June 25, 2007

ECONOMIC STAGNATION IN THE LATE YI DYNASTY:

AN INSTITUTIONAL ACCONT

By Chung H. Lee*

University of Hawaii at Manoa

By the end of the 19th century the economy of Korea’s Yi dynasty (1392-1910) was in economic stasis with an extreme impoverishment of peasantry. It may have reached a Malthusian state with the growth of population outpacing the availability of land, made worse by ill-defined property rights to forests, inept management of common resources, and a decaying system of water control. This paper argues that property rights to the fruits of one’s own labor was also absent in the late Yi dynasty, discouraging productive activities and thus contributing to economic stasis in the late Yi dynasty. Evidence for this argument is found in the accounts of foreign travelers and visitors to Korea of that period.

*The author wishes to thank Yongho Choe and Edward Shultz for their comments on an earlier version of the paper.

ECONOMIC STAGNATION IN THE LATE YI DYNASTY:

AN INSTITUTIONAL ACCONT

By the end of the 19th century the economy of Korea’s Yi dynasty (1392-1910)was in economic stasis with an extreme impoverishment of peasantry. It may have reached a Malthusian state with the growth of population outpacing the availability of land, made worse by ill-defined property rights to forests, inept management of common resources, and a decaying system of water control. This paper argues that property rights to the fruits of one’s own labor was also absent in the late Yi dynasty, discouraging productive activities and thus contributing to economic stasis in the late Yi dynasty. Evidence for this argument is found in the accounts of foreign travelers and visitors to Korea of that period.

INTRODUCTION

By the late 19th century, the Korean economy of the Yi dynasty (1392-1910) was in a state of stasis where money was barely used and markets and external trade were severely underdeveloped (Deuchler 1977, Palais 1998). It was, as put by Palais (1975, p.67), in a Malthusian state with a highly skewed distribution of land, small land holdings for the average farm household, and high rates of tenancy.

What brought about this stasis is obviously a complex questionwith many competing, if not partial, answers. According to Deuchler (1977, p. 67), this stasis is a natural state of a traditional society that failed to develop modern commerce. The economy of the Yi dynasty was based on “community self-sufficiency”with little use of markets and money as late as the second half of the 19th century. It was an economy in which domestic trade was conducted under strict government supervision and foreign tradewas regarded as a danger to the economy. Even after the signing of a treaty with Japan in 1876, which officially opened trade with Japan, the Korean government was barely interested in encouraging foreign trade and modernizing the economy (Deuchler 1977, p.84).[1]

In contrast, Cha (2001, 2004) attributes the economic decline in the 19th century Yi dynasty, a decline that began, according to him, in 1700,to the mismanagement of common resources, which caused a decaying system of water control and the consequent decline in rice production, the main stay of the economy of Korea then. The mismanagement included the failure to protect forests, the failure to build or repair water reservoirs, the failure to prevent illegal farming inside reservoirs, and the failure to adjudicate disputes over the control of waterways. Clearly, these are failures relating to property rights and common resource management, and since the protection of property rights and the proper management of common resources are generally the function of the state it is the Korean state that must be held ultimately responsible for economic decline in the late Yi dynasty.

Ill-defined property rights to forests accelerated deforestation and thus contributed to an increasing incidence of flooding. The flooding in turn led to the destruction of water reservoirs. Farmers responded to it by building waterways to divert water from rivers, but that in turn led to numerous disputes between upstream and downstream villages. In other words, ill-defined property rights to forests led to the predictable consequences of the “tragedy of the commons,” and the government’s failure to adjudicate disputes relating to waterways discouraged private efforts to improve irrigation.

This highly plausible account of economic decline in the late Yi dynasty by Cha (ibid.) focuses on a decaying system of water control, which is attributed to ill-defined property rights to forests, as the causal factor for faltering efficiency in rice production. In this paper we broaden the definition of property rights to include the rights to the fruits of one’s own labor and argue that the absence of effective property right protection in the late Yi dynasty had serious consequences on economic incentives and economic growth. For evidence on the absence of property right protection and its adverse effect on economic incentives we rely on observations made by foreign travelers and visitors in the late Yi dynasty. Granted that they provide only anecdotal evidence and cannot be said to be completely unbiased, they nevertheless render support to the thesis that the absence of economic institutions of property rights was a contributing factor ineconomic stagnation in the late Yi dynasty.

The following section discusses the general relationship between the institutions of property rights and economic growth. It is followed with a discussion of the lack of property right protection in the late Yi dynasty and its effect on incentives and economic activities as observed by some foreign travelers and visitors to Korea then. The final section concludes the paper.

