Protected Power

Here's a letter I sent to the Joong Ang Daily today:

As you reported recently, the Fair Trade Commission is once again wringing its hands over the potential for market abuse in numerous local industries which are dominated by a small number of local firms. Good steward of the market that it is, the FTC has promised to keep its eyes open for unfair competition. Among the industries mentioned by the FTC, however, were beer and automobiles, sectors in which the oligopoly is due largely to the government itself. ("Corporate oligopolies increase," Dec. 22)

As of 2008, local brewers Hite and OB controlled nearly 100% of the Korean beer market, allowing the companies to reap average annual operating profits of more than 60 percent. This lack of competition, however, should come as no surprise to the FTC. For years, smaller, upstart brewers have been prohibited by law from bottling their beer and competing with Hite and OB, while foreign brews are slapped with a 30 percent import tariff. The result has been a life free of competitive pressure for Hite and OB, but higher prices and lower quality beer for consumers.

Similarly, in the automobile market, the Korean government protects local automakers with a variety of barriers (tax, regulatory, tariff) to foreign-made cars. For example, in addition to an 8 percent import tariff, foreign cars are subject to a tax burden of more than 70 percent, compared to 56 percent for domestic cars. Surely the leaders of the FTC don’t need a high-powered think tank to tell them that such a system will result in oligopoly.

According to its website, the FTC aims to foster a “competitive market environment by reforming anti-competitive regulations which allow entry barriers and limit business activities.” I trust, then, that the FTC will find the government’s own market distortions in the beer and car markets to be of great interest in its efforts to enhance local competition.

Aaron McKenzie
Seoul

Update: the Joong Ang Daily published this letter on 3 January, 2010.

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Good Riddance

It's about time.

When Representative Patrick Kennedy of Rhode Island announced earlier this year that he would not seek reelection to the U.S. Congress, he ensured that, for the first time in my life - and indeed, in my parents' lives - no member of the Kennedy family will hold national office in the United States. That's right: since 1947, a Kennedy has held either a seat in the Senate, the House, or the Oval Office - sometimes simultaneously, as when John F. Kennedy was president and his two brothers, Robert and Edward, sat in the Senate.

Like millions of other American kids, I was brought up to see the Kennedys as noble public servants, as American royalty who, god bless them, took time out of their busy days of yachting and adultery to look after us little people. Nevermind Chappaquiddick, or that JFK shared a mistress with a mob boss, or that RFK essentially taught Richard Nixon how to use the FBI for his political ends. No, the commonfolk were supposed to be grateful for all the Kennedys had done for them. In fact, given their knack for skiing into trees, dying in plane crashes, or being assassinated, the Kennedy clan managed to become an object not only of our gratitude but also of our sympathy.

But perhaps now that we're free of this blueblooded bunch, we can rid ourselves of the notion that the Kennedy politicians were devoted to "public service" (though the NYT is certainly doing its damndest to keep the tradition alive).

A service is something voluntary provided and willingly received. When I use my own time and money to give food to a hungry man on the street, that is a true public service (and charity). If, instead, that hungry man uses a gun to rob me of my money in order to buy food, he will rightly go to prison for theft. If the state uses the threat of force to take my money and give it to that man, however, it is merely called "taxation" or, to put it in Kennedy terms, a "public service." But the Kennedys are not public servants for the same reason a thief is not a public servant: they have made their living by quietly confiscating the property of one group of people in order to finance a flamboyant shower of benefits for other groups of people - state-sanctioned thuggery, in other words, and hardly a lifestyle worthy of reverence.

Patrick Kennedy's departure reminds me of Don Boudreaux's remarks upon the passing of Representative Jack Murtha earlier this year. Simply substitute the Kennedy name for Murtha's:

If Mr. Murtha on his own had traveled the country picking pockets, robbing banks, and burgling houses, only to bring the booty back to western PA and share it with his friends, he would have been rightly despised as a common criminal. But because Mr. Murtha joined forces with persons having similarly questionable morals, who together pass off their thievery as “lawmaking,” he’s celebrated in your pages – celebrated for doing, save on a grander scale, exactly what is done by common thieves.

