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North Korea - Economy Background

North Koreans are often forced to participate in projects deemed necessary for the good of the country or to attend multiple ceremonies and lectures in the lead up to celebrations marking regime anniversaries or the birthdays of the country’s leaders. In 2008 provincial Workers’ Party committees issued orders increasing control over the province’s judicial authority, youth unions, and residents for the purpose of shoring up flagging construction projects. The orders had given authorities in the provinces broad powers to conscript residents into labor units. People are dragged off to the Labor-Training Corps and are forced to work.

The Gross Domestic Product [GDP] was estimated by CIA at $28 billion (2013 est.) at the official exchange rate). A nation's GDP at official exchange rates (OER) is the home-currency-denominated annual GDP figure divided by the bilateral average US exchange rate with that country in that year. The measure is simple to compute and gives a precise measure of the value of output. Many economists prefer this measure when gauging the economic power an economy maintains. North Korea does not publish reliable National Income Accounts data.

CIA reported purchasing power parity GDP in the 2010s at $40 billion. This was derived from purchasing power parity (PPP) GDP estimates that were made by Angus MADDISON in a study conducted for the OECD; his figure for 1999 was extrapolated to 2015 using estimated real growth rates for North Korea's GDP and an inflation factor based on the US GDP deflator; the results were rounded to the nearest $10 billion.

Military expenditures [dollar figure] are $5 billion to $7 billion (1995 est.), or about 25% of GDP (1995 est.). Exports total value were $912 million (f.o.b., 1996 est.), and included commodities such as minerals, metallurgical products, agricultural and fishery products, and manufactures (including armaments). Major partners were China, Japan, South Korea, Germany, Hong Kong, Russia. Imports had a total value of $1.95 billion (c.i.f., 1996 est.). Commodities included petroleum, grain, coking coal, machinery and equipment, consumer goods, with partners including China, Japan, Hong Kong, Germany, Russia, Singapore.

More than 90% of this command economy is socialized; agricultural land is collectivized; and state-owned industry produces 95% of manufactured goods. State control of economic affairs is unusually tight even for a communist country because of the small size and homogeneity of the society and the strict rule of KIM Il-song in the past and now his son, KIM Chong-il. Economic growth during the period 1984-88 averaged 2%-3%, but output declined by an average of 4%-5% or more annually during 1989-97 because of systemic problems and disruptions in economic and technological links with the former USSR and China.

The leadership insisted on maintaining its high level of military outlays from a shrinking economic pie. Moreover, a serious drawdown in inventories and critical shortages in the energy sector in the 1990s led to increasing interruptions in industrial production. Abundant mineral resources and hydropower have formed the basis of industrial development since World War II. Manufacturing is centered on heavy industry, including military industry, with light industry lagging far behind. Despite the use of improved seed varieties, expansion of irrigation, and the heavy use of fertilizers, North Korea is not yet self-sufficient in food production.

Indeed, a shortage of arable lands, several years of poor harvests, systemic inefficiencies, a cumbersome distribution system, and extensive floods in 1995-96 followed by a severe drought in 1997 have resulted in increasingly serious food shortages. Substantial grain shipments from Japan and South Korea are offsetting a portion of the losses. North Korea remains far behind South Korea in economic development and living standards.

During Japan's colonial administration of Korea from 1910 until 1945, industrial and infrastructure development efforts were largely concentrated in the relatively under-populated and resource-rich northern portion of the country. As a result, following Japan's defeat in 1945, the division of the Korean Peninsula left around 65% of the heavy industrial facilities and infrastructure in the North but the majority of the population in the agrarian South.

Both North and South Korea suffered widespread destruction during the Korean War but in the period immediately following the armistice, the DPRK was able to mobilise its labour force and exploit its natural resources - particularly its substantial mineral reserves and hydropower - to achieve rapid economic development. It was assisted by large amounts of aid from other communist countries, particularly the Soviet Union and China, which helped the DPRK resurrect and develop heavy industry and mining, although at the expense of agriculture and light manufacturing. Western studies confirm that through mass economic mobilisation based on a series of economic development plans beginning in 1954, the DPRK was able to achieve very rapid rates of growth - averaging 12% per annum - that far exceeded the ROK's until the late 1960s.

As a result, the DPRK was able to build a socialised command economy in which state-run industries produced 95% of the goods and agriculture was collectivised. However, in the 1970s the economy began to stagnate. The first significant failure came during the First Seven-Year Economic Plan (1961-67) when the USSR suspended its aid because of the DPRK's decision to support China in the increasingly bitter Sino-USSR dispute. The lacklustre performance of the economy over this period forced the regime to extend the Plan by three years, although the publicly stated reason for the failure to attain production goals was the need to divert more resources and manpower to the military. Upon the Plan's completion in 1970, the DPRK stopped releasing economic and social data.

In an attempt to reduce its reliance on Soviet economic aid, the DPRK began a large-scale modernisation program based on importing technology and capital, principally for the further development of the heavy industrial sectors of the economy. The DPRK was not, however, able to operate the plant properly or produce goods of sufficient quality to export. Problems of efficiency and quality control were exacerbated by a weakening of global demand stemming from the oil shocks of the time, resulting in the DPRK defaulting on the repayment of its foreign loans. The initial enthusiasm and rhetoric of mass mobilisation was no longer sufficient to drive the economy forward as the inefficiencies of a command economy became evident. Rather than adapting to changed domestic and international economic circumstances, the DPRK increasingly turned to contrived "work harder" campaigns, mass loyalty displays and the intensification of the Kim Il-Sung personality cult and ideological education, appealing to the people to continue their arduous march towards the DPRK's goals. At the same time, an increasing proportion of the national budget - as much as 30% - was directed towards a rapid expansion of the DPRK's armed forces.

