A Status of North Korea’s Economy
|By Drew Horne|
Ranked last out of 180 countries in The Heritage Foundation’s 2019 Index of Economic Freedom and with a GDP per capita of a meager $2000, North Korea has one of the world’s poorest economies. Still, North Korea has captured international attention for decades and especially in the last 5 years as erratic steps towards nuclear operationalization have been taken. With a denuclearization summit between the United States and North Korea cut short in Hanoi last February, and a South Korea- United States summit planned to take place in DC in April, the future of the Korean Peninsula is at a critical turning-point. A review of the economic situation in the North will shed light on current moves and potential next steps of the Kim regime.
At the end of World War II Japanese troops retreated from Korea, leaving the North to Soviet occupation and the South to the United States. Following the 1950-53 Korean War, the North experienced rapid industrial growth. Under the leadership of Kim Il-sung three guiding economic policies were adopted: construction of a self-reliant national economy (자립적 민족경제 건설 노선), development through the prioritization of heavy industry (중공업 우선 발전 노선), and a dual line of economic and defense industry growth known as Byungjin (경제·국방 건설 병진노선). The guiding principle of self-reliance in the social sphere is also known, as it came into official usage in the 1950s, as Juche (주체). Juche advocates for independence and agricultural/industrial-led growth, and it is a North Korean ideal that outlives any one economic policy or strategy. These principles led North Korea to rapid growth and economic success, surpassing the South’s comparatively meager advances under Sigman Rhee. It was not until 1965 that the South’s rate of economic growth first exceeded the North.
It was the mid-1960s when the North Korean economy began to slow down. An aggressive 7-year plan was announced in 1961 to continue industrial expansion and improve living conditions, but when it became clear that that goals were not being met the plan was extended until 1970. This was the first sign of slow-down in what was up to that point a promising Soviet economy. This may have been in large part caused by slowing support from the Soviet Union during the Soviet-Chinese conflict in which North Korea showed support for the Chinese. Still, the secure Communist North Korean economy was attracting large amounts of international credit and investment.
This early 70s high credit rating allowed North Korea to go on a spending spree and borrow incredible amounts of cash. While that money, if invested in infrastructure or education, could have propelled the North forward even without full Soviet support, the government instead invested in prestige projects: high rises, elaborate monuments, and the beautification of Pyongyang. Money was effectively squandered on larger-than-life projects that did little to improve the nation’s economic situation.
As a result of stagnant growth and ballooning debt, by the late 1970s and 1980s North Korea defaulted on most of its loans. Despite renegotiations and large-scale debt forgiveness, debt reached $12 billion by the year 2000 (in US dollars). As debt soared, industrial growth slowed and per capita GNP lagged far behind that of South Korea.
When the Soviet Union finally collapsed in 1991 the aid that the North had so long depended on suddenly dried up, leaving the debt-ridden country with nowhere to turn (an unfortunate irony given the self-help juche doctrine which decries dependence on foreign powers). A few short years afterward, historic flooding led to one of the worst widespread famines in history. Estimates vary, but as many as 3 million North Koreans died in what amounts to a total agricultural failure in the years 1995-2000.
Until the Soviet collapse the North’s economy was almost completely market-free; nearly all items could only be acquired through the official public distribution system. North Korea scholar Andrei Lankov explains: “few if any other Communist countries were as successful as North Korea in their attempts to limit market activities” In the aftermath of the disastrous early 1990s and famine-stricken later half of the decade, however, the North Korean economy began to fundamentally change. Unable to rely on the defunct distribution system, ordinary citizens began to implement micro-market reforms in order to survive. Although still technically illegal, government enforcement of the no-market policy loosened as people relied on small side businesses to cope with ration shortages.
Farmers began growing extra crops on hillsides and in private kitchen gardens, selling what little was left over. Government officials were willing to overlook travel outside of the country for a small bribe, and before long an underground trade network had sprung up selling some international goods. Trading and marketization had non-officially entered into a country that had all but eliminated money as an element of the economy just a few decades earlier.
The impacts of this post-Soviet era marketization have permanently changed the North Korean economy and accompanying governing principles. Changes in regime have also influenced the direction of the economy. The 50’s policy of parallel economic and military growth has been replaced with the Kim Jung-un version: a byungjin line of parallel economic and nuclear capabilities growth (경제․핵무력 건설 병진노선).
Kim Jung-un has accepted the inevitable gradual marketization of the economy. Markets remain technically illegal today, but the systems of bribery and turn-a-blind-eye marketization from the late 90s and early 2000s continues to grow. Changes intentionally implemented by the Kim regime include permitting managers to set salaries and hire or fire workers, allowing countryside workers to retain more of their crop and relaxing of the ration system.
With these changes has come modest economic growth. In 2016 the Bank of Korea reported that the North Korean experienced 3.9% growth, more than any year in the previous decade. Adhering to Juche ideology, most of this growth has been focused in internal production rather than importing or exporting goods. International sanctions, reaching their peak in 2017 and 2018, have put a stop to most of what little importing and exporting was taking place. Ramped-up sanctions seem to be taking their toll: The Bank of Korea reported that the North’s economy contracted by 3.5% in 2017, almost entirely caused by biting international commercial sanctions.
