The North Korean Economy in 2002 and its Prospects for 2003
2003-04-25
The North Korean Economy in 2002 and its Prospects for 2003: A Comprehensive Review (Summary)
1. Direction of Economic Policies
A. During the year 2002, North Korea pursued an economic policy to build ¡°Our-style Socialism" through the realization of the motto, ¡°Our System Is Best,¡± which is one of the ¡°Four Great Firsts.¡±
(1) North Korea designated the year 2002 as a year of ¡°March to carry out the 'Four Great Firsts' with full power to make a new leap toward the construction of a strong and prosperous nation.¡±
* The 2002 New Year joint editorial defined the "Four Great Firsts" as the ¡°leader, ideology, military and system.¡± It also said the year 2002 vigorously demonstrated the power of the ¡°Four Great Firsts.¡± (Dec. 17, 2002, Central Broadcast)
(2) Major tasks were pursued under the banner of ¡°Torch of Ranam,¡± which was based on political ideas.
(a) The North encouraged workers to develop businesses from innovative perspectives, discarding the habitual, passive behavior of the past.
* "Workers must discard old behaviors and conventional methods, and engage in their work from an innovative viewpoint." (New Year Joint Editorial)
B. Emphasis on Practical Approaches to Improve Economic Management.
(1) Emphasis on the importance of ¡°practical socialism¡± to improve and perfect economic management in order to garner maximum profits, while upholding socialist ideals (The Joseon Sinbo, Nov. 25, 2002)
(2) Calls to implement proper ¡°social measures¡± to realize the socialist principle of distribution
* "The basic direction to complete the socialist economic management is to help get the greatest profits, while maintaining socialist ideals.¡± (New Year joint editorial)
C. Highest Priority on Improving the Living Standards of the People
(1) To increase agricultural output and normal production in the areas of daily lives of citizens.
* "It is most important to resolve the problems related with the daily lives of citizens." (New Year joint editorial)
D. To pursue advancement of science and technology and projects to foster best brains
(1) North Korea focused its energies on improving and modernizing industrial technologies, intensively promoting the development of the IT industry and nurturing high-tech manpower.
2. The Economic Management Improvement Measures and the Addition of Special Districts
A. North Korea carried out extraordinarily wide-ranging internal economic reform measures by readjusting the distorted commodity prices.
(1) The Economic Management Improvement Measures are aimed at expanding corporate jurisdictions in order to manage enterprises autonomously and improve management.
(a) Specifically, the authority of senior party members was transferred to managers in an effort to exclude Party interventions and nurture professionalism. The measures also called for the formulation of realistic business plans based on actual circumstances and allowed companies to use the additional profits as ¡°resources for reinvestment.¡±
* Business autonomy and incentives were expanded to increase productivity.
(2) On a trial basis, individual farmlands were expanded and individual farming introduced.
(a) The size of farmland allowed for individual cultivation was expanded to 400 pyong from the previous 30 to 50 pyong.
* These steps are expected to increase productivity by spurring enthusiasm of farmers. It is likely to develop into Chinese-style contract farming.
(3) Phase-out the rationing system for foods and daily necessities.
(a) Foods and daily necessities used to be distributed to the general population at almost free of charge. The citizens now have to purchase them directly at grain stores or state-run shops at very high prices.
* In order to earn money necessary to buy foods and daily necessities, an increasing number of workers who walked off their jobs have returned to their workplaces. It is expected to lessen the burden on state finances.
(4) Sharp increases in prices, wages and the introduction of differentiated payments according to performance
(a) The prices of foods and daily necessities were raised 25 times on average, to similar levels at the "farmers' markets."
* Price readjusting meant reduction of commodity outflows into the black markets. Increases in work incentives led to increases in competitive mind. And, savings of state subsidies meant increases in the state investment resources.
(5) Realignment of foreign exchange rates and customs duties, and conversion of its base foreign currency into euro.
(a) North Korea realigned the value of its "won" currency at Rajin-Seonbong Free Economic and Trade Zone levels. (Under the move, the won-dollar exchange rate changed from 2.2 won to 150 won to the dollar.) Customs duties on imported commodities were doubled.
* The won's depreciation against the dollar contributed to improving conditions for foreign investment and promoting exports. It also resulted in protecting its own light industries by curbing the imports of low-priced consumer goods from China and the Southeast Asian countries.
(b) North Korea focused on collecting hidden dollars after its decision to ¡°replace the dollar with the euro as the base foreign currency from December 1.¡±
* North Korea took a drastic step of carrying out a comprehensive set of measures to improve economic management on July 1, 2002. It came eight months after the guidelines on the adoption of the measures were announced in October 2001 at chairman Kim Jong-il's dialogue with economy-related officials of the party.
B. North Korea has shown willingness toward openness by designating three special districts additionally including Sinuiju Special Administrative Region (SSAR), Mt. Geumgang Tourist Zone and Gaesong Industrial Complex.
(1) Following the enforcement of the July Economic Management Improvement Measures, the Standing Committee of the Supreme People's Assembly adopted the Basic Law for Sinuiju Special Administrative Region on September 12, 2002 in a surprise move.
* North Korea granted the rights of legislation, administration and jurisdiction to the SSARs. In order to create an international ¡°free economic zone,¡± it adopted drastic capitalist economic norms based on market economy principles.
(2) Subsequently, the presidium of the Supreme People's Assembly adopted the Law on Mt. Geumgang Tourist Zone, which is being developed as one of the inter-Korean cooperative projects, on November 13, following the designation of the area as a special tourist zone on October 23.
* Conditions for the promotion of tourism and investment have been arranged as the autonomy of the tourist zone was guaranteed both in legal and institutional terms.