INSTITUTIONS, PROPERTY RIGHTS AND ECONOMIC GROWTH

Institutions are the formal and informal rules governing human interactions and vary from society to society (North and Thomas 1973, North 1990). As such they affect the way individuals carry out economic transactions and are, along with policies, what differentiates the rich nations from the poor (Olson 1996). As to be expected, certain institutions such as property rights and the rule of law are of greater importance to economic growth than others, as they impact more directly on the structure of incentives (Acemoglu, et al., 2001a and 2001b).[2]

Property rights are, according to Libecap (1989, p.1), “…the social institutions that define or delimit the range of privileges granted to individuals to specific assets, such as parcels of land or water…. Property rights institutions range from formal arrangements, including constitutional provisions, statutes, and judicial rulings, to informal conventions and customs regarding the allocation and use of property.” Clearly, property rights to parcels of land and water are important to economic growth in an agrarian economy since they influence how those scare resources are used, and Korea of the Yi dynasty certainly had a well established system of private land ownership (Hulbert 1906, Palais 1975). Equally, if not more important to economic growth, however, is the right an individual person has to the products of his own labor, a notion that goes back to John Locke (Rowley 1993, p.13). It is this concept of property right that is adopted in this paper, and it is the insecurity of that right that, according to some foreign observers, afflicted the Korea of the late Yi dynasty with adverse consequences on the economy.

The importance of the property right to the products of one’s own labor for economic growth was noted by Adam Smith (1776), who wrote that “the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property can have no other interest but to eat as much, and to labour as little as possible.” By having no right to the products of his own labor a slave has little incentive to work hard and accumulate wealth. Even in a society where slavery is not practiced its members would act as if they were slaves if the rights to the products of their own labor are not protected either because there are no laws protecting such rights or the laws that exist are not effectively enforced. In such a society the private rate of return on one’s labor will be much less than its social rate of return and socially productive activities will not be undertaken or, if undertaken, will be less than socially optimal.

INSECURITY OF PROPERTY RIGHTS IN THE LATE YI DYNASTY

What was the protection of property rights like in the late Yi dynasty? The Korea of the late Yi dynasty had a well-established system of property right to land with provincial government offices equipped with maps and detailed descriptions of every piece of arable land in the district. The system formed the basis of the land tax, which yielded a major part of the nation’s revenues (Hulbert 1906, 205). What made many of these property rights ineffectual, however, is the lack of protection of the rights to the yields from the land. A farmer may have a legal right to a piece of land, but if he has no legal protection to the yields from that land he will not be induced to be as productive as he can be. Some of the observations made by foreigners visiting Korea then provide evidence to the lack of such protection.[3]

Between January 1894 and March 1897 an English lady named Isabella Bird Bishop made four visits to Korea. She traveled extensively throughout the Korean peninsula and also visited Siberia where she had many opportunities to observe Korean settlers. Because of her travels she was in a position to compare the two groups of Koreans living in different institutional settings. What she wrote about them is remarkable in that although she did not express her observations in terms of property rights they clearly demonstrate the importance she attached to those institutions,or the absence of thereof, for the impoverishment of peasantry in Korea.

The following is what she wrote about the absence of effective property rights in Korea then (Bishop 1970, p.102):[4]

There is no doubt that the people, i.e. the vast mass of the unprivileged, on whose shoulders rests the burden of taxation, are hard pressed by the yang-bans, who not only use their labor without paying for it, but make merciless exactions under the name of loans. As soon as it is rumored or known that a merchant or peasant has laid up a certain amount of cash, a yang-ban or official seeks a loan. Practically it is a levy, for if it is refused the man is either thrown into prison on a false change and whipped every morning until he or his relations pay the sum demanded, or he is seized and practically imprisoned on low diet in the yang-ban’s house until the money is forthcoming. It is the best of the nobles who disguise their exactions under the name of loans, but the lender never sees principal or interest. It is a very common thing for a noble, when he buys a house or field, to dispense with paying for it, and no mandarin will enforce payment.

What the lack of effective property rights to the product of one’s own labordid to the Korean economy can be seen in the following observation she made about fishermen in Korea:

The Korean fisherman is credited with utter want of enterprise, … I believe that the fishing industry, with every other, is paralyzed by the complete insecurity of the earnings of labor and by the exactions of officials, and that the Korean fisherman does not care to earn money of which he will surely be deprived on any or no pretence, and that, along with the members of the industrial classes generally, he seeks the protection of poverty (p.158). (Italics added)

Without property right protection fishermen as well as merchants and farmers had little incentive to work hard and be enterprising to accumulate wealth.[5] Worse, they were induced to remain poor in order to avoid arbitrary arrest, torture, and imprisonment by capricious officials.