To be sure, there will be no shortage of other goons waiting to fill the Kennedys' expensive Capitol Hill loafers. Perhaps, though, without the Kennedy sheen, people will be more likely to see the new bullies for what they truly are.

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Why Not Give Them Spoons?

Sometime back in the 1960s, the late economist Milton Friedman was being shown around an Asian country, during which tour he was taken to a worksite where the government was building a new canal. Friedman noticed that scores of workers were moving earth with shovels rather than heavy construction equipment. When he asked why the state wasn't using more efficient equipment, Friedman's host replied that the state's goal was to keep employment high and that this was a jobs program.

Friedman replied, "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."

The point being, of course, that employment does not make people (or society) wealthy - only productivity can do that.

The South Korean Ministry of Employment and Labor (MEL), however, seems to believe that spreading work hours over a greater number of people will somehow benefit the nation economically. As Yonhap reported yesterday, the MEL wants to reduce the average annual hours worked by 13.5% next year - to 1,950 annual hours from 2,255 hours - in the hopes that companies will then hire more workers to pick up the slack.

Why 1,950 hours? If the goal is for companies to spread the total hours over more people, why not put a limit of 1,000 hours on each worker? Surely, by the MEL's logic, this would be an even greater boon to the economy? Hell, why not 100 hours? Or even 10 hours? The reason, of course, is that the MEL's move is based not on what is economically rational, but rather on what is politically beneficial - i.e. the ruling party will be able to point to the new jobs it "created."

Granted, concern over the average South Korean's working hours is not entirely unfounded, as South Koreans currently work more annual hours than any other OECD country (more than 2,200 hours per year, as compared to about 1,700 in the United States). By itself, however, this statistic is inherently neither good nor bad - it's just a number.

Of greater concern is the low productivity of South Korean workers. While South Koreans work more hours than their fellow OECD members, they have one of the lowest rates of labor productivity (only Estonia, Poland, Russia, and Mexico create less value per hour worked). To be sure, this is to some extent the result of a South Korean corporate culture that frowns upon workers leaving the office before their boss, despite having completed their work for the day. South Korean workers often complain of frittering away a couple extra hours at the end of each day, chatting online or browsing the internet, as they wait for their boss to leave. As a result, the actual number of "working" hours in South Korea is probably slightly lower than the OECD stats would indicate. The OECD's statistics, however, merely average South Korean GDP per capita across the average hours spent at the jobsite, which makes labor productivity appear dismally low.

Yet, despite these quibbles with the statistics, South Korean labor productivity could no doubt stand to improve. The goverment, however, does little to help in this area. Rather, the state spends most of its time and resources helping inefficient firms avoid competition, whether from foreign or domestic sources.

Taking a page from Milton Friedman, if the South Korean government merely wants to create jobs, I suggest that it ban the use of computers in local offices. Just imagine the jobs that would be created: pools of typists would be needed to prepare documents, postmen would once again be needed to carry letters in the absence of email, and, as online porn would vanish, adult video stores could once again flourish.

If, however, the government truly cares about prosperity, it will have to acknowledge that only productivity leads to economic growth.

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The Great Chicken Wars of 2010: A Tragic Ending

Well, that was short-lived.

Lotte Mart, apparently cowed by the tantrums of local chicken shack owners, announced yesterday that December 15th will be the final day of sales for its much-ballyhooed 5,000 KRW bucket of fried chicken.

Lotte Mart had previously promised that the low price would be in place for at least a year but, with a muddled explanation, suddenly reversed itself this week. Perhaps the fact that owners of small fried chicken restaurants, backed by by the Korean Franchise Association, lodged a formal complaint with the Korea Fair Trade Commission and staged protests outside of a Lotte Mart outlet in Seoul had something to do with Lotte Mart's abrupt change of heart.

That the chicken restauranteurs ran crying to the KFTC as soon as any other business had the temerity to compete with them only reinforces my view that the KFTC (and similar agencies in other countries) is little more than a tool used by firms to avoid having to improve the quality of their goods and services - i.e. to avoid meeting consumer demands. Not that we should be surprised: the KFTC concerns itself neither with fair trade nor low prices.

