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DPRK Economy

Kim Jong-un did admit that his economic policy had been unsuccessful during a plenary meeting of the Workers’ Party Central Committee on 19 August 2020. At the meeting, North Korea admitted to the failure of the five-year economic development strategy and announced that the party would hold its eighth congress in January 2021 to establish a new economic plan. It was the first time that North Korea officially acknowledged economic failure since 1993.

North Korea’s five-year plan failed to meet economic growth goals. The North Korean economy is getting even worse lately, due to COVID-19, flood damage and typhoons. It is quite surprising that the top leader admitted to the failure of his economic policy. While he delegated some of his power to others to shift blame for the failed policy, he recognized that he should take ultimate responsibility. Many analysts saw the leader’s rare acknowledgement of the failure as a show of his confidence in the regime’s stable power structure.

In August 2020 Fitch Ratings lowered its 2020 growth forecast for the North Korean economy by two-and-a-half percentage points to negative 8.5 percent. In February 2020, Fitch had forecast growth of 3.7 percent, but revised that down to negative 6 percent in May due to the Covid-19 pandemic. Fitch took into consideration the continued international sanctions on the regime, growing global uncertainties and an economic slump in China, the North's largest trading partner.

North Korea's GDP in 2018 fell by over four percent compared to the previous year. The Bank of Korea said 25 July 2019 this is the biggest drop since 1997 when the regime went through a severe famine. Seoul's central bank attributed the poor growth to international sanctions and poor agricultural yields. The North's exports dropped by over 86 percent compared to 2017 and imports by over 31 percent, shrinking North Korea's overall trade volume by nearly half.

North Korea's food production fell to a 10-year low in 2018, according to the United Nations. The regime harvested 4.9-5 million tons of grain duirng th year year and by 2019 at least 43 percent of their population was in need of humanitarian aid. Despite the growing need for assistance, donations had fallen as several aid groups were forced to curtail programs on North Korea due to international sanctions on the regime. According to the UN, the food shortage was caused by a lack of farmland, inefficient agricultural production, and a string of natural disasters.

According to UN entities operating in the DPRK, in 2019 almost 10 million people do not have access to safe drinking water and 16 percent of the population does not have access to basic sanitation facilities, increasing the risk of disease and malnutrition. People living in northeastern and rural provinces suffer most from the lack of basic services, and the 2018 Global Hunger Index classified the level of hunger in the country as “serious” and “bordering on alarming.”

Kim Jong Un inherited power in December 2011 and soon afterwards initiated reformist policies remarkably similar to China in the early 1980s, in the early years of Deng Xiaoping’s rule. But the North Korean media has not acknowledged that the country is reforming itself (with a measure of success). Little is actually left from the Soviet-style state socialism in present-day North Korea. Instead, there are nice-sounding euphemisms, like ‘economic improvement measures’ or ‘our style socialism’.

South Korea's central bank estimated that North Korea's economy posted its sharpest decline in 20 years in 2017, due to tougher international sanctions. The Bank of Korea said on 20 July 2018 that the North's Gross Domestic Product is estimated to have contracted 3.5 percent last year from 2016 in price-adjusted real terms. The bank said it was the first negative growth since 2015. It said North Korea's mining sector contracted 11 percent. Coal output plunged after exports were banned by the UN Security Council in 2017. The heavy chemical industry shrank 10.4 percent. The agriculture, forestry and fishery sector fell 1.3 percent due to a drought. The country's total trade value dropped 15 percent to around 5.5 billion dollars. Per capita Gross National Income stood at about 1,250 dollars, about 4 percent of the level in South Korea. Bank of Korea officials said North Korea's economy has suffered for years from international sanctions, but it was hit harder in 2017 than previously, as its traditional ally China joined the trade restrictions.

The Bank of Korea(BOK) on 28 July 2017 estimated the 2016 North Korean economic growth, noting the relatively high growth in fact reflected a base effect stemming from the economic struggles faced by the communist regime in 2015 due in part to drought. The South Korean central bank said the average annual economic growth of the North in 2015 and 2016 was only one-point-three percent, emphasizing the North is continuing a low one-percent-range economic growth in recent years. The BOK also presumed the North’s nominal gross national income (GNI) in 2016 at 36.4 trillion won, only 1/45 that of South Korea. Per capita GNI of the North was projected to be 1,461,000 won, 1/22 that of the South.

A typhoon hit at the end of September 2016, inundating villages near the Tumen River, along the border areas with China and Russia. Relief agencies reported that over 100 people were killed, 400 were missing and 70,000 have been displaced by one of the worst humanitarian disasters to affect North Korea, since the droughts in the 1990s that caused, in part, widespread suffering and starvation. The floods have destroyed 20,000 homes as well as numerous schools and hospitals, and washed away 30,000 hectares of crops that were nearing harvest. The North Korean government mobilized 200,000 people to help with the relief effort, and has committed to build 20,000 homes and other buildings before winter temperatures take hold. The South Korean government is not providing any flood relief to the North.

At the 7th KWP Party Congress in May 2016, Kim Jong-un announced a five-year economic plan, the first since the 1980s. Over the next five years, the North should "fly the flag of victory" and become a "scientific and technological, economic and highly civilized power," Kim said. He also called for efforts to improve the country’s power shortage crisis. Many analysts say increasing electricity output is key to reviving the North’s economy.

North Korea's unregulated "market economy" is responsible for over 28 percent of overall demand in the regime, including consumption and investment. That's the conclusion reached 02 November 2016 by South Korea's central bank after dissecting the relationship between North Korea's "Social Accounting Matrix," which studies the flow of economic transactions between households, firms and the government and the regime's "informal sector," or the self-employed economy that's not monitored by the central government. Researchers found that de-centralized economic production and consumption have been on a constant rise, in both the agricultural and the financial sectors, with the country's richest social class now using private financial institutions to invest in various construction projects. Twenty-eight percent is significantly higher than the range of 10 to 25 percent seen in the 15 Republics of the Soviet Union from 1965 until its demise.

The Gross Domestic Product [GDP] $15.5 billion (2001E), with a purchasing power parity of $21.8 billion (1997 est.). 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: 01-09-2020 20:43:11 ZULU