It is widely recognized that the ability to exchange through contract enforcement limits the potential for economic growth and the history of economic growth in Europe is a story of ever-expanding exchange relations fostered by effective contract enforcements (Greif 1993). What the Korean situation described by Bishop suggests is that the ability to exchange is only a necessary condition for expanding exchange relations, as there will be no exchange and thus no market when there are no surpluses beyond what are necessary for one’s own sustenance for exchange and for reinvestment necessary for capitalistic economic growth.[6] If potentially productive members of a society seek the “protection of poverty”because it lacks effective property rights there will be few surpluses to exchange and thus to develop markets.[7]

Another documentary source pointing to the lack of property rights and to people’s inclination to seek the protection of poverty in the late Yi dynasty is Things Korean (1908) by Horace Allen. He wrote (pp.102-3):

In a land where the collection of taxes was farmed out and every office had its recognized price, as in China, the rapacious official became a curse, and there was no incentive to manufacture, or raise more than necessary to meet immediate needs. The accumulation of visible property was therefore found to be a mistake,...

The uninfluential peasant or labouring man had ample reason therefore for not attempting to accumulate visible property. He simply wanted enough to keep him warm and to satisfy his hunger, tobacco for an almost continual smoke, and a little wine now and then to make him forget his lot.

The rapaciousness of the late Yi dynasty officials was a consequence of a political system where public offices had become a marketable commodity, as remarked by Homer B. Hulbert (1906, p.51):

Public offices were bought and sold like any other goods. There was a regular schedule of the price of offices, ranging from fifty thousand dollars for a provincial governorship to five hundred dollars for a small magistrate’s position. The handsome returns which this brought in to the venial officials at Seoul fed their cupidity, and, in order to increase these felonious profits, the tenure of office was shortened so as to make the payment of these enormous fees more frequent. Of course this was a direct tax upon the people, for each governor or prefect was obliged to tax the people heavily in order to cover the price of office and to feather his own nest during his short tenure of that office.

In contrast with the Koreans in Korea, whom Bishop and Allen found lacking in diligence and enterprise, the Korean settlers in Siberia were hardworking and enterprising:

The villages between Krasnoye Celo and Nowo Kiewsk are fair average specimens of Russo-Korean settlements. The roads are fairly good, and the ditches which border them well kept. Sanitary rules are strictly enforced, the headman being made responsible for village cleanliness. Unlike the poor, ragged, filthy villages of the peninsula, these are well built in Korean style,… It would be impossible for a traveler to meet with more cordial hospitality and more cleanly and comfortable accommodation than I did in these Korean homes.

But there is more than this. The air of men has undergone a subtle but real change, and the women, though they nominally keep up their habit of seclusion, have lost the hangdog air which distinguishes them at home. The suspiciousness and indolent conceit, and the servility to his betters, which characterize the home-bred Korean have very generally given place to an independence and manliness of manner rather British than Asiatic (Bishop 1970, pp.234-5).

What Bishop observed about the Koreans in Korea and Siberia is revealing in that it demonstrates how differences in institutions affect human behavior and how important property rights are to economic growth. Writing a century later about immigrants to the United States, Mancur Olson (1996) has made a similar observation about the effect of host country institutions on immigrants.

CONCLUDING REMARKS

Economic stasis in the late Yi dynasty clearly demonstrates that markets seldom develop unless there are surpluses to exchange and there will be no surplus to exchange unless property rights to the fruits of one’s own laborare effectively protected.[8]The accounts by foreign travelers and visitors to Korea, sketchy they might be, attest to the fact that property rights were ill protected during the late Yi dynasty, discouraging farmers and fishermen from productive occupation.

Palais (1998) points out that the elite of the Yi dynasty were intent on creating a moral and harmonious society based on the Confucian values and not making profit from commercial or industrial enterprise. The elite, he notes, had many failings to actually build a society in accordance with their belief system, but added to these istheir failure to establish a state capable of protecting property rights and managing common resources. Obviously, this failure alone cannot account for the economic decline and stasis ofthe Yi dynasty in the late 19th century, but it could not but have contributed to the decline.[9]

REFERENCES

Acemoglu, Daron, Johnson, Simon, and Robinson, James A. (2001a), The Colonial Origins of Comparative Development: An Empirical Investigation American economic Review, 91: 1369-1401.

______(2001b), Institutions and Economic Development, (“extractive institutions”).

Allen, Horace N. (1908), Things Korean: A Collection of Sketches and Anecdotes Missionary and Diplomatic (New York: Fleming H. Revel Company) (republished by Kyung-In Publishing Company in 1975 for the Royal Asiatic Society Korea Branch).