The DPRK's economic growth slowed considerably through the 1970s and 1980s, with per capita income estimated to have fallen around 40% below that of the ROK. By 1980, per capita GNP in the DPRK was estimated at around a third that of the ROK and its international debt blew out to more than $5 billion, nearly $2 billion of which was owed to communist creditors. In 1982, Kim Il-Sung announced a new economic policy giving priority to increased agricultural production through land reclamation, development of the country's infrastructure and trade and greater reliance on domestically-produced capital equipment. The DPRK also promulgated a joint venture law in 1984 to attract foreign investment and technology. The new emphasis on expanding trade and non-heavy industry was not, however, accompanied by any shift away from support for the military sector and the expected results of these programs did not eventuate. In a further attempt to attract foreign investment, the DPRK announced in 1991 the creation of a Special Economic Zone in the far northeast of the country, at Rajin-Sonbong. However, lack of infrastructure and uncertainty about investment security and viability have hindered growth and development.

The Third Seven-Year Economic Plan (1987-93) was abandoned when the Soviet Union and Eastern Europe collapsed in the early 1990s and for the first time, the DPRK admitted the Plan's failure, but emphasised that this was temporary. To compensate for the setback, Pyongyang launched another Three-year Plan in 1994 which again placed emphasis on agriculture, light industry and foreign trade but this ended without result after barely six months. After Kim Il-Sung's death in July 1994, the DPRK did not announce any new economic plans, merely calling for its workers to "rally under the Red Banner, continue on their arduous march and demonstrate their revolutionary zeal."

The seasonal arrival of extreme rains in July and August 1995 compounded by soil erosion and river silting led to flooding that destroyed the harvest and contributed to the period of starvation that has been deemed the great famine and referred to as the “Arduous March” by the DPRK. Between 1996 and 1999, it is estimated that between 450,000 and 2 million people starved to death.

The DPRK had fallen far behind the ROK in economic development and living standards, and is suffering from severe shortages of capital, energy and raw materials, obsolete technology and outdated production facilities. Without hard currency to purchase essential imports and update technology and equipment, the economy is caught in a downward spiral. The rigidities and inefficiencies of a command economy and lack of investment in the rural economy have also contributed to serious food shortages which have been compounded by natural disasters in 1994-97 and the increasingly insistence of China and Russia on hard currency payments rather than barter transactions.

The DPRK cannot afford to import enough of the essential goods needed for its economy to function, most importantly coking coal for steel production and oil for transportation. The resultant energy shortages compounded the problems facing the country's industrial base and transport system, especially given the economy's heavy reliance on energy-intensive industries such as chemical production and heavy machine building. There is no indication so far of domestic economic or political reform of the kind that is taking place in China, Vietnam or Russia. In fact, the DPRK has worked hard to distinguish itself from those countries where socialism has failed, by emphasising in its domestic propaganda its "own style of socialism". In the late 1990s most observers believed the DPRK's economic problems had grown so large that they threatened to overwhelm the regime.

By the end of the decade, things began to turn around. According to ROK Bank of Korea estimates, the DPRK economy grew 6.2% in 1999, its first increase in a decade, followed by a more modest 1.3% growth in 2000, 3.7% in 2001, and 1.2% in 2002.

The constitutional amendment in September 1998 freed technocrats in charge of economic management from oversight of the Central People's Committee, dominated by cadres of North Korea's communist party. In addition, in 1998, local governments were given the responsibility of managing light industries and cooperative farms in local areas, while cabinet ministries retained oversight of heavy industries. These changes were further confirmed in a document entitled "Directives for Economic Management" delivered by Kim Jong-il in late 2001.

Despite the reforms, by 2001, North Korea's GDP was still more than 20% below its 1989 level. In mid-2002, Pyongyang announced a series of, by local standards, drastic changes that had taken place on 1 July 2002. There were multi-fold increases in the price of food grains, fuel, electricity, transportation, rents and wages, with, for instance, the price of rice raised 550 times and basic wages 18 times. There was a devaluation of USD/KPW 4 to 150 from 2.15, close to the black market rate of 200. Farmers markets were officially legalised, and some price-setting autonomy was given to consumption goods factories. State enterprises were told to become profitable or to close, with "a cost accounting system to be applied more thoroughly", and subsidies abolished. The creation of a special economic zone at Sinuiji, on the border with Dandong in China, held further prospects for market reform.

But the North Korean economy did not collapse. The mid-2002 reforms did not resulted in loss of monetary control, most likely as a result of the lack of monetary accommodation and the removal of bottlenecks to domestic and international trade. Some supply response to the mid-2002 reforms seems to have taken place, but remained limited in the absence of large-scale international aid and foreign investment, which would require a successful conclusion to the nuclear talks. In North Korea, even slow income growth would be supportive of political stability.

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Page last modified: 30-06-2021 11:42:34 ZULU