Denying that it is bowing to outside pressure, Lotte Mart insists that it will raise the price of its chicken "out of consideration for corporate social responsibility" - whatever that means. The primary responsibility of a corporation - and especially of a supermarket - is to make a profit by satisfying its customers. And if the long lines of people queuing up to buy low-priced chicken are any indication, Lotte Mart was being very responsible indeed.

Fortunately, as the Joong Ang Daily points out, this incident has raised the hackles of many consumers who are now aware that they've been paying too much for their fried chicken:

In the end, it was the consumers that got the short end of the stick.

Jung geun-sook, a housewife in her late forties who stood in line at Lotte Mart’s Yeongdeungpo outlet to buy chicken yesterday morning, said that this was her second time braving the lines. “I heard that they’re not selling the chicken any more,” she said, changing her grip on the shopping bag. “As soon as [fried chicken] became affordable, they take it away from us. Nobody’s standing up for the consumer.”

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Reunification and the 'One Korea' Myth

Since the end of World War II in 1945, when American and Soviet forces bumped into each other in Northeast Asia, the Korean peninsula has been divided along the 38th parallel. In those 65 years, South Korea has become one of the most advanced economies on earth, while North Korea struggles to feed its own people. Since the division of the peninsula, the assumption has been that the two Koreas would one day reunify, by means peaceful or otherwise. And if I was a betting man, I too would put my money on eventual reunification.

But should the two countries be glued back together? At what point would it be safe to say that North Koreans and South Koreans are no longer "one people," and that, as a result, reunification should not be the goal?

Korean students learn from an early age that Korea, as a unified nation and race, has roots that date back more than 4,300 years, and that the Korean people are descended from a uniquely pure bloodline. This long history of unity, so the story goes, was only disrupted by the colonial savagery of the Japanese and, ultimately, by Cold War politics. From this narrative follows the logical belief that North Korea and South Korea are destined to be reunited.

This narrative, however, is likely wrong. As Carter Eckert has written (and as B.R. Myers has also argued), the notion of a single Korean nation is relatively recent:

...Before the late nineteenth century there was little, if any, feeling of loyalty toward the abstract concept of "Korea" as a nation-state, or toward fellow inhabitants of the peninsula as "Koreans." Far more meaningful at the time, in addition to a sense of loyalty to the king, were attachments of Koreans to their village or region, and above all to their clan, lineage, and immediate and extended family.

The Korean elite in particular would have found the idea of a nationalism not only strange but also uncivilized. Since at least the seventh century the ruling classes in Korea had thought of themselves in cultural terms less as Koreans than as members of a larger cosmopolitan civilization centered on China.

To the extent that a monolithic sense of "Koreanness" ever existed, it would certainly be put to the test if and when North Korea finally collapses and sends millions of refugees streaming southward in search of a decent meal amidst the bright lights of Seoul.

However similar the people of North and South Korea may have been in 1945, they have quickly, and in important ways, become two different peoples since the division of the Korean peninsula. Most visibly, the average South Korean is now estimated to be 12 centimeters taller than the average North Korean due to malnutrition in the North (and you certainly won't see misery like this in South Korea). When combined with the distinct Northern dialect of the Korean language, such physical disparities will be visible markers of a person's origins and will likely introduce a visible underclass of people into South Korea, which prides itself on the homogeneity of its society.

Perhaps more importantly, the Korean peninsula is often referred to as the best natural political-economic experiment ever witnessed. A group of people, sharing a common cultural background and starting from a similarly poor base, were divided under vastly different economic systems. As a result, North Koreans and South Koreans have evolved entirely different institutions (by which I mean not only their governments but also the entire implicit social framework under which people interact and form their expectations) and, in consequence, different values. Francis Fukuyama, for example, has categorized South Korea as a "low trust" society in which people are suspicious of those outside their own family. But if you think South Koreans have problems trusting others, imagine the North Koreans, who come from a society in which any other person might be a government informant. Now that's a low-trust society.

