The Hidden People of North Korea (14 page)

The Economic System

Nothing more immediately influences the lives of the North Korean people than their economy—an economy that did not evolve to suit their needs but was imposed on them by politicians. Even when it became apparent that the system was not working, the country’s leaders kept it in place because it served their political purposes. Although the millions of North Koreans who suffer from this poor economy neither understand the economic principles that underlie their daily lives nor are aware of the economic statistics that describe the economy, these principles and statistics can help us understand why, from one year to the next, the economy continues to struggle. By the late 1990s the socialist command economy had eroded to such an extent that most people abandoned it and tried to create a new economy for themselves. Chapter 4 addresses how they are doing this in their day-to-day lives. This chapter looks at the underlying health of the economy.

Communism is an alluring social and economic vision: communities of farmers, workers, and intellectuals banding together as equals to selflessly produce and distribute the fruits of their enthusiastic labor according to their needs. No capitalists lord it over them and take a large slice of the proceeds for themselves. All for one, and one for all. This vision was still popular throughout much of the world when Kim Il-sung came to power in the late 1940s, although it was most often practiced in the form of a central-command socialist economy directed by the Communist Party. Whatever its shortcomings, this economic model was uniquely suited to the needs of a Stalinist government, a fact that the budding dictator Kim must certainly have appreciated. Kim knew nothing about economics and would have adopted any economic system his Soviet mentors told him to, but in the late 1940s, he could have had no misgivings about adopting the socialist economic model.

The central-planning aspect of socialism seemed preeminently logical: why let businesses produce whatever goods they wish? Overlooking the self-correcting nature of the market economy, socialist economic ideologues believe that market economies produce too much of some things and not enough of others. Yet, economic bureaucrats trying to run command economies find it next to impossible to direct them in such a way that all the parts work together. Even in a country as homogeneous as North Korea, it is not possible to control and coordinate the lives of twenty-three million people, much less coordinate the domestic and international economies. And yet, the Kim regime continues to place its faith in centralized economic control. A 2009
Nodong Sinmun
article quotes Kim Jong-il as saying, “It is the intrinsic demand of the socialist economy to rapidly develop the economy in a planned manner under the unified guidance of the state.”
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If after sixty years the state has not managed to “rapidly develop” the economy in a unified direction, it is not likely to do so in the future. Later in the article, the author gets to the important point: “The observance of socialist principles in guiding and managing the economy is not a simple working-level economic matter, but it is a serious political issue that is related to the destiny of socialism.” And, of course, to the destiny of the Kim regime.

For dictators, a great attraction of socialism’s central control is that it enables them to withhold goods and services from people who refuse to obey. Until recently, North Koreans who left their workplaces or made unauthorized trips away from their hometowns were unable to obtain food rations. Today, people rarely receive rations even if they show up at work, so the regime cannot count on starving them into submission. Yet another advantage of central control is that those who control the economy essentially own the means of production. To gain resources, it is unnecessary to levy taxes or charge fees; the elites can simply help themselves to the output of factories, mines, fields, and forests. The Kim family has appropriated for themselves North Korea’s most valuable commodities, including the output of its gold mines. Kim Jong-il is rumored to have stashed away billions of dollars, although this estimate is probably highly inflated.

In order for communism to work, workers must be motivated by a collective work ethic. Such workers embody the “new man” that both the Stalinists and Kimists vainly tried to create among the workers, although the creators themselves remained unchanged egotists. In North Korea, the Kims themselves were the most selfish and least socialistic of the lot. Although many North Koreans did buy into the communitarian ethic, so many people either went along for a free ride or tried to make the system work for their personal benefit that the system ultimately failed.

Under the most favorable circumstances, a centrally controlled socialist economy can provide a basic living for the people, but in North Korea’s case, absence of trade with advanced economies, failure to receive continuing support from fellow socialist economies, natural disasters, and a degradation of the economic infrastructure have rendered socialism unsustainable. As North Korean authorities admitted in 2002 (to party cadres, not to the general population), the government is bankrupt. Only by receiving billions of dollars in foreign aid can it continue to function at all, and hundreds of billions of dollars will have to be invested to repair the economic infrastructure. Unfortunately, instead of trying to solve its financial problems by abandoning socialism in whole or in part, the regime’s solution has been to push the financial responsibilities onto the people, who are still supposed to work within the socialist economy.

Although much is not understood about North Korea’s economy, the outlines are clear. In the absence of meaningful economic statistics from the North Korean government, statistics from North Korea’s trade partners and close analysis by foreign economists provide a fairly clear picture of North Korea’s economy. For example, estimates of the factory-operating rate, around 25 percent, are based on aerial photographs of smoke spiraling from chimneys and counts of the number of people going to work in the morning. Aerial photography is likewise one method used to estimate crop yields. Trade statistics are notoriously unreliable because North Korea’s most important trade partner, China, is secretive about its dealings with Pyongyang, and much of the trade along the Chinese border is not even recorded by the Beijing government.

North Korea’s major economic indices, as compiled by South Korea’s Bank of Korea, should be taken as only a rough indication of the state of the economy.
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At least until the economic collapse of the 1990s, employment was fairly evenly divided between the three sectors of mining and manufacturing, agriculture, and services. Gross national income (GNI) for 2006 was estimated at $25.6 billion (the purchasing-power parity gross domestic product estimate by the CIA was $40 billion), with a per capita GNI of $1,108. South Korea’s GNI was thirty-five times greater, and per capita GNI was seventeen times greater. Until 1990, North Korea’s economy was growing at an annual rate of 2 to 3 percent, after which it fell by an average of almost 4 percent a year before returning to the black at the end of the 1990s, with annual growth averaging about 2 percent a year.

