1. a) i. What is another name for a collectivist economy?
Another name for collectivist economy is planned economy.
ii. Give another two examples of collectivist economies.
The USSR implemented the most complete and even for some time successful experience of a collectivist economy as a working alternative to a capitalist system. Indeed, actual examples of planned economies are closely connected with communist system countries, with Soviet Union as the original and demonstrative example (Ericson 1991).
Another good example of collectivist economy is Cuba. The economy of Cuba is centrally managed by the Government. The Communist Party of Cuba is responsible for guidelines of development concerning the planning of Cuba's economic development, coupled with supervising new initiatives aimed to foster the economy of Cuba.
b) What type of economic system operates in South Korea? Explain your answer.
In 1948, southern governments have established western-style democracy and market economy structure. While North Korea remains a totalitarian country, the South is a great free market economy. South market economy has made huge progress since1950’s and is now the 12th developed economy in the globe in terms of nominal value of GDP.
Since 1962, an aspiring five-year plan has been provided for economic elaboration. Also, after stabilization of diplomatic arrangements with Japan in 1965, a strategy focusing on international trade was adopted. Therefore, a period of rapid growth in trade and investment and a period of fast extension occurred in 1960’s. Later, in 1970’s, South Korean policy focused on light investment and heavy industries within which the yearly economic boost was at 8.6% (Savada & Shaw 1990).
State model of encouraging the boost of huge globally competitive companies named “chaebol” through easy funding and tax privileges led to growth of family-owned corporations, which later appeared as international corporations. For example, these include Hyundai, Samsung, and LG.
Nowadays, Southern economy is determined by temper inflation, high labor force occupation, export surplus, and honest allocation of revenue. South Korea has provided different employment possibilities in several industries.
c) Using the table in figure 1 compare the economic performance of South and North Korea.
According to the Figure 1, economic growth of North Korea has decelerated from 2011 and remained unstable. In fact, collapse of the economy in 2008 influenced GDP of South Korea in a negative way (Kyeong-Won & Hwa-Nyeon 2008). Exports of Korean companies declined as well as GDP growth rate. On the other hand, gross domestic product of North experienced growth. Nevertheless, export of goods and services in North Korea stays at the minimum level.
There is a significant difference in GDP per capita in North and South Korea. This means radical distinction in country's standards of living. While wealth of the population in South Korea shows its growth, people from North Korea have poor standards of living.
According to GDP comparison by sectors, northern economy concentrated on industry sector due to the strict policy of its government, while south economy concentrated on services due to the global market demand.
Labor force occupation in North Korea is remarkably low. The total population amounts to 24,554,000 and working labor is only 12.2 million (Chang 2009). This could be explained by high level of illegal employment. Occupation of labor in South Korea concentrated in services sector. Northern Korea labor occupation concentrated in industry sector as a key economic sector.
South budget revenues exceed the expenditures. This is an absolutely positive trend for state economy as budget is in surplus. Current liabilities are less than current accounts receivable. The budget of North Korea is in balance. Nevertheless, current liabilities of country are higher than its debt.
d) Why might firms which produce low quality goods survive in a collectivist economy but not in a market economy?
In a planned economy, there is state control over factors of production. In other words, state decides what to manufacture, how to produce it, and who to produce it for. Based on this assumption, government establishes strict supply for goods, and low quality of commodities can survive in the collectivist economy.
In the market economy there exists freedom of economic decisions. Also, he government does not control demand and supply of goods and services. In other words, demand for the good is influenced by the consumer needs. Often, low quality goods have low chances to succeed in the market.
In a collectivist economy, there is no competition between companies because state controls all sectors of economy. In the market economy, there are many firms in the market, which creates intense competition. Due to this, the higher the quality of company’s goods, the more chances it has to stay in the market.
e) Explain what is meant by innovation and why this would be encouraged in the type of economic system which operates in South Korea.
