Fisher Investments Editorial Staff
Geopolitics, Capitalism

Darkness and Light

By, 12/20/2011

Two world leaders passed away over the weekend, leaving vastly different legacies in their wakes. North Korea’s Kim Jong Il and the Czech Republic’s Vaclav Havel both led flailing communist economies after the Iron Curtain fell, but the choices each made were starkly different. Kim chose oppressive communism, presiding over starvation and depression for 17 years. Havel helped usher in a capitalist era of freedom and growth. Each path offers a host of lessons.

Kim’s reign taught us closed, communist economies—quite simply—are likely unable to provide for all citizens. It’s estimated two to three million people—one tenth of North Korea’s 24.5 million people—starved to death during Kim’s first decade in power. Sure, he didn’t cause the heavy flooding in 1995 and 1996 that drove a crop shortage. Nor were the ensuing two years of drought his fault. But plenty of food entered the country through international aid programs, most of which his government hijacked and dispersed among the military and party elite. Food remains scarce in several areas of the country to this day; meanwhile, some reports claim Kim consumed over $500,000 in cognac annually and had lobster airlifted to his trains when he traveled.

Electricity is also scarce in North Korea. Thanks to energy rationing, Pyongyang is often unlit—the darkness typically only breaking when international delegations (or news cameras) are present, like when the New York Philharmonic Orchestra and a television news crew visited in 2008. Outside Pyongyang, power is largely nonexistent, as this satellite map shows. Consider: 40% of the population lives in those dark areas. How are they to stay warm during the harsh winter?

Economic statistics paint an equally dark picture. GDP is estimated around $40 billion—99th in the world, but woefully behind nations with similarly sized populations. Taiwan and Australia, with about 23 and 21.8 million residents, are around $882 billion. North Korean international trade totaled $5.1 billion in 2009. Average annual income is estimated at $1,400—but while you’d think communist North Korea wouldn’t have a wealth gap, most income is earned by the ruling elite. The rural populace is unspeakably poor—as evidenced by the 20% child malnutrition rate as of 2004, 69-year average life expectancy (150th in the world) and high infant and maternal mortality rates. This, for a country sandwiched between fast-growing South Korea and faster-growing China and across the Sea of Japan from one of the world’s most developed economies.

Not much good has befallen the nation ranked dead last in economic freedom.  

But Havel taught us there’s a way out of that darkness. Only 12 when Stalinists seized power in 1948, he saw how communism wrecked Czechoslovakia in short order—and did something about it. From 1963 through 1989, he fought the Soviets with his pen, writing plays as social commentary. He was jailed numerous times for subversive writings and helping groups organize against the regime (that didn’t stop him—his prison writings were published, too). After his final release in 1989, Havel became the de facto leader of the Velvet Revolution, which ousted the Soviets. He was subsequently elected President of Czechoslovakia, oversaw the peaceful Slovakian independence and remained President of the Czech Republic until 2003.

During his presidency, Havel led the transition to capitalism, privatizing the Soviet-nationalized industries. He brought the Czech Republic into NATO and paved the way for 2004’s EU accession, forging strong political and economic ties to the West.

The results are staggering: With only 10.2 million people, the Czech Republic had a $261 billion GDP, with total trade of $230.6 billion, in 2010. Only 1.5% of the population falls on the lowest 10% of the income spectrum. Life expectancy is around 78 years, child malnutrition is only 2.1% as of 2002, and infant and maternal mortality are very low.

Granted, the country isn’t problem-free. Average annual salary (adjusted for cost of living) ranks 20th in the EU. Its population is aging, and it has large state pension and health care burdens. Though it ranks 28th  globally in economic freedom, corruption is an issue and private property rights need improvement.

But considering where the Czech Republic came from—40 years as a cog in the Soviet machine—it’s come a long way. Capitalism triumphed over communism in former Czechoslovakia, and if it ever has the chance to take hold in North Korea, it could help nearly 25 million people out of darkness.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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