In the long run, of course, the North Korean people would benefit greatly by adopting customs and mores which more closely resemble those of South Korea. Institutions, however, are not imposed, either suddenly or from above. Institutions are an evolved, emergent phonomenon and, as such, it is unrealistic to dump North Koreans into a South Korean-dominated society and expect them to make an automatic switch. Acknowledging this, South Korea currently sends North Korean defectors to Hanawon, a re-education and resettlement center outside of Seoul, where refugees are given a crash course on life in the modern, free market world. To date, only about 20,000 North Korean refugees have made it to South Korea, and yet Hanawon, for all its valiant efforts, can only do so much to soften the landing of these folks in South Korea. Imagine trying to re-educate 25 million North Koreans who have no sense of life in an open, democratic society.

Of course, most South Koreans insist that the entire nation pines for reunification. When pressed, however, most will admit that they don't want immediate reunification, largely because they understand the sacrifices such a sudden reunion would entail in their own life.

"Maybe," they say, "we could be reunited in 20 years...or maybe 50 years."

Which is as good as saying "not at all, at least not in my lifetime." Indeed, I've noticed an increasing number of younger South Koreans who are completely uninterested in North Korea and will openly admit that reunification holds little appeal for them.

And maybe this is the right attitude. After all, there is no universal law of magnetism which states that people with similar languages, cultural traditions or histories must always and forever be drawn together into one nation. Austria is not part of Germany; Canada is not part of the United States; Panama is not part of Colombia; Singapore is no longer part of Malaysia. Obviously, the Korean peninsula has its own history, different from all of these places, but the point is that neither ethnic similarities nor prior unions are enough to justify putting old nations back together when they've been separated for some long period. (And, incidentally, if Koreans follow the "one race [우리 민족]" concept to its logical end, they should be preparing to incorporate that area of China just north of the peninsula which is heavily populated by ethnic Koreans.)

Instead of reunification, then, perhaps the goal for policymakers ought to be a stable North Korean state which trades with - rather than antagonizes - its neighbors, and which does not imprison or starve its own people. Given the challenges of imposing South Korean institutions and culture on the North Korean people, a scenario in which North Koreans can gradually evolve and create their own history may well be in that nation's best interests.

I realize, however, that an open admission of such a policy would be politically impossible in South Korea. Articles 2 and 3 of the South Korean constitution still identify the administration in Seoul as the only legitimate government on the Korean peninsula and, thus, all North Koreans are technically citizens of South Korea, entitled to all the rights and privileges such a status entails. However inconvenient this provision may be, renouncing it would be equally unpalatable. As Andre Lankov writes: “An open renouncement of this decades-old position would be fraught with numerous ideological and legal problems because it would imply the renouncement of the long-standing fiction of ‘one Korea.’”

Unfortunately, I'm not convinced that much good will come of a policy based on this long-standing fiction.

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VBS.tv: The Vice Guide to North Korea

Here, in yet another "What a Peculiar Place North Korea Is" video, the boys at VBS.tv travel to Pyongyang for the standard tour. The film is touted as the "Vice Guide to North Korea," but it won't surprise you to learn that there is precious little in the way of vice here - at least where sins of the flesh are concerned. Nor is the video likely to show you anything you haven't seen in countless other videos about North Korea, but the place is indeed so peculiar that even this standard fare can often hold a person's attention.

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Chicken on the Cheap

Apparently, low prices are a bad thing - at least according to local pizza and fried chicken restaurants.

As the Joong Ang Daily reported yesterday, small restaurants in Korea which serve pizza and chicken have their knickers in a twist over the new low prices for similar products at large discount supermarkets.

Coming just months after the explosion in popularity and subsequent controversy surrounding pizzas sold at discount store E-Mart, Lotte Mart’s low-priced chicken could renew a public debate over whether large discount stores are taking business from smaller eateries.

Lotte Mart will begin selling buckets of fried chicken for just 5,000 won ($4.37) today at 82 Lotte Mart outlets nationwide. This is a third of the cost compared to leading chicken delivery franchises such as BBQ and Kyochon, which commonly sell the same portion for up to 17,000 won.

Considering that while “whole” fried chickens at local franchises usually weigh around 750 grams (26.46 ounces) while Lotte Mart’s chickens weigh 900 grams, Lotte Mart touted its chicken as having better value than the competition.

