companies can take which will alleviate, if not entirely solve, the problem.

Enter companies like Kiswire.

As the population continues to age and birth rates remain low, South Korean businesses will face an incentive to keep workers in the workforce longer by delaying the age at which workers retire. As in Japan, the current system of early mandated retirements was designed for an era in which plenty of young people were entering the workforce each year and companies needed to make room for them. Those days, however, have passed and both private companies and the civil service must find a way to harness the skills, knowledge and productivity of their older workers. Reality won't leave them with much of a choice.


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Notes
¹ According to the United Nations Population Division, the potential support ratio in South Korea, which is defined as the ratio of the population aged 15-64 to the population aged 65 and older, will drop from 12.6 in 1995 to 5.7 in 2020 and to 2.4 in 2050 absent any replacement migration or an increase in the nation’s fertility rate.

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