The tale of two Koreas: Economic lessons for Egypt

South Korea is now the 10th largest economy in the world, and is among the most active economies in terms of international trade, home to globally recognised brands [GALLO/GETTY]

Cambridge, MA – A year after the Egyptian revolution, Egypt has taken a dramatic step in political transformation. With successful parliamentary elections recently under its belt, real change – while not altogether secured – looks more promising than ever.

Yet, while Egyptians can be proud of how far they’ve come, beyond democracy, Egypt’s long-term prospects may depend more crucially on its economic policy choices.

Will Egypt’s budding democracy usher in the right economic institutions? If the phrase “institutional inertia” means anything in Egypt, choices made today will, for better or worse, set the tone for the country’s economic prospects for many years to come.

In this regard, perhaps, it’s worth turning to another transition that recently unfolded: the decidedly undemocratic political transition from one North Korean dictator to another in the Far East.

What can Egyptian policymakers learn from the tale of twoKoreas? Despite their geographic distance, North and South Korea offer two instructive case studies of how decisions about economic policy can play out in the long-run.

South Korea went through its own democratic transition three decades ago. While its first nominal elections were held in 1948, many historians argue that “true democratisation” occurred only in fits and starts until 1987. South Korea’s model of economic orientation, both during and after this period, however, was one of openness: built on the pillars of industrialisation, universal education and export-led growth.

South Korea is creating jobs at rapid rate

South Korea is now the 10th largest economy in the world, despite occupying a small landmass the size of the US state of Ohio. It is also among the most active economies in terms of international trade, home to globally recognised brands such as Samsung, Hyundai, Kia and LG, and exporting goods worth over $450bn in 2010. The streets of Seoul today are more reminiscent of London or San Francisco than the war-torn backwater that it was 60 years ago, with gleaming skyscrapers, a state-of-the-art subway system, and a vibrant cultural scene.

Juxtapose this with North Korea – closed, poor, and now under the iron grip of the third generation of a dictatorial dynasty. The contrast could not be more striking. On a satellite image of the world at night, the border between the Two Koreas is starkly visible. To the South, a glittering mass of economic activity, and to the North, almost complete darkness.

More tellingly, North Korea’s per capita income at the time of separation from the South was actually higher. Now it is one of the poorest countries in the world, with an average annual income of less than id=”mce_marker”,800 – one sixteenth that of the South.

The North’s main economic and political philosophy has been one of juche or “self-reliance”, which has implied, among many things, a closed economy from the rest of the world. The state completely runs the show. The regime tolerates no private industry as such (although sizeable black-markets persist), and foreign direct investment in North Korea has been virtually impossible.

Relevance to Egypt

How is this relevant to Egypt? In some ways, North and South Korea today provide two stylised versions of what Egypt’s future economy could look like 20 to 30 years from now. As this tale of twoKoreas suggests, building the foundation for open economic institutions, coupled with democratic change, can pay immense long-term dividends, improving the wellbeing of the people and standing of the country on the global market.

But the pressures against establishing an open market are strong – especially if the economy seems to be sputtering in the short-run.

Impressive showings at the polls by both the Muslim Brotherhood and the Al-Nour Salafist party – both of Egypt’s Islamic parties – was likely more a product of their domestic platforms and their histories of social justice than voter resonance with Islamic ideologies. Both of Egypt’s largest parliamentary blocks, then, are beholden to Egypt’s poorest for political support. In light of the business corruption that has characterised Egypt’s economy throughout the Mubarak years, it may be tempting for these parties to enact radical redistribution policies from the get-go.

“The streets of Seoul today are more reminiscent of London or San Francisco… with gleaming skyscrapers, a state-of-the-art subway system, and a vibrant cultural scene.”

But the ruling coalition must resist the temptation to close off the Egyptian economy and redistribute its shrinking spoils by nationalising private industries or raising tariff barriers. The fact that the closed and centralised economic approach of the North probably led to faster economic growth in the short-run (during the early 1950s), but eventually stagnated over time, cannot be forgotten.

Luckily, better alternatives abound. Perverse energy subsidies, which account for a whole tenth of Egyptian GDP, represent an incredible low-hanging fruit: vestiges of the corrupt Mubarak regime. Cutting these and diverting them to more productive uses – something the Egyptian government has begun to do – is a good start. Levelling the energy playing field so that solar technologies can gain more traction – something many of Egypt’s sunny-climate neighbours are already doing – would be yet another step in the right direction.

Early news out of Cairo is promising – the emerging consensus on economic policy seems to be one of short-term stabilisation coupled with moderate long-term policy platforms. As of yet, there seems to be little indication of radical redistributive policies or an anti-trade agenda.

The key will be to focus on integrating the Egyptian economy with the rest of the world in ways other than tourism to the Great Pyramids. A measured strategy of gradual liberalisation seems to be the safest bet.

To couch the success of Egypt’s democratic revolution in economic terms would be completely insensitive to its deeper meaning, and to the sacrifices of the Egyptian people. Still, whether or not this revolution will lead to a freer, more prosperous Egypt decades from now will depend in large part on the economic decisions it makes in the coming months.

Jisung Park is a PhD student in Economics at Harvard University. He is also the executive director and host of Sense & Sustainability, a podcast dedicated to the many facets of sustainable development.

Dr Abdulrahman M El-Sayed is a social epidemiologist and physician, and is training at Columbia University. He is also a Fellow at Demos. His commentary has been featured in the Guardian, the Huffington Post, and the Spotlight on Poverty.