Astute readers will have quickly identified at least two problems with the gripes of the pizza/chicken restauranteurs. The first is the notion that Lotte Mart or E-Mart are "taking business" from smaller shops, as though customers are a commodity to be traded among firms. These fried chicken chains, such as BBQ and Kyochon, however, do not own their customers, nor are they guaranteed a certain minimum amount of profit. E-Mart and Lotte Mart are not "taking" business from anyone: they do not snatch people off the street, grab their money and then force fried chicken into their hands. The only way a business succeeds is by pleasing its customers, and when a competitor finds a way to "outplease" that customer, the first business either adapts or fails. And to judge by the long lines of people queuing up to buy Lotte Mart's chicken (see photo), Kyochon and BBQ have some adapting to do.

Secondly, a nation's standard of living does not rise because it protects businesses from competition or because sellers are able to charge high prices for their products. The standard of living, and quality of life, improves when consumers are able to buy more with the same amount of money (or, to put it differently: when firms are able to produce more from less). When Lotte Mart drops the price on its fried chicken, consumers are made ever so much wealthier, as money that had previously been spent on fried chicken can now be spent on other items. These lower prices benefit everyone, but they are especially helpful to lower income people who now have access to more goods and services than in the past.

Small restaurants are, understandably, upset about any added competitive pressure, as it is the rare business indeed that actually welcomes competition. Far from being villains, however, Lotte Mart and E-Mart should be applauded for catering to consumers and for helping to raise the Korean standard of living.

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Boudreaux on the KORUS FTA

Once again, South Korea and the United States have agreed to terms on a free trade deal, one that feels like it's been in the works since the days of Douglas MacArthur.

Fine, great, wonderful. Now, let's just see if the two countries' legislatures can ratify the FTA without riots breaking out in the chambers.

While the agreement is a step in the right direction, I can't say that I'm overly enthusiastic about it. Don Boudreaux, writing in a letter to the Wall Street Journal, nicely captures one of the numerous problems with the KORUS FTA:

Reporting on the U.S.-Korea free-trade pact, you write that “South Korea agreed to give the U.S. five years to phase out a 2.5% tariff it levies on Korean-built cars, rather than cutting the tariff immediately” (“U.S., Korea Agree on Free-Trade Pact,” Dec. 3).

In other words, South Korea agreed to allow Uncle Sam to continue to impose additional financial burdens on Americans who buy automobiles made in South Korea, for no reason other than to make life easier for Detroit.

So much for the Obama administration’s courageous refusal to allow special-interest groups (in this case, U.S. automakers and the UAW) to dictate policy – so much for our leader’s eagerness to get the policy right even if doing so means getting the politics wrong – and so much for all the ballyhoo, out of Detroit and Washington, about U.S. automakers again being world-class producers who can compete successfully with foreign automakers.

Sincerely,
Donald J. Boudreaux

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Saved by FIFA: South Korea Excused from World Cup Host Duties

The annoucement that Russia (2018) and Qatar (2022) have outbid (or outbribed, depending on your viewpoint) all competitors to host upcoming World Cup tournaments likely disappointed many South Koreans, who had hoped that their country would host the 2022 event. South Korea staged the 2002 tournament (in tandem with Japan) and, by most estimations, acquitted itself well as a host of the world's most popular sporting event. I hope, however, that you will all pause for a moment to thank whatever god you worship that South Korea won't be hosting another World Cup, at least in the foreseeable future.

Eight years after hosting the 2002 World Cup, South Korea is dotted with ten large stadiums which were purpose-built for the World Cup but which now sit empty most of the time. Moreover, whatever temporary employment opportunities the event may have offered have long since evaporated. This leads Stephen Dubner of Freakonomics to point out:

Economists and public policy analysts have studied the economic impact of large international sporting events like the World Cup and the Olympics, and national events like the Super Bowl, and the evidence shows that there is very little in the way of economic benefit from hosting these events. Incomes don’t grow faster, more jobs aren’t created, governments don’t rake in significant hauls of new tax revenues. In other words, the best evidence produced by disinterested researchers is that the economic value of hosting the World Cup or Olympics is not especially large.