Innovation is a course of action where the concept or invention converts in a good or service with a purpose to meet necessary needs. Authorities of South Korea have already started the implementation of transformation strategies aimed to develop its market position as innovative hub of Northeast Asia. According the data of Index of Economic Freedom, top corporate tax level has been reduced to 22%.
World Bank statistics also shows that Korean authorities have implemented a regulatory reform to simplify starting of new ventures. Just in one year South Korea improved its rank from 133 to 53 in terms of an ease of starting a business.
The role of the state has been essential in South Korea’s economic and industrial development. This is especially true if to look at strong interrelations between the “chaebols” and authorities. Nevertheless, diversified “chaebols” are pure private firms. The country intentionally created and nurtured them as key drivers of economic development. These industry groups created a basis for industrialization in labor-concentrated branches and played an important role in expediting technology learning in the industry. The “chaebol” has been the greatest power of South Korean innovation system.
f) From the growth figure 2 (North Korea) and figure 3 (South Korea) compare and contrast the growth patterns and suggest reasons for the differences.
According Figure 2, from 1992 till 1998 the economic situation in North Korea was the worst. This was caused by invariableness of political and economic systems. This left the country unprepared for world challenges. Industrial resources, including manures, pesticides, and electricity for flushing, also decreased even below the level that was before natural disasters of 1990s. Moreover, the reason of such crisis lies in high defense costs (nearly 25% of GDP) and ineffective governance. Otherwise, South Korean government provided effective economic policy in 1992 – 1998 that led to positive tendencies caused by implementation of a chosen type of economic system.
In the period from 1999 till 2005, North Korean economy recovered and showed positive tendencies brought about by external support and necessary market improvement. Also, an important factor was ending of famine in 1995, which was made possible by supplying necessary products from outside. But in the end of 2005, North Korea showed negative tendencies as a result of rolling back existing reforms according to new anti-reform policies. Furthermore, appearance of nuclear weapon faced disapproval of the international community.
As showed in Figure 3, in 1999, South Korean economy was affected by Asian financial crisis characterized by non-performing loans in many of Korea's merchant banks. After getting over the crisis, South Korean economy continued steady growth in 2000. The fast recovery and further growth of southern economy is a result of intensive innovative policy of government and adaptation to the latest trends.
2. With reference to the information in the case study, using North Korea as an example of a planned economy and South Korea as an example of a mixed economy, discuss the advantages and disadvantages of planned and mixed economies. (300 - 400 words)
Planned economy is a type of economic system where all decisions relating to production or investment are taken by the government without any possibility of influence from the side of companies or citizens) Advantages of planned economy are not abundant. First of all, the chances of monopoly appearing are next to nil because of government regime. Collectivistic system of economy may help reduce the gap between different segments of the population through provision of equal possibilities to each citizen.
Talking about the disadvantages of planned economy, it is necessary to point out the following notions. Planned economy leads to a destruction of local business and innovative activity. The results involve common lower productivity and lower economic development of a country. This system leads to possibility of citizen’s revolution due to hard government measures, especially related to local business activity. Also, the result of this type of economy is government bureaucracy, delay in decision making process, and inefficient use of external and internal resources.
Mixed economy is a type of economic system where all functions related to manufacturing or services are executed by a combination of government and business segment. As a result of participation of both state authority and private enterprises, there appears an advantage of enjoying benefits of private companies' capitalist nature and government socialist nature. Secondly, in government balanced economy, there is lower inequality of revenue distribution. And finally, there is a possibility for individuals to start business and make profits. However, at the same time, they have social responsibility and are concerned with the welfare of a society (Seung-Hun 2010).
Nevertheless, instead of positive aspects, it is necessary to consider negative attributes. There is lower than appropriate use of the sources, which plays an important role of society's welfare. It is caused by government decisions on resources mobilization towards the production or services. This production is beneficial for the society as a whole rather than economically profitable production or services.
In mixed economy businesses face a lot of various difficulties. The major of them are government loopholes like favoritism and bureaucracy.
Both of these economies have their own advantages and disadvantages. It may seem like one economy is better than other, but essentially it depends on state priorities and possibilities of development.