Collectivist Economy

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Collectivist economy is often called a planned economy. If a country has a planned (collective) economy, it is almost completely planning production and assortment of all goods and services and is regulating prices of all products and the level of wages. At present, planned economies are Cuba and, partially, Laos.

South Korean model of economic development belongs to one of the major models of the mixed system. This model relies on a strategy aiming the production of the country for export. The economy successfully combines a large influx of foreign capital, growth of monetary savings, and intensive introduction of advanced scientific and technological progress. South Korea is characterized by intensive economic growth based on scaling of output by improving quality of production factors. Despite the fact that import market of South Korea has become freer in recent years, the agricultural sector is still under the policy of protectionism because of serious discrepancies in the price level of agricultural products, such as rice, inside and outside the country.

As of 2012, South Korean economy is the 13th in the world in terms of gross domestic product (at purchasing power parity), and 15th in the world by nominal GDP. For comparison: nominal South Korea's GDP in 2009 amounted to 832.3 billion dollars (IMF 2011), North Korea’s - only 28 billion dollars (CIA 2013). Thus, South Korea's GDP is 30 times greater than that of North Korea. If to compare two countries' GDP per capita in purchasing power parity, it appears that the corresponding figure for South Korea is 32.400 thousand dollars and for North Korea – 1.800 thousand dollars (excess of 18 times). According to the CIA, external debt of South Korea in 2012 amounted to 436.9 billion dollars (about 26.93% of GDP), which is about three times lower than in the neighbouring country (12,5 billion dollars). GDP composition by sector of these countries differs much as well. This is especially true in agricultural and services fields – 2.7% and 57.5% of South Korea to 23.1% and 29.4% of North Korea. Budgets of both countries can hardly be compared because of the enormous gap between them. Moreover, budgets surpluses or deficits also differ: while South Korea got its positive (2%), North Korea has a negative budget deficit (-0.4%) (CIA 2013).

Planning at the national level is sometimes useful in wartime when the market fails quickly because all resources of the country are directed at the protection from the enemy. Much worse results are obtained using the same plans for the country in times of peace, especially if the government makes a plan not as a recommendation to participants of economic life, but tries to get them to strictly comply to it by making people and business organizations to act strictly in accordance with planned targets. In this type of economy, there is no competition, and therefore, there is no inverse relationship between producer and consumer. This leads to the fact that the manufacturer can work despite the quality of the product, and the state has to take action to force the company to think about it.

The market economy is characterized by such features as unregulated proposal, i.e. manufacturers are free to decide what products and in what quantities to produce, unregulated demand (buyer, depending on the availability of equity determines how much and what to buy), unregulated price, and balancing supply and demand. Under these conditions, there is self-tuning or market regulation of economic activity. The market mechanism is regulated by two laws: the law of value and the law of supply and demand. The first generates the level of average prices and the second determines the ratio of cash and cash flow generated in the market.

Innovation is a new value for the customer. It must meet needs and desires of consumers. Thus, innovation is indispensable quality of novelty, industrial applicability (economic viability), and it is sure to meet the demands of consumers. Systematic innovation is purposefully organized for changes in the systematic analysis of opportunities that these changes can bring to the success of the enterprise. Reliance on innovation has become a sort of "hallmark" of reforms carried out in South Korea. Typical is the situation with e-government, which by the degree of development came in the first place in the world (Seung-ah 2012). South Koreans were able to almost completely abandon paper work, which speeded up decision-making. The public was broadly informed and consulted about its use. This method also saves significant amount of money each year since the cost associated with processing paper documents and service of those who previously were involved in transportation of all these documents now can be used for activities necessary for improvement of country's goods and services. Innovativeness of Korean economy can be shown by the example of the development of nuclear technology. A relatively small country in terms of the population that has recently risen from absolute poverty is now building nuclear reactors for themselves and for export. Moreover, in many ways, they are ahead of reactors, which are constructed in western countries. An important distinction is also South Korea's willingness to freely deliver new technology for export to developing countries in contrast to most western economies.

Upon the occurrence of financial crisis in Asia in 1997-98, weaknesses of the model of South Korea emerged. These include high proportion of debt to GDP and increased foreign borrowing in a short-term. As a result, South Korea's GDP in 1998 dropped by 6.9%, however, due to successful actions of the government of the country in 1999 and 2000, GDP grew by 9% annually. North Korean economy was affected by the crisis as well. It greatly dropped in 1997 by 6.3%, even more than in 1992 (-6.0%). South Korea has conducted many reforms in its economy after the crisis, which included steps to become more open to foreign imports and investments. In 2003 to 2007, GDP growth in South Korea decreased to 4-5% each year. In late 2008, due to global economic crisis, GDP growth in South Korea decreased to 0.2% in 2009. The economy began to recover to a large extent in the third quarter of 2009 because of growing exports, expansionary fiscal policy, and lower interest rates. Economic growth in 2010 has exceeded 6%. North Korean economy had a constant grow of GDP by average 4% from 1999 till 2005. However, it slowed down to -2.3% in 2007(CIA 2013).

The essence of planning and command system is that answers to the main questions of the economy are based on the guidance of national economic plan developed by central bodies of government. Attempt to achieve strict compliance with the uniform policy plan for the whole country, as a rule, creates negative consequences such as delay in decision making in the economy, decreased self-interest of people in the economy, and consequently low productivity and quality of their work, weakening economy susceptibility to scientific and technical progress, suppression of civil liberties, and death of democracy. Most manufactured goods in North Korea are not only of low quality and outdated design, but are made with prohibitive costs. Therefore, the goods are not in demand in the domestic and global markets. New technological processes (for example, continuous casting of steel), which could improve the situation have not been used for decades, whereas in countries with market economies, they have mastered very quickly and on a large scale. In 2004, South Korea became a member of the club of countries with GDP over a trillion dollars and now ranks among 20 largest economies in the world. Initially, this success was made possible through a system of close government and business ties, including directed credit and import restrictions. Government promoted import of raw materials and technology for the production of consumer goods and encouraged savings and investment. South Korea is one of the leading countries in the world in the development and manufacture of electronics (Kuchikomi 2012). Initially, the economy of southern part of Korea attracts foreign investors from America, Japan, and England. However, during last 30 years domestic production of the country was to conquer the world market on its own. Today, everyone knows brands such as LG and Samsung. These corporations are the pride of the Korean economy as well as a guarantee of the quality of electronics. South Korea competes with Japan in the production of humanoid robots. Moreover, Korean scientists continuously discover and explore new forms of energy (Bin Park 2013). KIA, Hyundai, and Daewoo develop plans to become leaders of the automotive industry.

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