In fact, I'll go Dubner one further: as I wrote recently, I suspect - and some evidence suggests - that the economic impact of these sporting events is negative.

To be fair, Dubner admits that hosting events such as the Olympics and the World Cup may contribute to a country's sense of prestige or national pride, but he also rightly notes that such an idea cannot be quantified. Just how much extra would you be willing to pay in taxes in order to achieve some nebulous boost to your patriotic self-esteem?

Now, if only I could convince South Korea to give up its obsession with hosting the Olympics again...

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Myers Discusses North Korea on BookTV

You can talk a regime into doing a lot of things, but one thing you can't make it do is commit political suicide. And this is where the left wing, and the right wing, and the center in America are all wrong about North Korea. The left wing is wrong because you cannot bribe or sweet-talk a regime into commiting political suicide. The right wing is wrong because you can't bully it into doing that either. The center is wrong for thinking that you can get the Chinese to persuade them to do it.

-B.R. Myers

This video is now ten months old, but B.R. Myers' lecture is well worth a listen in light of North Korea's attacks on the Cheonan and Yeonpyeong Island this year. Whether you agree or disagree with him, Myers always has a refreshingly unique take on our Northern neighbors and the way they think.

For Myers' comments on the Yeonpyeong Island attack, see Calculating Infinity. In addition, you're certain to profit from a reading of his book, The Cleanest Race.

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Henderson On Ending Conscription

My father turned 18 years old in March, 1973, an unremarkable fact in itself but a fortunate one when you consider that the last American conscripted into the US military was drafted in December, 1972. After his birthday, my father traipsed over to the Army recruiting station in Boise and volunteered to join up, provided he could serve as a medic. The Army, however, couldn't guarantee anything. And so my father, not terribly keen to see wartime Da Nang, merely shrugged and went back to his parents' logging business in the Idaho mountains, never to don a military uniform.

Given that he had such a choice at all, Pops had best add the latest audio release from the folks at Econ Journal Watch to his podcast queue. In the show, Lawrence White and David Henderson discuss how American economists helped to bring about an end to conscription in the United States. As someone who lives in South Korea (a country which mandates military service for all able-bodied males), this podcast obviously grabbed my attention, and Henderson gives an engaging overview of the arguments - relating both to efficiency and morality - that, in tandem with the wind-down in Vietnam, helped to bring an end to the draft. And don't fret: the show is devoid of econoimic jargon and entirely accessible to the layperson.

As Henderson notes, the true costs of conscription cannot be calcutated by simply tallying up the government's budgetary costs. Rather, as the economist Walter Oi pointed out, we must also account for the cost borne by the conscripted young man who is forced to forego several years of his life in order to serve in the military. As Henderson writes in this article:

Using some empirical methods that were sophisticated for their day, Oi estimated the loss to draftees and draft-induced volunteers and found it quite high— between $826 million and $1.134 billion. While this number might seem low today, Oi’s data were in mid-1960s dollars. Inflation-adjusted to 2005, the losses would be $4.8 billion to $6.6 billion.

An army of draftees, therefore, ain't quite so cheap as it seems at first glance.

On the moral front, the young economist Martin Anderson made the argument that conscription was, in effect, no different from the forced labor of slavery - and maybe even worse, as the U.S. government was forcing young men into the odious moral position of choosing between killing and being killed. I've written on this point before, and it's reassuring to know that a number of eminent brains have my back.

Finally, in what has become the most famous exchange of this debate, we have the late, great Milton Friedman sticking it to General William Westmoreland, then Chief of Staff of the U.S. Army, at a Vietnam-era conference on the merits of the draft. Writes Friedman in his memoir:

In the course of his testimony, [Westmoreland] made the statement that he did not want to command an army of mercenaries. I stopped him and said, ‘General, would you rather command an army of slaves?’ He drew himself up and said, ‘I don’t like to hear our patriotic draftees referred to as slaves.’ I replied, ‘I don’t like to hear our patriotic volunteers referred to as mercenaries.’ But I went on to say, ‘If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher.’ That was the last that we heard from the general about mercenaries.

Perhaps it's time South Korea considered going the mercenary route.

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