The Constant Crisis Of The North Korea Economy

Investopedia

North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), is an unreformed, isolated, tightly controlled, dictatorial command economy. The Korean peninsula was a Japanese colony from 1910 to 1945. As World War II drew to a close, the Japanese forces in the northern region of Korea surrendered to the Soviet troops while the American troops took charge of the southern region. The supposed reunification through elections never took place in the Korean peninsula, and the two regions appointed their respective leaders. In 1950, Kim II Sung backed by the Soviets made an attempt to capture the U.S.-backed southern region (Republic of Korea), which sparked the devastating Korean War (1950 to 1953).

North Korea Today

Kim II Sung’s aspiration of bringing the entire peninsula under his communist rule failed. Soon after, North Korea (DPRK) established its national economy through heavy-industry-first development and military-economy parallel development. Outsider experts consider that these policies have been an obstacle in the country’s economic development. The shortcomings of the policies were accentuated by the regime’s focus on songun (military-first politics), which have brought North Korea chronic economic problems. There is stagnation in industrial and power output along with food shortages because of systemic problems. According to the Central Intelligence Agency (CIA) World Factbook, “Industrial capital stock is nearly beyond repair as a result of years of underinvestment, shortages of spare parts, and poor maintenance. Large-scale military spending draws off resources needed for investment and civilian consumption.”

North Korea’s Economic Phases

North Korea’s initial phase of economic development was dominated by industrialization, which was impressive considering the devastation caused by the Korean War. The country then assumed the Soviet model and the ideology of juche (self-reliance). This model emphasized  the development of heavy industry. With investments in the iron, steel, cement and machine tool sectors, there was a steady increase in industrial output in the 1960s. However, trouble was brewing by the 1970s.

The country incurred foreign loans and indulged in large-scale imports of machinery and plant facilities from advanced countries such as Japan, Germany, France and Britain in the early 1970s. The decade witnessed a shift in North Korea’s borrowing; almost all loans in the 1960s were accepted from socialist states while loans in the 1970s included a huge amount from capitalist states. 

Foreign Loans and Grants (US$ Million)

  Former Soviet Union China Other Socialist States OECD Members Subtotal
Before 1948 53.0 53.0
1953-60 609.0 459.6 364.9 1,883.5
(Grants) (325.0) (287.1) (364.9) (977.0)
1961-70 558.3 157.4 159.0 9 883.7
1971-80 682.1 300.0 1,292.2 2,274.1
1981-90 508.4 500.0 1,008.4
Total 2,409.8 1,417.0 523.9 1,301.0 6,102.7

Source: North Korea’s External Debts: Trend and Characteristics, Korea Focus (KDI Review of the North Korea Economy, March 2012, published by the Korea Development Institute)

North Korea was barely able to manage its debt and was hit by the oil shock that rapidly increased the petroleum prices. The prices of North Korea’s main exports nose-dived while it had to pay more for its imports. A trade deficit surfaced, which weakened its repayment capabilities further aggravating the issue of external debt. The economy began to slow down.

North Korea’s economy in the 1980s showed symptoms of malfunction in its centralized planning system. There were supply shortages, systemic inefficiencies, mechanical obsolescence and infrastructural decay. North Korea tried to resolve its problems through its highly centralized functions and by refusing to open up the economy or liberalize its economic management. The rigidity in the approach caused the region to drift toward stagnation

The North Korean economy entered one of its worst phases almost collapsing in the 1990s. The disintegration of the Soviet Union followed by a food crisis caused by a series of natural disasters (hail storms in 1994, flooding in 1995 to 1996 and droughts in 1997) pushed North Korea into a crisis. The region experienced one of its hardest times. The country became heavily dependent on international aid to avoid widespread starvation in the mid-1990s, and the crisis was so severe that the aid continues even today. The table below from the Ministry of Unification reveals data on the food shortage in North Korea. 