(3) In connection with Gaeseong, the Gaesong Industrial Zone was formally designated on November 13, the "Law on Gaesong Industrial Zone" was adopted on November 20.
* These moves are aimed at realizing economic gains and stability of its socialist structure by demonstrating its willingness internally and externally to open its doors to the outside. At the same time, they signified the North's intention to expand inter-Korean exchange and cooperation and improve ties with South Korea.
3. Sector Economic Trends
A. In agriculture, crop output showed a modest improvement over the previous year due to favorable weather conditions.
(1) In agriculture, forestry and fisheries, production activities were more active than other sectors due to relatively favorable weather conditions and as a result of carrying out policies that put higher priorities on solving the livelihood of citizens.
(a) With regard to agricultural infrastructure, land readjustment works were completed in South Hwanghae Province and a 160km waterway linking Gaecheon with Taesong-ho Lake was built. These works laid a foundation to increase grain production. (North Korea's grain production totaled 4.13 million tons last year, a 4.6 percent rise from the previous year.)
* During the last four years, North Korea realigned a total 180,000 jeongbo of land, creating about 5,000 jeongbo of land, and built irrigation canals. Owing to these steps, the North expects the grain production to increase by 300,000 tons.
(2) Mining, manufacturing and the construction sectors enjoyed brisk production, particularly in the areas of citizens' grain needs.
B. Active Production in Mining, Manufacturing and Construction
(1) In the manufacturing sector, the North focused on normalizing the production in light industries related to the daily lives of citizens, such as textiles and footwear.
(2) In the construction sector, work began to spruce up streets of major cities including Pyongyang and Wonsan.
(a) Completion of the Gaecheon-Taesung Lake Waterway (160km); Land realignment projects in Nampo and South Pyongan Province; Construction of about 20,000 units of housing and public buildings;
Urbanization of 1.2km of Youngkwang Street in Pyongyang.
C. The Science/technology sector showed steady growth, while the transportation/communication sector managed to maintain the previous year's level.
(1) As part of the specific steps to carry out the Economic Management Improvement Measures, extensive efforts were made to improve technologies at industrial sites and to promote the development of up-to-date science and technology.
(a) While underscoring the importance of the IT industry, the North sought to achieve an instant quantum leap in the field. It also continued its efforts to introduce advanced technology and standardization by stepping up cooperation with other countries.
(2) In the area of transportation, it fell short of building railways and roads between provincial areas. In communication, attempts were made to introduce mobile communication in the Pyongyang area.
D. In foreign trade, last year saw a sharp reduction in trade deficit and a positive increase in external economic cooperation.
(1) Following the implementation of the July Economic Measures, the phenomenon of export evasion at factories or smaller enterprises due to the unfair price structure, was eased. As a result, production activities became active somewhat in the later half of last year, which has led to increased exports to China and Japan.
(a) The North's trade deficit was sharply reduced owing to increases in exports and decline in imports.
(2) External economic cooperation projects were aimed at drastically increasing exports by firmly solidifying production bases, promoting trade and economic cooperation and expanding joint venture businesses with foreign companies. (Premier Hong Song-nam's report to the Supreme People's Assembly on March 27, 2002)
(a) North Korea positively sought to expand economic cooperation with other countries. Kim Yong-nam, president of the Supreme People's Assembly, toured the Southeast Asian countries in February. It was followed by Kim Jong-il's visit to Russian and the Russian Far East on August 20-24. A North Korean economic delegation visited South Korea on Oct. 26-Nov. 2.
* A total of 13 high-level economic delegations were dispatched to China, Russia, Southeast Asia, EU countries and Africa.
4, Concluding Observations and Future Prospects
(1) Internally, North Korea extraordinarily focused on carrying out both comprehensive and concrete measures to invigorate the economy in an effort to cope with its structural economic downturn.
(a) In particular, it attempted a bold policy change by taking a practical approach in implementing the Economic Management Improvement Measures and external economic cooperation.
(2) However, North Korea is reported to have achieved only minor growth due to slower growth across all sectors.
(a) During the first half of last year, production activities were in the doldrums compared to the previous year, due to the preparations for such political events as the 90th birthday of the late leader Kim Il-sung and the 60th birthday of his son Jong-il.
(b) In the latter half, it recovered from the sluggish production in the first half as the production activities became brisk after the July Economic Measures were implemented. The result was minor growth.
(3) Key characteristics of North Korea's economic policy for the year 2003 are expected to be:
(a) Internally, North Korea is expected to maintain last year's policy framework, which calls for an emphasis on specialized production by factories and enterprises and tighter controls over these entities by tighter enforcement of the Economic Management Improvement Measures.
(b) It is likely to continue with the Economic Management Improvement Measures based on the record of having achieved positive growth for the past four years since 1999.
(c) Externally, it will seek to improve relations with the international community to develop the Sinuiju Special Administrative Region. With regard to relations with South Korea, a new basis for inter-Korean economic cooperation will be formed through such projects as the Gaesong Industrial Complex and the Mt. Geumgang Tourist Zone.
(4) However, without resolving the imminent nuclear issue, the aid from the international community and inter-Korean economic cooperation are likely to be scaled back due to the worsening external economic environment, such as the rising tension on the Korean peninsula.
(a) In that case, there is a possibility for the North Korean economy to revert to negative growth because the worsening energy supply will lead to domestic production stagnation.
(5) Eventually, it is inevitable for North Korea to solve economic problems by positively resolving non-economic issues including the nuclear issue and actively pursuing close economic cooperation with South Korea in addition to the assistances from the outside.
(a) At the same time, whether or not it will succeed in improving its economy will depend on how flexible and positive a position it will take toward openness at home and abroad.
