Missile Launch and Economy

By Chris Monday

After the North Korean missile launch, the Korean media paid special attention to a rise in the benchmark KOSPI stock index and the appreciation of the won against the U.S. dollar.

Presumably, this was reported to calm nerves and to demonstrate national strength. While Koreans have a right to boast of their relative economic stability, there are, I think, deeper reasons to expect a continuation of these positive economic trends.

History shows that tragic events can actually have positive economic effects. Notable examples are postwar Germany and Japan. It seems that even 9/11 gave the American economy a boost, postponing the housing crisis.

Perhaps this is why Thomas Carlyle termed economics the dismal science. But why would the misfortune of the North Korean missile launch be beneficial to the Korean economy?

Firstly, there will be added military investment. Not only Korea, but the United States and Japan will spend more on protecting themselves. This will also stimulate industry and foster technological spin-offs.

There is a solid theoretical basis for believing that the most effective Keynesian policies involve increases in military spending.

Secondly, and more importantly, an augmented North Korean threat will bring advantageous changes to Korean society. This can be seen by examining the ideas of economist Mancur Olson.

In his book ``Rise and Decline of Nations'' (1982), Olson demonstrated that cartels such as labor unions, professional associations, farm organizations and lobbies are constantly attempting to change market rules to create collective goods which do not increase the welfare of society as a whole, as with the public good, but rather bring benefits for their own cartel.

Following the logic of collective action, cartels act rationally when they try to alter market rules which create large rents for themselves while, lowering the economic welfare of the entire society (including themselves), but to a lesser degree than their newly gained rent.

This is why farming groups seek tariffs or unions aim to raise wages above market levels. ``Special-interest organizations and collusions,'' wrote Olson, ``reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.''

Moreover, because of coordination problems and high transaction costs, coalitions of cartels slow down a society's capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth.

Clearly, this is the case in today's Korea: Chaebol foster less and less innovation, national political life has been hijacked by the main opposition Democratic Party over silly sideshows such as Dokdo, farmers' coalitions create media spectacles over obscure issues with American meat imports.

But national emergencies tend to disrupt the organizational efforts of cartels, increasing their transaction costs relative to the benefits of rent-seeking.

Moreover, when national survival is at stake, a crisis will normally force cartel members to refocus on true ``public goods,'' rather than on collusive activities.

Not by chance, there is now a redoubled effort to pass free trade agreements (FTAs) with Europe and the United States. Clearly, a nuclear-armed North Korea makes contrived issues like the mythical ``mad-cow'' disease seem dangerously frivolous.

And, now, the need to coordinate economically and politically with Japan clearly outweighs the importance of South Korea's easternmost islets of Dokdo in the East Sea.

My worry, however, is that the contentious North Korea issue will hamper progress in signing a free trade agreement with China.

Chris Monday is a professor of economics at Dongseo University in Busan. He can be reached at chrismonday@gmail.com.