Year Amount of Shortage (Unit: 10,000 ton)
1995 121
1996 184
1997 161
1998 146
1999 115
2000 96
2001 165
2002 141
2003 129
2004 114
2005 106
2006 106
2007 95
2008 139
2009 117
2010 135
2011 109

According to the CIA’s World Factbook, “The North Korean government often highlights its goal of becoming a ‘strong and prosperous’ nation and attracting foreign investment, a key factor for improving the overall standard of living. In this regard, in 2013, the regime rolled out 14 new Special Economic Zones set up for foreign investors, though the initiative remains in its infancy.” In the 2000s, DPRK finally attempted to recover its ailing economy. It eased restrictions to allow semi-private markets, thereby partially modifying the central planning system, by introducing the Economic Management Improvement Measures in 2002. Economic growth picked up for a few years before dipping again, but the period was an improvement over the previous decade.

However, the military ambition of the country takes priority over its economy but at the cost of its economic development. According to a report by the Ministry of Unification, “Until 1966, the defense sector comprised around 10% of total expenditures, but this rose to over 30 percent in the period from 1967 to 1971. Since the 1970s, the official budget allocated to defense in North Korea has been 14% to 17%, but many experts presume that the regime actually spends around 30% to 50% of its total state funds on its defense industry.”

Unreliable Data

North Korea is known to be secretive and does not release accurate economic data. The region has not published any official indicators or statistics on its macroeconomic conditions since 1965. The regime has brought some facts and figures to international platforms that have shown inconsistencies and, thus, are not considered reliable. The few sources for basic statistics on the North Korean economy include The Bank of Korea (South Korea) and the Ministry of Unification and Korea Trade Promotion Agency (KOTRA) for North Korea’s trade.

Trends

The economy of North Korea has been badly impacted since the fall of the Soviet bloc in 1991. The impact is explicit in its average annual growth rate of -4.1 percent from 1990 to 1998. This resulted in a drop of more than 50% in total production from 1980s’ levels. There was a change of pace in 1999 when the economy showed signs of recovery. From 2000 to 2005, North Korea grew at an average rate of 2.2 percent. There was a downturn yet again in 2006, and during the five-year period 2006 to 2010, only the year 2008 registered positive growth. The DPRK has inched up since 2011.

The Gross Domestic Product (GDP) of North Korea is estimated to be $40 billion (2015). In terms of GDP per capita, North Korea had a per capita GDP of $1,700 according to The CIA’s World Factbook. Agriculture accounts for 25.4% of GDP, industry accounts for 41% and services account for 33.5% (2017 estimate). [1]

Agriculture employs 37% of the 14 million-strong labor force, and industry and services employs 63% (2008 estimate) of the workforce. The main industries in the country are military products; machine building, electric power, chemicals; mining (coal, iron ore, limestone, graphite, copper, zinc, lead, and precious metals), metallurgy; textiles, food processing and tourism.

In terms of trade, China and South Korea are North Korea’s main trading partners. Close to 86% of the region’s exports from North Korea are directed to China. The main exports are metallurgical products, minerals, manufactures (including armaments), textiles, agricultural and fishery products. The main import items for North Korea are petroleum, cooking coal, machinery and equipment, textiles and grain.  Ninety percent of the region’s total imports come from China [1]. Today, China not only accounts for the bulk of North Korea’s trade but also provides the region with concessional assistance and support. (For related reading, see: China’s GDP Examined: A Service-Sector Surge)

The Bottom Line

The economic history of North Korea portrays slowdown, stagnation and crisis with intermittent phases of recovery and sluggish economic growth. The regime’s priority to make Korea a defense economy has overshadowed development, food production, living standards and human rights. North Korea lives in isolation and hardship with its economy presenting a dichotomized picture with nuclear armament on one side and starvation (but for the aid) on the other. (To learn more, see: Socialist Economies: How China, Cuba And North Korea Work)

[1] https://www.cia.gov/library/publications/the-world-factbook/geos/kn.html (see under “Economy”)

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