Although the North Korean economy cannot survive on its own, trade relations with other economies are weak. Estimated total trade volume, which had been in the $3 to $5 billion range in the 1980s, fell to $1 to $2 billion a year in the 1990s and rebounded to the $4 to $5 billion range after 2000. In 2006, total trade was about $3 billion (including foreign aid), whereas South Korea’s total trade was approximately 240 times greater, at around $719 billion. For decades North Korea has run an annual trade deficit of $1 to $2 billion, which it makes up with foreign aid and by failing to repay its debts. In 2008, net debt, which is in default and has not been serviced for two decades, was estimated at $18 billion, which is almost as large as North Korea’s GNI.

Before the collapse of communism in Eastern Europe, North Korea’s major trading partners were the Soviet Union, China, and Japan, in that order. In the 1990s China became the largest trading partner, followed by Japan and South Korea, while trade with Russia almost ceased after Moscow demanded that trade be conducted on a cash basis rather than on concessionary terms. Since 2000, North Korea’s trade with China and South Korea has increased, while trade with Japan has plummeted, especially after 2002 when the Japanese government began imposing trade sanctions to pressure Pyongyang to give up its nuclear program and reveal information about Japanese citizens who had been abducted years earlier. By 2006, China and South Korea accounted for an estimated 39 percent and 27 percent of North Korea’s trade, followed by Thailand, Russia, and Japan. In late 2006, North Korea’s nuclear weapons test worsened its relations with Japan, and a new South Korean administration that took office in early 2008 proved unwilling to continue the unreciprocated aid program of the previous two administrations, resulting in a precipitous decline in North Korea’s trade with these two neighbors and an even greater reliance on trade with China.

Statistics for trade and investment between the two Koreas can in any case be deceiving. First, like statistics from other countries, they often include foreign aid transfers. In 2006, out of the $1.3 billion in inter-Korean trade, about 60 percent was foreign aid.
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Second, few foreign companies actually make money in North Korea, so while their investments look like business decisions, they are based largely on the hope that things will improve in the future, or they are patriotic investments in the homeland.

A Brief Economic History

Why is North Korea economically on a par with some of the poorest states in South Asia and Africa, while South Korea has become one of the world’s most successful economies? Both started in the same place, and for two decades North Korea was economically more successful than South Korea. When Soviet troops arrived in Korea in 1945 to take control from the departing Japanese, the northern half of the peninsula had 76 percent of Korea’s mining production, 92 percent of its electrical-generating capacity, and 80 percent of its heavy industry.
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The southern half of the peninsula was the country’s rice bowl, a differentiation in economic potential attributable to climate and topography. Thanks to Japanese development and the natural endowment of the land, the northern half of Korea had the potential to respond to the Stalinist preference for heavy industry over agriculture and light industry.

Kim Il-sung’s elementary school education had not prepared him to direct the country’s economy, and his trusted colleagues, soldiers like him, had no more economic expertise than he did. He initially followed the advice of his Soviet sponsors, who were rather ignorant about Korea and, for that matter, not very knowledgeable about economics. Fortunately for Kim, the brute force of centralized organization and the high motivation shared by Koreans emerging from years of colonial oppression were sufficient to jumpstart the economy. As a soldier, Kim had developed a talent for organizing and motivating people, which fit in well with the needs of a socialist command economy. Consequently, the North Korean economy reestablished itself in the 1950s and continued to function adequately into the early 1960s, at which time Kim made the fateful decision to give priority to his military industry, and the rest is sad history, at least for the people. The shortages that people in a market economy face during wartime are a reminder of what North Koreans contend with all the time.

By the end of the 1960s, the North Korean government had stopped publishing economic statistics. In the 1970s, the country defaulted on its foreign loans, and the government increasingly relied on propaganda to motivate workers to do more with less. The Kim regime tried to induce foreign investors to pump capital and technology into the economy by drafting a foreign-investment law in 1984 and opening the country’s first foreign trade zone at Najin-Sonbong in 1991, but laws drafted by a government that was above the law did not fool investors, and only a few small Japanese companies loyal to North Korea, along with a few Chinese entrepreneurs, took the bait. Foreign aid from the Soviet Union, Eastern Europe, and China barely kept the North Korean economy afloat, and by the late 1980s, some North Koreans were going hungry.

North Korea’s economic lifeline was severed by the demise of European communism in the late 1980s and early 1990s, and in an unprecedented move, the government admitted that its 1987–1993 economic plan had failed to achieve its objectives. Fulfillment failures were nothing new for these economic plans, which in typical communist style ran for a period of six or seven years with a one- or two-year “catch-up” period, but this was the first time the “infallible” party admitted that it had made a forecasting mistake. After Kim Il-sung died in 1994, the government took no economic initiatives, leaving the people to fend for themselves. Severe floods in 1995 set the stage for three years of extreme hardship that the media called the “Arduous March” (
konan ui haenggun
), when a half million or more people died of starvation.

While his father was alive, Kim Jong-il had only limited scope to try out new economic ideas, not so much because his father might disapprove but because the entire top level of the leadership was of his father’s generation, and as long as they continued to lead a comfortable life, they saw no need for change. But after the three-year mourning period, which largely overlapped with the three Arduous March years, Kim tried to revive the economy with two related campaigns, both announced around the time the Supreme People’s Assembly was convened in 1998. The
kangsong taeguk
(“economically strong nation”) campaign called for the people to return to the glory days of the 1950s, when great strides were made in heavy industry. By the 1990s, many of North Korea’s industries, such as the steel industry, were hardly in better shape than they had been after the Americans bombed them during the Korean War.