Although there has been some progress made in the Kim Jung-un era, in an in-depth study of potential market reforms in North Korea in 2011, BYU and Cambridge professors concluded that prospects for the North Korean economy under then-current policies were grim. If sufficient—sufficient meaning extreme—changes were implemented, however, the economy was not beyond saving: “Full market reform, with efficient capital investment and allocation may restore real growth to the North Korean economy but only if coupled with increases in infrastructure.” Advances in recent years do not negate this conclusion: it will take a lot more than small steps or even complete market reform to save the North Korean economy. It will take a redistribution of government spending to critical infrastructure needs, not the present high spending on prestige projects or maintaining a massive military that accounts for some 20% of the nation’s GDP. Given the Economic-Nuclear byungjin policy of the Kim regime, the chances for this economic restructuring from the top down are still low.
So, what will be the outcome of all these international sanctions? How does an understanding of how the North’s economy changed over the last half-century help us predict possible moves in the future?
First, an understanding of Juche and the Economic-Nuclear (previously Economic- Defense) Byongjin policies will help us understand the diplomatic path of the North. These policies are more than policies, they are national doctrines: independence, self-reliance, and the critical importance of the defense/nuclear programs have become ingrained in the identity of the nation. Abandoning a nuclear program for any reason is akin to abandoning the foundational ideals of the nation, for it is upon the back of militarization and self-reliance that any progress in the North has been made (or at least this is how the facts are portrayed in government propaganda).
Secondly, one can see that a pattern exists between economic conditions and diplomatic trends in the past. In 1994, 2005, 2007, 2012, and 2018 North Korea has made promises to work towards complete denuclearization. Each of these promises was made in a year of struggle and slow growth in the economy. In each case, the North’s promises were met with major sanctions relief or humanitarian assistance from the international community. And in each case, promises for denuclearization were broken when missile tests were undertaken; nuclear or missile tests were performed in 2006, 2009, 2013, and 2016.
With this introduction to North
Korea’s unique economic background and characteristics, perhaps it will be
easier to predict future moves of the Kim in regime. In a country where national
identity is intertwined with economic policy and brinksmanship is a well-used
diplomatic tool in times of hardship, one may at least assume that we can
expect more of the same.
 For more background and baseline information about North Korean economic and political conditions, see the Heritage Foundation’s profile “North Korea.” North Korea Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. https://www.heritage.org/index/country/northkorea and the CIA country profile “The World Factbook: Korea, North.” Central Intelligence Agency. February 01, 2018. https://www.cia.gov/library/publications/the-world-factbook/geos/kn.html.
 The BBC Korea news service reports that a US-ROK Summit will be held later in April: “정상회담: 문-트럼프 다음달 워싱턴서 만나…’한미동맹 강화-북한 비핵화 견인 차원’.” News 코리아, March 29, 2019. Accessed March 30, 2019. https://www.bbc.com/korean/news-47744492. (Korean only)
 United States. Central Intelligence Agency. North Korea Intentions and Capabilities with Respect to South Korea. Richard Helms. 1967. https://www.cia.gov/library/readingroom/docs/DOC_0001218147.pdf.
 Lankov, Andrei. “Why Unconditional Economic Aid Won’t Change – or Help – North Korea.” NK News – North Korea News. June 06, 2018. Accessed March 30, 2019. https://www.nknews.org/2018/06/why-unconditional-economic-aid-wont-change-or-help-north-korea/. Andrei Lankov is a professor at Kookmin University in Seoul and a lifelong scholar and international expert on North Korea.
 Lankov, Andrei. “Why Unconditional Economic Aid Won’t Change – or Help – North Korea
 Scahill, Tom. “WHAT KOREA HAS ACCOMPLISHED.” March 6, 2003. Accessed April 01, 2019. http://iacenter.org/Koreafiles/korea_accomp.htm.
 “North Korea Profile – Timeline.” BBC News. June 13, 2018. Accessed April 01, 2019. https://www.bbc.com/news/world-asia-pacific-15278612.
 For an in-depth analysis of the wearing away of Stalinist economic and political practices in North Korea, see Lankov, Andrei. “The Natural Death of North Korean Stalinism.” Asia Policy1, no. 1 (January 2006): 109-14. doi:10.1353/asp.2006.0015.
 Lankov. “The Natural Death of North Korea Stalinism”
 South Korea’s Unification Ministry published the following on North Korean economic policy: “경제 정책 (Economic Policy).” 북한정보포털 (North Korea Information Portal). Accessed March 30, 2019. http://nkinfo.unikorea.go.kr/nkp/overview/nkOverview.do?sumryMenuId=EC201. (Korean only)
 Additional background on North Korea’s internal situation and diplomatic history with the United States can be found in the 2018 Congressional Report. United States. Congressional Research Service. North Korea: U.S. Relations, Nuclear Diplomacy, and Internal Situation. By Emma Chanlett-Avery, Mark Manyin, Mary Beth Nikitin, Caitlin Campbell, and Wil Mackey. 14-16. July 27, 2018. https://fas.org/sgp/crs/nuke/R41259.pdf.
 Bradford, Scott C., Dong-Jin Kim, and Kerk L. Phillips. “Potential Economic Reforms in North Korea: A Dynamic General Equilibrium Model.” Journal of Economic Policy Reform14, no. 4 (2011): 321-32. doi:10.1080/17487870.2011.600037.