North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), is regarded as an unreformed, isolated, tightly controlled, dictatorial command economy. The Korean peninsula was a Japanese colony from 1910-1945. 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 US backed southern region (Republic of Korea), resulting in the devastating Korean War (1950-53).

Kim II Sung's aspiration of bringing the entire peninsula under his communist rule failed. Soon after, North Korea (DPRK) established itself as a centrally planned economy but with dynasty succession and not just one-party supremacy. Pyongyang adopted three guiding policies: “a self-sufficient national economy”, “heavy-industry-first development” and “military-economy parallel development”. Outsider experts feel that these policies have been an obstacle in the country’s economic development. The shortcomings of the policies got accentuated by the regime’s focus on songun (military-first politics) which have landed North Korea in a state of chronic economic problems. There is stagnation in industrial and power output along with food shortages because of the 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’s Economic Phases

The North’s initial phase of economic development was dominated by industrialization, which was impressive considering the devastation caused by the Korean War. The country moved on the Soviet model along with the ideology of juche (self-reliance). It emphasized on heavy industry development as laid out in its policies, as a result, heavy industry – iron, steel, cement and machine tool sectors got a push. There was a steady increase in industrial output in the 1960s but trouble started to brew in the 1970s.

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

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

North’s economy in 1980s shows symptoms of malfunctioning in its centralized planned system in the form of supply shortages, systemic inefficiency, mechanical obsolescence and infrastructural decay. North tried to resolve its problems through its highly centralized ways of functioning, refusing to open up the economy or liberalize its economic management. The rigidity in approach drifted the region towards stagnation

The North Korean economy entered one of its worst phases, nearly collapsing in the 1990s. The disintegration of the Soviet Union followed by severe food crisis due to a series of natural disasters (hails in 1994, flooding in 1995-1996, 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 since the mid-1990s, the dependence so deep that the aid continues even today. Table below (source: Ministry of Unification) reveals some figures on the shortage of food faced by the country. 

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 and eased restrictions to allow semi-private markets thereby partially modifying the central planning system. It was done by introducing the July 1 Economic Management Improvement Measures in 2002. The economic growth picked for few years before dipping again but the period was an improvement over the previous decade.

However, the “military” ambition of the country not only takes priority over its economy but actually come at the cost of its economic development. According to a report by the Ministry of Unification, “Until 1966, the defense sector comprised around 10 percent 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 percent, but many experts presume that the regime actually spends around 30 to 50 percent of its total state funds on the defense industry.”

No Reliable Source

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

Trends

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

The Gross Domestic Product (GDP) of North Korea is estimated at $33.3 billion (2013), a rise of 1.1 percent over the year 2012. In terms of GDP per capita, North Korea ranks at the 194 spot with its per capita GDP of $1,800 according to the CIA Factbook. As per the 2012 estimates, approximately 23.4 percent of GDP is contributed by agriculture, 47.2 percent by industry and 29.4 percent by services. The agricultural sector employs around 35 percent of the 12.6 million labor force. 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; tourism as per CIA Factbook.

In terms of trade, China and South Korea are North’s main trading partners. CIA’s 2012 estimates from the Factbook reveal that 63 percent of the exports from North are directed to China, while 27 percent to South Korea; the main exports being 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, 73 percent of the total imports comes from China while 19 percent from South Korea. Today, China not only accounts for more than 60 percent of North Korea’s trade but also provides it with concessional assistance and support. (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 of making Korea a defense economy has overshadowed the issues of development, food, living standard 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. (For more, see: Socialist Economies: How China, Cuba And North Korea Work)

 

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